10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 2003

OR

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

Commission File Number 1-15319

SENIOR HOUSING PROPERTIES TRUST

Maryland	04-3445278
(State of Organization)	(IRS Employer Identification No.)
400 Centre Street, Newton, Massachusetts 02458 617-796-8350
Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Name of each exchange on which registered
Common Shares of Beneficial Interest	New York Stock Exchange
Trust Preferred Securities of SNH Capital Trust I	New York Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.   Yes   ý   No   o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes ý   No  o

The aggregate market value of the voting shares of the registrant held by non-affiliates was $616.9 million based on the $13.56 closing price per common share on the New York Stock Exchange on June 30, 2003.  For purposes of this calculation, 12,809,238 common shares of beneficial interest, $0.01 par value, held by HRPT Properties Trust and an aggregate of 146,578 common shares held directly or by affiliates of the trustees and officers of the registrant have been included in the number of shares held by affiliates.

Number of the registrant’s common shares outstanding as of March 8, 2004: 63,453,338.

References in this Annual Report on Form 10-K to the “Company”, “SNH”, “Senior Housing”, “we”, “us” and “our” include Senior Housing Properties Trust and its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required in Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K is incorporated by reference from our definitive Proxy Statement for the annual meeting of shareholders currently scheduled for May 11, 2004.

WARNING CONCERNING FORWARD LOOKING STATEMENTS

OUR ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND FEDERAL SECURITIES LAWS.  THESE STATEMENTS REGARD OUR INTENT, BELIEF OR EXPECTATIONS, OR THE INTENT, BELIEF OR EXPECTATIONS OF OUR TRUSTEES AND OFFICERS CONCERNING:

•OUR TENANTS’ ABILITY TO PAY OUR RENTS,

•OUR ABILITY TO PURCHASE ADDITIONAL PROPERTIES,

•OUR ABILITY TO MAKE INTEREST AND PRINCIPAL PAYMENTS ON OUR DEBT,

•OUR ABILITY TO MAKE DISTRIBUTIONS ON OUR SHARES,

•OUR POLICIES AND PLANS REGARDING INVESTMENTS, FINANCING AND OTHER MATTERS,

•OUR TAX STATUS AS A REAL ESTATE INVESTMENT TRUST,

•OUR ABILITY TO APPROPRIATELY BALANCE THE USE OF DEBT AND EQUITY,

•OUR ABILITY TO ACCESS CAPITAL MARKETS OR OTHER SOURCES OF FUNDS,

•OUR LITIGATION WITH HEALTHSOUTH AND

•THE POSSIBLE EXPANSION OF OUR BUSINESS RELATIONSHIP WITH NEWSEASONS.

ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE”, “PREDICT” OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS.  ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY THE FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.  SUCH FACTORS INCLUDE, WITHOUT LIMITATION:

•CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS (INCLUDING PREVAILING INTEREST RATES),

•COMPLIANCE WITH AND CHANGES TO REGULATIONS AND PAYMENT POLICIES WITHIN THE REAL ESTATE, SENIOR HOUSING AND HEALTHCARE INDUSTRIES,

•CHANGES IN FINANCING TERMS,

•COMPETITION WITHIN THE REAL ESTATE, SENIOR HOUSING AND HEALTHCARE INDUSTRIES AND

•CHANGES IN FEDERAL, STATE AND LOCAL LEGISLATION.

FOR EXAMPLE, OUR TENANTS MAY EXPERIENCE LOSSES AND BECOME UNABLE TO PAY OUR RENTS, WE MAY BE UNABLE TO IDENTIFY PROPERTIES WHICH WE WANT TO BUY OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES OR LEASE TERMS FOR THOSE PROPERTIES. THESE UNEXPECTED RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH, SUCH AS CHANGES IN OUR TENANTS’ COSTS OR THEIR REVENUES INCLUDING MEDICARE AND MEDICAID REVENUES OR CHANGES IN THE CAPITAL MARKETS OR THE ECONOMY GENERALLY, ARE BEYOND OUR CONTROL.

MARRIOTT HAS TRANSFERRED THE OPERATIONS OF THE 31 SENIOR LIVING COMMUNITIES TO SUNRISE AND SINCE THE TRANSFER, THE OPERATING RESULTS AT THESE 31 COMMUNITIES

HAVE DECLINED; WE ARE UNABLE TO PREDICT WHAT EFFECT THIS TRANSFER MAY HAVE UPON FIVE STAR’S ABILITY TO PAY OUR RENT FOR THESE COMMUNITIES.

FORWARD LOOKING STATEMENTS ARE ONLY EXPRESSIONS OF OUR PRESENT EXPECTATIONS AND INTENTIONS. FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR, AND THEY MAY NOT OCCUR.  YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.

WE UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY THE RESULT OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.

STATEMENT CONCERNING LIMITED LIABILITY

THE ARTICLES OF AMENDMENT AND RESTATEMENT ESTABLISHING SENIOR HOUSING PROPERTIES TRUST, DATED SEPTEMBER 20, 1999, TOGETHER WITH ALL AMENDMENTS THERETO, AS DULY FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT THE NAME “SENIOR HOUSING PROPERTIES TRUST” REFERS TO THE TRUSTEES UNDER THE DECLARATION OF TRUST AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SENIOR HOUSING PROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY FOR ANY OBLIGATION OF, OR CLAIM AGAINST, 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 THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

SENIOR HOUSING PROPERTIES TRUST
2003 FORM 10-K ANNUAL REPORT

Table of Contents

	Part I
Item 1.	Business
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
	Part II
Item 5.	Market for Registrant’s Common Stock and Related Shareholder Matters
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results  of Operations
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Changes in and Disagreements with Accountants on Accounting and  Financial Disclosure
Item 9A.	Controls and Procedures
	Part III
Item 10.	Directors and Executive Officers of the Registrant
Item 11.	Executive Compensation*
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.	Certain Relationships and Related Party Transactions*
Item 14.	Principal Accountant Fees and Services*
	Part IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K

*Incorporated by reference from our Proxy Statement for the Annual Meeting of Shareholders currently scheduled to be held on May 11, 2004, to be filed pursuant to Regulation 14A.

PART I

Item 1.Business

The Company.

We are a real estate investment trust, or REIT, which was organized under the laws of the state of Maryland in 1998 to continue the senior housing real estate business of HRPT Properties Trust, or HRPT, our former parent.  As of December 31, 2003, we owned 150 properties located in 31 states.  On that date, the undepreciated carrying value of our properties, net of impairment losses, was $1.4 billion.  Our principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is (617) 796-8350.

We believe that the aging of the United States population will increase the demand for existing senior apartments, independent living properties, assisted living facilities and nursing homes and encourage development of new properties.  Our business plan is to profit from this increasing demand in two ways.  First, we intend to purchase additional properties and lease them at initial rents that are greater than our costs of acquisition capital.  Second, we intend to structure leases that provide for periodic rental increases.

Our present business plan for senior housing investments contemplates properties which offer four types of senior housing accommodations, including some properties that combine more than one type in a single building or campus, including age restricted apartment buildings, independent living properties, assisted living facilities and nursing homes.  Our investment, financing and disposition policies are established by our board of trustees and may be changed by our board of trustees at any time without shareholder approval.

Senior Apartments.  Senior apartments are marketed to residents who are generally capable of caring for themselves. Residence is usually restricted on the basis of age. Purpose built properties may have special function rooms, concierge services, high levels of security and assistance call systems for emergency use. Residents at these properties who need healthcare or assistance with the activities of daily living are expected to contract independently for these services with homemakers or home healthcare companies.

Independent Living Properties.  Independent living properties, or congregate communities, also provide high levels of privacy to residents and require residents to be capable of relatively high degrees of independence. Unlike a senior apartment property, an independent living property usually bundles several services as part of a regular monthly charge; for example, one or two meals per day in a central dining room, weekly maid service or a social director may be offered. Additional services are generally available from staff employees on a fee-for-service basis. In some independent living properties, separate parts of the property are dedicated to assisted living or nursing services.

Assisted Living Facilities.  Assisted living facilities are typically comprised of one bedroom suites which include private bathrooms and efficiency kitchens. Services bundled within one charge usually include three meals per day in a central dining room, daily housekeeping, laundry, medical reminders and 24 hour availability of assistance with the activities of daily living such as dressing and bathing.  Professional nursing and healthcare services are usually available at the property on call or at regularly scheduled times.

Nursing Homes.  Nursing homes generally provide extensive nursing and healthcare services similar to those available in hospitals, without the high costs associated with operating theaters, emergency rooms or intensive care units. A typical purpose built nursing home includes mostly two-bed units with a separate bathroom in each unit and shared dining and bathing facilities. Some private rooms are often available for those residents who pay higher rates or for residents whose medical conditions require segregation.  Nursing homes are generally staffed by licensed nursing professionals 24 hours per day.

Hospitals.  We currently own two rehabilitation hospitals.  These hospitals were acquired in a property exchange transaction for nursing homes which we previously owned and leased to HEALTHSOUTH

1

Corporation, or HEALTHSOUTH. HEALTHSOUTH decided to cease operating the nursing homes and we exchanged the nursing homes for the hospitals that HEALTHSOUTH continues to operate.

Other Types of Real Estate.  In the past we have considered investing in real estate different from senior housing properties.  To date we have not made any such investments, but we continue to explore such alternative investments.

Tenants.

All of our properties are included in 13 separate leases and one operating agreement.  The following chart presents a summary of these leases and this agreement as of December 31, 2003 (dollars in thousands).

Tenant	Number of Properties (beds/units)		Undepreciated Carrying Value of Properties		Net Book Value of Properties		Annual Rent		Lease Expiration	Renewal Options
Five Star Quality Care, Inc. /Sunrise Senior Living, Inc(1)	31 (7,491	)	$	619,942	$	590,084	$	63,674	12/31/17	1 for 10 years. 1 for 5 years.
Sunrise Senior Living, Inc. /Marriott International, Inc.(2)	14 (4,030	)	325,473		255,888		30,975		12/31/13	4 for 5 years each.
NewSeasons Assisted Living Communities, Inc./Independence Blue Cross(3)	10 (1,019	)	87,656		87,574		9,287		4/30/17	2 for 15 years each.
HEALTHSOUTH	2 (364	)	43,553		37,593		8,700		12/31/11	2 for 10 years each.
Five Star Quality Care, Inc.(4)	13 (1,054	)	83,471		81,254		8,235		12/31/18	1 for 15 years.
Five Star Quality Care, Inc.(4)	53 (4,868	)	147,072		112,407		7,646		12/31/19	1 for 15 years.
Alterra Healthcare Corporation(5)	18 (894	)	61,079		59,707		7,015		12/31/17	2 for 15 years each.
Genesis HealthCare Corporation(6)	1 (156	)	13,007		10,591		1,509		12/31/05	2 for 10 years each. 1 for 5 years.
ABE Briarwood Corp.  (formerly Integrated Health Services, Inc)	1 (140	)	15,598		7,356		1,200		12/31/10	3 for 10 years each.
HealthQuest, Inc	3 (361	)	7,589		5,281		1,075		1/31/13	2 for 10 years each.
Covenant Care, Inc	1 (180	)	3,503		2,465		954		9/30/15	1 for 15 years.
Evergreen Washington  Healthcare, LLC	1 (103	)	5,193		3,641		842		12/31/05	2 for 10 years each.
The MacIntosh Company	1 (200	)	3,593		2,773		513		6/30/19	1 for 10 years.
Managed for us(7)	1 (105	)	1,512		1,199		—		NA	NA
	150 (20,965	)	$	1,418,241	$	1,257,815	$	141,626

(1)These properties are leased to Five Star, but are managed by Sunrise.

(2)These properties are leased to a Sunrise subsidiary, but this lease is guaranteed by Marriott.

(3)This lease commenced on December 29, 2003 and is guaranteed by Independence Blue Cross, a Pennsylvania health insurance company.

2

(4)These two leases were combined in March 2004 and the lease expiration date was changed to December 31, 2020.  In March 2004, we purchased one property for $24.1 million and added it to this lease for an annual rent increase of $2.4 million.

(5)This lease commenced on February 28, 2003.

(6)In January 2004, this lease expiration was extended one year to December 31, 2006.

(7)This property is not leased.  The previous tenant defaulted its lease obligations and we terminated its lease.  Since March 17, 2003, this property has been operated for our account by Five Star Quality Care, Inc.  We are currently offering this property for sale or lease.

Sunrise Senior Living, Inc.  Until March 28, 2003, Marriott Senior Living Services, Inc., or MSLS, was the operator of properties leased under two of our leases:  (i) 14 properties leased to MSLS until 2013 for annual rent of $31.0 million; and (ii) 31 properties leased to Five Star Quality Care, Inc., or Five Star, until 2017 for annual rent of $63.7 million.  On March 28, 2003, Marriott International, Inc., or Marriott, sold MSLS to Sunrise Senior Living, Inc., or Sunrise, and MSLS changed it name to Sunrise Senior Living Services, Inc., or SLS.  SLS is a 100% owned subsidiary of Sunrise.  We do not know the financial arrangements which have been agreed between Sunrise and Marriott regarding the 14 property lease, but Marriott continues to guaranty the lease for these properties.  Neither Sunrise nor Marriott has guaranteed Five Star’s lease for the 31 properties managed by SLS.

The following table presents summary financial information reported by Marriott in its Annual Report on Form 10-K for its 2003, 2002 and 2001 fiscal years:

Summary Financial Information of Marriott International, Inc.
(in millions)

	As of or for the year ended
	January 2, 2004		January 3, 2003		December 28, 2001
Sales	$	9,014	$	8,415	$	7,768
Net income	502		277		236
Total assets	8,177		8,296		9,107
Long-term debt	1,391		1,553		2,708
Shareholders’ equity	3,838		3,573		3,478

The following table presents summary financial information reported by Sunrise in its press release furnished on Form 8-K on February 26, 2004 and its Annual Report on Form 10-K for the year ended December 31, 2002:

Summary Financial Information of Sunrise Senior Living, Inc.
(in thousands)

	As of or for the year ended
	December 31, 2003		December 31, 2002		December 31, 2001
Operating revenue	$	1,188,301	$	505,912	$	428,219
Net income	62,178		54,661		49,101
Total assets	1,009,798		1,116,151		1,177,615
Long-term debt	200,828		427,554		603,831
Shareholders’ equity	490,275		465,818		410,701

At the time of this report, Sunrise has not filed its annual report on Form 10-K for the year ended December 31, 2003.  We expect to furnish summary audited financial information relating to Sunrise for that period by an amendment to this Form 10-K when such information becomes available to us.

Five Star.  We lease 31 senior living communities to Five Star until 2017 for annual rent of $63.7 million.  As discussed above, these communities are managed by SLS.  Neither Marriott nor Sunrise has guaranteed the lease for these 31 properties.  Five Star has advised us that the financial results of operations of these 31 properties managed by SLS have declined since Sunrise acquired MSLS and that this decline has had a material and

3

adverse impact upon Five Star’s financial results.  Five Star and SLS are having discussions concerning possible improvements in the financial results of these operations, and we are monitoring these discussions.

During 2003, we had two additional leases with Five Star; one for 53 nursing homes and one for 13 independent and assisted living facilities.  These 66 properties are operated by Five Star.  On March 1, 2004, we purchased from Five Star one independent and assisted living facility with 229 units located in Maryland.  The purchase price was $24.1 million, the appraised value of the property.  Simultaneous with this purchase, our existing leases with Five Star were modified as follows:

•the lease for 53 nursing homes and the lease for 13 independent and assisted living facilities were combined into one lease andthe property acquired on March 1, 2004 was added to this combined lease;

•the combined lease maturity date was changed to December 31, 2020 from December 31, 2018 and 2019 for the separate leases;

•the minimum rent for the combined lease of 53 nursing homes and 14 independent living facilities was increased by $2.4 million; and

•for all of our leases with Five Star, the amount of additional rent to be paid to us was changed to 4% of the increase in revenues at the leased properties beginning in 2006.

All other lease terms remained substantially unchanged.

Five Star was formerly our 100% owned subsidiary.  We created Five Star in 2000 to operate nursing homes which we repossessed from former tenants who defaulted on their leases.  We distributed substantially all of our ownership of Five Star to our shareholders on December 31, 2001.  Today, Five Star is a separate company listed on the American Stock Exchange under the symbol “FVE” and our most important tenant.  Since it became a separate public company by the spin off to our shareholders, Five Star has not operated profitably.  We believe Five Star has adequate financial resources and liquidity to continue its business for at least the next 12 months; however, we can provide no assurance that Five Star will continue to meet all of its obligations to us.

As of the date of this report, Five Star, which is not an accelerated filer as defined in Rule 12b-2 of the Exchange Act, has not filed its Annual Report on Form 10-K.  Therefore, summary audited financial information regarding Five Star is not available.  We expect to furnish such information by an amendment to this Form 10-K when it becomes available to us.

NewSeasons Assisted Living Communities, Inc.  In December 2003, we purchased 10 assisted living properties with resident capacity of 1,019 located in two states for $86.6 million from NewSeasons Assisted Living Communities, Inc., or NewSeasons.  Simultaneously, NewSeasons leased these facilities from us for an initial term ending in 2017 plus renewal options.  The rent payable to us will average approximately $9.3 million per year during the initial lease term; although it will commence at a lower rent of approximately $8.0 million per year and then increase at agreed times during the lease term.  Substantially all of the revenues at these properties are paid by residents from their private resources.  NewSeasons is a subsidiary of Independence Blue Cross, or IBC.  IBC is a large regional health insurance company based in Philadelphia, Pennsylvania, with reported revenues of approximately $8.5 billion in 2002.  IBC has guaranteed NewSeasons’ rent to us.  In addition, we, NewSeasons and IBC have entered an agreement for the possible expansion of our business relationships by adding up to four assisted living properties with resident capacity of 540.  These four properties are currently encumbered by mortgage debts.  We intend to purchase these properties if and when these mortgage debts are prepaid or assumed on terms mutually acceptable to us, NewSeasons, IBC and the lenders.  If we purchase all four of these properties, our purchase price for these additional properties will be $28.4 million; any that we purchase will be added to the lease for the 10 currently leased properties and rent payable to us will increase.

HEALTHSOUTH. We lease two rehabilitation hospitals to HEALTHSOUTH until 2011 for annual rent of $8.7 million.  During 2003, 15 present or former executives of HEALTHSOUTH Corporation pled guilty to preparing and distributing false financial information.  A new management team is now operating HEALTHSOUTH.  As of March 8, 2004, HEALTHSOUTH’s current rent to us was timely paid and we believe the operations of our two hospitals by HEALTHSOUTH have continued to produce earnings in excess of our rent.

4

However, HEALTHSOUTH has not provided us with revised financial statements which its current management represents to be accurate.  Accordingly, we cannot provide any assurance that HEALTHSOUTH’s operations of our properties are profitable or that HEALTHSOUTH will continue to pay its rent.  We are currently involved in litigation with HEALTHSOUTH.  For more information about this litigation, see “Item 3.  Legal Proceedings” below.

Alterra Healthcare Corporation.  We lease 18 assisted living properties to a subsidiary of Alterra Healthcare Corporation, or Alterra, until 2017, plus renewal options.  The rent payable to us under this lease is $7.0 million per year plus increases starting in 2004 based upon increases in the gross revenues at the leased properties.  A majority of the revenues at these Alterra operated properties are paid by residents from their private resources.  Alterra filed for bankruptcy in February 2003.  Alterra’s plan of reorganization was approved by the Bankruptcy Court in November 2003.  Throughout its bankruptcy and as of March 8, 2004, Alterra has been current on its rent obligations to us.

Genesis HealthCare Corporation.  We lease one nursing home to a subsidiary of Genesis HealthCare Corporation, or Genesis, until 2006 for $1.5 million of annual rent.  Genesis filed for bankruptcy in 2000.  Genesis’s plan of reorganization was approved by the Bankruptcy Court in 2001.  Throughout its bankruptcy and continuing through today, Genesis has continued to pay our rent on a current basis.  During 2003, Genesis was separated from its related pharmacy business in a spin off transaction.  We consented to this separation in return for a lease extension to 2006 and a lease guaranty from Genesis.  We also hold a restricted cash security deposit of $235,000.  Genesis is a public company listed on the NASDAQ under the symbol “GHCI”.

ABE Briarwood Corp.(formerly Integrated Health Services, Inc).  We lease one skilled nursing facility to a former subsidiary of Integrated Health Services, Inc., or Integrated Health.  During 2003, control of Integrated Health was transferred to private companies pursuant to a bankruptcy plan of reorganization.  The stock of subsidiaries of Integrated Health, which included our tenant, were acquired by a private company called ABE Briarwood Corp.  Our property was sub-leased to THI of Pennsylvania at Greenery of Canonsburg, LLC, a subsidiary of another private company, THI of Baltimore, Inc.  We consented to this change of control in return for a cash security deposit of $600,000 and guarantees of the lease by ABE Briarwood Corp., IHS Long Term Care, Inc. and THI of Baltimore, Inc.  As of March 8, 2004, this tenant is current on its rent obligations to us.

HealthQuest, Inc.  We lease two skilled nursing facilities and one independent living facility located in Huron and Sioux Falls, South Dakota to HealthQuest, Inc., a privately owned company.  The lease is guaranteed by the sole shareholder of HealthQuest, Inc.  As of March 8, 2004, this tenant is current on its rent obligations to us.

Covenant Care, Inc.  We lease one skilled nursing facility in Fresno, California to Covenant Care California, Inc.  The lease is guaranteed by our tenant’s parent company, Covenant Care, Inc., a privately owned company, and secured by a cash security deposit of $900,000.  As of March 8, 2004, this tenant is current on its rent obligations to us.

Evergreen Washington Healthcare, LLC.  We lease one skilled nursing facility in Seattle, Washington to Evergreen Washington Healthcare Seattle, LLC.  This lease is guaranteed by our tenant’s parent company, Evergreen Washington Healthcare, LLC, a privately owned company, and secured by a cash security deposit of $385,000.  As of March 8, 2004, this tenant is current on its rent obligations to us.

The MacIntosh Company.  During 2003, our lease for one skilled nursing facility in Grove City, Ohio with The MacIntosh Company was extended to 2019 and we committed to fund up to $1.0 million of capital improvements at the property in exchange for increased rent.  This lease is guaranteed by a management company affiliate of our tenant and by the former and current majority shareholders of the tenant and the management company, which are privately owned.  As of March 8, 2004, this tenant is current on its rent obligations to us.

Managed Property.  During 2003, one of our private company tenants defaulted its lease.  We terminated this lease and engaged Five Star to manage this property for our account.  As of March 8, 2004, this property is being offered for sale or lease.

5

Lease Terms.

Our leases are so-called “triple net” leases which require the tenants to maintain our properties during the lease terms and generally to indemnify us from liability which may arise by reason of our ownership of the properties.  Our lease terms generally require our tenants to maintain the leased properties, at their expense, to remove and dispose of hazardous substances in compliance with applicable law and to maintain insurance policies.  In the event of partial damage, condemnation or taking, our tenants are required to rebuild with insurance or other proceeds, if any; in the case of total destruction, condemnation or taking, we receive all insurance or other proceeds and the tenants are required to pay any difference in the amount of proceeds and our historical investments in the affected properties; in the event of material destruction or condemnation, some tenants have a right to purchase the affected property for amounts at least equal to our historical investments in the properties.

Events of Default.  Under our leases events of default generally include:

•the failure of the tenant to pay rent or any other sum when due;

•the failure of the tenant to perform terms, covenants or conditions of its lease and the continuance thereof for a specified period after written notice;

•the failure of the tenant to maintain required insurance coverages; or

•the revocation of any material license necessary for the tenant’s operation of our property.

Default Remedies.  Upon the occurrence of any event of default, we may (subject to applicable law):

•terminate the affected lease and accelerate the rent;

•terminate the tenant’s rights to occupy and use the affected property, rent the property and recover from the tenant the difference between the amount of rent which would have been due under the lease and the rent received under the reletting;

•make any payment or perform any act required to be performed by the tenant under its lease;

•exercise our rights with respect to any collateral securing the lease; and

•require the defaulting tenant to reimburse us for all payments made and all costs and expenses incurred in connection with any exercise of the foregoing remedies.

However, the existence of triple net lease terms does not guaranty that our tenants will honor their obligations to us.

Investment Policies.

Acquisitions.  Our present investment goals are to acquire additional real estate primarily for income and secondarily for appreciation potential.  In implementing this acquisition strategy, we consider a range of factors relating to proposed acquisitions, including:

•proposed lease terms;

•the availability and reputation of a financially qualified lessee or guarantor;

•historical and projected cash flows from the operations of the property;

6

•the estimated replacement cost and proposed acquisition price of the property;

•the design, physical condition and age of the property;

•the competitive market environment of the property;

•the price segment and payment sources in which the property is operated; and

•the level of permitted services and regulatory history of the property and its historical operators.

We have no policies which specifically limit the percentage of our assets which may be invested in any individual property, in any one type of property, in properties leased to any one tenant or in properties leased to an affiliated group of tenants.

Form of Investments.  We prefer wholly-owned investments in fee interests. However, circumstances may arise in which we may invest in leaseholds, joint ventures, mortgages and other real estate interests.  We may invest in real estate joint ventures if we conclude that by doing so we may benefit from the participation of co-ventures or that our opportunity to participate in the investment is contingent on the use of a joint venture structure.  We may invest in participating, convertible or other types of mortgages if we conclude that by doing so, we may benefit from the cash flow or appreciation in the value of a property which is not available for purchase.

Mergers and Strategic Combinations.

In the past, we have considered the possibility of entering mergers or strategic combinations with other companies and we continue to explore such possibilities.  A principal goal of any such transaction will be to render more secure our revenue sources.

Disposition Policies.

From time to time we consider the sale of one or more properties or investments.  Disposition decisions are made based on a number of factors including, but not limited to, the following:

•our ability to lease the affected property;

•our tenant’s desire to purchase the affected property;

•our tenant’s desire to cease operating the affected property;

•the proposed sale price;

•the strategic fit of the property or investment with the rest of our portfolio; and

•the existence of alternative sources, uses or needs for capital.

During 2003 and 2002, we sold two nursing homes which had been leased to Five Star to unaffiliated parties.  As a result of these sales, Five Star’s rent for the combination of leased properties which included these properties was reduced by a percentage of the net proceeds of sale which we realized.  We have agreed to sell two nursing homes to Five Star.  We expect the sale of these properties to occur during the first half of 2004, however, this sale is conditioned upon Five Star obtaining Department of Housing and Urban Development insured financing for its purchase.  We are currently marketing for sale or lease one nursing home where our tenant defaulted its lease.

Financing Policies.

There are no limitations in our organizational documents on the amount of indebtedness we may incur.  Our revolving bank credit facility and our senior note indenture and its supplements contain financial covenants

7

which, among other things, restrict our ability to incur indebtedness and require us to maintain financial ratios and minimum net worth.  However, our board of trustees may seek to amend these covenants or seek replacement financings with less restrictive covenants.  Decisions to seek changes in the financial covenants which currently restrict our debt leverage will be made based upon then current economic conditions, the relative availability and costs of debt versus equity capital and our need for capital to take advantage of acquisition opportunities or otherwise.

Our board of trustees may determine to obtain replacements for our current credit facilities or to seek additional capital through equity offerings, debt financings, or retention of cash flows in excess of distributions to shareholders, or a combination of these methods.  To the extent that the board of trustees decides to obtain additional debt financing, we may do so on an unsecured basis or a secured basis.  We may seek to obtain lines of credit or to issue securities senior to our common shares, including preferred shares or debt securities, some of which may be convertible into common shares or be accompanied by warrants to purchase common shares.  We may also finance acquisitions by assuming debt, through an exchange of properties or through the issuance of equity or other securities.

Investment Manager.

Our day to day operations are conducted by Reit Management & Research LLC, or RMR, our investment manager.  RMR originates and presents investment opportunities to our board of trustees.  RMR is a Delaware limited liability company beneficially owned by Barry M. Portnoy and Gerard M. Martin, who are our managing trustees.  RMR has a principal place of business at 400 Centre Street, Newton Massachusetts, 02458, and its telephone number is (617) 928-1300.  RMR acts as the investment manager to HRPT, a New York Stock Exchange, or NYSE, listed real estate company which owns office buildings and is the holder of 9,660,738 of our common shares.  In addition, RMR has an agreement to provide certain shared services to Five Star and RMR has other business interests.  The directors of RMR are Gerard M. Martin, Barry M. Portnoy and David J. Hegarty.  The executive officers of RMR are David J. Hegarty, President and Secretary; John G. Murray, Executive Vice President; Evrett W. Benton, Vice President; Ethan S. Bornstein, Vice President; Jennifer B. Clark, Vice President; John R. Hoadley, Vice President; Mark L. Kleifges, Vice President; David M. Lepore, Vice President; Bruce J. Mackey Jr., Vice President; John A. Mannix, Vice President; Thomas M. O’Brien, Vice President; and John C. Popeo, Vice President and Treasurer; Adam D. Portnoy, Vice President; and William J. Sheehan, Director of Internal Audit.  Messrs. Hegarty and Hoadley are also our officers.

Employees.

We have no employees.  Services which would otherwise be provided by employees are provided by RMR and by our managing trustees and officers.  As of March 8, 2004, RMR had approximately 300 full-time employees.

Government Regulation and Reimbursement.

Our tenants’ operations of our properties must comply with numerous federal, state and local statutes and regulations.  Also, the healthcare industry depends significantly upon federal and federal/state programs for revenues and, as a result, is vulnerable to the budgetary policies of both the federal and state governments.

Senior Apartments.  Generally, government programs do not pay for housing in senior apartments. Rents are paid from the residents’ private resources. Accordingly, the government regulations that apply to these types of properties are generally limited to zoning, building and fire codes, Americans with Disabilities Act requirements and other life safety type regulations applicable to residential real estate. Government rent subsidies and government assisted development financing for low income senior housing are exceptions to these general statements. The development and operation of subsidized senior housing properties are subject to numerous governmental regulations. While it is possible that we may purchase and lease some subsidized senior apartment facilities, we do not expect these facilities to be a major part of our future business and we do not now own senior apartments where rent subsidies are applicable.

8

Independent Living Apartments. Government benefits generally are not available for services at independent living apartments and the resident charges in these facilities are paid from private resources. However, a number of Federal Supplemental Security Income program benefits pay housing costs for elderly or disabled residents to live in these types of residential facilities. The Social Security Act requires states to certify that they will establish and enforce standards for any category of group living arrangement in which a significant number of supplemental security income residents reside or are likely to reside. Categories of living arrangements that may be subject to these state standards include independent living apartments and assisted living facilities. Because independent living apartments usually offer common dining facilities, in many locations they are required to obtain licenses applicable to food service establishments in addition to complying with land use and life safety requirements. In many states, independent living apartments are licensed by state or county health departments, social service agencies, or offices on aging with jurisdiction over group residential facilities for seniors. To the extent that independent living apartments include units in which assisted living or nursing services are provided, these units are subject to applicable state licensing regulations, and if the facilities receive Medicaid or Medicare funds, to certification standards. In some states, insurance or consumer protection agencies regulate independent living apartments in which residents pay entrance fees or prepay other costs.

Assisted Living. According to the National Academy for State Health Policy, most states provide or are approved to provide Medicaid payments for residents in some assisted living facilities under waivers granted by the Federal Centers for Medicare and Medicaid Services, known as CMS, or under Medicaid state plans, and some states are planning some Medicaid funding by preparing or requesting waivers to fund assisted living or demonstration projects. Because rates paid to assisted living facility operators are lower than rates paid to nursing home operators, some states use Medicaid funding of assisted living as a means of lowering the cost of services for residents who may not need the higher intensity of health-related services provided in nursing homes. States that administer Medicaid programs for assisted living facilities are responsible for monitoring the services at, and physical conditions of, the participating facilities. Different states apply different standards in these matters, but generally we believe these monitoring processes are similar to the inspection processes mandated by these states for nursing homes.

In light of the large number of states using Medicaid to purchase services at assisted living facilities and the growth of assisted living in recent years, a majority of states have adopted licensing standards applicable to assisted living facilities. According to the National Academy for State Health Policy, the majority of states and the District of Columbia have licensing statutes or standards specifically using the term “assisted living”.  The majority of states have requirements for facilities servicing people with Alzheimer’s disease or dementia.  The majority of states have revised their licensing regulations recently or are reviewing their policies or drafting or revising their regulations. State regulatory models vary; there is no national consensus on a definition of assisted living, and no uniform approach by the states to regulating assisted living facilities. Most state licensing standards apply to assisted living facilities whether or not they accept Medicaid funding. Also, according to the National Academy for State Health Policy, some states require certificates of need from state health planning authorities before new assisted living facilities or programs may be developed. Based on our analysis of current economic and regulatory trends, we believe that assisted living facilities that become dependent upon Medicaid payments for a majority of their revenues may decline in value because Medicaid rates may fail to keep up with increasing costs. We also believe that assisted living facilities located in states that adopt certificate of need requirements or otherwise restrict the development of new assisted living facilities may increase in value because these limitations upon development may help ensure higher occupancy and higher non-governmental rates.

Two federal government studies and a recent report to a Senate committee by an assisted living work group provide background information and make recommendations regarding the regulation of, and the possibility of increased governmental funding for, the assisted living industry. The first study, an April 1999 report by the General Accounting Office to the Senate Special Committee on Aging, on assisted living facilities in four states, found a variety of residential settings serving a wide range of resident health and care needs. The General Accounting Office found that consumers often receive insufficient information to determine whether a particular facility can meet their needs and that state licensing and oversight approaches vary widely. The General Accounting Office anticipates that as the states increase the use of Medicaid to pay for assisted living, federal financing will likewise grow, and these trends will focus more public attention on the place of assisted living in the continuum of long-term care and upon state standards and compliance approaches. In June 2003, the General

9

Accounting Office recommended that CMS strengthen its oversight of state Medicaid waiver programs and state quality assurance activities.  The second study, a National Study of Assisted Living for the Frail Elderly, was funded by the U.S. Department of Health and Human Services Assistant Secretary for Planning and Evaluation and reported on the effects of different service and privacy arrangements on resident satisfaction, aging in place and affordability.  In 2001, 2002, and 2003, the Senate Special Committee on Aging held hearings on assisted living and its role in the continuum of care and on home and community-based alternatives to nursing homes. In April 2003, an assisted living workgroup consisting of almost 50 organizations involved in assisted living, representing providers, consumers, accrediting and state regulatory organizations and others, provided a final report to the Senate Special Committee on Aging, as the Committee had requested.  The workgroup could not agree on a definition for “assisted living” or on model standards, but presented recommendations on subjects ranging from staffing and funding to state regulatory approaches, for use by state and federal policymakers, assisted living operators and others.  We cannot predict whether these studies and reports will result in governmental policy changes or new legislation, or what impact any changes may have.  Based upon our analysis of current economic and regulatory trends, we do not believe that the federal government is likely to have a material impact upon the current regulatory environment in which the assisted living industry operates unless it also undertakes expanded funding obligations, and we do not believe a materially increased financial commitment from the federal government is presently likely. However, we do anticipate that assisted living facilities will increasingly be licensed and regulated by the various states, and that in the absence of federal standards, the states’ policies will continue to vary widely.

Nursing homes.

Reimbursement. About 64% of all nursing home revenues in the U.S. in 2002 came from publicly funded programs, including about 49% from Medicaid programs and 13% from the Medicare program. Nursing homes are among the most highly regulated businesses in the country. The federal and state governments regularly monitor the quality of care provided at nursing homes. State health departments conduct surveys of resident care and inspect the physical condition of nursing home properties. These periodic inspections and occasional changes in life safety and physical plant requirements sometimes require nursing home operators to make significant capital improvements. These mandated capital improvements have in the past usually resulted in Medicare and Medicaid rate adjustments, albeit on the basis of amortization of expenditures over expected useful lives of the improvements. A new Medicare prospective payment system, or Medicare PPS, was phased in over three years beginning with cost reporting years starting on or after July 1, 1998. Under Medicare PPS, capital costs are part of the prospective rate and are not facility specific. Medicare PPS and other recent legislative and regulatory actions with respect to state Medicaid rates are limiting the reimbursement levels for some nursing home and other eldercare services.  At the same time federal and state enforcement and oversight of nursing homes are increasing, making licensing and certification of these facilities more rigorous. These actions have adversely affected the revenues and increased the expenses of many nursing home operators, including our tenants.

Medicare PPS was established by the Balanced Budget Act of 1997, and was intended to reduce the rate of growth in Medicare payments for skilled nursing facilities. Before Medicare PPS, Medicare rates were facility-specific and cost-based. Under Medicare PPS, facilities receive a fixed payment for each day of care provided to residents who are Medicare beneficiaries. Each resident is assigned to one of 44 care groups depending on that resident’s medical characteristics and service needs. Per diem payment rates are based on these care groups. Medicare payments cover substantially all services provided to Medicare residents in skilled nursing facilities, including ancillary services such as rehabilitation therapies. Medicare PPS is intended to provide incentives to providers to furnish only necessary services and to deliver those services efficiently. During the three year phase-in period, Medicare rates for skilled nursing facilities were based on a blend of facility specific costs and rates established by the new Medicare payment system.  According to the General Accounting Office, between fiscal year 1998 and fiscal year 1999, the first full year of the new Medicare payment system phase-in, the average Medicare payment per day declined by about nine percent.

Since November 1999, Congress has provided some relief from the impact of the Balanced Budget Act of 1997. Effective April 1, 2000, the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999 temporarily boosted payments for certain skilled nursing cases by 20 percent and allowed nursing facilities to transition more rapidly to the federal payment system. This Act also increased the new Medicare payment rates by

10

4% for fiscal years 2001 and 2002 and imposed a two-year moratorium on some therapy limitations for skilled nursing patients covered under Medicare Part B.  In December 2000, the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 was approved. Effective April 1, 2001, to October 1, 2002, this Act increased the nursing component of the payment rate for each care group by 16.66%. This Act also increased annual inflation adjustments for fiscal year 2001, increased rehabilitation care group rates by 6.7%, extended the moratorium on some therapy limitations through 2000 and maintained the previously temporary 20% increase in the other care group rates established in 1999.  However, as of October 1, 2002, the 4% across-the-board increase in Medicare payment rates and the 16.66% increase in the nursing component of the rates each expired. Effective October 1, 2003, CMS has increased the annual inflation update to skilled nursing facility rates by 3% per year, and added an additional 3.26% for the year beginning October 1, 2003, to account for inflation underestimates in prior years.  The 20% increase for the skilled nursing care groups and the 6.7% increase in rehabilitation care group rates will expire when the current resource utilization groups are refined.  Effective December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 sets a new moratorium on implementation of some therapy limitations through 2005.

Because of the current federal budget deficit and other federal government priorities, such as homeland security and the war on terrorism, we do not expect the federal government to fully restore the Medicare rate increases which expired on October 1, 2002.  Similarly, because of budget deficits in numerous states, we expect Medicaid rate increases will be less than cost increases experienced by some of our tenants in 2004 and in some instances Medicaid rates may decline.  This combination of events may make it increasingly difficult for some of our tenants to pay our rent.

Survey And Enforcement. CMS has begun to implement an initiative to increase the effectiveness of Medicare and Medicaid nursing facility survey and enforcement activities. CMS’ initiative follows a July 1998 General Accounting Office investigation which found inadequate care in a significant proportion of California nursing homes and the CMS’ July 1998 report to Congress on the effectiveness of the survey and enforcement system. In 1999, the U.S. Department of Health and Human Services Office of Inspector General issued several reports concerning quality of care in nursing homes, and the General Accounting Office issued reports in 1999, 2000 and 2003 which recommended that CMS and the states strengthen their compliance and enforcement practices, including federal oversight of states, to better ensure that nursing homes provide adequate care. Since 1998, the Senate Special Committee on Aging has been holding hearings on these issues. CMS is taking steps to focus more survey and enforcement efforts on nursing homes with findings of substandard care or repeat violations of Medicare and Medicaid standards and to identify chain operated facilities with patterns of noncompliance. CMS is increasing its oversight of state survey agencies and requiring state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeat violations are identified, to investigate complaints more promptly, and to survey facilities more consistently. In addition, CMS has adopted regulations expanding federal and state authority to impose civil money penalties in instances of noncompliance. Medicare survey results and nursing staff hours per resident for each nursing home are posted on the internet at www.medicare.gov.  When deficiencies under state licensing and Medicare and Medicaid standards are identified, sanctions and remedies such as denials of payment for new Medicare and Medicaid admissions, civil monetary penalties, state oversight and loss of Medicare and Medicaid participation or licensure may be imposed.  Our tenants and their managers receive notices of potential sanctions and remedies from time to time, and such sanctions have been imposed from time to time on facilities operated by them.  If they are unable to cure deficiencies which have been identified or which are identified in the future, such sanctions may be imposed, and if imposed, may adversely affect our tenants’ abilities to pay their rents.

In 2000 and 2002 CMS issued reports on its study linking nursing staffing levels with quality of care, and CMS is assessing the impact that minimum staffing requirements would have on facility costs and operations. In a report presented to Congress in 2002, the Department of Health and Human Services found that 90% of nursing homes lack the nurse and nurse aide staffing necessary to provide adequate care to residents. The Bush administration has indicated that it does not intend to impose minimum staffing levels or to increase Medicare or Medicaid rates to cover the costs of increased staff at this time, but CMS is now publishing the nurse staffing level at each nursing home on its internet site to increase market pressures on nursing home operators.

11

Federal efforts to target fraud and abuse and violations of anti-kickback laws and physician referral laws by Medicare and Medicaid providers have also increased. In March 2000, the U.S. Department of Health and Human Services Office of Inspector General issued compliance guidelines for nursing facilities, to assist them in developing voluntary compliance programs to prevent fraud and abuse. Also, new rules governing the privacy, use and disclosure of individually identified health information became final in 2001 and took effect in 2003, with civil and criminal sanctions for noncompliance. An adverse determination concerning any of our tenants’ licenses or eligibility for Medicare or Medicaid reimbursement or the costs of required compliance with applicable federal or state regulations could negatively affect these tenants’ abilities to pay our rent.

Certificates Of Need.  Most states also limit the number of nursing homes by requiring developers to obtain certificates of need before new facilities may be built. Even states such as California and Texas that have eliminated certificate of need laws often have retained other means of limiting new nursing home development, such as the use of moratoria, licensing laws or limitations upon participation in the state Medicaid program. We believe that these governmental limitations generally make nursing homes more valuable by limiting competition.

Other Matters.  Under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, Medicare beneficiaries may receive prescription drug benefits beginning in 2006 by enrolling in private health plans or managed care organizations, or if they remain in traditional Medicare, by enrolling in stand-alone prescription drug plans.  A number of legislative proposals that would affect major reforms of the healthcare system have been introduced in Congress, such as programs for national health insurance, Medicaid block grants to states rather than federal matching moneys for optional state Medicaid services, additional Medicare and Medicaid reforms and federal and state cost containment measures. We cannot predict whether any of these legislative proposals will be adopted or, if adopted, what effect, if any, these proposals would have on our business or our tenants’ ability to pay rent.

Competition.

We compete with other real estate investment trusts.  We also compete with banks, non-bank finance companies, leasing companies and insurance companies which invest in real estate.  Some of these competitors have resources that are greater than ours and have lower costs of capital.

Environmental Matters.

Under various laws, owners of real estate may be required to investigate and clean up hazardous substances present at a property, and may be held liable for property damage or personal injuries that result from such hazardous substances.  These laws also expose us to the possibility that we become liable to reimburse the government for damages and costs it incurs in connection with hazardous substances. We reviewed environmental surveys of the facilities we own prior to their purchase. Based upon those surveys we do not believe that any of our properties are subject to material environmental liabilities. However, no assurances can be given that environmental conditions for which we may be liable are not present in our properties or that costs we incur to remediate contamination will not have a material adverse effect on our business or financial condition.

Internet Website.

Our internet address is www.snhreit.com.  Copies of our governance guidelines, code of ethics and the charters of our audit, compensation and nominating and governance committees may be obtained free of charge by writing to our Secretary, Senior Housing Properties Trust, 400 Center Street, Newton, MA  02458 or at our website www.snhreit.com under the heading “Governance.”  We make available, free of charge, through the “SEC Filings” tab under the “Financials” section of our internet website, our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such forms are electronically filed with, or furnished to, the SEC.  Any shareholder or other interested party who desires to communicate with our non-management trustees, individually or as a group, may do so by filling out a report at the “Contact Us” section of our website.  Our board also provides a process for security holders to send communications to the entire board.  Information about the process for sending communications to our board can

12

be found at the “Contact Us” section of our website.  Our website address is included several times in this Annual Report on Form 10-K as a textual reference only and the information in the website is not incorporated by reference into this Annual Report on Form 10-K.

FEDERAL INCOME TAX CONSIDERATIONS

The following summary of federal income tax considerations is based on existing law, and is limited to investors who own our shares as investment assets rather than as inventory or as property used in a trade or business.  The summary does not discuss the particular tax consequences that might be relevant to you if you are subject to special rules under federal income tax law, for example if you are:

•a bank, life insurance company, regulated investment company, or other financial institution;

•a broker or dealer in securities or foreign currency;

•a person who has a functional currency other than the U.S. dollar;

•a person who acquires our shares in connection with employment or other performance of services;

•a person subject to alternative minimum tax;

•a person who owns our shares as part of a straddle, hedging transaction, constructive sale transaction, constructive ownership transaction, or conversion transaction; or

•except as specifically described in the following summary, a tax-exempt entity or a foreign person.

The Internal Revenue Code sections that govern federal income tax qualification and treatment of a REIT and its shareholders are complex.  This presentation is a summary of applicable Internal Revenue Code provisions, related rules and regulations and administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect.  Future legislative, judicial, or administrative actions or decisions could affect the accuracy of statements made in this summary.  We have not received a ruling from the IRS with respect to any matter described in this summary,and we cannot assure you that the IRS or a court will agree with the statements made in this summary.  In addition, this summary is not exhaustive of all possible tax consequences, and does not discuss any estate, gift, state, local, or foreign tax consequences.  For all these reasons, we urge you and any prospective acquiror of our shares to consult with a tax advisor about the federal income tax and other tax consequences of the acquisition, ownership and disposition of our shares.  Our intentions and beliefs described in this summary are based upon our understanding of applicable laws and regulations which are in effect as of the date of this Form 10-K.  If new laws or regulations are enacted which impact us directly or indirectly, we may change our intentions or beliefs.

Your federal income tax consequences may differ depending on whether or not you are a “U.S. shareholder.”  For purposes of this summary, a “U.S. shareholder” for federal income tax purposes is:

•a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws;

•an entity treated as a corporation or partnership for federal income tax purposes, that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia, unless otherwise provided by Treasury regulations;

•an estate the income of which is subject to federal income taxation regardless of its source; or

13

•a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or electing trusts in existence on August 20, 1996, to the extent provided in Treasury regulations;

whose status as a U.S. shareholder is not overridden by an applicable tax treaty.  Conversely, a “non-U.S. shareholder” is a beneficial owner of our shares who is not a U.S. shareholder.

Taxation as a REIT

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with our taxable year ending December 31,1999.  Our REIT election, assuming continuing compliance with the qualification tests summarized below, continues in effect for subsequent taxable years.  Although no assurance can be given, we believe that we are organized, have operated, and will continue to operate in a manner that qualifies us to be taxed under the Internal Revenue Code as a REIT.

As a REIT, we generally are not subject to federal income tax on our net income distributed as dividends to our shareholders.  Distributions to our shareholders generally are included in their income as dividends to the extent of our current or accumulated earnings and profits.  Our dividends are not generally entitled to the favorable 15% rate on qualified dividend income, but a portion of our dividends may be treated as capital gain dividends, all as explained below.  No portion of any dividends are eligible for the dividends received deduction for corporate shareholders.  Distributions in excess of current or accumulated earnings and profits generally are treated for federal income tax purposes as return of capital to the extent of a recipient shareholder’s basis in our shares, and will reduce this basis.  Our current or accumulated earnings and profits are generally allocated first to distributions made on our preferred shares, if any,and thereafter to distributions made on our common shares.

Our counsel, Sullivan & Worcester LLP, has opined that we have been organized and have qualified as a REIT under the Internal Revenue Code for our 1999 through 2003 taxable years, and that our current investments and plan of operation enable us to continue to meet the requirements for qualification and taxation as a REIT under the Internal Revenue Code.  Our qualification and taxation as a REIT will depend upon our compliance with various qualification tests imposed under the Internal Revenue Code and summarized below.  While we believe that we will satisfy these tests, our counsel has not reviewed and will not review compliance with these tests on a continuing basis.  If we fail to qualify as a REIT, we will be subject to federal income taxation as if we were a C corporation and our shareholders will be taxed like shareholders of C corporations.  In this event, we could be subject to significant tax liabilities, and the amount of cash available for distribution to our shareholders may be reduced or eliminated.

If we qualify as a REIT and meet the tests described below, we generally will not pay federal income tax on amounts we distribute to our shareholders.  However, even if we qualify as a REIT, we may be subject to federal tax in the following circumstances:

•We will be taxed at regular corporate rates on any undistributed “real estate investment trust taxable income,” including our undistributed net capital gains.

•If our alternative minimum taxable income exceeds our taxable income, we may be subject to the corporate alternative minimum tax on our items of tax preference.

•If we have net income from the disposition of “foreclosure property” that is held primarily for sale to customers in the ordinary course of business or other nonqualifying income from foreclosure property, we will be subject to tax on this income at the highest regular corporate rate, currently 35%.

•If we have net income from prohibited transactions, including dispositions of inventory or property held primarily for sale to customers in the ordinary course of business other than foreclosure property, we will be subject to tax on this income at a 100% rate.

14

•If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, but nonetheless maintain our qualification as a REIT, we will be subject to tax at a 100% rate on the greater of the amount by which we fail the 75% or the 95% test, with adjustments, multiplied by a fraction intended to reflect our profitability.

•If we fail to distribute for any calendar year at least the sum of 85% of our REIT ordinary income for that year, 95% of our REIT capital gain net income for that year, and any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of the required distribution over the amounts actually distributed.

•If we acquire an asset from a corporation in a transaction in which our basis in the asset is determined by reference to the basis of the asset in the hands of a present or former C corporation, and if we subsequently recognize gain on the disposition of this asset during the ten year period beginning on the date on which the asset ceased to be owned by the C corporation, then we will pay tax at the highest regular corporate tax rate, which is currently 35%, on the lesser of the excess of the fair market value of the asset over the C corporation’s basis in the asset on the date the asset ceased to be owned by the C corporation, or the gain we recognize in the disposition.

•If we acquire a corporation, to preserve our status as a REIT we must generally distribute all of the C corporation earnings and profits inherited in that acquisition, if any, not later than the end of the taxable year of the acquisition.  However, if we fail to do so, relief provisions would allow us to maintain our status as a REIT provided we distribute any subsequently discovered C corporation earnings and profits and pay an interest charge in respect of the period of delayed distribution.As discussed below, we acquired several C corporations on January 11, 2002 in connection with our acquisition of 31 senior living facilities.  Our investigation of these C corporations indicated that they did not have undistributed earnings and profits. However, upon review or audit, the IRS may disagree with our conclusion.

•As summarized below, REITs are permitted within limits to own stock and securities of a “taxable REIT subsidiary.”  A taxable REIT subsidiary is separately taxed on its net income as a C corporation, and is subject to limitations on the deductibility of interest expense paid to its REIT parent.  In addition, its REIT parent is subject to a 100% tax on the difference between amounts charged and redetermined rents and deductions, including excess interest.

If we invest in properties in foreign countries, our profits from those investments will generally be subject to tax in those countries.  If we continue to operate as we currently do, then we will distribute our taxable income to our shareholders and we will generally not pay federal income tax.  As a result, the cost of foreign taxes imposed on our foreign investments cannot be recovered by claiming foreign tax credits against our federal income tax liability.  Also, we cannot pass through to our shareholders any foreign tax credits.

If we fail to qualify or elect not to qualify as a REIT, we will be subject to federal income tax in the same manner as a C corporation.  Distributions to our shareholders if we do not qualify as a REIT will not be deductible by us nor will distributions be required under the Internal Revenue Code.  In that event, distributions to our shareholders will generally be taxable as ordinary dividends and, subject to limitations in the Internal Revenue Code, will be eligible for the dividends received deduction for corporate shareholders.  Also, we will generally be disqualified from qualification as a REIT for the four taxable years following disqualification.  If we do not qualify as a REIT for even one year, this could result in reduction or elimination of distributions to our shareholders, or in our incurring substantial indebtedness or liquidating substantial investments in order to pay the resulting corporate-level taxes.

REIT Qualification Requirements

General Requirements.  Section 856(a) of the Internal Revenue Code defines a REIT as a corporation, trust or association:

(1)that is managed by one or more trustees or directors;

15

(2)the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest;

(3)that would be taxable, but for Sections 856 through 859 of the Internal Revenue Code, as a C corporation;

(4)that is not a financial institution or an insurance company subject to special provisions of the Internal Revenue Code;

(5)the beneficial ownership of which is held by 100 or more persons;

(6)that is not “closely held” as defined under the personal holding company stock ownership test, as described below; and

(7)that meets other tests regarding income, assets and distributions, all as described below.

Section 856(b) of the Internal Revenue Code provides that conditions (1) through (4) must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a pro rata part of a taxable year of less than 12 months. Section 856(h)(2) of the Internal Revenue Code provides that neither condition (5) nor (6) need be met for our first taxable year as a REIT.  We believe that we have met conditions (1) through (7) during each of the requisite periods ending on or before December 31, 2003, and that we can continue to meet these conditions in future taxable years.  There can, however, be no assurance in this regard.

By reason of condition (6), we will fail to qualify as a REIT for a taxable year if at any time during the last half of a year more than 50% in value of our outstanding shares is owned directly or indirectly by five or fewer individuals. To help comply with condition (6), our declaration of trust restricts transfers of our shares.  In addition, if we comply with applicable Treasury regulations to ascertain the ownership of our shares and do not know, or by exercising reasonable diligence would not have known, that we failed condition (6), then we will be treated as having met condition (6).  However, our failure to comply with these regulations for ascertaining ownership may result in a penalty of $25,000, or $50,000 for intentional violations.  Accordingly, we intend to comply with these regulations, and to request annually from record holders of significant percentages of our shares information regarding the ownership of our shares.  Under our declaration of trust, our shareholders are required to respond to these requests for information.

For purposes of condition (6), REIT shares held by a pension trust are treated as held directly by the pension trust’s beneficiaries in proportion to their actuarial interests in the pension trust.  Consequently, five or fewer pension trusts could own more than 50% of the interests in an entity without jeopardizing that entity’s federal income tax qualification as a REIT.  However, as discussed below, if a REIT is a “pension-held REIT,” each pension trust owning more than 10% of the REIT’s shares by value generally may be taxed on a portion of the dividends it receives from the REIT.

Our Wholly-Owned Subsidiaries and Our Investments through Partnerships.  Except in respect of taxable REIT subsidiaries as discussed below, Section 856(i) of the Internal Revenue Code provides that any corporation, 100% of whose stock is held by a REIT, is a qualified REIT subsidiary and shall not be treated as a separate corporation.  The assets, liabilities and items of income, deduction and credit of a qualified REIT subsidiary are treated as the REIT’s.  We believe that each of our direct and indirect wholly-owned subsidiaries, other than the taxable REIT subsidiaries discussed below, will either be a qualified REIT subsidiary within the meaning of Section 856(i) of the Internal Revenue Code, or a noncorporate entity that for federal income tax purposes is not treated as separate from its owner under regulations issued under Section 7701 of the Internal Revenue Code.  Thus, except for the taxable REIT subsidiaries discussed below, in applying all the federal income tax REIT qualification requirements described in this summary, all assets, liabilities and items of income, deduction and credit of our direct and indirect wholly-owned subsidiaries are treated as ours.

We may invest in real estate through one or more limited or general partnerships or limited liability companies that are treated as partnerships for federal income tax purposes.  In the case of a REIT that is a partner in

16

a partnership, regulations under the Internal Revenue Code provide that, for purposes of the REIT qualification requirements regarding income and assets discussed below, the REIT is deemed to own its proportionate share of the assets of the partnership corresponding to the REIT’s proportionate capital interest in the partnership and is deemed to be entitled to the income of the partnership attributable to this proportionate share.  In addition, for these purposes, the character of the assets and gross income of the partnership generally retain the same character in the hands of the REIT.  Accordingly, our proportionate share of the assets, liabilities, and items of income of each partnership in which we are a partner is treated as ours for purposes of the income tests and asset tests discussed below.  In contrast, for purposes of the distribution requirement discussed below, we must take into account as a partner our share of the partnership’s income as determined under the general federal income tax rules governing partners and partnerships under Sections 701 through 777 of the Internal Revenue Code.

Taxable REIT Subsidiaries.  We are permitted to own any or all of the securities of a “taxable REIT subsidiary” as defined in Section 856(l) of the Internal Revenue Code, provided that no more than 20% of our assets, at the close of each quarter, is comprised of our investments in the stock or securities of our taxable REIT subsidiaries.  Among other requirements, a taxable REIT subsidiary must:

(1)  be a non-REIT corporation for federal income tax purposes in which we directly or indirectly own shares;

(2)  join with us in making a taxable REIT subsidiary election;

(3)  not directly or indirectly operate or manage a lodging facility or a health care facility; and

(4)  not directly or indirectly provide to any person, under a franchise, license, or otherwise, rights to any brand name under which any lodging facility or health care facility is operated, except that in limited circumstances a subfranchise, sublicense or similar right can be granted to an independent contractor to operate or manage a lodging facility.

In addition, a corporation other than a REIT in which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value will automatically be treated as a taxable REIT subsidiary.  Subject to the discussion below, we believe that we and each of our taxable REIT subsidiaries have complied with, and will continue to comply with, the requirements for taxable REIT subsidiary status during all times each subsidiary’s taxable REIT subsidiary election remains in effect, and we believe that the same will be true for any taxable REIT subsidiary that we later form or acquire.

Our ownership of stock and securities in taxable REIT subsidiaries is exempt from the 10% and 5% REIT asset tests discussed below.  Also, as discussed below, taxable REIT subsidiaries can perform services for our tenants without disqualifying the rents we receive from those tenants under the 75% or 95% gross income tests discussed below.  Moreover, because taxable REIT subsidiaries are taxed as C corporations that are separate from us, their assets, liabilities and items of income, deduction and credit are not imputed to us for purposes of the REIT qualification requirements described in this summary.  Therefore, taxable REIT subsidiaries can generally undertake third-party management and development activities and activities not related to real estate.

Restrictions are imposed on taxable REIT subsidiaries to ensure that they will be subject to an appropriate level of federal income taxation.  For example, a taxable REIT subsidiary may not deduct interest paid in any year to an affiliated REIT to the extent that the interest payments exceed, generally, 50% of the taxable REIT subsidiary’s adjusted taxable income for that year.  However, the taxable REIT subsidiary may carry forward the disallowed interest expense to a succeeding year, and deduct the interest in that later year subject to that year’s 50% adjusted taxable income limitation.  In addition, if a taxable REIT subsidiary pays interest, rent, or other amounts to its affiliated REIT in an amount that exceeds what an unrelated third party would have paid in an arm’s length transaction, then the REIT generally will be subject to an excise tax equal to 100% of the excessive portion of the payment.  Finally, if in comparison to an arm’s length transaction, a tenant has overpaid rent to the REIT in exchange for underpaying the taxable REIT subsidiary for services rendered, then the REIT may be subject to an excise tax equal to 100% of the overpayment.  There can be no assurance that arrangements involving our taxable REIT subsidiaries will not result in the imposition of one or more of these deduction limitations or excise taxes, but we do not believe that we are or will be subject to these impositions.

17

In our 2000 taxable year, we took title to several healthcare facilities, valued in the aggregate at less than $9 million, through corporate subsidiaries in which we owned 99% of the outstanding common stock, all of which was nonvoting, and in which individual shareholders owned 1% of the outstanding common stock, all of which was voting.  We could not take direct title to these particular facilities and operate them under the “foreclosure property” rules discussed below because these facilities were not leased by or mortgaged to us at the time of our tenant-mortgagor’s default with respect to other facilities, nor could we lease these facilities on suitable terms because of market conditions at that time.  Accordingly, our 99% subsidiaries took title to these particular facilities and retained an independent contractor to operate and manage the facilities.  Although there can be no assurance in this regard, we believe that these 99% owned subsidiaries’ ownership and operational structure during our 2000 taxable year satisfied the then applicable REIT asset tests discussed below, because we did not own more than 10% of their voting securities.  As of January 1, 2001, we acquired 100% ownership of the formerly 99% owned corporate subsidiaries, and filed a taxable REIT subsidiary election with each of these subsidiaries effective January 1, 2001.  These elections were revoked early in taxable year 2002, in connection with the spin-off of Five Star Quality Care, Inc. and our diminished ownership of these subsidiaries.  We have received an opinion of counsel that it is more likely than not that these subsidiaries were taxable REIT subsidiaries from January 1, 2001, until the revocation of the taxable REIT subsidiary elections.  We had submitted a private letter ruling request to the IRS to confirm that these subsidiaries complied with the requirement that prohibits the direct or indirect operation or management of a healthcare facility by a taxable REIT subsidiary, but withdrew this request before any IRS ruling was issued.  If it is determined that these subsidiaries were ineligible for taxable REIT subsidiary status, we believe that the subsidiaries would instead have been qualified REIT subsidiaries under Section 856(i) of the Internal Revenue Code as of January 1, 2001 because we owned 100% of them and they were not properly classified as taxable REIT subsidiaries.  As our qualified REIT subsidiaries, the gross income from the subsidiaries’ healthcare facilities would be treated as our own, and as a general matter would be nonqualifying income for purposes of the 75% and 95% gross income tests discussed below.  However, we took steps to qualify for the 75% and 95% gross income tests under the relief provision described below.  Thus, even if the IRS or a court ultimately determines that these subsidiaries failed to qualify as our taxable REIT subsidiaries, and that this failure thereby implicated our compliance with the 75% and 95% gross income tests discussed below, we expect we would qualify for the gross income tests’ relief provision and thereby preserve our qualification as a REIT.  If this relief provision were to apply to us, we would be subject to tax at a 100% rate on the greater of the amount by which we failed the 75% or the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect our profitability for the taxable year; however, we would expect to owe little or no tax in these circumstances.

Income Tests.  There are two gross income requirements for qualification as a REIT under the Internal Revenue Code:

•At least 75% of our gross income, excluding gross income from sales or other dispositions of property held primarily for sale, must be derived from investments relating to real property, including “rents from real property” as defined under Section 856 of the Internal Revenue Code, mortgages on real property, or shares in other REITs.  When we receive new capital in exchange for our shares or in a public offering of five-year or longer debt instruments, income attributable to the temporary investment of this new capital in stock or a debt instrument, if received or accrued within one year of our receipt of the new capital, is generally also qualifying income under the 75% test.

•At least 95% of our gross income, excluding gross income from sales or other dispositions of property held primarily for sale, must be derived from a combination of items of real property income that satisfy the 75% test described above, dividends, interest, payments under interest rate swap or cap agreements, options, futures contracts, forward rate agreements, or similar financial instruments, and gains from the sale or disposition of stock, securities, or real property.

For purposes of these two requirements, income derived from a “shared appreciation provision” in a mortgage loan is generally treated as gain recognized on the sale of the property to which it relates.  Although we will use our best efforts to ensure that the income generated by our investments will be of a type which satisfies both the 75% and 95% gross income tests, there can be no assurance in this regard.

18

In order to qualify as “rents from real property” under Section 856 of the Internal Revenue Code, several requirements must be met:

•The amount of rent received generally must not be based on the income or profits of any person, but may be based on receipts or sales.

•Rents do not qualify if the REIT owns 10% or more by vote or value of the tenant, whether directly or after application of attribution rules.  While we intend not to lease property to any party if rents from that property would not qualify as rents from real property, application of the 10% ownership rule is dependent upon complex attribution rules and circumstances that may be beyond our control.  For example, an unaffiliated third party’s ownership directly or by attribution of 10% or more by value of our shares, as well as 10% or more by vote or value of the stock of one of our tenants, would result in that tenant’s rents not qualifying as rents from real property. Our declaration of trust disallows transfers or purported acquisitions, directly or by attribution, of our shares to the extent necessary to maintain our REIT status under the Internal Revenue Code.  Nevertheless, there can be no assurance that these provisions in our declaration of trust will be effective to prevent our REIT status from being jeopardized under the 10% affiliated tenant rule.  Furthermore, there can be no assurance that we will be able to monitor and enforce these restrictions, nor will our shareholders necessarily be aware of ownership of shares attributed to them under the Internal Revenue Code’s attribution rules.

•There is a limited exception to the above prohibition on earning “rents from real property” from a 10% affiliated tenant, if the tenant is a taxable REIT subsidiary.  If at least 90% of the leased space of a property is leased to tenants other than taxable REIT subsidiaries and 10% affiliated tenants, and if the taxable REIT subsidiary’s rent for space at that property is substantially comparable to the rents paid by nonaffiliated tenants for comparable space at the property, then otherwise qualifying rents paid by the taxable REIT subsidiary to the REIT will not be disqualified on account of the rule prohibiting 10% affiliated tenants.

•In order for rents to qualify, we generally must not manage the property or furnish or render services to the tenants of the property, except through an independent contractor from whom we derive no income or, for our 2001 taxable year and thereafter, through one of our taxable REIT subsidiaries.  There is an exception to this rule permitting a REIT to perform customary tenant services of the sort which a tax-exempt organization could perform without being considered in receipt of “unrelated business taxable income” as defined in Section 512(b)(3) of the Internal Revenue Code.  In addition, a de minimis amount of noncustomary services will not disqualify income as “rents from real property” so long as the value of the impermissible services does not exceed 1% of the gross income from the property.

•If rent attributable to personal property leased in connection with a lease of real property is 15% or less of the total rent received under the lease, then the rent attributable to personal property will qualify as “rents from real property”; if this 15% threshold is exceeded, the rent attributable to personal property will not so qualify.  For our taxable years through December 31, 2000, the portion of rental income treated as attributable to personal property was determined according to the ratio of the tax basis of the personal property to the total tax basis of the real and personal property which is rented.  For our 2001 taxable year and thereafter, the ratio is determined by reference to fair market values rather than tax bases.

We believe that all or substantially all our rents have qualified and will qualify as rents from real property for purposes of Section 856 of the Internal Revenue Code.

In order to qualify as mortgage interest on real property for purposes of the 75% test, interest must derive from a mortgage loan secured by real property with a fair market value, at the time the loan is made, at least equal to the amount of the loan.  If the amount of the loan exceeds the fair market value of the real property, the interest will be treated as interest on a mortgage loan in a ratio equal to the ratio of the fair market value of the real property to the total amount of the mortgage loan.

In our 2000 taxable year, we reduced to possession several healthcare facilities, including both the real property and the incidental personal property at these facilities, in each case after a default or imminent default on

19

either a loan secured by the facility or a lease of the facility.  As of and subsequent to December 31, 2001, these facilities are leased to Five Star Quality Care, Inc., and we believe the rents from these facilities qualify as “rents from real property”.  For periods before we began leasing these facilities to Five Star Quality Care, Inc., gross operating income from the facilities would not have qualified under the 75% and 95% gross income tests in the absence of “foreclosure property” treatment under Section 856(e) of the Internal Revenue Code, and would likely have disqualified us from being a REIT.  As foreclosure property, however, gross operating income from our repossessed facilities qualified under the 75% and 95% gross income tests.  Further, any gain we recognized on the sale of foreclosure property, plus any income we received from foreclosure property that would not qualify under the 75% gross income test in the absence of foreclosure property treatment, reduced by our expenses directly connected with the production of those items of income, was subject to tax at the maximum corporate rate of 35%.

We believe that we were eligible, pursuant to Section 856(e) of the Internal Revenue Code, to treat the facilities we repossessed in 2000 as “foreclosure property,” and we made a federal income tax election to that effect.  We do not believe that foreclosure property status for the repossessed facilities terminated at any point before our lease of these properties to Five Star Quality Care, Inc. began.  Accordingly, we believe that the gross operating income we received from these repossessed facilities during 2000 and 2001 qualified under the 75% and 95% gross income tests.

Other than sales of foreclosure property, any gain we realize on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business will be treated as income from a prohibited transaction that is subject to a penalty tax at a 100% rate.  This prohibited transaction income also may adversely affect our ability to satisfy the 75% and 95% gross income tests for federal income tax qualification as a REIT.  We cannot provide assurances as to whether or not the IRS might successfully assert that one or more of our dispositions is subject to the 100% penalty tax.  However, we believe that dispositions of assets that we have made or that we might make in the future will not be subject to the 100% penalty tax, because we intend to:

•own our assets for investment with a view to long-term income production and capital appreciation;

•engage in the business of developing, owning and operating our existing properties and acquiring, developing, owning and operating new properties; and

•make occasional dispositions of our assets consistent with our long-term investment objectives.

If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for that year if:

•our failure to meet the test was due to reasonable cause and not due to willful neglect;

•we report the nature and amount of each item of our income included in the 75% or 95% gross income tests for that taxable year on a schedule attached to our tax return; and

•any incorrect information on the schedule was not due to fraud with intent to evade tax.

We have in the past attached and will continue to attach a schedule of gross income to our federal income tax returns, but it is impossible to state whether in all circumstances we would be entitled to the benefit of this relief provision for the 75% and 95% gross income tests.  Even if this relief provision did apply, a special tax equal to 100% is imposed upon the greater of the amount by which we failed the 75% test or the 95% test, with adjustments, multiplied by a fraction intended to reflect our profitability.

Asset Tests.  At the close of each quarter of each taxable year, we must also satisfy these asset percentage tests in order to qualify as a REIT for federal income tax purposes:

•At least 75% of our total assets must consist of real estate assets, cash and cash items, shares in other REITs, government securities, and stock or debt instruments purchased with proceeds of a stock offering or an

20

offering of our debt with a term of at least five years, but only for the one-year period commencing with our receipt of the offering proceeds.

•Not more than 25% of our total assets may be represented by securities other than those securities that count favorably toward the preceding 75% asset test.

•Of the investments included in the preceding 25% asset class, the value of any one non-REIT issuer’s securities that we own may not exceed 5% of the value of our total assets, and we may not own more than 10% of any one non-REIT issuer’s outstanding voting securities.  For our 2001 taxable year and thereafter, we may not own more than 10% of the vote or value of any one non-REIT issuer’s outstanding securities, unless that issuer is our taxable REIT subsidiary or the securities are straight debt securities.

•For our 2001 taxable year and thereafter, our stock and securities in a taxable REIT subsidiary are exempted from the preceding 10% and 5% asset tests.  However, no more than 20% of our total assets may be represented by stock or securities of taxable REIT subsidiaries.

When a failure to satisfy the above asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within 30 days after the close of that quarter.  We intend to maintain records of the value of our assets to document our compliance with the above asset tests, and to take actions as may be required to cure any failure to satisfy the tests within 30 days after the close of any quarter.

Our Relationship with Five Star.  In 2001, we and HRPT spun off substantially all of our Five Star common shares.  In addition, our leases with Five Star, Five Star’s charter and bylaws, and the transaction agreement governing the spin-off contain restrictions upon the ownership of Five Star common shares and require Five Star to refrain from taking any actions that may jeopardize our qualification as a REIT under the Internal Revenue Code, including actions which would result in our or our significant shareholder, HRPT obtaining actual or constructive ownership of 10% or more of the Five Star common shares.  Accordingly, commencing with our 2002 taxable year, we expect that the rental income we receive from Five Star and its subsidiaries will be “rents from real property,” and thus qualifying income under the 75% and 95% gross income tests described above.

Annual Distribution Requirements.  In order to qualify for taxation as a REIT under the Internal Revenue Code, we are required to make annual distributions other than capital gain dividends to our shareholders in an amount at least equal to the excess of:

(A)the sum of 90% of our “real estate investment trust taxable income,” as defined in Section 857 of the Internal Revenue Code, computed by excluding any net capital gain and before taking into account any dividends paid deduction for which we are eligible, and 90% of our net income after tax, if any, from property received in foreclosure, over

(B)the sum of our qualifying noncash income, e.g., imputed rental income or income from transactions inadvertently failing to qualify as like-kind exchanges.

The distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for the earlier taxable year and if paid on or before the first regular distribution payment after that declaration.  If a dividend is declared in October, November, or December to shareholders of record during one of those months, and is paid during the following January, then for federal income tax purposes the dividend will be treated as having been both paid and received on December 31 of the prior taxable year.  A distribution which is not pro rata within a class of our beneficial interests entitled to a distribution, or which is not consistent with the rights to distributions among our classes of beneficial interests, is a preferential distribution that is not taken into consideration for purposes of the distribution requirements, and accordingly the payment of a preferential distribution could affect our ability to meet the distribution requirements.  Taking into account our distribution policies, including the dividend reinvestment plan we have adopted, we expect that we will not make any preferential distributions. The distribution requirements may be waived by the IRS if a REIT establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 4% excise tax

21

discussed below.  To the extent that we do not distribute all of our net capital gain and all of our real estate investment trust taxable income, as adjusted, we will be subject to tax on undistributed amounts.

In addition, we will be subject to a 4% excise tax to the extent we fail within a calendar year to make required distributions to our shareholders of 85% of our ordinary income and 95% of our capital gain net income plus the excess, if any, of the “grossed up required distribution” for the preceding calendar year over the amount treated as distributed for that preceding calendar year.  For this purpose, the term “grossed up required distribution” for any calendar year is the sum of our taxable income for the calendar year without regard to the deduction for dividends paid and all amounts from earlier years that are not treated as having been distributed under the provision. We will be treated as having sufficient earnings and profits to treat as a dividend any distribution by us up to the amount required to be distributed in order to avoid imposition of the 4% excise tax.

If we do not have enough cash or other liquid assets to meet the 90% distribution requirements, we may find it necessary and desirable to arrange for new debt or equity financing to provide funds for required distributions in order to maintain our REIT status.  We can provide no assurance that financing would be available for these purposes on favorable terms.

We may be able to rectify a failure to pay sufficient dividends for any year by paying “deficiency dividends” to shareholders in a later year.  These deficiency dividends may be included in our deduction for dividends paid for the earlier year, but an interest charge would be imposed upon us for the delay in distribution.  Although we may be able to avoid being taxed on amounts distributed as deficiency dividends, we will remain liable for the 4% excise tax discussed above.

In addition to the other distribution requirements above, to preserve our status as a REIT we are required to timely distribute C corporation earnings and profits that we inherit from acquired corporations.

Acquisition of C Corporations

On January 11, 2002, we acquired all of the outstanding stock of a subsidiary of a C corporation.  At the time of that acquisition, this subsidiary directly or indirectly owned all of the outstanding equity interests in various corporate and noncorporate subsidiaries.  Upon our acquisition, each of the acquired entities became either our qualified REIT subsidiary under Section 856(i) of the Internal Revenue Code or a disregarded entity under Treasury regulations issued under Section 7701 of the Internal Revenue Code.  Thus, after the acquisition, all assets, liabilities and items of income, deduction and credit of wholly-owned subsidiaries have been treated as ours for purposes of the various REIT qualification tests described above.  In addition, we generally were treated as the successor to the acquired subsidiaries’ federal income tax attributes, such as those entities’ adjusted tax bases in their assets and their depreciation schedules; we were also treated as the successor to the acquired corporate subsidiaries’ earnings and profits for federal income tax purposes, if any.

Built-in Gains from C Corporations.  As described above, notwithstanding our qualification and taxation as a REIT, we may still be subject to corporate taxation in particular circumstances.  Specifically, if we acquire an asset from a C corporation in a transaction in which our adjusted tax basis in the asset is determined by reference to the adjusted tax basis of that asset in the hands of the C corporation, and if we subsequently recognize gain on the disposition of that asset during the ten year period following the acquisition, then we will generally pay tax at the highest regular corporate tax rate, currently 35%, on the lesser of (1) the excess, if any, of the asset’s fair market value over its adjusted tax basis, each determined as of the time we acquired the asset, or (2) our gain recognized in the disposition.  Accordingly, any taxable disposition of an asset acquired in the January 11, 2002, transaction during the ten-year period commencing on that date could be subject to tax under these rules.  However, except as described below, we have not disposed, and have no present plan or intent to dispose, of any material assets acquired in the January 11, 2002, transaction.

Also on January 11, 2002, we conveyed to Five Star and its subsidiaries operating assets that were of a type that are typically owned by the tenant of a senior living facility.  In exchange, Five Star and its subsidiaries assumed related operating liabilities.  The aggregate adjusted tax basis in the transferred operating assets was less than the related liabilities assumed, and Five Star and its subsidiaries received a cash payment from us in the

22

amount of the difference.  We believe that the fair market value of these conveyed operating assets equaled their adjusted tax bases, and we and Five Star agreed to do our respective tax return reporting to that effect.  Accordingly, although Sullivan & Worcester LLP is unable to render an opinion on factual determinations such as assets’ fair market value, we reported no gain or loss, and therefore owed no corporate level tax under the rules for dispositions of former C corporation assets, in respect of this conveyance of operating assets to Five Star.

Earnings and Profits. A REIT may not at the end of any taxable year have any undistributed earnings and profits for federal income tax purposes that are attributable to a C corporation.  Upon the closing of the January 11, 2002, transaction, we succeeded to the undistributed earnings and profits, if any, of the acquired corporate subsidiaries.  Thus, we needed to distribute all of these earnings and profits no later than December 31, 2002.  If we failed to do so, we will not qualify as a REIT unless we are able to rely on the relief provision described below.

Although Sullivan & Worcester LLP is unable to render an opinion on factual determinations such as the amount of undistributed earnings and profits, we made an investigation of the amount of undistributed earnings and profits that we inherited in the January 11, 2002, transaction.  We believe that we did not acquire any undistributed earnings and profits in this transaction that remained undistributed on December 31, 2002, after taking into account our distributions for 2002.  However, there can be no assurance that the IRS would not, upon subsequent examination, propose adjustments to the undistributed earnings and profits that we inherited as a result of the January 11, 2002, transaction.  In examining the calculation of undistributed earnings and profits that we inherited, the IRS might consider all taxable years of the acquired subsidiaries as open for review for purposes of its proposed adjustments.  If it is subsequently determined that we had undistributed earnings and profits from the January 11, 2002, transaction at December 31, 2002, we may be eligible for a relief provision similar to the “deficiency dividends” procedure described above.  To utilize this relief provision, we would have to pay an interest charge for the delay in distributing the undistributed earnings and profits; in addition, we would be required to distribute to our shareholders, in addition to our other REIT distribution requirements, the amount of the undistributed earnings and profits less the interest charge paid.

Depreciation and Federal Income Tax Treatment of Leases

Our initial tax bases in our assets will generally be our acquisition cost.  We will generally depreciate our real property on a straight-line basis over 40 years and our personal property over 12years.  These depreciation schedules may vary for properties that we acquire through tax-free or carryover basis acquisitions.

The initial tax bases and depreciation schedules for our assets we held immediately after we were spun off in 1999 from HRPT depends upon whether the deemed exchange that resulted from that spin-off was an exchange under Section 351(a) of the Internal Revenue Code.  We believe that Section 351(a) treatment was appropriate.  Therefore, we carried over HRPT’s tax basis and depreciation schedule in each of the assets, and to the extent that HRPT recognized gain on an asset in the deemed exchange, we obtained additional tax basis in that asset which we depreciate in the same manner as we depreciate newly purchased assets.  In contrast, if Section 351(a) treatment was not appropriate for the deemed exchange, then we will be treated as though we acquired all our assets at the time of the spin-off in a fully taxable acquisition, thereby acquiring aggregate tax bases in these assets equal to the aggregate amount realized by HRPT in the deemed exchange, and it would then be appropriate to depreciate these tax bases in the same manner as we depreciate newly purchased assets.  We believe, and Sullivan & Worcester LLP has opined, that it is likely that the deemed exchange was an exchange under Section 351(a) of the Internal Revenue Code, and we will perform all our tax reporting accordingly.  We may be required to amend these tax reports, including those sent to our shareholders, if the IRS successfully challenges our position that the deemed exchange was an exchange under Section 351(a) of the Internal Revenue Code.  We intend to comply with the annual REIT distribution requirements regardless of whether the deemed exchange was an exchange under Section 351(a) of the Internal Revenue Code.

We are entitled to depreciation deductions from our facilities only if we are treated for federal income tax purposes as the owner of the facilities.  This means that the leases of the facilities must be classified for federal income tax purposes as true leases, rather than as sales or financing arrangements, and we believe this to be the case.  In the case of sale-leaseback arrangements, the IRS could assert that we realized prepaid rental income in the year of

23

purchase to the extent that the value of a leased property, at the time of purchase, exceeded the purchase price for that property.  While we believe that the value of leased property at the time of purchase did not exceed purchase prices, because of the lack of clear precedent we cannot provide assurances as to whether the IRS might successfully assert the existence of prepaid rental income in any of our sale-leaseback transactions.

Taxation of U.S. Shareholders

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the maximum individual federal income tax rate for long-term capital gains generally to 15% (for gains properly taken into account during the period beginning May 6, 2003, and ending for taxable years that begin after December 31, 2008) and for most corporate dividends generally to 15% (for taxable years that begin in the years 2003 through 2008).  However, because we are not generally subject to federal income tax on the portion of our REIT taxable income or capital gains distributed to our shareholders, dividends on our shares generally are not eligible for the new 15% tax rate on dividends.  As a result, our ordinary dividends continue to be taxed at the higher federal income tax rates applicable to ordinary income.  However, the 15% federal income tax rate for long-term capital gains and dividends generally applies to:

(1)your long-term capital gains, if any, recognized on the disposition of our shares;

(2)our distributions designated as long-term capital gain dividends (except to the extent attributable to real estate depreciation recapture, in which case the distributions are subject to a 25% federal income tax rate);

(3)our dividends attributable to dividends, if any, received by us from non-REIT corporations such as taxable REIT subsidiaries; and

(4)our dividends to the extent attributable to income upon which we have paid federal corporate income tax.

As long as we qualify as a REIT for federal income tax purposes, a distribution to our U.S. shareholders that we do not designate as a capital gain dividend will be treated as an ordinary income dividend to the extent of our current or accumulated earnings and profits. Distributions made out of our current or accumulated earnings and profits that we properly designate as capital gain dividends will be taxed as long-term capital gains, as discussed below, to the extent they do not exceed our actual net capital gain for the taxable year.  However, corporate shareholders may be required to treat up to 20% of any capital gain dividend as ordinary income under Section 291 of the Internal Revenue Code.

In addition, we may elect to retain net capital gain income and treat it as constructively distributed.  In that case:

(1)we will be taxed at regular corporate capital gains tax rates on retained amounts;

(2)each U.S. shareholder will be taxed on its designated proportionate share of our retained net capital gains as though that amount were distributed and designated a capital gain dividend;

(3)each U.S. shareholder will receive a credit for its designated proportionate share of the tax that we pay;

(4)each U.S. shareholder will increase its adjusted basis in our shares by the excess of the amount of its proportionate share of these retained net capital gains over its proportionate share of this tax that we pay; and

(5)both we and our corporate shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes.

24

If we elect to retain our net capital gains in this fashion, we will notify our U.S. shareholders of the relevant tax information within 60 days after the close of the affected taxable year.

As discussed above, for noncorporate U.S. shareholders, long-term capital gains are generally taxed at maximum rates of 15% or 25%, depending upon the type of property disposed of and the previously claimed depreciation with respect to this property.  If for any taxable year we designate capital gain dividends for U.S. shareholders, then the portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all classes of our shares.  We will similarly designate the portion of any capital gain dividend that is to be taxed to noncorporate U.S. shareholders at the maximum rates of 15% or 25% so that the designations will be proportionate among all classes of our shares.

Distributions in excess of current or accumulated earnings and profits will not be taxable to a U.S. shareholder to the extent that they do not exceed the shareholder’s adjusted tax basis in the shareholder’s shares, but will reduce the shareholder’s basis in those shares.  To the extent that these excess distributions exceed the adjusted basis of a U.S. shareholder’s shares, they will be included in income as capital gain, with long-term gain generally taxed to noncorporate U.S. shareholders at a maximum rate of 15%.  No U.S. shareholder may include on his federal income tax return any of our net operating losses or any of our capital losses.

Dividends that we declare in October, November or December of a taxable year to U.S. shareholders of record on a date in those months will be deemed to have been received by shareholders on December 31 of that taxable year, provided we actually pay these dividends during the following January.  Also, items that are treated differently for regular and alternative minimum tax purposes are to be allocated between a REIT and its shareholders under Treasury regulations which are to be prescribed.  It is possible that these Treasury regulations will require tax preference items to be allocated to our shareholders with respect to any accelerated depreciation or other tax preference items that we claim.

A U.S. shareholder will recognize gain or loss equal to the difference between the amount realized and the shareholder’s adjusted basis in our shares which are sold or exchanged.  This gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the shareholder’s holding period in the shares exceeds one year.  In addition, any loss upon a sale or exchange of our shares held for six months or less will generally be treated as a long-term capital loss to the extent of our long-term capital gain dividends during the holding period.

Noncorporate U.S. shareholders who borrow funds to finance their acquisition of our shares could be limited in the amount of deductions allowed for the interest paid on the indebtedness incurred.  Under Section 163(d) of the Internal Revenue Code, interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment is generally deductible only to the extent of the investor’s net investment income.  A U.S. shareholder’s net investment income will include ordinary income dividend distributions received from us and, if an appropriate election is made by the shareholder, capital gain dividend distributions received from us; however, distributions treated as a nontaxable return of the shareholder’s basis will not enter into the computation of net investment income.

Taxation of Tax-Exempt Shareholders

In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a REIT to a tax-exempt employees’ pension trust did not constitute “unrelated business taxable income,” even though the REIT may have financed some its activities with acquisition indebtedness.  Although revenue rulings are interpretive in nature and subject to revocation or modification by the IRS, based upon the analysis and conclusion of Revenue Ruling 66-106, our distributions made to shareholders that are tax-exempt pension plans, individual retirement accounts, or other qualifying tax-exempt entities should not constitute unrelated business taxable income, unless the shareholder has financed its acquisition of our shares with “acquisition indebtedness” within the meaning of the Internal Revenue Code.

25

Tax-exempt pension trusts, including so-called 401(k) plans but excluding individual retirement accounts or government pension plans, that own more than 10% by value of a “pension-held REIT” at any time during a taxable year may be required to treat a percentage of all dividends received from the pension-held REIT during the year as unrelated business taxable income.  This percentage is equal to the ratio of:

(1)the pension-held REIT’s gross income derived from the conduct of unrelated trades or businesses, determined as if the pension-held REIT were a tax-exempt pension fund, less direct expenses related to that income, to

(2)the pension-held REIT’s gross income from all sources, less direct expenses related to that income,

except that this percentage shall be deemed to be zero unless it would otherwise equal or exceed 5%.  A REIT is a pension-held REIT if:

•the REIT is “predominantly held” by tax-exempt pension trusts; and

•the REIT would fail to satisfy the “closely held” ownership requirement discussed above if the stock or beneficial interests in the REIT held by tax-exempt pension trusts were viewed as held by tax-exempt pension trusts rather than by their respective beneficiaries.

A REIT is predominantly held by tax-exempt pension trusts if at least one tax-exempt pension trust owns more than 25% by value of the REIT’s stock or beneficial interests, or if one or more tax-exempt pension trusts, each owning more than 10% by value of the REIT’s stock or beneficial interests, own in the aggregate more than 50% by value of the REIT’s stock or beneficial interests. Because of the share ownership concentration restrictions in our declaration of trust, we believe that we are not and will not be a pension-held REIT.  However, because our shares are publicly traded, we cannot completely control whether or not we are or will become a pension-held REIT.

Social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans exempt from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code, respectively, are subject to different unrelated business taxable income rules, which generally will require them to characterize distributions from a REIT as unrelated business taxable income.  In addition, these prospective investors should consult their own tax advisors concerning any “set aside” or reserve requirements applicable to them.

Taxation of Non-U.S. Shareholders

The rules governing the United States federal income taxation of non-U.S. shareholders are complex, and the following discussion is intended only as a summary of these rules.  If you are a non-U.S. shareholder, we urge you to consult with your own tax advisor to determine the impact of United States federal, state, local, and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your investment in our shares.

In general, a non-U.S. shareholder will be subject to regular United States federal income tax in the same manner as a U.S. shareholder with respect to its investment in our shares if that investment is effectively connected with the non-U.S. shareholder’s conduct of a trade or business in the United States.  In addition, a corporate non-U.S. shareholder that receives income that is or is deemed effectively connected with a trade or business in the United States may also be subject to the 30% branch profits tax under Section 884 of the Internal Revenue Code, which is payable in addition to regular United States federal corporate income tax.  The balance of this discussion of the United States federal income taxation of non-U.S. shareholders addresses only those non-U.S. shareholders whose investment in our shares is not effectively connected with the conduct of a trade or business in the United States.

A distribution by us to a non-U.S. shareholder that is not attributable to gain from the sale or exchange of a United States real property interest and that is not designated as a capital gain dividend will be treated as an ordinary income dividend to the extent that it is made out of current or accumulated earnings and profits.  A distribution of

26

this type will generally be subject to United States federal income tax and withholding at the rate of 30%, or lower rate if the non-U.S. shareholder has in the manner prescribed by the IRS demonstrated its entitlement to benefits under a tax treaty.  Because we cannot determine our current and accumulated earnings and profits until the end of the taxable year, withholding at the rate of 30% or applicable lower treaty rate will generally be imposed on the gross amount of any distribution to a non-U.S. shareholder that we make and do not designate a capital gain dividend.  Notwithstanding this withholding on distributions in excess of our current and accumulated earnings and profits, these distributions are a nontaxable return of capital to the extent that they do not exceed the non-U.S. shareholder’s adjusted basis in our shares, and the nontaxable return of capital will reduce the adjusted basis in these shares.  To the extent that distributions in excess of current and accumulated earnings and profits exceed the non-U.S. shareholder’s adjusted basis in our shares, the distributions will give rise to tax liability if the non-U.S. shareholder would otherwise be subject to tax on any gain from the sale or exchange of these shares, as discussed below.  A non-U.S. shareholder may seek a refund from the IRS of amounts withheld on distributions to him in excess of our current and accumulated earnings and profits.

For any year in which we qualify as a REIT, distributions that are attributable to gain from the sale or exchange of a United States real property interest are taxed to a non-U.S. shareholder as if these distributions were gains effectively connected with a trade or business in the United States conducted by the non-U.S. shareholder.  Accordingly, a non-U.S. shareholder will be taxed on these amounts at the normal capital gain rates applicable to a U.S. shareholder, subject to any applicable alternative minimum tax and to a special alternative minimum tax in the case of nonresident alien individuals; the non-U.S. shareholder will be required to file a United States federal income tax return reporting these amounts, even if applicable withholding is imposed as described below; and corporate non-U.S. shareholders may owe the 30% branch profits tax under Section 884 of the Internal Revenue Code in respect of these amounts.  We will be required to withhold from distributions to non-U.S. shareholders, and remit to the IRS, 35% of the maximum amount of any distribution that could be designated as a capital gain dividend.  In addition, for purposes of this withholding rule, if we designate prior distributions as capital gain dividends, then subsequent distributions up to the amount of the designated prior distributions will be treated as capital gain dividends.  The amount of any tax withheld is creditable against the non-U.S. shareholder’s United States federal income tax liability, and any amount of tax withheld in excess of that tax liability may be refunded if an appropriate claim for refund is filed with the IRS.  If for any taxable year we designate capital gain dividends for our shareholders, then the portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all classes of our shares.

Tax treaties may reduce the withholding obligations on our distributions.  Under some treaties, however, rates below 30% that are applicable to ordinary income dividends from United States corporations may not apply to ordinary income dividends from a REIT.  You must generally use an applicable IRS Form W-8, or substantially similar form, to claim tax treaty benefits.  If the amount of tax withheld by us with respect to a distribution to a non-U.S. shareholder exceeds the shareholder’s United States federal income tax liability with respect to the distribution, the non-U.S. shareholder may file for a refund of the excess from the IRS.  The 35% withholding tax rate on capital gain dividends corresponds to the maximum income tax rate applicable to corporate non-U.S. shareholders but is higher than the 15% and 25% maximum rates on capital gains generally applicable to noncorporate non-U.S. shareholders.  Treasury regulations also provide special rules to determine whether, for purposes of determining the applicability of a tax treaty, our distributions to a non-U.S. shareholder that is an entity should be treated as paid to the entity or to those owning an interest in that entity, and whether the entity or its owners are entitled to benefits under the tax treaty.

If our shares are not “United States real property interests” within the meaning of Section 897 of the Internal Revenue Code, a non-U.S. shareholder’s gain on sale of these shares generally will not be subject to United States federal income taxation, except that a nonresident alien individual who was in the United States for 183 days or more during the taxable year will be subject to a 30% tax on this gain.  Our shares will not constitute a United States real property interest if we are a “domestically controlled REIT.”  A domestically controlled REIT is a REIT in which at all times during the preceding five-year period less than 50% in value of its shares is held directly or indirectly by foreign persons.  We believe that we are and will be a domestically controlled REIT and thus a non-U.S. shareholder’s gain on sale of our shares will not be subject to United States federal income taxation.

27

However, because our shares are publicly traded, we can provide no assurance that we will be a domestically controlled REIT.  If we are not a domestically controlled REIT, a non-U.S. shareholder’s gain on sale of our shares will not be subject to United States federal income taxation as a sale of a United States real property interest, if that class of shares is “regularly traded,” as defined by applicable Treasury regulations, on an established securities market like the New York Stock Exchange, and the non-U.S. shareholder has at all times during the preceding five years owned 5% or less by value of that class of shares.  If the gain on the sale of our shares were subject to United States federal income taxation, the non-U.S. shareholder will generally be subject to the same treatment as a U.S. shareholder with respect to its gain, will be required to file a United States federal income tax return reporting that gain, and a corporate non-U.S. shareholder might owe branch profits tax under Section 884 of the Internal Revenue Code.  A purchaser of our shares from a non-U.S. shareholder will not be required to withhold on the purchase price if the purchased shares are regularly traded on an established securities market or if we are a domestically controlled REIT.  Otherwise, a purchaser of our shares from a non-U.S. shareholder may be required to withhold 10% of the purchase price paid to the non-U.S. shareholder and to remit the withheld amount to the IRS.

Backup Withholding and Information Reporting

Information reporting and backup withholding may apply to distributions or proceeds paid to our shareholders under the circumstances discussed below.  The backup withholding rate is currently 28%.  Amounts withheld under backup withholding are generally not an additional tax and may be refunded or credited against the REIT shareholder’s federal income tax liability.

A U.S. shareholder will be subject to backup withholding when it receives distributions on our shares or proceeds upon the sale, exchange, redemption, retirement or other disposition of our shares, unless the U.S. shareholder properly executes, or has previously properly executed, under penalties of perjury an IRS Form W-9 or substantially similar form that:

•provides the U.S. shareholder’s correct taxpayer identification number; and

•certifies that the U.S. shareholder is exempt from backup withholding because it is a corporation or comes within another exempt category, it has not been notified by the IRS that it is subject to backup withholding, or it has been notified by the IRS that it is no longer subject to backup withholding.

If the U.S. shareholder has not and does not provide its correct taxpayer identification number on the IRS Form W-9 or substantially similar form, it may be subject to penalties imposed by the IRS and the REIT or other withholding agent may have to withhold a portion of any capital gain distributions paid to it. Unless the U.S. shareholder has established on a properly executed IRS Form W-9 or substantially similar form that it is a corporation or comes within another exempt category, distributions on our shares paid to it during the calendar year, and the amount of tax withheld, if any, will be reported to it and to the IRS.

Distributions on our shares to a non-U.S. shareholder during each calendar year and the amount of tax withheld, if any, will generally be reported to the non-U.S. shareholder and to the IRS. This information reporting requirement applies regardless of whether the non-U.S. shareholder is subject to withholding on distributions on our shares or whether the withholding was reduced or eliminated by an applicable tax treaty.  Also, distributions paid to a non-U.S. shareholder on our shares may be subject to backup withholding, unless the non-U.S. shareholder properly certifies its non-U.S. shareholder status on an IRS Form W-8 or substantially similar form in the manner described above.  Similarly, information reporting and backup withholding will not apply to proceeds a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares, if the non-U.S. shareholder properly certifies its non-U.S. shareholder status on an IRS Form W-8 or substantially similar form.  Even without having executed an IRS Form W-8 or substantially similar form, however, in some cases information reporting and backup withholding will not apply to proceeds that a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares if the non-U.S. shareholder receives those proceeds through a broker’s foreign office.

28

Other Tax Consequences

Our and our shareholders’ federal income tax treatment may be modified by legislative, judicial, or administrative actions at any time, which actions may be retroactive in effect.  The rules dealing with federal income taxation are constantly under review by the Congress, the IRS and the Treasury Department, and statutory changes, new regulations, revisions to existing regulations, and revised interpretations of established concepts are issued frequently.  No prediction can be made as to the likelihood of passage of new tax legislation or other provisions or the direct or indirect effect on us and our shareholders. Revisions to federal income tax laws and interpretations of these laws could adversely affect the tax consequences of an investment in our shares.  We and our shareholders may also be subject to taxation by state or local jurisdictions, including those in which we or our shareholders transact business or reside.  State and local tax consequences may not be comparable to the federal income tax consequences discussed above.

29

ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS

General Fiduciary Obligations

Fiduciaries of a pension, profit-sharing or other employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, ERISA, must consider whether:

•their investment in our shares satisfies the diversification requirements of ERISA;

•the investment is prudent in light of possible limitations on the marketability of our shares;

•they have authority to acquire our shares under the applicable governing instrument and Title I of ERISA; and

•the investment is otherwise consistent with their fiduciary responsibilities.

Trustees and other fiduciaries of an ERISA plan may incur personal liability for any loss suffered by the plan on account of a violation of their fiduciary responsibilities.  In addition, these fiduciaries may be subject to a civil penalty of up to 20% of any amount recovered by the plan on account of a violation. Fiduciaries of any IRA, Roth IRA, Keogh Plan or other qualified retirement plan not subject to Title I of ERISA, referred to as “non-ERISA plans,” should consider that a plan may only make investments that are authorized by the appropriate governing instrument.  Fiduciary shareholders should consult their own legal advisors if they have any concern as to whether the investment is consistent with the foregoing criteria.

Prohibited Transactions

Fiduciaries of ERISA plans and persons making the investment decision for an IRA or other non-ERISA plan should consider the application of the prohibited transaction provisions of ERISA and the Internal Revenue Code in making their investment decision. Sales and other transactions between an ERISA or non-ERISA plan, and persons related to it, are prohibited transactions.  The particular facts concerning the sponsorship, operations and other investments of an ERISA plan or non-ERISA plan may cause a wide range of other persons to be treated as disqualified persons or parties in interest with respect to it.  A prohibited transaction, in addition to imposing potential personal liability upon fiduciaries of ERISA plans, may also result in the imposition of an excise tax under the Internal Revenue Code or a penalty under ERISA upon the disqualified person or party in interest with respect to the plan.  If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA or Roth IRA is maintained or his beneficiary, the IRA or Roth IRA may lose its tax-exempt status and its assets may be deemed to have been distributed to the individual in a taxable distribution on account of the prohibited transaction, but no excise tax will be imposed.  Fiduciary shareholders should consult their own legal advisors as to whether the ownership of our shares involves a prohibited transaction.

“Plan Assets” Considerations

The Department of Labor, which has administrative responsibility over ERISA plans as well as non-ERISA plans, has issued a regulation defining “plan assets.” The regulation generally provides that when an ERISA or non-ERISA plan acquires a security that is an equity interest in an entity and that security is neither a “publicly offered security” nor a security issued by an investment company registered under the Investment Company Act of 1940, the ERISA plan’s or non-ERISA plan’s assets include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established either that the entity is an operating company or that equity participation in the entity by benefit plan investors is not significant.

Each class of our shares (that is, our common shares and any class of preferred shares that we may issue) must be analyzed separately to ascertain whether it is a publicly offered security. The regulation defines a publicly offered security as a security that is “widely held,” “freely transferable” and either part of a class of securities registered under the Securities Exchange Act of 1934, or sold under an effective registration statement under the Securities Act of 1933, provided the securities are registered under the Securities Exchange Act of 1934 within 120

30

days after the end of the fiscal year of the issuer during which the offering occurred.  All our outstanding shares have been registered under the Securities Exchange Act of 1934.

The regulation provides that a security is “widely held” only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. However, a security will not fail to be “widely held” because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer’s control.  Our common shares have been widely held and we expect our common shares to continue to be widely held.  We expect the same to be true of any class of preferred stock that we may issue, but we can give no assurance in that regard.

The regulation provides that whether a security is “freely transferable” is a factual question to be determined on the basis of all relevant facts and circumstances. The regulation further provides that, where a security is part of an offering in which the minimum investment is $10,000 or less, some restrictions on transfer ordinarily will not, alone or in combination, affect a finding that these securities are freely transferable. The restrictions on transfer enumerated in the regulation as not affecting that finding include:

•any restriction on or prohibition against any transfer or assignment which would result in a termination or reclassification for federal or state tax purposes, or would otherwise violate any state or federal law or court order;

•any requirement that advance notice of a transfer or assignment be given to the issuer and any requirement that either the transferor or transferee, or both, execute documentation setting forth representations as to compliance with any restrictions on transfer which are among those enumerated in the regulation as not affecting free transferability, including those described in the preceding clause of this sentence;

•any administrative procedure which establishes an effective date, or an event prior to which a transfer or assignment will not be effective; and

•any limitation or restriction on transfer or assignment which is not imposed by the issuer or a person acting on behalf of the issuer.

We believe that the restrictions imposed under our declaration of trust on the transfer of shares do not result in the failure of our shares to be “freely transferable.”  Furthermore, we believe that there exist no other facts or circumstances limiting the transferability of our shares which are not included among those enumerated as not affecting their free transferability under the regulation, and we do not expect or intend to impose in the future, or to permit any person to impose on our behalf, any limitations or restrictions on transfer which would not be among the enumerated permissible limitations or restrictions.

Assuming that each class of our shares will be “widely held” and that no other facts and circumstances exist which restrict transferability of these shares, we have received an opinion of  our counsel, Sullivan & Worcester LLP, that our shares will not fail to be “freely transferable” for purposes of the regulation due to the restrictions on transfer of the shares under our declaration of trust and that under the regulation the shares are publicly offered securities and our assets will not be deemed to be “plan assets” of any ERISA plan or non-ERISA plan that invests in our shares.

31

Item 2.Properties

At December 31, 2003, we had real estate investments totaling $1.4 billion, at cost and after impairment loss write-downs, in 150 properties.  At December 31, 2003, five properties with an aggregate cost of $61.4 million were mortgaged or subject to capital lease obligations totaling $31.8 million.

The following table summarizes some information about our properties as of December 31, 2003.  All dollar amounts are in thousands.

Location of Properties by State	Number of Properties	Number of Living Units/Beds	Undepreciated Carrying Value		Net Book Value
Arizona	8	1,439	$	95,387	$	86,455
California	9	1,634	126,038		111,686
Colorado	8	853	33,388		26,044
Connecticut	2	300	12,867		8,431
Delaware	5	869	59,940		57,054
Florida	12	3,081	223,496		190,759
Georgia	3	338	11,188		8,907
Illinois	1	363	36,743		29,058
Indiana	2	263	23,369		22,353
Iowa	7	495	12,678		9,823
Kansas	3	402	32,374		30,820
Kentucky	3	606	43,333		41,175
Maryland	6	724	66,986		58,891
Massachusetts	3	489	66,082		59,053
Michigan	7	543	26,422		25,201
Minnesota	2	92	7,009		6,838
Missouri	2	180	4,153		3,112
Nebraska	14	814	15,399		13,348
New Jersey	6	984	87,248		83,175
New Mexico	1	209	26,750		25,468
North Carolina	3	197	12,633		12,308
Ohio	2	516	31,885		29,517
Pennsylvania	9	811	67,013		58,633
South Carolina	3	248	8,258		7,980
South Dakota	3	361	7,589		5,280
Tennessee	2	90	7,510		7,341
Texas	6	1,763	157,062		147,516
Virginia	8	1,146	76,605		63,731
Washington	1	103	5,193		3,641
Wisconsin	7	861	26,071		18,813
Wyoming	2	191	7,572		5,404
Total	150	20,965	$	1,418,241	$	1,257,815

32

Item 3.Legal Proceedings

During 2002, about the time Marriott determined to sell MSLS to Sunrise, we and Five Star became involved in litigation with Marriott and MSLS which has been described in our 2002 Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q.  On January 7, 2004, we and Five Star settled this litigation with Marriott and MSLS.  Under the terms of the settlement we and Five Star, and Marriott and MSLS, agreed to dismiss all claims and counterclaims asserted in the litigation.  Also under the terms of the settlement, Marriott paid to us and Five Star $1.25 million each.  The settlement was a compromise of the parties’ disputes entered into to avoid the expense and inconvenience of litigation and none of we or Five Star, nor Marriott or MSLS, has admitted any liability, violation of law or wrongdoing in connection with the matters in the litigation.  We believe it settles all our litigation with Marriott.  This settlement does not affect our or Five Star’s rights vis-à-vis Sunrise or SLS which arise by reason of events occurring after Sunrise purchased MSLS.

In January 2002, HEALTHSOUTH settled a non-monetary default with us by exchanging properties.  We delivered to HEALTHSOUTH title to five nursing homes which HEALTHSOUTH leased from us.  In exchange, HEALTHSOUTH delivered to us title to two rehabilitation hospitals which HEALTHSOUTH leases from us.  As part of this settlement, HEALTHSOUTH’s lease was extended to December 2011 from January 2006, the annual rent was reduced from $10.3 million to $8.7 million and other lease terms between HEALTHSOUTH and us were changed.  A primary factor which caused us to lower the rent for an extended lease term was the purported credit strength of HEALTHSOUTH.  In agreeing to lower the rent and extend the lease term, we relied upon statements made by certain officers of HEALTHSOUTH, upon financial statements and other documents provided by HEALTHSOUTH, upon public statements made by HEALTHSOUTH and its representatives concerning HEALTHSOUTH’s financial condition and upon publicly available documents filed by HEALTHSOUTH.

Based on an SEC complaint against HEALTHSOUTH filed in March 2003 and reports that several former officers of HEALTHSOUTH have admitted to various crimes, including creating and publishing false financial statements which overstated HEALTHSOUTH’s earnings and assets by several billion dollars, we concluded that the financial information which was provided to us and upon which we relied to lower the rent and extend the lease term was false and fraudulent.  On April 16, 2003, we filed a complaint in the Land Court of the Commonwealth of Massachusetts, seeking that our lease with HEALTHSOUTH be reformed to change the rent back to $10.3 million per year effective January 1, 2002, and to change the lease term back to expire on January 1, 2006, among other matters.  This litigation remains pending and no trial date has been set.  HEALTHSOUTH has continued to pay us rent at the rate of $8.7 million per year during the pendency of this litigation through the date of this report.

In the ordinary course of business we may be involved in other legal proceedings; however, we are not aware of any other material pending or threatened legal proceeding affecting us or any of our properties for which we might become liable or the outcome of which we expect to have a material impact on us.

Item 4.Submission of Matters to a Vote of Security Holders

None.

33

PART II

Item 5.Market for Registrant’s Common Stock and Related Shareholder Matters

Our common shares are traded on the NYSE (symbol: SNH).  The following table sets forth for the periods indicated the high and low closing sale prices for our shares as reported by the NYSE.

	High		Low
2002
First Quarter	$	14.46	$	13.19
Second Quarter	15.70		13.74
Third Quarter	15.57		10.25
Fourth Quarter	11.38		9.85
2003
First Quarter	$	12.20	$	10.68
Second Quarter	13.60		11.88
Third Quarter	14.49		13.19
Fourth Quarter	17.60		14.53

The closing price of our common shares on the NYSE on March 8, 2004, was $19.02.

As of March 8, 2004, there were 3,463 record holders of our common shares, and we estimate that as of that date there were in excess of 77,000 beneficial owners of our common shares.

The following table sets forth the amount of cash distributions paid with respect to the periods indicated:

	Distributions Per Common Share
	2003		2002
First Quarter	$	0.31	$	0.31
Second Quarter	0.31		0.31
Third Quarter	0.31		0.31
Fourth Quarter	0.31		0.31

Our distributions are generally paid in the quarterly period following the quarter to which the distribution relates.

On October 27, 2003, pursuant to our incentive share award plan, Frederick N. Zeytoonjian, a newly elected trustee, received a grant of 500 common shares of beneficial interest, par value $0.01 per share, valued at $14.95 per share, the closing price of our common shares on the New York Stock Exchange on October 27, 2003.  This grant was made pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended.

34

Item 6.Selected Financial Data

Set forth below is selected financial data for the periods and dates indicated.  Year to year comparisons are impacted by property acquisitions during historical periods.  This data should be read in conjunction with, and is qualified in its entirety by reference to, management’s discussion and analysis of financial condition and results of operations and the consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K.  Amounts are in thousands, except per share information.

Income Statement Data:

	Year Ended December 31,
	2003		2002		2001		2000		1999(1)
Total revenues (2)	$	131,148	$	122,297	$	274,644	$	75,632	$	90,790
Income from continuing operations(3)	47,034		52,013		18,021		31,208		14,907
Net income (3) (4)	45,874		50,184		17,018		58,437		14,834
Cash distributions to common shareholders(5)	72,472		72,457		42,640		31,121		31,202
Weighted average shares outstanding	58,445		56,416		30,859		25,958		26,000
Per common share data:
Income from continuing operations(3)	$	0.80	$	0.92	$	0.58	$	1.20	$	0.57
Net income (3) (4)	0.78		0.89		0.55		2.25		0.57
Cash distributions to common shareholders(5)	1.24		1.24		1.20		1.20		1.20

Balance Sheet Data:

	At December 31,
	2003		2002		2001		2000		1999
Real estate properties, at cost, net of impairment losses	$	1,418,241	$	1,238,487	$	593,199	$	593,395	$	708,739
Real estate mortgages receivable, net of bad debt reserves	—		—		—		—		22,939
Total assets	1,304,100		1,158,200		867,303		530,573		654,000
Total indebtedness	527,429		357,364		252,707		97,000		200,000
Total shareholders’ equity	727,906		752,326		574,624		422,310		409,406

(1)Prior to October 12, 1999, we and our properties were owned by HRPT.  The data is presented as if we were a separate entity from HRPT for 1999.  This financial data has been derived from HRPT’s historical financial statements for periods prior to October 12, 1999.  Per share data has been presented as if our shares were outstanding for all of 1999.  The table includes pro rata allocations of HRPT’s interest expense and general and administrative expenses for periods prior to October 12, 1999.  In the opinion of our management, the methods used for allocating interest and general and administrative expenses are reasonable.  However, it is impossible to estimate all operating costs that we would have incurred as a public company separate from HRPT.  Accordingly, the income statement and per common share data shown are not necessarily indicative of results that we would have realized as a separate company.

(2)Includes FF&E reserve income of $5.3 million ($0.09 per share) in 2002, which was collected by us but escrowed for use by our tenant to fund improvements to our properties.  Includes patient revenues from facilities’ operations of $224.9 million in 2001.  Includes a gain on foreclosures and lease terminations of $7.1 million ($0.27 per share) in 2000.

(3)Includes $4.2 million ($0.14 per share) of non-recurring general and administrative expenses related to foreclosures and lease terminations and Five Star spin-off costs of $3.7 million ($0.12 per share) in 2001, a gain on foreclosures and lease terminations of $7.1 million ($0.27 per share) and $3.5 million ($0.14 per share) of non-recurring general and administrative expenses related to foreclosures and lease terminations in 2000, and an impairment loss write-down of $15.5 million ($0.60 per share) and loan loss reserve of $14.5 million ($0.55 per share) in 1999.

(4)Includes a loss on sale of properties of $1.2 million ($0.02 per share) in 2003, a loss from discontinued operations of $1.8 million ($0.03 per share) and $1.0 million ($0.03 per share) in 2002 and 2001, respectively, and a gain on sale of properties of $27.4 million ($1.06 per share) in 2000.

(5)In addition to the cash distributions, on December 31, 2001, we made a distribution of one share of Five Star for every ten shares of our common shares then outstanding.  This in kind distribution was valued at $31.5 million ($0.726 per share) based upon the market value of Five Star shares at the time of the distribution.

35

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the consolidated financial statements included in this Annual Report.

PORTFOLIO OVERVIEW

The following tables present an overview of our portfolio as of December 31, 2003 (dollars in thousands):

	# of Properties	# of Units/Beds	Investment		% of Investment		Annual Rent		% of Annual Rent
Facility Type
Independent living communities(1)	35	10,191	$	868,593	61.2	%	$	82,403	58.2	%
Assisted living facilities	48	3,542	260,257		18.4	%	29,826		21.1	%
Skilled nursing facilities	65	6,868	245,838		17.3	%	20,697		14.6	%
Hospitals	2	364	43,553		3.1	%	8,700		6.1	%
Total	150	20,965	$	1,418,241	100.0	%	$	141,626	100.0	%
Tenant/Operator
Five Star/Sunrise (2)	31	7,491	$	619,942	43.6	%	$	63,674	45.0	%
Marriott/Sunrise (2)	14	4,030	325,473		22.9	%	30,975		21.8	%
NewSeasons	10	1,019	87,656		6.2	%	9,287		6.6	%
HEALTHSOUTH	2	364	43,553		3.1	%	8,700		6.1	%
Five Star #2	13	1,054	83,471		5.9	%	8,235		5.8	%
Five Star #1	53	4,868	147,072		10.4	%	7,646		5.4	%
Alterra Healthcare	18	894	61,079		4.3	%	7,015		5.0	%
Genesis HealthCare Corporation	1	156	13,007		1.0	%	1,509		1.1	%
5 private companies (combined)	8	1,089	36,988		2.6	%	4,585		3.2	%
Total	150	20,965	$	1,418,241	100.0	%	$	141,626	100.0	%

Year Ended December 31,
									Percentage of Operating Revenue Sources
	Rent Coverage				Occupancy				Private Pay				Medicare				Medicaid
Tenant Operating Statistics (3)	2003		2002		2003		2002		2003		2002		2003		2002		2003		2002
Five Star/Sunrise (2)(4)	1.0	x	1.1	x	90	%	90	%	86	%	87	%	10	%	10	%	4	%	3	%
Marriott/Sunrise (2)	1.3	x	1.4	x	87	%	89	%	83	%	84	%	13	%	13	%	4	%	3	%
NewSeasons(5)(6)	1.1	x	NA		79	%	NA		100	%	NA		0	%	NA		0	%	NA
HEALTHSOUTH(7)	NA		NA		NA		NA		NA		NA		NA		NA		NA		NA
Five Star #2(5)	1.0	x	1.1	x	87	%	88	%	100	%	100	%	0	%	0	%	0	%	0	%
Five Star #1	2.9	x	2.6	x	90	%	91	%	21	%	22	%	21	%	20	%	58	%	58	%
Alterra Healthcare(5)	1.6	x	1.5	x	86	%	89	%	98	%	98	%	0	%	0	%	2	%	2	%
Genesis HealthCare Corporation	1.5	x	1.8	x	97	%	96	%	23	%	26	%	34	%	38	%	43	%	36	%
5 private companies (combined)	2.4	x	2.1	x	87	%	88	%	23	%	21	%	19	%	20	%	58	%	59	%

(1)Properties where the majority of units are independent living apartments are classified as independent living communities.

(2)On March 28, 2003, Marriott sold its senior living division, MSLS, to Sunrise.   Effective on that date, Sunrise became the manager of the 31 properties leased to Five Star and the tenant and manager of the 14 properties leased to MSLS.  Marriott continues to guarantee the lease for the 14 properties.

(3)All tenant operating statistics presented are based upon the operating results provided by our tenants for the indicated periods ending December 31 or the most recent prior period tenant operating results available to us from our tenants.  Rent coverage is calculated as operating cash flow from our tenants’ facility operations, before subordinated charges and capital expenditure reserves, divided by rent payable to us.   We have not independently verified our tenants’ operating data.

(4)Rent coverage is after non-subordinated management fees of $17.1 million and $17.4 million for the year ended December 31, 2003 and 2002, respectively.

(5)Includes data for periods prior to our ownership of these properties.

(6)We acquired these properties on December 29, 2003.

(7)In March 2003, HEALTHSOUTH issued a press release stating that its historical financial information should not be relied upon.  Because we have reason to doubt the financial information we have from HEALTHSOUTH, we do not disclose any operating statistics for this tenant.

36

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

RESULTS OF OPERATIONS

Year Ended December 31, 2003, Compared to Year Ended December 31, 2002

Rental income for the year ended December 31, 2003, was $129.2 million compared to rental income of $115.6 million for the year ended December 31, 2002, an increase of $13.6 million, or 11.8%.  This increase results from our acquisition and lease of 40 properties during 2002 and 32 properties during 2003.

FF&E reserve income for the year ended December 31, 2003, was zero compared to $5.3 million for the year ended December 31, 2002.  One of our leases with Five Star required a percentage of gross revenues be paid to us as additional rent, which was escrowed for future capital expenditures at the leased facilities.  This lease was amended on October 1, 2002.  As a result of this amendment, the FF&E reserve escrow deposits are not paid to us as additional rent, but are paid into accounts owned by Five Star.  We have security and remainder interests in these accounts and in property purchased with funding from these accounts.  Accordingly, we no longer record FF&E reserve income.

Interest and other income for the year ended December 31, 2003 and 2002, each include $800,000 of dividend income from one million shares of HRPT that we own.  Also included in interest and other income for the year ended December 31, 2003, is $750,000 of proceeds from the sale of a mortgage note.  In connection with one of our 2002 acquisitions, we were assigned the rights under this mortgage note from an unrelated third party.  The mortgage note was assigned zero value at the time of the assignment.  However, in March 2003, we sold the note to an affiliate of the note obligor for $750,000.  The year ended December 31, 2003, also includes $371,000 of mortgage interest income from mortgage financing we provided in February 2003 to Alterra, and a net operating loss of $146,000 from the property we repossessed from a tenant which defaulted its lease obligations to us in March 2003.

Interest expense for the year ended December 31, 2003, was $35.1 million compared to interest expense for the year ended December 31, 2002, of $27.4 million, an increase of $7.7 million, or 28.1%.  The increase was caused by our issuance of $150.0 million of 7 7/8% senior unsecured notes in April 2003, partially offset by less interest expense on reduced amounts outstanding under our revolving bank credit facility during 2003.

Depreciation expense for the year ended December 31, 2003, was $35.7 million compared to depreciation expense for the year ended December 31, 2002, of $31.6 million, an increase of $4.1 million, or 13.0%.  General and administrative expense for the year ended December 31, 2003, was $10.5 million compared to general and administrative expense for the year ended December 31, 2002, of $8.5 million, an increase of $2.0 million, or 23.5%.  These increases were primarily due to the full impact in 2003 of our investment in 40 properties during 2002, our investment in 32 properties in 2003 and costs of $1.2 million in connection with our litigations with Marriott and HEALTHSOUTH.  In January 2004, we settled our litigation with Marriott.

During the year ended December 31, 2003, we experienced a loss of $1.2 million on the sale of one property.  In the year ended December 31, 2002, we recorded a loss from discontinued operations of $1.8 million at a facility leased to Five Star which was closed and subsequently sold during 2002.  We had no discontinued operations in 2003.

Net income was $45.9 million, or $0.78 per share, for the year ended December 31, 2003, compared to $50.2 million, or $0.89 per share, for the year ended December 31, 2002, a decrease of $4.3 million, or $0.11 per share.  These changes reflect the changes described above in revenues and expenses and the more than 2.0 million share increase in the weighted average number of shares outstanding between the 2003 and 2002 periods resulting from our issuance of our common shares during 2002.

37

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

Year Ended December 31, 2002, Compared to Year Ended December 31, 2001

Total revenues for the year ended December 31, 2002, were $122.3 million, compared to total revenues of $274.6 million for the year ended December 31, 2001.  Included in total revenues for the year ended December 31, 2001, are revenues from facilities’ operations of $224.9 million. During 2001, Five Star, one of our wholly owned subsidiaries, operated facilities for our account.  On December 31, 2001, we distributed substantially all of our ownership of Five Star to our shareholders and Five Star became a separate public company.  In connection with the Five Star spin-off, Five Star leased the facilities from us which it previously operated for our account; and, as a result, after the Five Star spin-off, we do not have facilities’ operations revenues or expenses.

Rental income for the year ended December 31, 2002, was $115.6 million compared to rental income of $47.4 million for the year ended December 31, 2001, an increase of $68.2 million.  This increase was due to our acquisition and lease of 31 properties on January 11, 2002, for annual rent of $63.0 million, our lease to Five Star of facilities which had been previously operated for our account for annual rent of $6.9 million and our lease to Five Star which commenced in October 2002 for annual rent of $6.3 million.  This increase was partially offset by a decrease in annual rent from HEALTHSOUTH of $10.3 million to $8.7 million resulting from a lease modification related to a non-monetary exchange of properties, effective January 2, 2002.  The primary reasons which we entered into this exchange transaction were as follows:

•HEALTHSOUTH advised us that it was not interested to continue operating the five nursing homes which it leased from us, but it was interested to operate on a long term basis the two hospitals which it delivered to us;

•Historically the two hospitals which we received had produced financial performance which was equal to or better than the financial performance of the five nursing homes we delivered to HEALTHSOUTH; and

•Although the amount of annual rent which we would receive was less than we previously received, we obtained a longer term lease commitment from a tenant that represented itself to be, and that we believed to be, an investment grade quality company.

FF&E reserve income for the year ended December 31, 2002, was $5.3 million compared to zero for the year ended December 31, 2001.  The lease with Five Star for certain properties acquired in January 2002 required a percentage of gross revenues be paid to us as additional rent, which was escrowed for future capital expenditures at the leased facilities.  This lease was amended on October 1, 2002.  As a result of this amendment, the FF&E reserve escrow deposits are not paid to us as additional rent, but are paid into accounts owned by Five Star.  We have security and remainder interests in these accounts and in property purchased with funding from these accounts.  As a result, we no longer receive FF&E reserve income.

Interest and other income for the years ended December 31, 2002 and 2001, each include $800,000 of dividend income from the one million shares of HRPT that we own.

Total expenses for the year ended December 31, 2002, were $67.5 million, compared to total expenses of $255.2 million for the year ended December 31, 2001, a decrease of $187.7 million. Total expenses for the year ended December 31, 2001, include expenses from facilities’ operations of $217.9 million.  Subsequent to the Five Star spin-off, we no longer have any facilities’ operations expenses.

Interest expense for the year ended December 31, 2002, was $27.4 million compared to interest expense for the year ended December 31, 2001, of $5.9 million, an increase of $21.5 million.  This increase was primarily due to our issuance of $245.0 million of 8⁵/₈% senior unsecured notes in December 2001 and our assumption of debt in connection with our purchase of properties in January 2002.  These increases were partially offset by a decrease in the weighted average interest rate on our revolving bank credit facility.

38

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

Depreciation expense for the year ended December 31, 2002, was $31.6 million compared to depreciation expense for the year ended December 31, 2001, of $19.4 million, an increase of $12.2 million.  Recurring general and administrative expense for the year ended December 31, 2002, was $8.5 million compared to recurring general and administrative expense for the year ended December 31, 2001, of $4.1 million, an increase of $4.4 million.  These increases were primarily due to our acquisition of properties in January and October 2002 and increased legal fees in connection with our litigation with Marriott.

During the year ended December 31, 2001, we incurred nonrecurring general and administrative costs totaling approximately $4.2 million.  These costs were incurred in connection with the establishment of operating systems for foreclosed and repossessed properties, which systems were distributed to shareholders in the Five Star spin-off.  In addition, we incurred $3.7 million of non-recurring costs in connection with the Five Star spin-off.

Distributions on trust preferred securities for the year ended December 31, 2002, were $2.8 million compared to $1.5 million for the year ended December 31, 2001.  The increase is due to our issuance of trust preferred securities in June and July 2001.

During the year ended December 31, 2002, we recorded a loss from discontinued operations of $1.8 million related to a facility leased to Five Star which was closed during the second quarter of 2002 and sold during the fourth quarter of 2002.  The loss includes historical depreciation expense as well as an impairment write down of the real estate associated with this property, offset by the sales proceeds received by us.  For the 2001 period, amounts were reclassified from depreciation expense and facilities’ operations revenues and expenses to the loss from discontinued operations.

Net income was $50.2 million, or $0.89 per share, for the year ended December 31, 2002, compared to $17.0 million, or $0.55 per share, for the year ended December 31, 2001, an increase of $33.2 million, or $0.34 per share.  This increase is primarily the result of the changes in revenues and expenses resulting from our January and October 2002 acquisitions, the Five Star spin off and the issuance of senior notes and trust preferred securities as described above, and the increase in weighted average number of shares outstanding between the 2001 and 2002 periods.

Recent Developments

In February 2003, we purchased from Alterra 18 assisted living properties for $61.0 million and leased them to a subsidiary of Alterra for an initial term through 2017, plus renewal options.  In addition, we provided $6.9 million of mortgage financing to Alterra for six assisted living properties.  Our investment in properties leased and mortgaged by Alterra was part of Alterra’s bankruptcy reorganization financing. The Alterra Bankruptcy Court approved the terms of our investment and that approval included an order that payments due to us under the lease and mortgage were accorded administrative priority status under the Bankruptcy Code. In October 2003, Alterra filed a plan of reorganization that we believed failed to meet certain conditions that we agreed to when we made our investment. Accordingly, we objected to Alterra’s plan. In November 2003, we reached a compromise with Alterra regarding the revised plan pursuant to which Alterra prepaid our mortgage note in full and paid us an additional $3.5 million. This $3.5 million, net of $688,000 of costs we incurred related to our objection, is being amortized into our income during the remaining term of the Alterra lease.

In December 2003, we purchased 10 assisted living properties with resident capacity of 1,019 for $86.6 million from NewSeasons.  We funded this acquisition by borrowing under our revolving bank credit facility and with cash on hand. Simultaneously, NewSeasons leased these facilities from us for an initial term ending in 2017, plus renewal options for up to an additional 30 years. The rent payable to us will average approximately $9.3 million per year during the initial lease term; although it will commence at a lower rent of approximately $8.0 million per year and then increase at agreed times during the lease term. Substantially all of the revenues at these properties are paid by residents from their private resources.  NewSeasons is a subsidiary of

39

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

IBC.  IBC is a large regional health insurance company based in Philadelphia, Pennsylvania, with reported revenues of approximately $8.5 billion in 2002.  IBC has guaranteed NewSeasons’ rent to us. In addition, we, NewSeasons and IBC have entered into an agreement for the possible expansion of our business relationships by adding up to four assisted living properties with resident capacity of 540. These four properties are currently encumbered by mortgage debts. We intend to purchase these properties if and when these mortgage debts are prepaid or assumed on terms mutually acceptable to us, NewSeasons, IBC and the lenders. If we purchase all four of these properties, our purchase price for these additional properties will be $28.4 million; any that we purchase will be added to the lease for the 10 currently leased properties and rent payable to us will increase.

Subsequent to December 31, 2003, we have entered into several transactions with Five Star, which are discussed below under the heading, “Related Party Transactions”.

In January 2004, we issued 5,000,000 common shares of beneficial interest, raising net proceeds of $86.3 million.   These net proceeds were used to repay borrowings outstanding under our revolving bank credit facility.

40

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources

Our principal sources of funds for current expenses and distributions to shareholders are rents from our properties.  Minimum rents are generally received monthly or quarterly from our tenants and percentage rents are received monthly, quarterly or annually.  This flow of funds has historically been sufficient for us to pay our operating expenses, debt service and distributions.  We believe that our operating cash flow will be sufficient to meet our operating expenses, debt service and distribution payments for the foreseeable future.

Our Investment and Financing Liquidity and Resources

In order to fund acquisitions and to accommodate cash needs that may result from timing differences between our receipt of rents and the need to make distributions or pay operating expenses, we maintain a revolving bank credit facility with a group of commercial banks.  Our revolving bank credit facility matures in November 2005 and may be extended at our option to November 2006 upon payment of an extension fee.  Borrowings under the revolving bank credit facility can be up to $250.0 million and the revolving bank credit facility includes a feature under which the maximum borrowing may be expanded to $500.0 million, in certain circumstances.  Borrowings under our revolving bank credit facility are unsecured.  Funds may be borrowed, repaid and reborrowed until maturity, and no principal repayment is due until maturity.  Interest on borrowings under the revolving bank credit facility is payable at a spread above LIBOR.

In February 2003, we acquired 18 assisted living facilities and provided mortgage financing for six other assisted living facilities for a total investment of $67.9 million.  The funding for this transaction was provided by borrowings under our revolving bank credit facility.  In November 2003, the mortgage financing of $6.9 million was fully repaid.

In April 2003, we issued $150.0 million of 7 7/8% senior unsecured notes due 2015, raising net proceeds, after a discount and costs of issuance, of $146.2 million.  The net proceeds from this issuance were used to repay amounts outstanding under our revolving bank credit facility and for general business purposes.

In May 2003, we purchased three assisted living facilities for $6.5 million.  During 2003, in accordance with several of our leases, we funded $11.4 million of expenditures related to the repair, maintenance or renovation of our properties.  In September 2003, we purchased one independent living property for $12.3 million.  In December 2003, we purchased 10 assisted living facilities for $86.6 million. In March 2004, we purchased one independent and assisted living facility for $24.1 million.  The funding for these transactions was provided by borrowings under our revolving bank credit facility and cash on hand.

During 2003, we agreed to sell two nursing homes for $10.5 million, subject to various conditions.  Proceeds from the sale of these properties will be used to repay borrowings outstanding under our revolving bank credit facility and for general business purposes.

In January 2004, we issued 5 million of our common shares in a public offering.  The net proceeds of $86.3 million were used to repay borrowings outstanding on our revolving bank credit facility.

In connection with our December 2003 acquisition of 10 assisted living facilities, we agreed to purchase up to an additional four assisted living facilities.  These four properties are currently encumbered by mortgage debts. We intend to purchase these properties if and when these mortgage debts are prepaid or assumed on terms mutually acceptable to us, the seller and the lenders. If we purchase all four of these properties, our purchase price for these additional properties will be $28.4 million.  Funding required to complete this transaction is expected to be provided by borrowing under our revolving bank credit facility and cash on hand.

41

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

At December 31, 2003, we had $3.5 million of cash and cash equivalents and $148.0 million available under our revolving bank credit facility.  As of March 8, 2004, we had $40.0 million outstanding and $210.0 million available under our revolving bank credit facility.  We expect to use cash balances, borrowings under our revolving bank credit facility and net proceeds of offerings of equity or debt securities to fund future property acquisitions, including the future funding for expenditures related to the repair, maintenance or renovation of our properties.

When amounts are outstanding on our revolving bank credit facility and as the maturity dates of our revolving bank credit facility and term debts approach over the longer term, we will explore alternatives for the repayment of amounts due.  Such alternatives may include incurring additional long term debt and issuing new equity securities.  As of March 8, 2004, we had $1.6 billion available on an effective shelf registration statement.  An effective shelf registration statement allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities.  Although there can be no assurance that we will consummate any debt or equity offerings or other financings, we believe we will have access to various types of financing, including debt or equity offerings, with which to finance future acquisitions and to pay our debts and other obligations.

On January 6, 2004, a distribution of $0.31 per common share was declared with respect to our 2003 fourth quarter results.  This distribution was paid to shareholders on February 20, 2004, using cash on hand and borrowings under our revolving bank credit facility.

As of December 31, 2003, our contractual obligations were as follows (dollars in thousands):

	Payment due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-Term Debt Obligations(1)	$	418,800	$	9,100	$	—	$	—	$	409,700
Capital Lease Obligations	8,017		791		1,769		2,052		3,405
Ground Lease Obligations	6,196		426		852		852		4,065
Purchase Obligations(2)	28,400		28,400		—		—		—
Total	$	461,413	$	38,717	$	1,769	$	2,052	$	413,105

(1)Our term debt maturities are as follows:  $9.1 million in 2004; $245.0 million in 2012; $150.0 million in 2015; and $14.7 million in 2027.  In addition to the long-term debt obligations included in the table above, we had $27.4 million of trust preferred securities outstanding.  As discussed in Note 8 of the accompanying financial statements, our subsidiary that has issued these trust preferred securities also holds $27.4 million of debentures that have been issued by us and which are due in 2041.  As discussed in Note 2 of the accompanying financial statements, the accounting treatment of these trust preferred securities and the related debentures may change in the first quarter of 2004.

(2)This amount represents the four additional properties we agreed to purchase in connection with our December 2003 acquisition.

Debt and Trust Preferred Securities Covenants

Our principal debt obligations at December 31, 2003, were our unsecured revolving bank credit facility and our $395.0 million of unsecured senior notes.  Our senior notes are governed by an indenture.  This indenture and related supplements and our revolving bank credit facility contain a number of financial ratio covenants which generally restrict our ability to incur debts, including debts secured by mortgages on our properties in excess of calculated amounts, require us to maintain a minimum net worth, restrict our ability to make distributions under certain circumstances and require us to maintain other ratios.  Our trust preferred securities are governed by an indenture which is generally less restrictive than the indenture governing our senior notes and the

42

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

terms of our revolving bank credit facility.  As of December 31, 2003, we were in compliance with all of the covenants under our indentures and related supplements and our revolving bank credit facility.

None of our indentures and related supplements, our revolving bank credit facility or our other debt obligations contain provisions for acceleration which could be triggered by our debt ratings.  However, under the revolving bank credit facility, our senior debt rating is used to determine the fees and the interest rate payable.

Our public debt indenture and related supplements contain cross default provisions to any other debts of $10.0 million or more.  Similarly, a default on our public debt or trust preferred securities indenture would be a default under our revolving bank credit facility.

As of March 8, 2004, we have no commercial paper, derivatives, swaps, hedges, joint ventures or partnerships.

43

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

Related Party Transactions

In 1999, HRPT distributed a majority of our shares to its shareholders of record on October 8, 1999.  In order to effect this spin off and to govern relations after the spin off, we entered into a transaction agreement with HRPT, pursuant to which it was agreed that so long as (1) HRPT owns more than 10% of our shares; (2) we and HRPT engage the same investment manager; or (3) we and HRPT have one or more common managing trustees; then we will not invest in office buildings, including medical office buildings and clinical laboratory buildings, without the prior consent of HRPT’s independent trustees, and HRPT will not invest in properties involving senior housing without the prior consent of our independent trustees.  If an investment involves both office and senior housing components, the character of the investment will be determined by building area, excluding common areas, unless our board and HRPT’s board otherwise agree at the time.  These provisions do not apply to any investments HRPT held at the time of the spin off.  Also as part of the transaction agreement, we agreed to subject our ability to waive ownership restrictions contained in our charter to the consent of HRPT’s trustees so long as HRPT owns more than 9.8% of our outstanding voting or equity interest.

On December 31, 2001, we distributed substantially all of our shares of Five Star to our shareholders of record on December 17, 2001.  In order to effect this spin off and to govern relations after the spin off, we entered into agreements with Five Star, pursuant to which it was agreed that:

•so long as we remain a real estate investment trust, Five Star may not waive the share ownership restrictions in its charter on the ability of any person or group to acquire more than 9.8% of any class of its equity shares without, among other requirements, our consent and Five Star’s determination that the exception to the ownership limitations would not cause a default under any of its leases;

•so long as Five Star is our tenant, Five Star will neither permit any person or group to acquire more than 9.8% of any class of Five Star’s voting stock or permit the occurrence of other change in control events, as defined, nor will Five Star take any action that, in the reasonable judgment of us or HRPT, might jeopardize the tax status of us or HRPT as a real estate investment trust;

•we have the option, upon the acquisition by a person or group of more than 9.8% of Five Star’s voting stock and upon other change in control events of Five Star, as defined, to cancel all of Five Star’s rights under its leases with us; and

•so long as Five Star maintains its shared service agreement with RMR or is a tenant under a lease with us, Five Star will not acquire or finance any real estate without first giving us, HRPT, Hospitality Properties Trust, or HPT, or any other publicly owned real estate investment trust or other entity managed by RMR the opportunity to acquire or finance real estate investments of the type in which we, HRPT, HPT or any other publicly owned real estate investment trust or other entity managed by RMR, respectively, invest.

At the time Five Star was spun off from us, all of the persons serving as directors of Five Star were also our trustees.  Two of our trustees, Messrs. Martin and Portnoy, are current directors of Five Star.

As of December 31, 2003, we leased 97 senior living communities to Five Star for total annual minimum rent of $79.6 million.

During 2003, we and Five Star were jointly involved in litigation with Marriott and MSLS, the operator of 31 of the senior living communities which we leased to Five Star.  We and Five Star equally shared the costs of this litigation.  This litigation was settled in January 2004.

44

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

Since January 1, 2003, we have entered or agreed to enter into several transactions with Five Star, including the following:

•During 2003, pursuant to the terms of our leases with Five Star, we purchased $11.4 million of improvements to our properties leased by Five Star, and the annual rent payable to us by Five Star was increased by 10% of the amounts invested, or $1.1 million.

•In March 2003, one of our private company tenants defaulted its lease for a nursing home in Missouri.  We terminated this lease and engaged Five Star to manage this property for our account.  Currently, this property is listed for sale or lease.  Five Star is paid a management fee of 5% of the gross revenues at this nursing home, totaling $135,000 through December 31, 2003.

•In May 2003, we purchased from an unrelated third party three assisted living properties with 143 living units located in Virginia for $6.5 million.  In September 2003, we purchased from Five Star one independent living property with 164 units in California for $12.3 million, its appraised value.  These four properties were added to our existing lease with Five Star for nine other independent and assisted living properties.  The annual minimum rent for the properties included in this lease increased by $1.9 million.  All other terms of the lease remained unchanged.

•In July 2003, we agreed to sell to Five Star two nursing homes in Michigan that we leased to Five Star.  The purchase price is $10.5 million, the appraised value of the properties.  These two properties are leased on a combined basis with other nursing home properties. Under the terms of our lease with Five Star, upon consummation of the sale, the annual rent payable under the combined lease will be reduced by 10% of the net proceeds that we received from the sale.  We expect the sale of these properties to occur during the first half of 2004.  However, this sale is contingent upon Five Star’s obtaining Department of Housing and Urban Development insured financing for its purchase, and this sale may not close because of a failure of this condition or for some other reason.

•On March 1, 2004, we purchased from Five Star one independent and assisted living facility with 229 units located in Maryland.  The purchase price was $24.1 million, the appraised value of the property.  Simultaneous with this purchase, our existing leases with Five Star were modified as follows:

•the lease for 53 nursing homes and the lease for 13 independent and assisted living facilities were combined into one lease andthe property acquired on March 1, 2004 was added to this combined lease;

•the combined lease maturity date was changed to December 31, 2020 from December 31, 2018 and 2019 for the separate leases;

•the minimum rent for the combined lease of 53 nursing homes and 14 independent living facilities was increased by $2.4 million; and

•for all of our leases with Five Star, the amount of additional rent to be paid to us was changed to 4% of the increase in revenues at the leased properties beginning in 2006.

All other lease terms remained substantially unchanged.

In October 2003, we entered into an agreement between us and HRPT,  pursuant to which we agreed to file a registration statement with respect to our shares held by HRPT and use reasonable efforts to effect the registration of those shares.  HRPT paid the expenses of this registration.  The registration statement became effective October 24, 2003.  In January and February 2004, we completed a public offering of 5 million of our common shares.  In a simultaneous offering, HRPT sold 3,148,500 of our shares which it owned.  We and HRPT were parties to a joint underwriting agreement in connection with this offering.  We did not receive any proceeds from the sale of our shares by HRPT, but HRPT paid its pro-rata share of the expenses of this offering.

45

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

RMR provides investment, management and administrative services to us under an advisory agreement which is renewed annually if the renewal is approved by a majority of our independent trustees.  RMR is compensated at an annual rate equal to a percentage of our average real estate investments, as defined.  The percentage applied to our investments at the time we were spun off from HRPT is 0.5%.  The annual compensation percentage for the first $250 million of investments made since our spin off from HRPT is 0.7% and thereafter is 0.5%.  RMR may also earn an incentive fee based upon increases in our funds from operations per share, as defined.  The incentive fee payable to RMR is paid in common shares.  Aggregate fees earned by RMR for services during 2003 were $7.6 million, including $263,000 as an incentive fee which will be paid in common shares in April 2004.  RMR is owned by Messrs. Martin and Portnoy who are our managing trustees.  Messrs.  Martin and Portnoy each have material interests in the transactions between us and RMR described above.  All transactions between us and RMR are approved by our independent trustees. Our independent trustees have approved the renewal of the advisory agreement for its term which will end December 31, 2004.

Critical Accounting Policies

Our critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates.  We believe that our judgments and assessments are consistently applied and produce financial information that fairly presents our results of operations.  Our three most critical accounting policies concern our investments in real property and are:

Allocation of Purchase Price and Recognition of Depreciation Expense.  The acquisition cost of each real property investment is allocated to various property components such as land, buildings and improvements, and each component generally has a different useful life. Acquisition cost allocations and the determination of the useful lives are based on our management’s estimates or, under some circumstances, studies commissioned from independent real estate appraisal firms. For real estate acquired subsequent to June 1, 2001, the effective date of Statement of Financial Accounting Standards No. 141, Business Combinations, we allocate the value of real estate acquired among building, land, furniture, fixtures and equipment, the value of in-place leases and the fair market value of above or below market leases and customer relationships.  We compute related depreciation expense using the straight line method over estimated useful lives of up to 40 years for buildings and improvements, and up to 12 years for personal property.  The value of intangible assets is amortized over the term of the respective lease.  The allocated cost of land is not depreciated.  Inappropriate allocation of acquisition costs or incorrect estimates of useful lives could result in depreciation and amortization expenses which do not appropriately reflect the allocation of our capital expenditures over future periods required by generally accepted accounting principles.

46

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

Impairment of Assets. We periodically evaluate our real property investments for impairment indicators.  These indicators may include weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life and market or industry changes that could permanently reduce the value of our investments.  If indicators of impairment are present, we evaluate the carrying value of the related real property investment by comparing it to the expected future undiscounted cash flows to be generated from that property.  If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the property to the present value of these expected future cash flows. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows.  If we misjudge or estimate incorrectly or if future tenant profitability, market or industry factors differ from our expectations we may record an impairment charge which is inappropriate or fail to record a charge when we should have done so, or the amount of such charges may be inaccurate.

Classification of Leases.  Our real property investments are generally leased on a triple net basis, pursuant to non-cancelable, fixed term, operating leases.  Each time we enter a new lease or materially modify an existing lease we evaluate its classification as either a capital lease or operating lease.  The classification of a lease as capital or operating affects the carrying value of a property, as well as our recognition of rental payments as revenue.  These evaluations require us to make estimates of, among other things, the remaining useful life and market value of a leased property, discount rates and future cash flows.  Incorrect assumptions or estimates may result in misclassification of our leases.

These policies involve significant judgments based upon our experience, including judgments about current valuations, ultimate realizable value, estimated useful lives, salvage or residual values, the ability of our tenants and operators to perform their obligations to us, and the current and likely future operating and competitive environments in which our properties are operated.  In the future we may need to revise our assessments to incorporate information which is not now known, and such revisions could increase or decrease our depreciation expense related to properties we own, result in the classification of our leases as other than operating leases or decrease the carrying values of our assets.

During 2000, we assumed the operations of nursing homes from bankrupt former tenants, pursuant to negotiated settlement agreements.  During the first quarter of 2001, we obtained substantially all of the healthcare regulatory licenses and Medicare and Medicaid provider agreements necessary for these nursing home operations, and we consolidated the nursing home operations effective January 1, 2001.  With respect to the consolidated facilities’ operations, our most critical accounting policies in 2001 involved revenue recognition and our assessment of the net realizable value of the facilities’ accounts receivable.  These policies involved significant judgments based upon our experience, including judgments about changes in governmental payment methodology, contract modifications and economic conditions that affect the collectibility of the facilities’ accounts receivable.  As a result of the Five Star spin-off on December 31, 2001, we no longer operate any facilities.  Also, the accounts receivable related to facilities’ operations were transferred to Five Star as part of the initial capitalization of Five Star.

Impact of Inflation

Inflation might have both positive and negative impacts upon us.  Inflation might cause the value of our real estate investments to increase.  In an inflationary environment, the percentage rents which we receive based upon a percentage of our tenants’ revenues should increase.  Offsetting these benefits, inflation might cause our costs of equity and debt capital and other operating costs to increase.  An increase in our capital costs or in our operating costs will result in decreased earnings unless it is offset by increased revenues.  In periods of rapid inflation, our tenants’ operating costs may increase faster than revenues and this fact may have an adverse impact upon us if our tenants’ operating income from our properties becomes insufficient to pay our rent.  To mitigate the adverse impact of increased operating costs at our leased properties, we generally require our tenants to guarantee our rent.  To mitigate the adverse impact of increased costs of debt capital in the event of material inflation, we

47

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations continued

previously have purchased interest rate cap agreements and we may enter into similar interest rate hedge arrangements in the future.  The decision to enter into these agreements was and will be based on the amount of floating rate debt outstanding, our belief that material interest rate increases are likely to occur and upon requirements of our borrowing arrangements.

Impact of Government Reimbursement

Approximately 84% of our current annual rents come from properties where approximately 83% or more of the operating revenues are derived from residents who pay from their own private resources.  Of the remaining 16% of our rents which come from properties where the revenues are heavily dependent upon Medicare and Medicaid programs, the operations of these properties currently produce sufficient cash flow to support our rent.  However, as discussed above in “Business – Government Regulation and Reimbursement”, we expect that Medicare and Medicaid rates paid to our tenants may not increase in amounts sufficient to pay our tenants’ increased operating costs, or that they may even decline.  Also, the hospitals we lease to HEALTHSOUTH are heavily dependent upon Medicare revenues.  As discussed in Item 1, reports of erroneous financial statements by HEALTHSOUTH have called into question whether those hospitals in fact produce sufficient revenues to pay our rent.  We cannot predict whether our tenants which are affected by Medicare and Medicaid rates will be able to continue to pay their rent obligations if these expected circumstances occur and persist for an extended time.

Seasonality

Nursing home and assisted living operations have historically reflected modest seasonality.  During calendar fourth quarter holiday periods, residents at such facilities are sometimes discharged to join in family celebrations and admission decisions are often deferred.  The first quarter of each calendar year usually coincides with increased illness among residents which can result in increased costs or discharges to hospitals.  As a result of these factors and others, these operations sometimes produce greater earnings in the second and third quarters of each calendar year and lesser earnings in the fourth and first calendar quarters.  We do not expect these seasonal differences to have a material impact upon the ability of our tenants to pay our rent.

48

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

We are exposed to risks associated with market changes in interest rates.  We manage our exposure to this market risk by monitoring available financing alternatives.  Our strategy to manage exposure to changes in interest rates is unchanged from December 31, 2002.  Other than as described below, we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how we plan to manage this exposure in the near future.

At December 31, 2003, our outstanding debt included $245.0 million of 8 5/8% senior unsecured notes due in 2012 and $150.0 million of 7 7/8% senior unsecured notes due in 2015.  The interest on these notes is payable semi-annually.  No principal payments are due under these notes until maturity.  Because these notes bear interest at a fixed rate, changes in market interest rates during the term of this debt will not affect our operating results.  If at maturity these notes are refinanced at interest rates which are 10% higher than the current rate, our per annum interest cost would increase by approximately $3.3 million.  We are allowed to make prepayments of these senior notes, in whole or in part, at par plus a premium, as defined.  Prior to April 15, 2006, we may redeem up to 35% of the 7 7/8% senior notes with the net cash proceeds of qualified equity offerings, as defined.  These prepayment rights may afford us the opportunity to mitigate the risk of refinancing at maturity. Changes in market interest rates also affect the fair value of our debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt.  Our total fixed rate debt obligations outstanding at December 31, 2003, was $409.7 million, including the $245.0 million of 8 5/8% notes due in 2012, $150.0 million of 7 7/8% notes due in 2015 and mortgage notes totaling $14.7 million due in 2027.  Based on the balances outstanding at December 31, 2003, and discounted cash flow analysis through the maturity date of our fixed rated debt obligations, a hypothetical immediate 10% change in interest rates would change the fair value of those obligations by approximately $22.0 million.

At December 31, 2003, we had $27.4 million of trust preferred securities outstanding, the dividends on which are dependent upon our making required payments on our 10.125% junior subordinated debentures due 2041.  No principal repayments are due on the debentures until maturity.  If the debentures were to be refinanced at interest rates which are 10% higher than the current rate, our per annum interest cost would increase $277,000.  Our trust preferred securities are listed on the NYSE and their market value is principally determined by supply and demand factors.  The market price of our debentures may be sensitive to changes in interest rates, similar to our unsecured senior notes discussed above.  Based on the balance outstanding at December 31, 2003, and discounted cash flow analysis through the maturity date of the trust preferred securities, a hypothetical immediate 10% change in interest rates would change the fair value of our fixed rate debentures by approximately $2.4 million.  Our debentures have provisions that allow us to make repayments earlier than the stated maturity date.  These prepayment rights may afford us the opportunity to mitigate the risk of refinancing at maturity at higher rates by refinancing at lower rates prior to maturity.  Our ability to prepay the debentures at par, beginning June 15, 2006, will also effect the change in the fair value of the debentures which would result from a change in interest rates.  For example, using discounted cash flow analysis, a 10% change in interest rates calculated from December 31, 2003 to the first par prepayment option date for our trust preferred securities would change the value of those securities by approximately $630,000.

49

Item 7A.  Qualitative and Quantitative Disclosures About Market Risk continued

Our unsecured revolving bank credit facility bears interest at floating rates and matures in November 2005.  As of December 31, 2003, we had $102.0 million outstanding and $148.0 million available for borrowing under our revolving bank credit facility.  Repayments under our revolving bank credit facility may be made at any time without penalty.  We borrow in U.S. dollars and borrowings under our revolving bank credit facility require interest at LIBOR plus a premium.  Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR.  A change in interest rates would not affect the value of this floating rate debt but would affect our operating results.  For example, the interest rate payable on our outstanding indebtedness of $102.0 million at December 31, 2003, was 2.72% per annum.  The following table presents the impact a 10% change in interest rates would have on our floating rate interest expense as of December 31, 2003 (dollars in thousands):

	Impact of Changes in Interest Rates
	Interest Rate Per Year		OutstandingDebt		Total Interest Expense Per Year
At December 31, 2003	2.72	%	$	102,000	$	2,774
10% reduction	2.44	%	$	102,000	$	2,489
10% increase	2.99	%	$	102,000	$	3,050

The foregoing table shows the impact of an immediate change in floating interest rates.  If interest rates were to change gradually over time, the impact would be spread over time.  Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under our revolving bank credit facility or other floating rate obligations.

50

Item 8.Financial Statements and Supplementary Data

The information required by this item is included in Item 15 of this Annual Report on Form 10-K.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

We have had no changes in or disagreements with our accountants on accounting and financial disclosure.

Item 9A.Controls and Procedures

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our managing trustees, President and Chief Operating Officer and Treasurer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15.  Based upon that evaluation, our managing trustees, President and Chief Operating Officer and Treasurer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses.

51

PART III

Items 10.Directors and Executive Officers of the Registrant

In March 2004, we adopted a Code of Business Conduct and Ethics that applies to all our representatives, including our officers and trustees and employees of RMR.  Our Code of Business Conduct and Ethics is posted on our website, www.snhreit.com, under the heading “Governance.”  A printed copy of our Code of Business Conduct and Ethics is also available free of charge to any shareholder who requests a copy.

The remainder of the information required by Item 10 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year.

Items 11.Executive Compensation

The information required by Item 11 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year.

Items 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Plan Information.  We may grant common shares to our officers and other employees of RMR, subject to vesting requirements, under either our 1999 Incentive Share Award Plan or our 2003 Incentive Share Award Plan.  In addition, our independent trustees receive 500 shares per year each as part of their annual compensation for serving as our trustees and such shares may be awarded under either of these plans.  The terms of grants made under these plans are determined by our trustees at the time of the grant.  Payments by us to RMR are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Related Party Transactions”.  The following table provides a summary as of December 31, 2003, of our 1999 Incentive Share Award Plan and our 2003 Incentive Share Award Plan.

	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	None.	None.	2,860,520	(1)
Equity compensation plans not approved by security holders	None.	None.	2,860,520	(1)
Total	None.	None.	2,860,520	(1)

(1)Pursuant to the terms of the 1999 Incentive Share Award Plan and the 2003 Incentive Share Award Plan, in no event shall the number of shares issued under both plans combined exceed 2,921,920.

We have reserved an aggregate of 2,921,920 shares of our common shares to be issued under the terms of the 1999 Incentive Share Award Plan and the 2003 Incentive Share Award Plan, collectively referred to as the Award Plans.  During the year ended December 31, 2003, 14,500 common shares were awarded to our officers and certain employees of our investment manager pursuant to these plans.  In addition, our independent trustees are each awarded 500 common shares annually as part of their annual fees.  The shares awarded to the trustees

52

vest immediately.  The shares awarded to our officers and certain employees of our investment manager vest over a three-year period.  At December 31, 2003, 2,860,520 of our common shares remain reserved for issuance under the Award Plans.  All share awards are expensed at the time of the grants.

The remainder of the information required by Item 12 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year.

Item 13.Certain Relationships and Related Transactions

The information required by Item 13 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year.

Items 14.Principal Accountant Fees and Services

The information required by Item 14 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year.

53

PART IV

Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)Index to Financial Statements and Financial Statement Schedules

The following consolidated financial statements and financial statement schedule of Senior Housing Properties Trust are included on the pages indicated:

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, and therefore have been omitted.

(b)Reports on Form 8-K

During the fourth quarter of 2003, we submitted the following Current Reports on Form 8-K:

(i)Current Report on Form 8-K, dated October 27, 2003, relating to (1) the resignation of one of our trustees and (2) the election of a new trustee (Item 5).

(ii)Current report on Form 8-K, dated October 30, 2003, furnishing our press release containing our results of operations and financial condition for the quarter ended September 30, 2003 (Items 7 and 12).

(c)Exhibits

Exhibit Number		Description
	3.1	Composite Copy of Amended and Restated Declaration of Trust, dated September 20, 1999, as amended to date.  (Incorporated by reference to the Company’s Current Report on Form 8-K dated January 21, 2004.)
	3.2	Articles Supplementary dated May 11, 2000.  (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.)
	3.3	Composite Copy of Amended and Restated Bylaws, dated March 14, 2003, as amended to date.  (Incorporated by reference to the Company’s Current Report on Form 8-K dated March 10, 2004.)
	4.1	Form of common share certificate.  (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.)

54

4.2	Junior Subordinated Indenture between the Company and State Street Bank and Trust Company as trustee, dated June 21, 2001.  (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.)
4.3	Supplemental Indenture No. 1 by and between the Company and State Street Bank and Trust Company as trustee, dated June 21, 2001.  (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.)
4.4	Amended and Restated Trust Agreement among SNH Capital Trust Holdings as sponsor, State Street Bank and Trust Company as property trustee and the regular trustees named therein relating to SNH Capital Trust I, dated June 21, 2001. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.)
4.5	Guarantee Agreement between the Company and State Street Bank and Trust Company as trustee, dated June 21, 2001.  (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.)
4.6	Agreement as to Expenses and Liabilities  between the Company and SNH Capital Trust I, dated June 21, 2001.  (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.)
4.7	Indenture, dated as of December 20, 2001, between the Company and State Street Bank and Trust Company.  (Incorporated by reference to the Company’s Registration Statement on Form S-3, File No. 333-76588.)
4.8	Supplemental Indenture No. 1, dated December 20, 2001, by and between the Company and State Street Bank and Trust Company.  (Incorporated by reference to the Company’s Current Report on Form 8-K dated February 13, 2002.)
4.9.	Supplemental Indenture No. 2, dated December 28, 2001, by and between the Company and State Street Bank and Trust Company.  (Incorporated by reference to the Company’s Current Report on Form 8-K dated February 13, 2002.)
4.10	Supplemental Indenture No. 3, dated as of April 21, 2003, between the Company and U.S. Bank National Association. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.)
4.11	Rights Agreement, dated as of March 10, 2004, by and between the Company and Equiserve Trust Company, N.A. (Incorporated by reference to the Company’s Current Report on Form 8-K dated March 10, 2004.)
8.1	Opinion of Sullivan & Worcester LLP as to certain tax matters.  (Filed herewith.)
10.1	Advisory Agreement, dated as of October 12, 1999, between the Company and REIT Management & Research, Inc. (+)  (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999.)
10.2	Amendment No. 1 to Advisory Agreement, dated as of March 10, 2004, by and between the Company and Relt Management & Research LLC. (+)  (Incorporated by referenbce to the Company’s Current Report on Form 8-K dated March 10, 2004.)
10.3	1999 Incentive Share Award Plan. (+)  (Incorporated by reference to the Company’s Registration Statement on Form S-11, File No. 333-69703.)
10.4	Amendment to the Senior Housing Properties Trust 1999 Incentive Share Award Plan. (+) (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.)
10.5	2003 Incentive Share Award Plan. (+)  (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.)
10.6	Form of Restricted Share Agreement. (+) (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.)

55

10.7	Credit Agreement, dated as of June 27, 2002, by and among the Company, Wachovia Bank National Association, as Agent and the other financial institutions signatory thereto.  (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.8	Transaction Agreement, dated September 21, 1999, between HRPT Properties Trust and the Company.  (Incorporated by reference to the Current Report on Form 8-K dated October 12, 1999 by HRPT Properties Trust.)
10.9	Representative Lease for properties leased to subsidiaries of Marriott International, Inc.  (Incorporated by reference to the Company’s Registration Statement on Form S-11, File No. 333-69703.)
10.10	Representative Guaranty of Tenant Obligations, dated as of October 8, 1993, by Marriott International, Inc. in favor of HMC Retirement Properties, Inc.  (Incorporated by reference to the Company’s Registration Statement on Form S-11, File No. 333-69703.)
10.11	Representative First Amendment to Lease for properties leased to subsidiaries of Marriott International, Inc.  (Incorporated by reference to the Company’s Registration Statement on Form S-11, File No. 333-69703.)
10.12	Representative Assignment and Assumption of Leases, Guarantees and Permits for properties leased to subsidiaries of Marriott International, Inc.  (Incorporated by reference to the Company’s Registration Statement on Form S-11, File No. 333-69703.)
10.13	Representative Second Amendment of Lease for properties leased to subsidiaries of Marriott International, Inc.  (Incorporated by reference to the Company’s Registration Statement on Form S-11, File No. 333-69703.)
10.14	Representative First Amendment of Guaranty by Marriott International, Inc., dated as of May 16, 1994, in favor of HMC Retirement Properties, Inc.  (Incorporated by reference to the Company’s Registration Statement on Form S-11, File No. 333-69703.)
10.15	Assignment of Lease, dated as of June 16, 1994, by HMC Retirement Properties, Inc. in favor of Health and Rehabilitation Properties Trust.  (Incorporated by reference to the Company’s Registration Statement on Form S-11, File No. 333-69703.)
10.16	Third Amendment to Facilities Lease, dated as of June 30, 1994, between HMC Retirement Properties, Inc. and Marriott Senior Living Services, Inc.  (Incorporated by reference to the Company’s Registration Statement on Form S-11, File No. 333-69703.)
10.17	Third Amendment of Lease, dated August 4, 2000, between SPTMRT Properties Trust and Marriott Senior Living Services, Inc. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.)
10.18	Representative Fourth Amendment of Lease for properties leased to subsidiaries of Marriott International, Inc.  (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.)
10.19	Representative Fifth Amendment of Lease for properties leased to subsidiaries of Marriott International, Inc. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.)

56

10.20	Amended and Restated Lease Agreement, dated as of January 1, 2000, between HRES1 Properties Trust and IHS Acquisition 135, Inc.  (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.)
10.21	Transaction Agreement, dated December 7, 2001, by and among the Company, certain subsidiaries of the Company party thereto, Five Star Quality Care, Inc., certain subsidiaries of Five Star Quality Care, Inc. party thereto, FSQ, Inc., Inc., Hospitality Properties Trust, HRPT Properties Trust and REIT Management & Research, LLC.  (Incorporated by reference to the Company’s Current Report on Form 8-K dated December 13, 2001.)
10.22	Agreement of Merger, dated December 5, 2001, among Five Star Quality Care, Inc., FSQ, Inc. Acquisition, Inc. and FSQ, Inc., Inc.  (Incorporated by reference the Company’s Current Report on Form 8-K dated December 13, 2001.)
10.23	Master Lease Agreement by and among certain affiliates of the Company, as Landlords, and Five Star Quality Care Trust, as Tenant, dated December 31, 2001.  (Incorporated by reference to the Company’s Current Report on 8-K dated December 31, 2001.)
10.24	Partial termination of Lease and Sublease, dated as of June 5, 2003, by and among SPT IHS Properties Trust, Five Star Quality Care, Inc. and Five Star Quality Care-GA, LLC. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.)
10.25	Amended and Restated Master Lease Agreement by and among certain affiliates of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant, dated March 1, 2004.  (Filed herewith).
10.26	Guaranty Agreement made by Five Star Quality Care, Inc., as Guarantor, for the benefit of certain  affiliates of the Company, dated December 31,  2001, relating to the Maser Lease Agreement by and among certain affiliates of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant, dated December 31, 2001. (Incorporated by reference to the Company’s Current Report on 8-K filed January 24, 2002.)
10.27	Amended Master Lease Agreement by and among certain affiliates of the Company, as Landlords, and FS Tenant Holding Company Trust, as Tenant, dated January 11, 2002.  (Incorporated by reference to the Company’s Current Report on 8-K dated December 31, 2001.)
10.28	Guaranty Agreement made by Five Star Quality Care, Inc., as Guarantor, for the benefit of certain affiliates of the Company, dated January 11, 2002, relating to the Amended Master Lease Agreement by and among certain affiliates of the Company, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant, dated January 11, 2002.  (Incorporated by reference to the Company’s Current Report on 8-K dated December 31, 2001.)
10.29	First Amendment to Amended Master Lease Agreement by and among certain affiliates of the Company, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust as Tenant, dated October 1, 2002.  (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.)
10.30	Second Amendment to Master Lease Agreement by and among certain affiliates of the Company, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust as Tenants, dated March 1, 2004.  (Filed herewith).
10.31	Registration Agreement, dated October 10, 2003, between the Company and HRPT Properties Trust.  (Incorporated by reference to the Company’s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on October 10, 2003.)
10.32	Form of Idemnification Agreement. (Incorporated by reference to the Company’s Current Report on Form 8-K dated March 10, 2004.)

57

12.1	Ratio of Earnings to Fixed Charges.  (Filed herewith.)
21.1	List of Subsidiaries.  (Filed herewith.)
23.1	Consent of Sullivan & Worcester LLP.  (Contained In Exhibit 8.1.)
23.2	Consent of Ernst and Young LLP. (Filed herewith.)
31.1	Certification Required by Rule 13a-14(a) / 15d – 14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2	Certification Required by Rule 13a-14(a) / 15d – 14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.3	Certification Required by Rule 13a-14(a) / 15d – 14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.4	Certification Required by Rule 13a-14(a) / 15d – 14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1	Certification Pursuant to 18 U.S.C. Sec 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Furnished herewith.)

(+)Management contract or compensatory plan or arrangement

58

REPORT OF INDEPENDENT AUDITORS

To the Trustees and Shareholders of Senior Housing Properties Trust

We have audited the accompanying consolidated balance sheets of Senior Housing Properties Trust, as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003.  Our audits also included the financial statement schedule listed in the Index at Item 15(a).  These financial statements and schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Senior Housing Properties Trust as of December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

	/s/ Ernst & Young LLP
Boston, Massachusetts
February 6, 2004
Except for Note 14, as to which date is March 1, 2004

F-1

SENIOR HOUSING PROPERTIES TRUST

Consolidated Balance Sheet

(in thousands, except share amounts)

	December 31,
	2003			2002
ASSETS
Real estate properties, at cost:
Land	$	162,512		$	145,037
Buildings and improvements	1,255,729			1,093,450
	1,418,241			1,238,487
Less accumulated depreciation	160,426			125,039
	1,257,815			1,113,448
Cash and cash equivalents	3,530			8,654
Restricted cash	10,108			12,364
Investments	10,244			8,288
Deferred financing fees, net	11,311			9,512
Due from affiliate	6,062			—
Other assets	5,030			5,934
Total assets	$	1,304,100		$	1,158,200
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving bank credit facility	$	102,000		$	81,000
Senior unsecured notes due 2012 and 2015, net of discount	393,612			243,746
Secured debt and capital leases	31,817			32,618
Prepaid rent	909			7,342
Security deposits	2,185			1,585
Accrued interest	12,360			9,962
Due to affiliate	894			652
Other liabilities	5,023			1,575
Total liabilities	548,800			378,480
Trust preferred securities	27,394			27,394
Commitments and contingencies
Shareholders’ equity:
Common shares of beneficial interest, $0.01 par value:  80,000,000 shares authorized, 58,453,338 and 58,436,900 shares issued and outstanding at December 31, 2003 and 2002, respectively	585			584
Additional paid-in capital	853,858			853,637
Cumulative net income	151,749			105,875
Cumulative distributions	(281,776		)	(209,304		)
Unrealized gain on investments	3,490			1,534
Total shareholders’ equity	727,906			752,326
Total liabilities and shareholders’ equity	$	1,304,100		$	1,158,200

See accompanying notes

F-2

SENIOR HOUSING PROPERTIES TRUST

Consolidated Statement of Income

(in thousands, except per share amounts)

	Year Ended December 31,
	2003			2002			2001
Revenues:
Rental income	$	129,188		$	115,560		$	47,430
FF&E reserve income	—			5,345			—
Facilities’ operations	—			—			224,867
Interest and other income	1,960			1,392			2,347
Total revenues	131,148			122,297			274,644
Expenses:
Interest	35,088			27,399			5,879
Depreciation	35,728			31,596			19,351
Facilities’ operations	—			—			217,910
General and administrative:
-  Recurring	10,487			8,478			4,129
-  Related to foreclosures and lease terminations	—			—			4,167
Five Star spin-off costs	—			—			3,732
Total	81,303			67,473			255,168
Income from continuing operations before distributions on trust preferred securities, loss from discontinued operations and loss on sale of properties	49,845			54,824			19,476
Distributions on trust preferred securities	2,811			2,811			1,455
Income from continuing operations before loss from discontinued operations and loss on sale of properties	47,034			52,013			18,021
Loss from discontinued operations	—			(1,829		)	(1,003		)
Loss on sale of properties	(1,160		)	—			—
Net income	$	45,874		$	50,184		$	17,018
Weighted average shares outstanding	58,445			56,416			30,859
Basic and diluted earnings per share:
Income from continuing operations before loss from discontinued operations and loss on sale of properties	$	0.80		$	0.92		$	0.58
Loss from discontinued operations and loss on sale of properties	$	(0.02	)	$	(0.03	)	$	(0.03	)
Net income	$	0.78		$	0.89		$	0.55

See accompanying notes

F-3

SENIOR HOUSING PROPERTIES TRUST

Consolidated Statements of shareholders’ Equity

(dollars in thousands)

	Number of Shares		Common Shares		Additional Paid-in Capital		Cumulative Net Income		Cumulative Distributions			Accumulated Other Comprehensive Income			Totals
Balance at December 31, 2000	25,916,100		$	259	$	444,638	$	38,673	$	(62,323	)	$	1,063		$	422,310
Comprehensive Income:
Net income	—		—		—		17,018		—			—			17,018
Unrealized gain on investments	—		—		—		—		—			1,024			1,024
Total comprehensive income	—		—		—		17,018		—			1,024			18,042
Distributions	—		—		—		—		(29,613		)	—			(29,613		)
Distribution of Five Star Quality Care, Inc. shares	—		—		—		—		(50,000		)	—			(50,000		)
Issuance of shares	17,492,000		175		213,534		—		—			—			213,709
Stock grants	13,600		—		176		—		—			—			176
Balance at December 31, 2001	43,421,700		434		658,348		55,691		(141,936		)	2,087			574,624
Comprehensive Income:
Net income	—		—		—		50,184		—			—			50,184
Unrealized loss on investments	—		—		—		—		—			(553		)	(553		)
Total comprehensive income	—		—		—		50,184		—			(553		)	49,631
Distributions	—		—		—		—		(67,368		)	—			(67,368		)
Issuance of shares	15,000,000		150		195,060		—		—			—			195,210
Stock grants	15,200		—		229		—		—			—			229
Balance at December 31, 2002	58,436,900		$	584	853,637		105,875		(209,304		)	1,534			752,326
Comprehensive Income:
Net income	—		—		—		45,874		—			—			45,874
Unrealized loss on investments	—		—		—		—		—			1,956			1,956
Total comprehensive income	—		—		—		45,874		—			1,956			47,830
Distributions	—		—		—		—		(72,472		)	—			(72,472		)
Retired shares	(62	)	—		—		—		—			—			—
Stock grants	16,500		1		221		—		—			—			222
Balance at December 31, 2003	58,453,338		$	585	$	853,858	$	151,749	$	(281,776	)	$	3,490		$	727,906

See accompanying notes

F-4

SENIOR HOUSING PROPERTIES TRUST

Consolidated Statement of Cash Flows

(in thousands)

	Year Ended December 31,
	2003			2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	45,874		$	50,184		$	17,018
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation	35,728			31,596			19,351
Loss on sale of properties	1,160			—			—
Loss from discontinued operations	—			1,829			1,003
Amortization of deferred finance costs and debt discounts	2,034			1,324			—
FF&E reserve income	—			(5,345		)	—
Changes in assets and liabilities:
Restricted cash	105			(3,955		)	(9,400		)
Due from affiliate	(6,124		)	3,275			—
Other assets	1,125			11,730			(3,737		)
Prepaid rent	(6,433		)	228			7,058
Accrued interest	2,398			9,217			(369		)
Due to affiliate	303			387			254
Other liabilities	3,449			(1,359		)	(13,774		)
Cash provided by operating activities	79,619			99,111			17,404
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real estate	288			728			—
Real estate acquisitions	(179,391		)	(622,462		)	(2,176		)
Increase in security deposits	600			65			1,285
Cash contribution to Five Star in connection with spin-off	—			—			(24,943		)
Mortgage financing provided	(6,900		)	—			—
Mortgage financing repaid by mortgagor	6,900			—			—
Cash used for investing activities	(178,503		)	(621,669		)	(25,834		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares, net	—			195,210			213,709
Proceeds from issuance of senior notes, net of discount	149,709			—			243,607
Proceeds from issuance of trust preferred securities	—			—			27,394
Proceeds from issuance of mortgages payable	—			—			9,100
Proceeds from borrowings on revolving bank credit facility	234,000			415,000			43,000
Repayments of borrowings on revolving bank credit facility	(213,000		)	(334,000		)	(140,000		)
Repayment of debt	(801		)	(25,537		)	—
Deferred financing fees	(3,676		)	(4,119		)	(6,659		)
Distributions to shareholders	(72,472		)	(67,368		)	(37,388		)
Cash provided by financing activities	93,760			179,186			352,763
(Decrease) increase in cash and cash equivalents	(5,124		)	(343,372		)	344,333
Cash and cash equivalents at beginning of period	8,654			352,026			515
Cash and cash equivalents at facilities’ operations at beginning of period	—			—			7,178
Cash and cash equivalents at end of period	$	3,530		$	8,654		$	352,026

F-5

SENIOR HOUSING PROPERTIES TRUST

Consolidated Statement of Cash Flows

(in thousands)

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	30,695		$	18,182		$	6,248
NON-CASH INVESTING ACTIVITIES:
Debt assumed in acquisition	—			49,055			—
Real estate acquired in a property exchange	—			(43,308		)	—
Real estate disposed of in a property exchange, net	—			43,308			—
Capital expenditure deposits in restricted cash	—			5,345			—
Purchases of fixed assets with restricted cash	(2,151		)	(7,137		)	—
Net working capital contributed to Five Star in connection with spin-off	—			—			22,153
Real estate and related property conveyed, net	—			—			2,904
NON-CASH FINANCING ACTIVITIES:
Issuance of common shares	222			229			176

See accompanying notes

F-6

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.Organization

We are a Maryland real estate investment trust, or REIT.  At December 31, 2003, we owned 150 properties located in 31 states.

Note 2.Summary of Significant Accounting Policies

BASIS OF PRESENTATION.  These consolidated financial statements include the accounts of Senior Housing Properties Trust and all of our subsidiaries.  All intercompany transactions have been eliminated.

During 2000, we assumed the operations of nursing homes from bankrupt former tenants, pursuant to negotiated settlement agreements.  During 2001, we consolidated the nursing home operations and recognized facilities’ operations revenues and expenses.  On December 31, 2001, we distributed substantially all of our ownership of Five Star Quality Care, Inc., or Five Star, one of our wholly-owned subsidiaries which operated these facilities prior to that date for our account, to our shareholders.  This distribution is referred to herein as the Five Star Spin-Off.  At the time of the Five Star Spin-Off, we entered a lease with Five Star for the facilities previously operated by Five Star for our account.  Subsequent to the Five Star Spin-Off, we recognize only rental income from these operations.

Under a lease with Five Star for 31 communities acquired in January 2002, periodic deposits based on a percentage of the gross revenue at the leased properties are made into escrow accounts as a capital expenditure reserve.  Through September 30, 2002, these escrow accounts were owned by us.  Payments into these escrow accounts through September 30, 2002, were reported by us as FF&E reserve income and expenditures made from these escrow accounts were recorded as fixed assets and depreciated over their estimated useful lives.  As a result of an amendment to this lease on October 1, 2002, Five Star makes periodic deposits into accounts that it owns, rather than making payments into our accounts and we no longer have any FF&E reserve income.  During the remainder of the lease term, all escrowed cash and improvements funded with monies from Five Star’s escrow accounts remain the property of Five Star.  We have security and remainder interests in Five Star’s accounts and in property purchased with funding from these accounts; and, at lease termination, ownership of any funds remaining in the escrow accounts and all improvements purchased with monies from the escrow accounts will be transferred to us.  As a result of this October 1, 2002, lease amendment, the amount of funding in Five Star’s escrow accounts has not been changed and all of the escrowed funds will continue to be available for capital expenditures at these leased properties.

REAL ESTATE PROPERTIES.  Depreciation on real estate properties is expensed on a straight-line basis over estimated useful lives of up to 40 years for buildings and improvements and up to 12 years for personal property.  Our management regularly evaluates whether events or changes in circumstances have occurred that could indicate an impairment in the value of long-lived assets.  If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows of the related properties to determine if an impairment loss should be recognized.  The amount of impairment loss is determined by comparing the historical carrying value of the asset to its estimated fair value.  Estimated fair value is determined through an evaluation of recent financial performance and projected discounted cash flows of properties using standard industry valuation techniques.  In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of our long-lived assets.  If estimated lives are changed, the carrying value of affected assets is allocated over the remaining lives.

For real estate acquired subsequent to June 1, 2001, the effective date of Statement of Financial Accounting Standards No. 141, Business Combinations, we allocate the value of real estate acquired among building, land, furniture, fixtures and equipment, the value of in-place leases and the fair market value of above or below

F-7

market leases and customer relationships.  The value of intangible assets is amortized over the term of the respective lease.

CASH AND CASH EQUIVALENTS.  Cash and cash equivalents, consisting of overnight repurchase agreements and short-term investments with original maturities of three months or less at the date of purchase, are carried at cost plus accrued interest, which approximates market.

RESTRICTED CASH.  Restricted cash consists of a $9.2 million bank certificate of deposit which matures in July 2004 pledged as security for a $9.1 million mortgage debt plus amounts escrowed for capital expenditures at one of our leased properties.

INVESTMENTS.  We  own 1,000,000 common shares, or 0.56%, of HRPT Properties Trust, or HRPT, which are classified as available for sale and carried at fair value, with unrealized gains and losses reported as a separate component of shareholders’ equity.  We also own 35,000 common shares of Five Star which we retained or received in connection with the Five Star Spin-Off.  The Unrealized Gain On Investments shown on the Consolidated Balance Sheet represents the difference between the market value of these shares of HRPT and Five Star calculated by using quoted market prices on the date they were acquired ($6.50 and $7.26 per share, respectively) and on December 31, 2003 ($10.09 and $4.40 per share, respectively).  At December 31, 2003, our  investment in HRPT had a fair value of $10.1 million and unrealized holding gains of $3.6 million.  At February 6, 2004, this investment had a fair value of $10.9 million and unrealized holding gains of $4.4 million.  At December 31, 2003, our investment in Five Star had a fair value of $154,000 and an unrealized holding loss of $100,000.  At February 6, 2004, this investment had a fair value of $198,000 and an unrealized holding loss of $56,000.

DEFERRED FINANCE COSTS.  Issuance costs related to borrowings are capitalized and amortized over the terms of the respective loans.  The unamortized balance of deferred finance costs and accumulated amortization were $14.5 million and $3.2 million and $10.8 million and $1.3 million at December 31, 2003 and 2002, respectively.  The weighted average amortization period is approximately 12 years.  The amortization expense to be incurred over the next five years as of December 31, 2003 is $1.9 million in 2004, $1.4 million in 2005, $912,000 in 2006, $912,000 in 2007 and $912,000 in 2008.

REVENUE RECOGNITION.  Rental income from operating leases is recognized on a straight-line basis over the life of lease agreements.  Interest income is recognized as earned over the terms of real estate mortgages.  Percentage rents are recognized as earned in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”.  For the years ended December 31, 2003, 2002 and 2001, percentage rents aggregated $3.6 million, $3.2 million, and $3.1 million, respectively.

In 2001, revenues from facilities’ operations were derived primarily from providing healthcare services to residents.  Approximately 76% of 2001 revenues were derived from payments under federal and state medical assistance programs.  We accrued for revenues when services were provided at standard charges adjusted to amounts estimated to be received under governmental programs and other third-party contractual arrangements.

EARNINGS PER COMMON SHARE.  Earnings per common share is computed using the weighted average number of shares outstanding during the period.  We have no common share equivalents, instruments convertible into common shares or other dilutive instruments.

USE OF ESTIMATES.  Preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that may affect the amounts reported in these financial statements and related notes.  The actual results could differ from these estimates.

F-8

INCOME TAXES.  We qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended.  Accordingly, we do not expect to be subject to federal income taxes if we continue to distribute our taxable income and continue to meet the other requirements for qualifying as a real estate investment trust.  However, we are subject to some state and local taxes on our income and property.  The characterization of the distributions made in 2003, 2002 and 2001 was 52.62%, 62.32% and 48.51% ordinary income, respectively, and 47.38%, 37.68% and 51.49% return of capital, respectively.

NEW ACCOUNTING PRONOUNCEMENTS.  In April 2002, the Financial Accounting Standards Board, or the FASB, issued SFAS No. 145, “Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”, or FAS 145.  The provisions of this standard eliminate the requirement that a gain or loss from the extinguishment of debt be classified as an extraordinary item, unless it can be considered unusual in nature and infrequent in occurrence.  Our adoption of FAS 145 on January 1, 2003, had no impact on our financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, or FIN 46.  Our adoption of FIN 46 had no impact on our financial condition or results of operations.  In December 2003, the FASB issued Revised Interpretation No. 46, or Revised FIN 46, which we will be required to adopt for the first quarter of 2004.  Our adoption of Revised FIN 46 will not have an impact on our financial condition or results of operations, but may affect the accounting treatment of our trust preferred securities.

RECLASSIFICATIONS.  Reclassifications have been made to prior period financial statements to conform to the current period presentation.

Note 3.Real Estate Properties

Our properties are generally leased on a triple net basis, pursuant to noncancellable, fixed term, operating leases expiring between 2005 and 2020.  Some leases to a single tenant or group of affiliated tenants are cross-defaulted or cross-guaranteed, and provide for all-or-none tenant renewal options at existing or market rent rates.  These triple net leases generally require the lessee to pay all property operating costs.  The cost, after impairment write downs, and the carrying value of the properties leased were $1.4 billion and $1.3 billion at December 31, 2003, respectively.  The future minimum lease payments to be received during the current terms of our leases as of December 31, 2003, are $138.7 million in 2004, $138.8 million in 2005, $136.4 million in 2006, $136.4 million in 2007, $136.4 million in 2008 and $1.1 billion thereafter.

In February 2003, we purchased from Alterra Healthcare Corporation, or Alterra, 18 assisted living properties with 894 living units located in 10 states for $61.0 million. Simultaneously with this purchase, we leased these properties to a subsidiary of Alterra for an initial term through 2017, plus renewal options. The rent payable to us under this lease is $7.0 million per year plus increases starting in 2004 based upon increases in the gross revenues at the leased properties. In addition, we provided $6.9 million of mortgage financing to Alterra for six assisted living properties. A majority of the revenues at these Alterra operated properties are paid by residents from their private resources. Our investment in properties leased and mortgaged by Alterra was part of Alterra’s bankruptcy reorganization financing. The Alterra Bankruptcy Court approved the terms of our investment and that approval included an order that payments due to us under the lease and mortgage were accorded administrative priority status under the Bankruptcy Code. In October 2003, Alterra filed a plan of reorganization that we believed failed to meet certain conditions that we agreed to when we made our investment. Accordingly, we objected to Alterra’s plan. In November 2003, we reached a compromise with Alterra regarding the revised plan pursuant to which Alterra prepaid our mortgage note in full and paid us an additional $3.5 million. This $3.5 million, net of $688,000 of costs we incurred related to our objection, is being amortized into our income during the remaining term of the Alterra lease.

F-9

In March 2003, we terminated a lease for a nursing home in Missouri and evicted the tenant, which had defaulted its rent obligations to us.  Five Star, another tenant of ours, is managing this nursing home on an interim basis until it is leased or sold.  We pay Five Star a management fee of 5% of the gross revenues at this nursing home.  The facility revenues, expenses and net operating loss for this property for the period from March 17, 2003, to December 31, 2003, were $2.6 million, $2.7 million and $150,000, respectively.  The net operating loss is included in Interest and Other Income in our Consolidated Statement of Income.

In May 2003, we purchased from an unrelated third party three assisted living properties with 143 living units located in Virginia for $6.5 million.  In September 2003, we purchased from Five Star one independent living property with 164 units in California for $12.3 million, its appraised value.  These four properties were added to our existing lease with Five Star for nine other independent and assisted living properties.  The annual minimum rent for the properties included in this lease increased by $1.9 million.  All other terms of the lease remained unchanged.

In June 2003, we sold a nursing home in Georgia for $300,000 which we had previously leased to Five Star on a combined basis with other properties.  Under the terms of that lease, we reduced the annual rent payable on the combined lease by 10% of the net sale proceeds that we received.

During 2003, pursuant to the terms of our leases with Five Star, we purchased $11.4 million of improvements to our properties leased by Five Star, and the annual rent payable to us by Five Star was increased by 10% of the amounts invested, or $1.1 million.

In December 2003, we purchased 10 assisted living properties with resident capacity of 1,019 for $86.6 million from NewSeasons Assisted Living Communities, Inc., or NewSeasons.  We funded this acquisition by borrowing under our revolving bank credit facility and with cash on hand. Simultaneously, NewSeasons leased these facilities from us for an initial term ending in 2017, plus renewal options for up to an additional 30 years. The rent payable to us will average approximately $9.3 million per year during the initial lease term; although it will commence at a lower rent of approximately $8.0 million per year and then increase at agreed times during the lease term. Substantially all of the revenues at these properties are paid by residents from their private resources. NewSeasons is a subsidiary of Independence Blue Cross, or IBC. IBC is a large regional health insurance company based in Philadelphia, Pennsylvania, with reported revenues of approximately $8.5 billion in 2002. IBC has guaranteed NewSeasons’ rent to us. In addition, we, NewSeasons and IBC have entered into an agreement for the possible expansion of our business relationships by adding up to four assisted living properties with resident capacity of 540. These four properties are currently encumbered by mortgage debts. We intend to purchase these properties if and when these mortgage debts are prepaid or assumed on terms mutually acceptable to us, NewSeasons, IBC and the lenders. If we purchase all four of these properties, our purchase price for these additional properties will be $28.4 million; any that we purchase will be added to the lease for the 10 currently leased properties and rent payable to us will increase.

During 2002, we sold a property which had been closed by Five Star earlier in the year and had been classified as an asset held for sale.  We had previously leased this property to Five Star on a combined basis with other properties.  Under the terms of that lease, we reduced the annual rent payable on the combined lease by 10% of the net sale proceeds that we received.  The following table provides the components of the Loss From Discontinued Operations included in the Consolidated Statement of Income related to this property:

F-10

	2002			2001
Revenues	$	—		$	4,368
Facilities’ operations expense	—			(5,291		)
Depreciation expense	(40		)	(80		)
Impairment loss	(2,450		)	—
Gain on sale of property	661			—
Loss from discontinued operations	$	(1,829	)	$	(1,003	)

Note 4.Shareholders’ Equity

We have reserved an aggregate of 2,921,920 shares of our common shares to be issued under the terms of our 1999 Incentive Share Award Plan and our 2003 Incentive Share Award Plan, collectively referred to as the Award Plans.  During the year ended December 31, 2003, 14,500 common shares were awarded to our officers and certain employees of our investment manager pursuant to these plans.  In addition, our independent trustees are each awarded 500 common shares annually as part of their annual fees.  The shares awarded to the trustees vest immediately.  The shares awarded to our officers and certain employees of our investment manager vest over a three-year period.  At December 31, 2003, 2,860,520 of our common shares remain reserved for issuance under the Award Plans.  All share awards are expensed at the time of the grants.

Cash distributions paid or payable by us to our common shareholders for the years ended December 31, 2003, 2002 and 2001, were $1.24 per share, $1.24 per share and $1.20 per share, respectively.  In connection with the Five Star Spin-Off, we distributed one share of Five Star for every ten of our shares to our shareholders on December 31, 2001, which was valued at $0.726 per our common share for income tax purposes.  This valuation was based upon the trading price of Five Star shares at the time of the Five Star Spin-Off.

Note 5.Spin-off Transaction

As discussed in Notes 2 and 4, we completed the Five Star Spin-Off by distributing 4,342,170 common shares of Five Star to our shareholders on December 31, 2001.  Concurrent with the Five Star Spin-Off, we entered into a lease agreement with Five Star for 56 healthcare facilities.  Simultaneous with the Five Star Spin-Off, Five Star became a public company listed on the American Stock Exchange.  We incurred $3.7 million of expenses relating to the Five Star Spin-Off, which included costs of distributing Five Star shares to shareholders, legal and accounting fees, Securities and Exchange Commission filing fees and Five Star’s American Stock Exchange listing fees.

Note 6.Transactions with Affiliates

We have an agreement with Reit Management & Research LLC, or RMR, for RMR to provide investment, management and administrative services to us.  This agreement is renewed annually if the renewal is approved by a majority of our independent trustees.  RMR is owned by Gerard M. Martin and Barry M. Portnoy, each a managing trustee and member of our board of trustees.  RMR is compensated annually based on a formula amount of gross invested real estate assets.  RMR is also entitled to an annual incentive fee, which is based on a formula and paid in our restricted common shares.  Investment advisory fees paid to RMR for the years ended December 31, 2003, 2002 and 2001, were $7.3 million, $6.6 million and $3.2 million, respectively.  To date, we have not paid any incentive fees to RMR, but we incurred $263,000 of incentive fees during 2003.  This fee will be paid in our common shares during 2004.

As discussed in Note 3, during 2003, we purchased four properties, one of which was purchased from Five Star for its appraised value, and leased them to Five Star.  We also purchased $11.4 million of improvements to our

F-11

properties leased by Five Star and the annual rent payable to us by Five Star was increased by 10% of the amounts invested, or $1.1 million.

During 2003, we agreed to sell to Five Star two nursing homes in Michigan that we leased to Five Star.  The purchase price is $10.5 million, the appraised value of the properties.  These two properties are leased on a combined basis with other nursing home properties. Under the terms of our lease with Five Star, upon consummation of the sale, the annual rent payable under the combined lease will be reduced by 10% of the net proceeds that we received from the sale.  The sale is contingent upon Five Star’s obtaining Department of Housing and Urban Development insured financing for its purchase, and this sale may not close because of a failure of this condition or for some other reason.

In October 2003, we entered an agreement with HRPT to file a registration statement with respect to our shares held by HRPT and use reasonable efforts to effect the registration of those shares.  HRPT paid the expenses of this registration.  The registration statement became effective October 24, 2003.

As a result of the nursing home bankruptcies and settlements discussed in Note 2, subject to the receipt of necessary healthcare licenses, we assumed operating responsibilities for healthcare facilities effective July 1, 2000.  Nursing care and other services were provided at these properties to approximately 5,000 residents.  Under tax laws and regulations applicable to REITs, we were required to engage a contractor to manage these properties after a 90 day transition period. We entered into management agreements with FSQ, Inc., to provide these services beginning in 2000.  FSQ, Inc., was owned by Messrs. Martin and Portnoy, our managing trustees, until January 2, 2002.  During 2001, the fees paid to FSQ, Inc., by us totaled $11.5 million.  This amount includes fees with respect to all services provided by FSQ, Inc., to us.  FSQ, Inc. was merged into Five Star at the time of the Five Star Spin-Off.

Note 7.Indebtedness

We have a revolving bank credit facility that matures in November 2005 and may be extended to November 2006 upon the payment of an extension fee.  Our credit facility permits borrowings up to $250.0 million, which amount may be expanded to $500.0 million in certain circumstances.  Borrowings under our credit facility are unsecured.  Funds may be borrowed, repaid and reborrowed until maturity, and no principal repayment is due until maturity.  The interest rate (2.72% at December 31, 2003) on borrowings under the new credit facility are calculated as a spread above LIBOR. Our credit facility is available for acquisitions, working capital and general business purposes.  As of December 31, 2003, $102.0 million was outstanding and $148.0 million was available for borrowing under this credit facility.

F-12

At December 31, 2003, our additional outstanding debt consisted of the following (dollars in thousands):

Unsecured Debt	Coupon		Maturity	Face Amount		UnamortizedDiscount
Senior Notes	8.625	%	2012	$	245,000	$	1,114
Senior Notes	7.875	%	2015	150,000		274
Total unsecured senior notes				$	395,000	$	1,388

Secured and Other Debt	Balance		Interest Rate		Maturity	Secured by	Carrying Value of Collateral		Net Book Value of Collatral
Mortgages	$	9,100	Prime minus 2	%	July 2004	2 properties	$	9,600	$	8,750
Bonds	14,700		5.875	%	December 2027	1 properties	34,094		32,474
Capital leases	8,017		7.7	%	May 2016	2 properties	17,737		16,768
Total secured	$	31,817					$	61,431	$	57,992

Interest on our unsecured senior notes and our bonds is payable semi-annually in arrears and no principal repayments are due until maturity.  Interest on our mortgages is payable monthly and no principal repayments are due until maturity.  Payments due under our capital leases are made monthly.

Required principal payments on our outstanding debt as of December 31, 2003, are as follows (dollars in thousands):

2004	$	9,891
2005	$	102,852
2006	$	917
2007	$	988
2008	$	1,064
Thereafter	$	413,105

Note 8.Trust Preferred Securities

At December 31, 2003, a wholly-owned finance subsidiary of ours had 1,095,750 shares of 10.125% trust preferred securities outstanding, with a liquidation preference of $25 per share, for a total liquidation amount of $27.4 million.  This finance subsidiary exists solely to issue the trust preferred securities and its own common securities and to hold 10.125% junior subordinated debentures due June 15, 2041 issued by us, which are its sole assets.  We can redeem the debentures for their liquidation amount in whole or in part on or after June 15, 2006.  When the debentures are redeemed or repaid at maturity, a like amount of trust preferred securities will be redeemed by this finance subsidiary.  We have provided a full and unconditional guarantee of this finance subsidiary’s obligations related to the trust preferred securities arising out of payments on or redemptions of the debentures.  Underwriting commissions and other costs are being amortized over the 40 year life of the trust preferred securities and the debentures.

F-13

Note 9.Segment Information

For 2003 and 2002, we had one reportable segment, leasing.  During 2001, we had two reportable segments, leasing and facilities’ operations.  Revenues of the leasing segment were derived from rental agreements for properties that are leased to third party operators.  Revenues of the facility operations segment were derived from services provided to patients at the healthcare facilities operated for our account.  Performance is measured based on the return on investments for the leased properties and on contribution margin of the facilities’ operations.  The following table is a summary of these reportable segments as of and for the year ended December 31, 2001.  Because we only operated in one segment during 2003 and 2002, a comparative table is not presented (dollars in thousands):

	Year Ended December 31, 2001
	Leasing		Facilities’Operations		Unallocated			Total
Revenues	$	47,430	$	224,867	$	2,347		$	274,644
Interest expense	—		—		5,879			5,879
Depreciation expense	13,129		6,222		—			19,351
Facilities’ operations expense	—		217,910		—			217,910
General and administrative expenses
-Recurring	4,129		—		—			4,129
-Related to foreclosures and lease terminations	—		—		4,167			4,167
Five Star Spin-Off costs	—		—		3,732			3,732
Total	17,258		224,132		13,778			255,168
Income from continuing operations before distributions on trust preferred securities	30,172		735		(11,431		)	19,476
Distributions on trust preferred distributions	—		—		(1,455		)	(1,455		)
Net income (loss)	$	30,172	$	735	$	(12,886	)	$	18,021
Real estate properties, at cost	$	448,561	$	144,638	$	—		$	593,199

F-14

Note 10.Fair Value of Financial Instruments and Commitments

The financial statements presented include rents receivable, senior notes, mortgages payable, other liabilities, security deposits and trust preferred securities.  The fair values of the financial instruments were not materially different from their carrying values at December 31, 2003 and 2002, except as follows (dollars in thousands):

	2003				2002
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Senior notes	$	393,612	$	426,150	$	243,746	$	242,550
Trust preferred securities		27,394		30,024		27,394	$	28,764

The fair values of our senior notes are based on estimates using discounted cash flow analysis and currently prevailing interest rates.  The fair value of our trust preferred securities is based on their quoted per share prices of $27.40 and $26.25 at December 31, 2003 and 2002, respectively.

Note 11.Concentration of Credit Risk

The assets included in these financial statements are primarily income producing senior housing real estate located throughout the United States.  The following is a summary of the significant lessees as of and for the years ended December 31, 2003 and 2002 (dollars in thousands):

	AtDecember 31, 2003				Year EndedDecember 31, 2003
	Investment(1)		% of Total		Revenue		% of Total
Five Star	$	850,485	60	%	$	77,589	60	%
Sunrise Senior Living, Inc.(2)	325,473		23	%	30,911		24	%
All others	242,283		17	%	20,688		16	%
	$	1,418,241	100	%	$	129,188	100	%

	AtDecember 31, 2002				Year EndedDecember 31, 2002
	Investment(1)		% of  Total		Revenue		% of  Total
Five Star	$	819,795	66	%	$	70,405	61	%
Marriott International, Inc.(2)	325,473		26	%	31,246		27	%
All others	93,219		8	%	13,909		12	%
	$	1,238,487	100	%	$	115,560	100	%

(1)Historical costs before previously recorded depreciation and, in certain instances, after impairment losses.

(2)Marriott International, Inc., or Marriott, sold its senior living division to Sunrise Senior Living, Inc., or Sunrise, during 2003.  Upon the consummation of the sale, Sunrise became our tenant for properties formerly leased to Marriott.  However, Marriott continues to guaranty the lease obligations.

F-15

Note 12.Selected Quarterly Financial Data (unaudited)

The following is a summary of our unaudited quarterly results of operations for 2003 and 2002 (dollars in thousands, except per share amounts):

	2003
	FirstQuarter		SecondQuarter		ThirdQuarter		FourthQuarter
Revenues	$	31,350	$	31,842	$	32,101	$	35,855
Income from continuing operations before loss from discontinued operations and loss on sale of properties	12,059		10,961		10,449		13,565
Net income	12,059		9,801		10,449		13,565
Per share data:
Income from continuing operations before loss from discontinued operations and loss on sale of properties	0.21		0.19		0.18		0.23
Net income	0.21		0.17		0.18		0.23

	2002
	FirstQuarter		SecondQuarter		ThirdQuarter		FourthQuarter
Revenues	$	28,707	$	30,378	$	30,377	$	32,835
Income from continuing operations before loss from discontinued operations and loss on sale of properties	11,640		13,067		13,142		14,164
Net income	11,620		10,596		13,142		14,826
Per share data:
Income from continuing operations before loss from discontinued operations and loss on sale of properties	0.23		0.22		0.22		0.24
Net income	0.23		0.18		0.22		0.25

Note 13.Commitments and Contingencies

During 2002, about the time Marriott determined to sell its senior living division, MSLS, to Sunrise, we and Five Star became involved in litigation with Marriott and MSLS.  This litigation remained pending throughout 2003.  On January 7, 2004, we and Five Star settled this litigation.  Under the terms of the settlement we and Five Star, and Marriott and MSLS, agreed to dismiss all claims and counterclaims asserted in the litigation.  Also under the terms of the settlement, Marriott paid to us and Five Star $1.25 million each.  The settlement was a compromise of the parties’ disputes entered into to avoid the expense and inconvenience of litigation and none of we or Five Star, nor Marriott or MSLS, has admitted any liability, violation of law or wrongdoing in connection with the matters in the litigation.  We believe it settles all our litigation with Marriott.  This settlement does not affect our or Five Star’s rights vis-à-vis Sunrise which arise by reason of events occurring after Sunrise purchased MSLS.

In January 2002, HEALTHSOUTH Corporation, or HEALTHSOUTH, settled a non-monetary default with us by exchanging properties.  We delivered to HEALTHSOUTH title to five nursing homes which HEALTHSOUTH leased from us.  In exchange, HEALTHSOUTH delivered to us title to two rehabilitation hospitals which

F-16

HEALTHSOUTH leases from us.  As part of this settlement, HEALTHSOUTH’s lease was extended to December 2011 from January 2006, the annual rent was reduced from $10.3 million to $8.7 million and other lease terms were changed.  The primary factor which caused us to lower the rent for an extended lease term was the purported credit strength of HEALTHSOUTH.  In agreeing to lower the rent and extend the lease term, we relied upon statements made by certain officers of HEALTHSOUTH, upon financial statements and other documents provided by HEALTHSOUTH, upon public statements made by HEALTHSOUTH and its representatives concerning HEALTHSOUTH’s financial condition and upon publicly available documents filed by HEALTHSOUTH.

Based on an SEC complaint against HEALTHSOUTH filed in March 2003 and reports that several former officers of HEALTHSOUTH have admitted to various crimes, including creating and publishing false financial statements which overstated HEALTHSOUTH’s earnings and assets by several billion dollars, we concluded that the financial information which was provided to us and upon which we relied to lower the rent and extend the lease term was false and fraudulent.  On April 16, 2003, we filed a complaint in the Land Court of the Commonwealth of Massachusetts, seeking that our lease with HEALTHSOUTH be reformed to change the rent back to $10.3 million per year effective January 1, 2002, and to change the lease term back to expire on January 1, 2006, among other matters.  This litigation remains pending and no trial date has been set.  HEALTHSOUTH has continued to pay us rent at the rate of $8.7 million per year during the pendency of this litigation through the date of this report.

As discussed in Note 3, we agreed to purchase four additional properties from NewSeasons.  These four properties are currently encumbered by mortgage debts.  We intend to purchase these properties if and when these mortgage debts are prepaid or assumed on terms mutually acceptable to us, NewSeasons, IBC and the lenders.  If we purchase all four of these properties, our purchase price for these additional properties will be $28.4 million; any properties that we purchase will be added to the lease for the 10 currently leased properties and rent payable to us will increase.

As discussed in Note 6, we agreed to sell two properties to Five Star for $10.5 million, their appraised value.

In connection with obtaining regulatory approval for the acquisition and lease of one senior living property, we provided a guaranty and a security interest in that property of certain prepaid service obligations to residents.  We are contingently liable in the event the tenant, Five Star, or operator, SLS, of this property fail to provide these future services.  In addition, we guaranty approximately $3.0 million of surety bonds and insurance premiums for Five Star.

Note 14.Subsequent Events

In January and February 2004, we completed a public offering of 5 million of our common shares.  Simultaneously, HRPT sold 3,148,500 of our shares it owned.  We raised net proceeds of $86.3 million, which were used to repay borrowings outstanding under our revolving bank credit facility.  We and HRPT were parties to a joint underwriting agreement in connection with this offering.  We did not receive any proceeds from the sale of our shares by HRPT, but HRPT paid its pro-rata share of the expenses of this offering.

At December 31, 2003, we had three leases with Five Star; a lease for 31 independent living communities that are operated by Sunrise; a lease for 53 nursing homes operated by Five Star; and a lease for 13 independent and assisted living facilities operated by Five Star.  On March 1, 2004, we purchased from Five Star one independent and assisted living facility with 229 units located in Maryland.  The purchase price was $24.1 million, the appraised value of the property.  Simultaneous with this purchase, our existing leases with Five Star were modified as follows:

•the lease for 53 nursing homes and the lease for 13 independent and assisted living facilities were combined into one lease andthe property acquired on March 1, 2004, was added to this combined lease;

F-17

•the combined lease maturity date was changed to December 31, 2020 from December 31, 2018 and 2019, for the separate leases;

•the minimum rent for the combined lease of 53 nursing homes and 14 independent living facilities was increased by $2.4 million; and

•for all of our leases with Five Star, the amount of additional rent to be paid to us was changed to 4% of the increase in revenues at the leased properties beginning in 2006.

All other lease terms remained substantially unchanged.

F-18

SENIOR HOUSING PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2003

(Dollars in Thousands)

Location	State	Initial Cost to Company		Costs Capitalized Subsequent to Acquisition	Impairment		Cost Amount Carried at Close of Period 12/31/03			(2) Accumulated Depreciation	(3) Date Acquired	Original Construction Date
		Land	Buildings and Equipment				Land	Buildings and Equipment	Total (1)
Peoria	AZ	2,687	15,843	388	—		2,687	16,231	18,918	907	1/11/2002	1990
Scottsdale	AZ	2,315	13,650	416	—		2,315	14,066	16,381	788	1/11/2002	1984
Scottsdale	AZ	979	8,807	91	—		941	8,936	9,877	2,150	5/16/1994	1990
Sun City	AZ	1,174	10,569	173	—		1,189	10,727	11,916	2,559	6/17/1994	1990
Sun City West	AZ	400	3,305	—	—		400	3,305	3,705	82	2/28/2003	1998
Tucson	AZ	4,429	26,119	746	—		4,429	26,865	31,294	1,525	1/2/2002	1989
Yuma	AZ	223	2,100	212	—		223	2,312	2,535	701	6/30/1992	1984
Yuma	AZ	103	604	52	—		103	656	759	221	6/30/1992	1984
Arleta	CA	230	2,070	305	—		230	2,375	2,605	210	11/1/2000	1976
Fresno	CA	738	2,577	188	—		738	2,765	3,503	1,038	12/28/1990	1963
Laguna Hills	CA	3,132	28,184	475	—		3,172	28,619	31,791	6,649	9/9/1994	1975
Lancaster	CA	601	1,859	1,152	—		601	3,011	3,612	1,059	12/28/1990	1969
San Diego	CA	9,142	53,904	528	—		9,142	54,432	63,574	3,017	1/11/2002	1987
Stockton	CA	382	2,750	244	—		382	2,994	3,376	934	6/30/1992	1968
Stockton	CA	1,176	11,171	—	—		1,176	11,171	12,347	95	9/30/2003	1988
Thousand Oaks	CA	622	2,522	620	—		622	3,142	3,764	1,069	12/28/1990	1965
Van Nuys	CA	716	378	373	—		719	748	1,467	280	12/28/1990	1969
Canon City	CO	292	6,228	274	(3,512	)	292	2,990	3,282	283	9/26/1997	1970
Colorado Springs	CO	245	5,236	317	(3,031	)	245	2,522	2,767	249	9/26/1997	1972
Delta	CO	167	3,570	262	—		167	3,832	3,999	619	9/26/1997	1963
Grand Junction	CO	6	2,583	1,511	—		136	3,964	4,100	1,100	12/30/1993	1978
Grand Junction	CO	204	3,875	431	—		204	4,306	4,510	1,337	12/30/1993	1968
Lakewood	CO	232	3,766	899	—		232	4,665	4,897	1,628	12/28/1990	1972
Littleton	CO	185	5,043	700	—		185	5,743	5,928	2,042	12/28/1990	1965
Littleton	CO	400	3,505	—	—		400	3,505	3,905	87	2/28/2003	1998
New Haven	CT	1,681	14,953	2,113	(12,154	)	1,681	4,912	6,593	2,239	5/11/1992	1971
Waterbury	CT	1,003	9,023	1,942	(5,694	)	1,003	5,271	6,274	2,196	5/11/1992	1974
Newark	DE	2,010	11,852	362	—		2,010	12,214	14,224	688	1/11/2002	1991
Wilmington	DE	4,365	25,739	403	—		4,365	26,142	30,507	1,455	1/11/2002	1988
Wilmington	DE	1,179	6,950	248	—		1,179	7,198	8,377	405	1/11/2002	1974
Wilmington	DE	38	227	150	—		38	377	415	27	1/11/2002	1965
Wilmington	DE	869	5,126	422	—		869	5,548	6,417	311	1/11/2002	1989
Boca Raton	FL	4,404	39,633	799	—		4,474	40,362	44,836	9,709	5/20/1994	1994
Cape Coral	FL	400	2,904	—	—		400	2,904	3,304	72	2/28/2003	1998
Coral Springs	FL	3,410	20,104	542	—		3,410	20,646	24,056	1,145	1/11/2002	1984
Deerfield Beach	FL	3,196	18,848	539	—		3,196	19,387	22,583	1,076	1/11/2002	1990
Deerfield Beach	FL	1,664	14,972	299	—		1,690	15,245	16,935	3,667	5/16/1994	1986
Fort Lauderdale	FL	22	129	126	—		22	255	277	19	1/11/2002	1949
Fort Myers	FL	369	2,174	100	—		369	2,274	2,643	125	1/1/2002	1990
Fort Myers	FL	2,349	21,137	419	—		2,385	21,520	23,905	5,044	8/16/1994	1984

S-1

SENIOR HOUSING PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2003

(Dollars in Thousands)

Location	State	Initial Cost to Company		Costs Capitalized Subsequent to Acquisition	Impairment	Cost Amount Carried at Close of Period 12/31/03			(2) Accumulated Depreciation	(3) Date Acquired	Original Construction Date
		Land	Buildings and Equipment			Land	Buildings and Equipment	Total (1)
Palm Harbor	FL	3,327	29,945	591	—	3,379	30,484	33,863	7,333	5/16/1994	1992
Palm Harbor	FL	3,449	20,336	327	—	3,449	20,663	24,112	1,155	1/11/2002	1989
Port St. Lucie	FL	1,223	11,009	219	—	1,242	11,209	12,451	2,696	5/20/1994	1993
West Palm Beach	FL	2,061	12,153	319	—	2,061	12,472	14,533	696	1/11/2002	1988
College Park	GA	300	2,702	194	—	300	2,896	3,196	673	5/15/1996	1985
Dublin	GA	442	3,982	301	—	442	4,283	4,725	958	5/15/1996	1968
Marietta	GA	300	2,702	263	—	300	2,965	3,265	650	5/15/1996	1967
Clarinda	IA	77	1,453	582	—	77	2,035	2,112	596	12/30/1993	1968
Council Bluffs	IA	225	893	331	—	225	1,224	1,449	350	4/1/1995	1963
Des Moines	IA	123	627	204	—	123	831	954	95	7/1/2000	1965
Glenwood	IA	322	2,098	198	—	322	2,296	2,618	252	7/1/2000	1964
Mediapolis	IA	94	1,776	407	—	94	2,183	2,277	655	12/30/1993	1973
Pacific Junction	IA	32	306	51	—	32	357	389	96	4/1/1995	1978
Winterset	IA	111	2,099	671	—	111	2,770	2,881	811	12/30/1993	1973
Arlington Heights	IL	3,621	32,587	534	—	3,665	33,077	36,742	7,734	9/9/1994	1986
Indianapolis	IN	2,781	16,396	687	—	2,785	17,079	19,864	939	1/11/2002	1986
South Bend	IN	400	3,105	—	—	400	3,105	3,505	77	2/28/2003	1988
Ellinwood	KS	130	1,137	187	—	130	1,324	1,454	304	4/1/1995	1972
Overland Park	KS	1,274	11,426	156	—	1,274	11,582	12,856	390	10/25/2002	1989
Overland Park	KS	2,568	15,140	357	—	2,568	15,497	18,065	860	1/11/2002	1984
Lafayette(4)	KY	—	10,848	225	—	—	11,073	11,073	602	1/11/2002	1985
Lexington(4)	KY	—	6,394	270	—	—	6,664	6,664	366	1/11/2002	1980
Louisville	KY	3,524	20,779	1,293	—	3,524	22,072	25,596	1,189	1/11/2002	1984
Braintree	MA	3,193	16,652	17	—	3,193	16,669	19,862	2,718	1/2/2002	1975
Winchester	MA	3,218	18,988	323	—	3,218	19,311	22,529	1,069	1/11/2002	1980
Woburn	MA	3,809	19,862	20	—	3,809	19,882	23,691	3,242	1/2/2002	1984
Bowie	MD	408	3,421	88	—	408	3,509	3,917	119	10/25/2002	2000
Easton	MD	383	4,555	116	—	383	4,671	5,054	157	10/25/2002	2000
Frederick	MD	385	3,444	90	—	385	3,534	3,919	119	10/25/2002	1998
Severna Park	MD	229	9,798	192	—	229	9,990	10,219	335	10/25/2002	1998
Silver Spring	MD	1,192	9,288	317	—	1,200	9,597	10,797	324	10/25/2002	1996
Silver Spring	MD	3,229	29,065	786	—	3,301	29,779	33,080	7,041	7/25/1994	1992
Farmington(5)	MI	474	3,682	269	—	474	3,951	4,425	392	7/1/2000	1969
Howell(5)	MI	703	4,227	245	—	703	4,472	5,175	458	7/1/2000	1966
Midland	MI	300	2,404	—	—	300	2,404	2,704	60	2/28/2003	1988
Monroe	MI	400	2,604	—	—	400	2,604	3,004	65	2/28/2003	1988
Monroe	MI	300	2,504	—	—	300	2,504	2,804	62	2/28/2003	1988
Portage	MI	600	4,807	—	—	600	4,807	5,407	119	2/28/2003	1998
Saginaw	MI	300	2,604	—	—	300	2,604	2,904	65	2/28/2003	1998
West  St. Paul	MN	400	3,705	—	—	400	3,705	4,105	101	2/28/2003	1998

S-2

SENIOR HOUSING PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2003

(Dollars in Thousands)

Location	State	Initial Cost to Company		Costs Capitalized Subsequent to Acquisition	Impairment		Cost Amount Carried at Close of Period 12/31/03			(2) Accumulated Depreciation	(3) Date Acquired	Original Construction Date
		Land	Buildings and Equipment				Land	Buildings and Equipment	Total (1)
Eagan	MN	400	2,504	—	—		400	2,504	2,904	68	2/28/2003	1998
St. Joseph	MO	111	1,027	374	—		111	1,401	1,512	312	6/4/1993	1976
Tarkio	MO	102	1,938	602	—		102	2,540	2,642	729	12/30/1993	1970
Cary	NC	713	4,628	82	—		713	4,710	5,423	166	10/25/2002	1999
Chapel Hill	NC	800	6,409	—	—		800	6,409	7,209	159	2/28/2003	1996
Ainsworth	NE	25	420	240	—		25	660	685	100	7/1/2000	1966
Ashland	NE	28	1,823	97	—		28	1,920	1,948	237	7/1/2000	1965
Blue Hill	NE	56	1,063	152	—		56	1,215	1,271	133	7/1/2000	1967
Central City	NE	21	919	155	—		21	1,074	1,095	132	7/1/2000	1969
Columbus	NE	89	561	121	—		88	683	771	82	7/1/2000	1955
Edgar	NE	1	138	77	—		1	215	216	55	7/1/2000	1971
Exeter	NE	4	626	92	—		4	718	722	104	7/1/2000	1965
Grand Island	NE	119	1,446	563	—		119	2,009	2,128	427	4/1/1995	1963
Gretna	NE	267	673	92	(29	)	237	766	1,003	126	7/1/2000	1972
Lyons	NE	13	797	176	—		13	973	986	127	7/1/2000	1969
Milford	NE	24	880	146	—		24	1,026	1,050	146	7/1/2000	1967
Sutherland	NE	19	1,251	153	—		19	1,404	1,423	160	7/1/2000	1970
Utica	NE	21	569	100	—		21	669	690	95	7/1/2000	1966
Waverly	NE	529	686	193	—		529	879	1,408	128	7/1/2000	1989
Burlington	NJ	1,300	11,700	7	—		1,300	11,707	13,007	2,416	9/29/1995	1994
Cherry Hill	NJ	1,001	8,176	—	—		1,001	8,176	9,177	9	12/29/2003	1999
Lakewood(6)	NJ	4,885	28,803	407	—		4,885	29,210	34,095	1,620	1/11/2002	1987
Mt. Arlington	NJ	1,375	11,235	—	—		1,375	11,235	12,610	12	12/29/2003	2001
Voorhees	NJ	1,001	8,179	—	—		1,001	8,179	9,180	9	12/29/2003	1998
Washington Twp	NJ	1,001	8,179	—	—		1,001	8,179	9,180	9	12/29/2003	1999
Albuquerque	NM	3,828	22,572	350	—		3,828	22,922	26,750	1,282	1/11/2002	1986
Columbus	OH	—	27,778	515	—		—	28,293	28,293	1,549	1/11/2002	1989
Grove City	OH	332	3,081	179	—		332	3,260	3,592	819	6/4/1993	1965
Canonsburg	PA	1,499	13,493	606	—		1,518	14,080	15,598	8,241	3/1/1991	1985
Clarks Summitt	PA	1,001	8,235	—	—		1,001	8,235	9,236	9	12/29/2003	2001
Devon	PA	550	4,537	—	—		550	4,537	5,087	5	12/29/2003	2001
Exton	PA	1,001	8,235	—	—		1,001	8,235	9,236	9	12/29/2003	2000
Glen Mills	PA	1,001	8,235	—	—		1,001	8,235	9,236	9	12/29/2003	2001
Murraysville	PA	300	2,504	—	—		300	2,504	2,804	68	12/29/2003	1998
New Britain	PA	979	8,054	—	—		979	8,054	9,033	8	12/29/2003	1998
Penn Hills	PA	200	901	—	—		200	901	1,101	25	12/29/2003	1997
Tiffany Court	PA	—	5,683	—	—		—	5,683	5,683	6	12/29/2003	1997
Columbia	SC	300	1,903	—	—		300	1,903	2,203	47	2/28/2003	1998
Myrtle Beach	SC	543	3,202	307	—		543	3,509	4,052	185	1/11/2002	1980
Rock Hill	SC	300	1,703	—	—		300	1,703	2,003	45	2/28/2003	1998

S-3

SENIOR HOUSING PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2003

(Dollars in Thousands)

Location	State	Initial Cost to Company				Costs Capitalized Subsequent to Acquisition		Impairment			Cost Amount Carried at Close of Period 12/31/03						(2) Accumulated Depreciation		(3) Date Acquired	Original Construction Date
		Land		Buildings and Equipment							Land		Buildings and Equipment		Total (1)
Huron	SD	144		3,108		4		—			144		3,112		3,256		1,004		6/30/1992	1968
Huron	SD	45		968		1		—			45		969		1,014		264		6/30/1992	1968
Sioux Falls	SD	253		3,062		4		—			253		3,066		3,319		992		6/30/1992	1960
Goodlettsville	TN	400		3,495		—		—			400		3,495		3,895		83		2/28/2003	1998
Maryville	TN	300		3,315		—		—			300		3,315		3,615		86		2/28/2003	1998
Bellaire	TX	1,223		11,010		177		—			1,238		11,172		12,410		2,688		5/16/1994	1991
Dallas	TX	4,709		27,768		732		—			4,709		28,500		33,209		1,574		1/11/2002	1990
El Paso	TX	2,301		13,567		333		—			2,301		13,900		16,201		775		1/11/2002	1987
Houston	TX	5,537		32,647		735		—			5,537		33,382		38,919		1,853		1/11/2002	1989
San Antonio	TX	4,283		25,256		482		—			4,283		25,738		30,021		1,423		1/11/2002	1989
Woodlands	TX	3,694		21,782		825		—			3,694		22,607		26,301		1,234		1/11/2002	1988
Arlington	VA	1,859		16,734		296		—			1,885		17,004		18,889		4,020		7/25/1994	1992
Charlottesville	VA	2,936		26,422		471		—			2,977		26,852		29,829		6,405		6/17/1994	1991
Chesapeake	VA	160		1,498		—		—			160		1,498		1,658		26		5/30/2003	1988
Fredericksburg	VA	287		8,480		126		—			287		8,606		8,893		298		10/25/2002	1998
Poquoson	VA	220		2,041		—		—			220		2,041		2,261		35		5/30/2003	1987
Richmond	VA	134		3,191		64		—			134		3,255		3,389		109		10/25/2002	1999
Virginia Beach	VA	881		7,926		141		—			893		8,055		8,948		1,938		5/16/1994	1990
Williamsburg	VA	270		2,468		—		—			270		2,468		2,738		43		5/30/2003	1987
Seattle	WA	256		4,869		67		—			256		4,936		5,192		1,552		11/1/1993	1964
Brookfield	WI	832		3,849		8,321		(6,552		)	832		5,618		6,450		1,193		12/28/1990	1964
Clintonville	WI	49		1,625		186		—			30		1,830		1,860		660		12/28/1990	1965
Clintonville	WI	14		1,695		176		—			14		1,871		1,885		654		12/28/1990	1960
Madison	WI	144		1,633		174		—			144		1,807		1,951		654		12/28/1990	1920
Milwaukee	WI	277		3,883		201		—			277		4,084		4,361		1,373		3/27/1992	1969
Pewaukee	WI	984		2,432		222		—			984		2,654		3,638		902		9/10/1998	1963
Waukesha	WI	68		3,452		2,407		—			68		5,859		5,927		1,822		12/28/1990	1958
Laramie	WY	191		3,632		375		—			191		4,007		4,198		1,231		12/30/1993	1964
Worland	WY	132		2,503		739		—			132		3,242		3,374		937		12/30/1993	1970
Totals		$	161,968	$	1,234,549	$	52,696	$	(30,972	)	$	162,512	$	1,255,729	$	1,418,241	$	160,426

(1)Aggregate cost for federal income tax purposes is approximately $1.59 billion.

(2)Depreciation is provided on buildings and improvements for periods ranging up to 40 years and on equipment up to 12 years.

(3)Includes acquisition dates of HRPT Properties Trust, our predecessor.

(4)These properties are subject to our $8.0 million of capital leases.

(5)These properties are collateral for our $9.1 million of mortgage notes.

(6)This property is collateral for our $14.7 million of mortgage bonds.

S-4

SENIOR HOUSING PROPERTIES TRUST

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2003

(Dollars in Thousands)

Reconciliation of the carrying amount of real estate and equipment and accumulated depreciation during the period:

	Real Estate and Equipment			Accumulated Depreciation
Balance at December 31, 2000	$	593,395		$	106,681
Balance at December 31, 2000 included in net investment in facilities’ operations	2,609			210
Additions	2,169			19,431
Disposals	(4,974		)	(2,070		)
Balance at December 31, 2001	593,199			124,252
Additions	678,411			31,637
Disposals	(33,123		)	(30,850		)
Balance at December 31, 2002	1,238,487			125,039
Additions	181,542			35,728
Disposals	(1,788		)	(341		)
Balance at December 31, 2003	$	1,418,241		$	160,426

S-5

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly 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:  March 12, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ David J. Hegarty	President and Chief Operating Officer	March 12, 2004
David J. Hegarty
/s/ John R. Hoadley	Treasurer and Chief Financial Officer	March 12, 2004
John R. Hoadley
/s/ Frank J. Bailey	Trustee	March 12, 2004
Frank J. Bailey
/s/ Frederick N. Zeytoonjian	Trustee	March 12, 2004
Frederick N. Zeytoonjian
/s/ John L. Harrington	Trustee	March 12, 2004
John L. Harrington
/s/ Gerard M. Martin	Trustee	March 12, 2004
Gerard M. Martin
/s/ Barry M. Portnoy	Trustee	March 12, 2004
Barry M. Portnoy

EX-8.1

Exhibit 8.1

March 12, 2004

Senior Housing Properties Trust

400 Centre Street

Newton, Massachusetts  02458

Ladies and Gentlemen:

The following opinion is furnished to Senior HousingProperties Trust, a Maryland real estate investment trust (the “Company”), to be filed with the Securities and Exchange Commission (the “SEC”) as Exhibit 8.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (the “Form 10-K”), under the Securities Exchange Act of 1934, as amended.

We have acted as counsel for the Company in connection with the preparation of the Form 10-K, and we have reviewed originals or copies, certified or otherwise identified to our satisfaction, of corporate records, certificates and statements of officers and accountants of the Company and of public officials, and such other documents as we have considered relevant and necessary in order to furnish the opinion hereinafter set forth.  In doing so, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such documents.  Specifically, and without limiting the generality of the foregoing, we have reviewed:  (i) the declaration of trust and the by-laws of the Company, each as amended and restated; and (ii) the sections of Item 1 of the Form 10-K captioned “Federal Income Tax Considerations” and “ERISA Plans, Keogh Plans and Individual Retirement Accounts.”  With respect to all questions of fact on which the opinion set forth below is based, we have assumed the accuracy and completeness of and have relied on the information set forth in the Form 10-K and in the documents incorporated therein by reference, and on representations made to us by officers of the Company.  We have not independently verified such information.

The opinion set forth below is based upon the Internal Revenue Code of 1986, as amended, the Treasury Regulations issued thereunder, published administrative interpretations

thereof, and judicial decisions with respect thereto, all as of the date hereof (collectively, the “Tax Laws”), and upon the Employee Retirement Income Security Act of 1974, as amended, the Department of Labor regulations issued thereunder, published administrative interpretations thereof, and judicial decisions with respect thereto, all as of the date hereof (collectively, the “ERISA Laws”).  No assurance can be given that the Tax Laws or the ERISA Laws will not change.  In preparing the discussions with respect to Tax Laws and ERISA Laws matters in the sections of Item 1 of the Form 10-K captioned “Federal Income Tax Considerations” and “ERISA Plans, Keogh Plans and Individual Retirement Accounts,” we have made certain assumptions and expressed certain conditions and qualifications therein, all of which assumptions, conditions and qualifications are incorporated herein by reference.  With respect to all questions of fact on which our opinion is based, we have assumed the initial and continuing truth, accuracy and completeness of: (i) the information set forth in the Form 10-K and in the documents incorporated therein by reference; and (ii) representations made to us by officers of the Company or contained in the Form 10-K in each such instance without regard to qualifications such as “to the best knowledge of” or “in the belief of”.

We have relied upon, but not independently verified, the foregoing assumptions.  If any of the foregoing assumptions are inaccurate or incomplete for any reason, or if the transactions described in the Form 10-K (or the documents incorporated therein by reference) have been consummated in a manner that is inconsistent with the manner contemplated therein, our opinion as expressed below may be adversely affected and may not be relied upon.

Based upon and subject to the foregoing, we are of the opinion that the discussions with respect to Tax Laws and ERISA Laws matters in the sections of Item 1 of the Form 10-K captioned “Federal Income Tax Considerations” and “ERISA Plans, Keogh Plans and Individual Retirement Accounts,” in all material respects are accurate and fairly summarize the Tax Laws issues and the ERISA Laws issues addressed therein, and hereby confirm that the opinions of counsel referred to in said sections represent our opinions on the subject matter thereof.

Our opinion above is limited to the matters specifically covered hereby, and we have not been asked to address, nor have we addressed, any other matters or any other transactions.  Further, we disclaim any undertaking to advise you of any subsequent changes of the matters stated, represented or assumed herein or any subsequent changes in the Tax Laws or the ERISA Laws.

2

This opinion is intended solely for the benefit and use of the Company, and is not to be used, released, quoted, or relied upon by anyone else for any purpose (other than as required by law) without our prior written consent.  We hereby consent to filing of a copy of this opinion as an exhibit to the Form 10-K, which is incorporated by reference in the Company’s Registration Statements on Form S-3 (File Nos. 333-76588 and 333-109659) under the Securities Act of 1933, as amended (the “Act”), and to the references to our firm in the Form 10-K and such Registration Statements.  In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or under the rules and regulations of the SEC promulgated thereunder.

Very truly yours,

/s/ Sullivan & Worcester LLP

SULLIVAN & WORCESTER LLP

3

EX-10.24

Exhibit 10.24

AMENDED AND RESTATED LEASE AGREEMENT,

dated as of March 1, 2004,

by and among

CERTAIN AFFILIATES OF SENIOR HOUSING PROPERTIES TRUST,

AS LANDLORD,

AND

FIVE STAR QUALITY CARE TRUST,

AS TENANT

Table of Contents

Table of Contents
(continued)

ii

Table of Contents
(continued)

iii

Table of Contents
(continued)

iv

Table of Contents
(continued)

v

AMENDED AND RESTATED LEASE AGREEMENT

THIS AMENDED AND RESTATED LEASE AGREEMENT is entered into as of March 1, 2004 by and among (i) each of the parties identified on the signature page hereof as landlord (collectively, “Landlord”), and (ii) FIVE STAR QUALITY CARE TRUST, a Maryland business trust, as tenant (“Tenant”).

W I T N E S S E T H :

WHEREAS, Landlord collectively owns the sixty-seven (67) Properties (this and other capitalized terms used and not otherwise defined herein having the meanings ascribed to such terms in Article 1) described on Exhibits A-1 - A-67 attached hereto and made a part hereof; and

WHEREAS, Landlord and Tenant wish to amend, restate and expand the Existing Leases, subject to and upon the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree that the Existing Leases are hereby amended and restated in their entirety, as follows:

ARTICLE 1

DEFINITIONS

For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, (a) the terms defined in this Article shall have the meanings assigned to them in this Article and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein shall have the meanings assigned to them in accordance with GAAP, (c) all references in this Agreement to designated “Articles,” “Sections” and other subdivisions are to the designated Articles, Sections and other subdivisions of this Agreement, and (d) the words “herein,” “hereof,” “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision.

1.1          “Additional Charges”  shall have the meaning given such term in Section 3.1.3.

1.2          “Additional Rent”  shall have the meaning given such term in Section 3.1.2(a).

1.3          “Affiliated Person”  shall mean, with respect to any Person, (a)  in the case of any such Person which is a partnership, any partner in such partnership, (b) in the case of any such Person which is a limited liability company, any member of such company, (c) any other Person which is a Parent, a Subsidiary, or a Subsidiary of a Parent with respect to such Person or to one or more of the Persons referred to in the preceding clauses (a) and (b), (d) any other Person who is an officer, director, trustee or employee of, or partner in or member of, such Person or any Person referred to in the preceding clauses (a), (b) and (c), and (e) any other Person who is a member of the Immediate Family of such Person or of any Person referred to in the preceding clauses (a) through (d).

1.4          “Agreement”  shall mean this Amended and Restated Lease Agreement, including all exhibits attached hereto, as it and they may be amended from time to time as herein provided.

1.5          “Applicable Laws”  shall mean all applicable laws, statutes, regulations, rules, ordinances, codes, licenses, permits and orders, from time to time in existence, of all courts of competent jurisdiction and Government Agencies, and all applicable judicial and administrative and regulatory decrees, judgments and orders, including common law rulings and determinations, relating to injury to, or the protection of, real or personal property or human health or the Environment, including, without limitation, all valid and lawful requirements of courts and other Government Agencies pertaining to reporting, licensing, permitting, investigation, remediation and removal of underground improvements (including, without limitation, treatment or storage tanks, or water, gas or oil wells), or emissions, discharges, releases or threatened releases of Hazardous Substances, chemical substances, pesticides, petroleum or petroleum products, pollutants, contaminants or hazardous or toxic substances, materials or wastes whether solid, liquid or gaseous in nature, into the Environment, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances or Regulated Medical Wastes, underground improvements (including, without limitation, treatment or storage tanks, or water, gas or oil wells), or pollutants, contaminants or hazardous or toxic substances, materials or wastes, whether solid, liquid or gaseous in nature.

1.6          “Award”  shall mean all compensation, sums or other value awarded, paid or received by virtue of a total or partial Condemnation of any Property (after deduction of all reasonable legal fees and other reasonable costs and expenses, including, without limitation, expert witness fees, incurred by Landlord, in connection with obtaining any such award).

1.7          “Base Net Patient Revenues”  shall mean the amount of Net Patient Revenues for the Leased Property for the Base Year, provided, however, that in the event that, with respect to any Lease Year, or portion thereof, for any reason (including, without limitation, a casualty or Condemnation) there shall be a reduction in the number of units available at any Facility located at the Leased Property or in the services provided at such Facility from the number of such units or the services provided during the Base Year, in determining Additional Rent payable for such Lease Year, Base Net Patient Revenues shall be reduced as follows:  (a) in the event of the termination of this Agreement with respect to any Property pursuant to Article 10, 11 or 12, all Net Patient Revenues for such Property for the period during the Base Year equivalent to the period after the termination of this Agreement with respect to such Property shall be subtracted from Base Net Patient Revenues; (b) in the event of a partial closing of any Facility affecting the number of units, or the services provided, at such Facility, Net Patient Revenues attributable to units or services at such Facility shall be ratably allocated among all units in service at such Facility during the Base Year and all such Net Patient Revenues attributable to units no longer in service shall be subtracted from Base Net Patient Revenues throughout the period of such closing; and (c) in the event of any other change in circumstances affecting any Facility, Base Net Patient Revenues shall be equitably adjusted in such manner as Landlord and Tenant shall reasonably agree.

2

1.8          “Base Year”  shall mean the 2005 calendar year.

1.9          “Business Day”  shall mean any day other than Saturday, Sunday, or any other day on which banking institutions in The Commonwealth of Massachusetts are authorized by law or executive action to close.

1.10        “Capital Addition”  shall mean, with respect to any Property, any renovation, repair or improvement to such Property, the cost of which constitutes a Capital Expenditure.

1.11        “Capital Expenditure”  shall mean any expenditure treated as capital in nature in accordance with GAAP.

1.12        “Change in Control”  shall mean (a) the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the SEC) of 9.8% or more, or rights, options or warrants to acquire 9.8% or more, of the outstanding shares of voting stock or other voting interests of Tenant or any Guarantor, as the case may be, or the power to direct the management and policies of Tenant or any Guarantor, directly or indirectly, (b) the merger or consolidation of Tenant or any Guarantor with or into any other Person (other than the merger or consolidation of any Person into Tenant or any Guarantor that does not result in a Change in Control of Tenant or such Guarantor under clauses (a), (c) or (d) of this definition), (c) any one or more sales or conveyances to any Person of all or any material portion of its assets (including capital stock or other equity interests) or business of Tenant or any Guarantor, as the case may be, or (d) the cessation, for any reason, of the individuals who at the beginning of any twenty-four (24) consecutive month period (commencing on the date hereof) constituted the board of directors of Tenant or any Guarantor (together with any new directors whose election by such Board or whose nomination for election by the shareholders of Tenant or such Guarantor, as the case may be, was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of any such period or whose election or nomination for election was previously so approved) to constitute a majority of the board of directors of Tenant or any Guarantor then in office.

3

1.13        “Claim”  shall have the meaning given such term in Article 8.

1.14        “Code”  shall mean the Internal Revenue Code of 1986 and, to the extent applicable, the Treasury Regulations promulgated thereunder, each as from time to time amended.

1.15        “Commencement Date”  shall mean (a) with respect to the Properties originally demised under the Legacy Lease, December 31, 2001; (b) with respect to the Properties originally demised under the Independence Lease, October 25, 2002; and (c) with respect to the Property located in Ellicott City, Maryland, the date hereof.

1.16        “Condemnation”  shall mean, with respect to any Property, or any portion thereof, (a) the exercise of any governmental power with respect to such Property, whether by legal proceedings or otherwise, by a Condemnor of its power of condemnation, (b) a voluntary sale or transfer of such Property by Landlord to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending, or (c) a taking or voluntary conveyance of such Property, or any interest therein, or right accruing thereto or use thereof, as the result or in settlement of any condemnation or other eminent domain proceeding affecting such Property, whether or not the same shall have actually been commenced.

1.17        “Condemnor”  shall mean any public or quasi-public Person, having the power of Condemnation.

1.18        “Consolidated Financials”  shall mean, for any Fiscal Year or other accounting period of Five Star, annual audited and quarterly unaudited financial statements of Five Star prepared on a consolidated basis, including Five Star’s consolidated balance sheet and the related statements of income and cash flows, all in reasonable detail, and setting forth in comparative form the corresponding figures for the corresponding period in the preceding Fiscal Year, and prepared in accordance with GAAP throughout the periods reflected.

1.19        “Date of Taking”  shall mean, with respect to any Property, the date the Condemnor has the right to possession of such Property, or any portion thereof, in connection with a Condemnation.

1.20        “Default”  shall mean any event or condition which with the giving of notice and/or lapse of time would ripen into an Event of Default.

4

1.21        “Disbursement Rate”  shall mean an annual rate of interest, as of the date of determination, equal to the greater of (i) the Interest Rate and (ii) the per annum rate for ten (10) year U.S. Treasury Obligations as published in The Wall Street Journal plus four hundred (400) basis points; provided, however, that in no event shall the Disbursement Rate exceed eleven and one-half percent (11.5%).

1.22        “Distribution”  shall mean (a) any declaration or payment of any dividend (except ordinary cash dividends payable in common stock or other equity interests of Tenant) on or in respect of any shares of any class of capital stock or other equity interests of Tenant, (b) any purchase, redemption, retirement or other acquisition of any shares of any class of capital stock of a corporation, (c) any other distribution on or in respect of any shares of any class of capital stock of a corporation or (d) any return of capital to shareholders.

1.23        “Easement Agreement”  shall mean any conditions, covenants and restrictions, easements, declarations, licenses and other agreements which are Permitted Encumbrances and such other agreements as may be granted in accordance with Section 19.1.

1.24        “Encumbrance”  shall have the meaning given such term in Section 20.1.

1.25        “Entity”  shall mean any corporation, general or limited partnership, limited liability company or partnership, stock company or association, joint venture, association, company, trust, bank, trust company, land trust, business trust, cooperative, any government or agency, authority or political subdivision thereof or any other entity.

1.26        “Environment”  shall mean soil, surface waters, ground waters, land, stream, sediments, surface or subsurface strata and ambient air.

1.27        “Environmental Obligation”  shall have the meaning given such term in Section 4.4.1.

1.28        “Environmental Notice”  shall have the meaning given such term in Section 4.4.1.

1.29        “Event of Default”  shall have the meaning given such term in Section 12.1.

1.30        “Excess Net Patient Revenues”  shall mean, with respect to any Lease Year, or portion thereof, the amount of Net Patient Revenues for such Lease Year, or portion thereof, in excess of Base Net Patient Revenues for the equivalent period during the Base Year.

1.31        “Existing Leases”  shall mean, collectively, the Legacy Lease and the Independence Lease.

5

1.32        “Extended Term”  shall have the meaning given such term in Section 2.4.

1.33        “Facility”  shall mean, with respect to any Property, the skilled nursing/intermediate care/independent living/assisted living/special care/group home facility being operated or proposed to be operated on such Property.

1.34        “Facility Mortgage”  shall mean any Encumbrance placed upon the Leased Property, or any portion thereof, in accordance with Article 20.

1.35        “Facility Mortgagee”  shall mean the holder of any Facility Mortgage.

1.36        “Financial Officer’s Certificate”  shall mean, as to any Person, a certificate of the chief executive officer, chief financial officer or chief accounting officer (or such officers’ authorized designee) of such Person, duly authorized, accompanying the financial statements required to be delivered by such Person pursuant to Section 17.2, in which such officer shall certify (a) that such statements have been properly prepared in accordance with GAAP and are true, correct and complete in all material respects and fairly present the consolidated financial condition of such Person at and as of the dates thereof and the results of its and their operations for the periods covered thereby, and (b), in the event that the certifying party is an officer of Tenant and the certificate is being given in such capacity, that no Event of Default has occurred and is continuing hereunder.

1.37        “Fiscal Year”  shall mean the calendar year or such other annual period designated by Tenant and approved by Landlord.

1.38        “Five Star”  shall mean Five Star Quality Care, Inc., a Maryland corporation, and its permitted successors and assigns.

1.39        “Fixed Term”  shall have the meaning given such term in Section 2.3.

1.40        “Fixtures”  shall have the meaning given such term in Section 2.1(d).

1.41        “GAAP”  shall mean generally accepted accounting principles consistently applied.

1.42        “Government Agencies”  shall mean any court, agency, authority, board (including, without limitation, environmental protection, planning and zoning), bureau, commission, department, office or instrumentality of any nature whatsoever of any governmental or quasi-governmental unit of the United States or any State or any county or any political subdivision of any of the foregoing, whether now or hereafter in existence, having jurisdiction over Tenant or any Property, or any portion thereof, or any Facility operated thereon.

6

1.43        “Guarantor”  shall mean Five Star and each and every other guarantor of Tenant’s obligations under this Agreement, and each such guarantor’s successors and assigns.

1.44        “Guaranty”  shall mean any guaranty agreement executed by a Guarantor in favor of Landlord pursuant to which the payment or performance of Tenant’s obligations under this Agreement are guaranteed, together with all modifications, amendments and supplements thereto.

1.45        “Hazardous Substances”  shall mean any substance:

(a)           the presence of which requires or may hereafter require notification, investigation or remediation under any federal, state or local statute, regulation, rule, ordinance, order, action or policy; or

(b)           which is or becomes defined as a “hazardous waste”, “hazardous material” or “hazardous substance” or “pollutant” or “contaminant” under any present or future federal, state or local statute, regulation, rule or ordinance or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) and the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.) and the regulations promulgated thereunder; or

(c)           which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency or instrumentality of the United States, any state of the United States, or any political subdivision thereof; or

(d)           the presence of which on any Property, or any portion thereof, causes or materially threatens to cause an unlawful nuisance upon such Property, or any portion thereof, or to adjacent properties or poses or materially threatens to pose a hazard to such Property, or any portion thereof, or to the health or safety of persons on or about such Property, or any portion thereof; or

(e)           without limitation, which contains gasoline, diesel fuel or other petroleum hydrocarbons or volatile organic compounds; or

(f)            without limitation, which contains polychlorinated biphenyls (PCBs) or asbestos or urea formaldehyde foam insulation; or

(g)           without limitation, which contains or emits radioactive particles, waves or material; or

7

(h)           without limitation, constitutes Regulated Medical Wastes.

1.46        “Immediate Family”  shall mean, with respect to any individual, such individual’s spouse, parents, brothers, sisters, children (natural or adopted), stepchildren, grandchildren, grandparents, parents-in-law, brothers-in-law, sisters-in-law, nephews and nieces.

1.47        “Impositions”  shall mean, collectively, all taxes (including, without limitation, all taxes imposed under the laws of any State, as such laws may be amended from time to time, and all ad valorem, sales and use, or similar taxes as the same relate to or are imposed upon Landlord, Tenant or the business conducted upon the Leased Property), assessments (including, without limitation, all assessments for public improvements or benefit, whether or not commenced or completed prior to the date hereof), ground rents (including any minimum rent under any ground lease, and any additional rent or charges thereunder), water, sewer or other rents and charges, excises, tax levies, fees (including, without limitation, license, permit, inspection, authorization and similar fees), and all other governmental charges, in each case whether general or special, ordinary or extraordinary, foreseen or unforeseen, of every character in respect of the Leased Property or the business conducted thereon by Tenant (including all interest and penalties thereon due to any failure in payment by Tenant), which at any time prior to, during or in respect of the Term hereof may be assessed or imposed on or in respect of or be a lien upon (a) Landlord’s interest in the Leased Property, (b) the Leased Property or any part thereof or any rent therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, or sales from, or activity conducted on, or in connection with the Leased Property or the leasing or use of the Leased Property or any part thereof by Tenant; provided, however, that nothing contained herein shall be construed to require Tenant to pay and the term “Impositions” shall not include (i) any tax based on net income imposed on Landlord, (ii) any net revenue tax of Landlord, (iii) any transfer fee (but excluding any mortgage or similar tax payable in connection with a Facility Mortgage) or other tax imposed with respect to the sale, exchange or other disposition by Landlord of the Leased Property or the proceeds thereof, (iv) any single business, gross receipts tax, transaction privilege, rent or similar taxes as the same relate to or are imposed upon Landlord, (v) any interest or penalties imposed on Landlord as a result of the failure of Landlord to file any return or report timely and in the form prescribed by law or to pay any tax or imposition, except to the extent such failure is a result of a breach by Tenant of its obligations pursuant to Section 3.1.3, (vi) any impositions imposed on Landlord that are a result of Landlord not being considered a “United States person” as defined in Section 7701(a)(30) of the Code, (vii) any impositions that are enacted or adopted by their express terms as a substitute for any tax that would not have been payable by Tenant pursuant to the terms of this Agreement or (viii) any impositions imposed as a result of a breach of covenant or representation by

8

Landlord in any agreement governing Landlord’s conduct or operation or as a result of the negligence or willful misconduct of Landlord.

1.48        “Incidental Documents”  shall mean the Guaranty, the Security Agreement, the Pledge Agreement any and other pledge or security agreement issued or executed by an assignee or transferee pursuant to Section 16.1.

1.49        “Indebtedness”  shall mean all obligations, contingent or otherwise, which in accordance with GAAP should be reflected on the obligor’s balance sheet as liabilities.

1.50        “Independence Lease”  shall mean the Lease Agreement, dated as of October 25, 2002, by and among certain Entities comprising Landlord and Tenant’s predecessor in interest, as amended.

1.51        “Insurance Requirements”  shall mean all terms of any insurance policy required by this Agreement and all requirements of the issuer of any such policy and all orders, rules and regulations and any other requirements of the National Board of Fire Underwriters (or any other body exercising similar functions) binding upon Landlord, Tenant, any Manager or the Leased Property.

1.52        “Interest Rate”  shall mean ten percent (10%) per annum.

1.53        “Land”  shall have the meaning given such term in Section 2.1(a).

1.54        “Landlord”  shall have the meaning given such term in the preambles to this Agreement and shall also include their respective permitted successors and assigns.

1.55        “Landlord Default”  shall have the meaning given such term in Article 14.

1.56        “Landlord Liens”  shall mean liens on or against the Leased Property or any payment of Rent (a) which result from any act of, or any claim against, Landlord or any owner of a direct or indirect interest in the Leased Property (other than the lessor under any ground lease affecting any portion of the Leased Property), or which result from any violation by Landlord of any terms of this Agreement, or (b) which result from liens in favor of any taxing authority by reason of any tax owed by Landlord or any fee owner of a direct or indirect interest in the Leased Property (other than the lessor under any ground lease affecting any portion of the Leased Property); provided, however, that “Landlord Lien” shall not include any lien resulting from any tax for which Tenant is obligated to pay or indemnify Landlord against until such time as Tenant shall have already paid to or on behalf of Landlord the tax or the required indemnity with respect to the same.

1.57        “Lease Year”  shall mean any Fiscal Year or portion thereof during the Term.

9

1.58        “Leased Improvements”  shall have the meaning given such term in Section 2.1(b).

1.59        “Leased Intangible Property”  shall mean all agreements, service contracts, equipment leases, booking agreements and other arrangements or agreements affecting the ownership, repair, maintenance, management, leasing or operation of the Leased Property, or any portion thereof,  to which Landlord is a party; all books, records and files relating to the leasing, maintenance, management or operation of the Leased Property, or any portion thereof, belonging to Landlord; all transferable or assignable permits, certificates of occupancy, operating permits, sign permits, development rights and approvals, certificates, licenses, warranties and guarantees, rights to deposits, trade names, service marks, telephone exchange numbers identified with the Leased Property, and all other transferable intangible property, miscellaneous rights, benefits and privileges of any kind or character belonging to Landlord with respect to the Leased Property.

1.60        “Leased Personal Property”  shall have the meaning given such term in Section 2.1(e).

1.61        “Legacy Lease”  shall mean the Lease Agreement, dated as of December 31, 2001, by and among certain Entities comprising Landlord and Tenant, as amended.

1.62        “Legacy Properties”  shall have the meaning given such term in the recitals to this Agreement.

1.63        “Legal Requirements”  shall mean all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting the Leased Property or the maintenance, construction, alteration or operation thereof, whether now or hereafter enacted or in existence, including, without limitation, (a) all permits, licenses, authorizations, certificates of need, authorizations and regulations necessary to operate any Property for its Permitted Use, and (b) all covenants, agreements, restrictions and encumbrances contained in any instruments at any time in force affecting any Property, including those which may (i) require material repairs, modifications or alterations in or to any Property or (ii) in any way materially and adversely affect the use and enjoyment thereof, but excluding any requirements arising as a result of Landlord’s status as a real estate investment trust.

1.64        “Lien”  shall mean any mortgage, security interest, pledge, collateral assignment, or other encumbrance, lien or charge of any kind, or any transfer of property or assets for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to payment of general creditors.

1.65        “Manager”  shall mean, with respect to any Property, the operator or manager under any Management Agreement from time to time

10

in effect with respect to such Property, and its permitted successors and assigns.

1.66        “Management Agreement”  shall mean, with respect to any Property, any operating or management agreement from time to time entered into by Tenant with respect to such Property in accordance with the applicable provisions of this Agreement, together with all amendments, modifications and supplements thereto.

1.67        “Minimum Rent”  shall mean Eighteen Million Two Hundred Ninety Thousand Two Hundred Sixty-Nine Dollars ($18,290,269) per annum.

1.68        “Net Patient Revenues”  shall mean, for each Fiscal Year during the Term, all revenues and receipts (determined on an accrual basis and in all material respects in accordance with GAAP) of every kind derived from renting, using and/or operating the Leased Property and parts thereof, including, but not limited to:  all patient, client or resident rents and revenues received or receivable for the use of or otherwise by reason of all units, beds and other facilities provided, meals served, services performed, space or facilities subleased or goods sold on the Leased Property, or any portion thereof, including, without limitation, any other arrangements with third parties relating to the possession or use of any portion of the Leased Property; and proceeds, if any, from business interruption or other loss of income insurance; provided, however, that Net Patient Revenues shall not include the following:  revenue from professional fees or charges by physicians and unaffiliated providers of services, when and to the extent such charges are paid over to such physicians and unaffiliated providers of services, or are separately billed and not included in comprehensive fees; contractual allowances (relating to any period during the Term) for billings not paid by or received from the appropriate governmental agencies or third party providers; allowances according to GAAP for uncollectible accounts, including credit card accounts and charity care or other administrative discounts; all proper patient billing credits and adjustments according to GAAP relating to health care accounting; provider discounts for hospital or other medical facility utilization contracts and credit card discounts; any amounts actually paid by Tenant for the cost of any federal, state or local governmental programs imposed specially to provide or finance indigent patient care; federal, state or municipal excise, sales, use, occupancy or similar taxes collected directly from patients, clients or residents or included as part of the sales price of any goods or services; insurance proceeds (other than proceeds from business interruption or other loss of income insurance); Award proceeds (other than for a temporary Condemnation); revenues attributable to services actually provided off-site or otherwise away from the Leased Property, such as home health care, to persons that are not patients, clients or residents at the Leased Property; revenues attributable to child care services provided primarily to employees of the Leased Property; any proceeds from any sale of the Leased Property or from the refinancing of any debt encumbering the Leased Property; proceeds from the disposition of

11

furnishings, fixture and equipment no longer necessary for the operation of the Facility located thereon; any security deposits and other advance deposits, until and unless the same are forfeited to Tenant or applied for the purpose for which they were collected; and interest income from any bank account or investment of Tenant.

1.69        “Notice”  shall mean a notice given in accordance with Section 23.10.

1.70        “Officer’s Certificate”  shall mean a certificate signed by an officer or other duly authorized individual of the certifying Entity duly authorized by the board of directors or other governing body of the certifying Entity.

1.71        “Overdue Rate”  shall mean, on any date, a per annum rate of interest equal to the lesser of fifteen percent (15%) and the maximum rate then permitted under applicable law.

1.72        “Parent”  shall mean, with respect to any Person, any Person which owns directly, or indirectly through one or more Subsidiaries or Affiliated Persons, twenty percent (20%) or more of the voting or beneficial interest in, or otherwise has the right or power (whether by contract, through ownership of securities or otherwise) to control, such Person.

1.73        “Permitted Encumbrances”  shall mean, with respect to any Property, all rights, restrictions, and easements of record set forth on Schedule B to the applicable owner’s or leasehold title insurance policy issued to Landlord with respect to such Property, plus any other encumbrances as may have been granted or caused by Landlord or otherwise consented to in writing by Landlord from time to time.

1.74        “Permitted Liens”  shall mean any Liens granted in accordance with Section 21.8(a).

1.75        “Permitted Use”  shall mean, with respect to any Property, any use of such Property permitted pursuant to Section 4.1.1.

1.76        “Person”  shall mean any individual or Entity, and the heirs, executors, administrators, legal representatives, successors and assigns of such Person where the context so admits.

1.77        “Pledge Agreement”  shall mean the Pledge Agreement, dated as of the December 31, 2002, made by FSQ, Inc. in favor of Landlord with respect to the stock or other equity interests of Tenant, as it may be amended, restated, supplemented or otherwise modified from time to time.

1.78        “Property”  shall have the meaning given such term in Section 2.1.

1.79        “Provider Agreements”  shall mean all participation, provider and reimbursement agreements or arrangements now or hereafter

12

in effect for the benefit of Tenant or any Manager in connection with the operation of any Facility relating to any right of payment or other claim arising out of or in connection with Tenant’s participation in any Third Party Payor Program.

1.80        “Records”  shall have the meaning given such term in Section 7.2.

1.81        “Regulated Medical Wastes”  shall mean all materials generated by Tenant, subtenants, patients, occupants or the operators of the Leased Properties which are now or may hereafter be subject to regulation pursuant to the Material Waste Tracking Act of 1988, or any Applicable Laws promulgated by any Government Agencies.

1.82        “Rent”  shall mean, collectively, the Minimum Rent, Additional Rent and Additional Charges.

1.83        “SEC”  shall mean the Securities and Exchange Commission.

1.84        “Security Agreement”  shall mean any security agreement made by Tenant for the benefit of Landlord, as it may be amended, restated, supplemented or otherwise modified from time to time.

1.85        “State”  shall mean, with respect to any Property, the state, commonwealth or district in which the such Property is located.

1.86        “Subordinated Creditor”  shall mean any creditor of Tenant which is a party to a Subordination Agreement in favor of Landlord.

1.87        “Subordination Agreement”  shall mean any agreement (and any amendments thereto) executed by a Subordinated Creditor pursuant to which the payment and performance of Tenant’s obligations to such Subordinated Creditor are subordinated to the payment and performance of Tenant’s obligations to Landlord under this Agreement.

1.88        “Subsidiary”  shall mean, with respect to any Person, any Entity (a) in which such Person owns directly, or indirectly through one or more Subsidiaries, twenty percent (20%) or more of the voting or beneficial interest or (b) which such Person otherwise has the right or power to control (whether by contract, through ownership of securities or otherwise).

1.89        “Successor Landlord”  shall have the meaning given such term in Section 20.2.

1.90        “Tenant”  shall have the meaning given such term in the preambles to this Agreement and shall also include its permitted successors and assigns.

1.91        “Tenant’s Personal Property”  shall mean all motor vehicles and consumable inventory and supplies, furniture, furnishings, equipment, movable walls and partitions, equipment and machinery and all other tangible personal property of Tenant, if any, acquired by

13

Tenant on and after the date hereof and located at the Leased Property or used in Tenant’s business at the Leased Property and all modifications, replacements, alterations and additions to such personal property installed at the expense of Tenant, other than any items included within the definition of Fixtures or Leased Personal Property.

1.92        “Term”  shall mean, collectively, the Fixed Term and the Extended Term, to the extent properly exercised pursuant to the provisions of Section 2.4, unless sooner terminated pursuant to the provisions of this Agreement.

1.93        “Third Party Payor Programs”  shall mean all third party payor programs in which Tenant presently or in the future may participate, including, without limitation, Medicare, Medicaid, CHAMPUS, Blue Cross and/or Blue Shield, Managed Care Plans, other private insurance programs and employee assistance programs.

1.94        “Third Party Payors”  shall mean Medicare, Medicaid, CHAMPUS, Blue Cross and/or Blue Shield, private insurers and any other Person which presently or in the future maintains Third Party Payor Programs.

1.95        “Unsuitable for Its Permitted Use”  shall mean, with respect to any Facility, a state or condition of such Facility such that (a) following any damage or destruction involving a Facility, (i) such Facility cannot be operated on a commercially practicable basis for its Permitted Use and it cannot reasonably be expected to be restored to substantially the same condition as existed immediately before such damage or destruction, and as otherwise required by Section 10.2.4, within twelve (12) months following such damage or destruction or such longer period of time as to which business interruption insurance is available to cover Rent and other costs related to the applicable Property following such damage or destruction, (ii) the damage or destruction, if uninsured, exceeds $1,000,000 or (iii) the cost of such restoration exceeds ten percent (10%) of the fair market value of such Property immediately prior to such damage or destruction, or (b) as the result of a partial taking by Condemnation, such Facility cannot be operated, in the good faith judgment of Tenant, on a commercially practicable basis for its Permitted Use.

1.96        “Work”  shall have the meaning given such term in Section 10.2.4.

ARTICLE 2

LEASED PROPERTY AND TERM

2.1          Leased Property.  Upon and subject to the terms and conditions hereinafter set forth, Landlord leases to Tenant and Tenant leases from Landlord all of Landlord’s right, title and interest in and to all of the following (each of items (a) through (g) below

14

which, as of the Commencement Date, relates to any single Facility, a “Property” and, collectively, the “Leased Property”):

(a)           those certain tracts, pieces and parcels of land, as more particularly described in Exhibits A-1 through A-[67], attached hereto and made a part hereof (the “Land”);

(b)           all buildings, structures and other improvements of every kind including, but not limited to, alleyways and connecting tunnels, sidewalks, utility pipes, conduits and lines (on-site and off-site), parking areas and roadways appurtenant to such buildings and structures presently situated upon the Land (collectively, the “Leased Improvements”);

(c)           all easements, rights and appurtenances relating to the Land and the Leased Improvements;

(d)           all equipment, machinery, fixtures, and other items of property, now or hereafter permanently affixed to or incorporated into the Leased Improvements, including, without limitation, all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems and apparatus, sprinkler systems and fire and theft protection equipment, all of which, to the maximum extent permitted by law, are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereto, but specifically excluding all items included within the category of Tenant’s Personal Property (collectively, the “Fixtures”);

(e)           all machinery, equipment, furniture, furnishings, moveable walls or partitions, computers or trade fixtures or other personal property of any kind or description used or useful in Tenant’s business on or in the Leased Improvements, and located on or in the Leased Improvements, and all modifications, replacements, alterations and additions to such personal property, except items, if any, included within the category of Fixtures, but specifically excluding all items included within the category of Tenant’s Personal Property (collectively, the “Leased Personal Property”);

(f)            all of the Leased Intangible Property; and

(g)           any and all leases of space in the Leased Improvements.

2.2          Condition of Leased Property.  Tenant acknowledges receipt and delivery of possession of the Leased Property and Tenant accepts the Leased Property in its “as is” condition, subject to the rights of parties in possession, the existing state of title, including all covenants, conditions, restrictions, reservations, mineral leases, easements and other matters of record or that are visible or apparent

15

on the Leased  Property, all applicable Legal Requirements, the lien of any financing instruments, mortgages and deeds of trust existing prior to the Commencement Date or permitted by the terms of this Agreement, and such other matters which would be disclosed by an inspection of the Leased Property and the record title thereto or by an accurate survey thereof.  TENANT REPRESENTS THAT IT HAS INSPECTED THE LEASED PROPERTY AND ALL OF THE FOREGOING AND HAS FOUND THE CONDITION THEREOF SATISFACTORY AND IS NOT RELYING ON ANY REPRESENTATION OR WARRANTY OF LANDLORD OR LANDLORD’S AGENTS OR EMPLOYEES WITH RESPECT THERETO AND TENANT WAIVES ANY CLAIM OR ACTION AGAINST LANDLORD IN RESPECT OF THE CONDITION OF THE LEASED PROPERTY.  LANDLORD MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY TENANT.  To the maximum extent permitted by law, however, Landlord hereby assigns to Tenant all of Landlord’s rights to proceed against any predecessor in interest or insurer for breaches of warranties or representations or for latent defects in the Leased Property.  Landlord shall fully cooperate with Tenant in the prosecution of any such claims, in Landlord’s or Tenant’s name, all at Tenant’s sole cost and expense.  Tenant shall indemnify, defend, and hold harmless Landlord from and against any loss, cost, damage or liability (including reasonable attorneys’ fees) incurred by Landlord in connection with such cooperation.

2.3          Fixed Term.  The initial term of this Agreement (the “Fixed Term”) shall commence on the Commencement Date and shall expire on December 31, 2020.

2.4          Extended Terms.  Provided that no Event of Default shall have occurred and be continuing, Tenant shall have the right to extend the Term for one renewal term of fifteen (15) years (the “Extended Term”).

The Extended Term shall commence on the day succeeding the expiration of the Fixed Term.  All of the terms, covenants and provisions of this Agreement shall apply to the Extended Term, except that Tenant shall have no right to extend the Term beyond the expiration of the Extended Term.  If Tenant shall elect to exercise the aforesaid option, it shall do so by giving Landlord Notice thereof not later than December 31, 2018, it being understood and agreed that time shall be of the essence with respect to the giving of such Notice.  If Tenant shall fail to give such Notice, this Agreement shall automatically terminate at the end of the Fixed Term and Tenant shall have no further option to extend the Term of this Agreement.  If Tenant shall give such Notice, the extension of this Agreement shall be automatically effected without the execution of any additional documents; it being understood and agreed, however, that Tenant and Landlord shall execute such documents and agreements as either party shall reasonably require to evidence the same.  Notwithstanding the provisions of the foregoing sentence, if, subsequent to the giving of

16

such Notice, an Event of Default shall occur, at Landlord’s option, the extension of this Agreement shall cease to take effect and this Agreement shall automatically terminate at the end of the Fixed Term, and Tenant shall have no further option to extend the Term of this Agreement.

ARTICLE 3

RENT

3.1          Rent.  Tenant shall pay, in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, without offset, abatement, demand or deduction (unless otherwise expressly provided in this Agreement), Minimum Rent and Additional Rent to Landlord and Additional Charges to the party to whom such Additional Charges are payable, during the Term.  All payments to Landlord shall be made by wire transfer of immediately available federal funds or by other means acceptable to Landlord in its sole discretion.  Rent for any partial calendar month shall be prorated on a per diem basis.

3.1.1           Minimum Rent.

(a)           Payments.  Minimum Rent shall be paid in equal monthly installments in arrears on the first Business Day of each calendar month during the Term.

(b)           Allocation of Minimum Rent.  Minimum Rent may be allocated and reallocated among the Properties comprising the Leased Property by agreement among Landlord and Tenant; provided, however that in no event shall the Minimum Rent allocated to any Property be less than the monthly amount payable by Landlord on account of any Facility Mortgage and/or ground or master lease with respect to such Property nor shall the aggregate amount of Minimum Rent allocated among the Properties exceed the total amount payable for the Leased Property.

(c)           Adjustments of Minimum Rent Following Disbursements Under Sections 5.1.2(b), 10.2.3 and 11.2.  Effective on the date of each disbursement to pay for the cost of any repairs, maintenance, renovations or replacements pursuant to Sections 5.1.2(b), 10.2.3 or 11.2, the annual Minimum Rent shall be increased by a per annum amount equal to the Disbursement Rate times the amount so disbursed.  If any such disbursement is made during any calendar month on a day other than the first Business Day of such calendar month, Tenant shall pay to Landlord on the first

(d)           Business Day of the immediately following calendar month (in addition to the amount of Minimum Rent payable with respect to such calendar month, as adjusted pursuant to this paragraph (c)) the amount by which Minimum Rent for the preceding calendar month, as adjusted for such disbursement on a per diem

17

basis, exceeded the amount of Minimum Rent paid by Tenant for such preceding calendar month.

(e)           Adjustments of Minimum Rent Following Partial Lease Termination.  Subject to Section 4.1.1(b), if this Agreement shall terminate with respect to any Property but less than all of the Leased Property, Minimum Rent shall be reduced by the affected Property’s allocable share of Minimum Rent determined in accordance with the applicable provisions of this Agreement.

3.1.2           Additional Rent.

(a)           Amount.  Tenant shall pay additional rent (“Additional Rent”) with respect to each Lease Year during the Term subsequent to the Base Year in an amount, not less than zero, equal to four percent (4%) of Excess Net Patient Revenues at the Leased Property.  Quarterly payments of Additional Rent for the Leased Property shall be calculated based on Net Patient Revenues for such quarter during the preceding year and shall be due and payable and delivered to Landlord on the first Business Day of each calendar quarter, or portion thereof, thereafter occurring during the Term, together with an Officer’s Certificate setting forth the calculation of Additional Rent due and payable for such quarter.

(b)           Quarterly Installments.  Installments of Additional Rent for each Lease Year during the Term, or portion thereof, shall be calculated and paid quarterly in arrears, together with an Officer’s Certificate setting forth the calculation of Additional Rent due and payable for such quarter.

(c)           Reconciliation of Additional Rent.  In addition, within seventy-five (75) days after the end of the Base Year and each Lease Year thereafter (or any portion thereof occurring during the Term), Tenant shall deliver, or cause to be delivered, to Landlord (i) a financial report setting forth the Net Patient Revenues for each Property for such preceding Lease Year, or portion thereof, together with an Officer’s Certificate from Tenant’s chief financial or accounting officer certifying that such report is true and correct, (ii) an audit of Net Patient Revenues prepared by a firm of independent certified public accountants proposed by Tenant and approved by Landlord (which approval shall not be unreasonably withheld, delayed or conditioned), and (iii) a statement showing Tenant’s calculation of Additional Rent due for such preceding Lease Year based on the Net Patient Revenues set forth in such financial report, together with an Officer’s Certificate from Tenant’s chief financial or accounting officer certifying that such statement is true and correct.

If the annual Additional Rent for such preceding Lease Year as set forth in Tenant’s statement thereof exceeds the amount previously paid with respect thereto by Tenant, Tenant shall pay

18

such excess to Landlord at such time as the statement is delivered, together with interest at the Interest Rate, which interest shall accrue from the close of such preceding Lease Year until the date that such statement is required to be delivered and, thereafter, such interest shall accrue at the Overdue Rate, until the amount of such difference shall be paid or otherwise discharged.  If the annual Additional Rent for such preceding Lease Year as shown in such statement is less than the amount previously paid with respect thereto by Tenant, provided that no Event of Default shall have occurred and be continuing, Landlord shall grant Tenant a credit against the Additional Rent next coming due in the amount of such difference, together with interest at the Interest Rate, which interest shall accrue from the date of payment by Tenant until the date such credit is applied or paid, as the case may be.  If such credit cannot be made because the Term has expired prior to application in full thereof, provided no Event of Default has occurred and is continuing, Landlord shall pay the unapplied balance of such credit to Tenant, together with interest at the Interest Rate, which interest shall accrue from the date of payment by Tenant until the date of payment by Landlord.

(d)           Confirmation of Additional Rent.  Tenant shall utilize, or cause to be utilized, an accounting system for the Leased Property in accordance with its usual and customary practices and in all material respects in accordance with GAAP, which will accurately record all Net Patient Revenues and Tenant shall retain, for at least three (3) years after the expiration of each Lease Year, reasonably adequate records conforming to such accounting system showing all Net Patient Revenues for such Lease Year.  Landlord, at its own expense, except as provided hereinbelow, shall have the right, exercisable by Notice to Tenant, by its accountants or representatives, to audit the information set forth in the Officer’s Certificate referred to in subparagraph (c) above and, in connection with such audits, to examine Tenant’s books and records with respect thereto (including supporting data and sales and excise tax returns).  Landlord shall begin such audit as soon as reasonably possible following its receipt of the applicable Officer’s Certificate and shall complete such audit as soon as reasonably possible thereafter.  All such audits shall be performed at the location where such books and records are customarily kept and in such a manner so as to minimize any interference with Tenant’s business operations.  If any such audit discloses a deficiency in the payment of Additional Rent and, either Tenant agrees with the result of such audit or the matter is otherwise determined,

19

Tenant shall forthwith pay to Landlord the amount of the deficiency, as finally agreed or determined, together with interest at the Interest Rate, from the date such payment should have been made to the date of payment thereof.  If any such audit discloses that Tenant paid more Additional Rent for any Lease Year than was due hereunder, and either Landlord agrees with the result of such audit or the matter is otherwise determined, provided no Event of Default has occurred and is continuing, Landlord shall, at Landlord’s option, either grant Tenant a credit or pay to Tenant an amount equal to the amount of such overpayment against Additional Rent next coming due in the amount of such difference, as finally agreed or determined, together with interest at the Interest Rate, which interest shall accrue from the time of payment by Tenant until the date such credit is applied or paid, as the case may be; provided, however, that, upon the expiration or sooner termination of the Term, provided no Event of Default has occurred and is continuing, Landlord shall pay the unapplied balance of such credit to Tenant, together with interest at the Interest Rate, which interest shall accrue from the date of payment by Tenant until the date of payment from Landlord.  Any dispute concerning the correctness of an audit shall be settled by arbitration pursuant to the provisions of Article 22.

Any proprietary information obtained by Landlord with respect to Tenant pursuant to the provisions of this Agreement shall be treated as confidential, except that such information may be disclosed or used, subject to appropriate confidentiality safeguards, pursuant to court order or in any litigation between the parties and except further that Landlord may disclose such information to its prospective lenders, provided that Landlord shall direct such lenders to maintain such information as confidential.  The obligations of Tenant and Landlord contained in this Section 3.1.2 shall survive the expiration or earlier termination of this Agreement.

3.1.3           Additional Charges.  In addition to the Minimum Rent and Additional Rent payable hereunder, Tenant shall pay (or cause to be paid) to the appropriate parties and discharge (or cause to be discharged) as and when due and payable the following (collectively, “Additional Charges”):

(a)           Impositions.  Subject to Article 8 relating to permitted contests, Tenant shall pay, or cause to be paid, all Impositions before any fine, penalty, interest or cost (other than any opportunity cost as a result of a failure to take advantage of any discount for early payment) may be added for non-payment, such payments to be made directly to the taxing authorities where feasible, and shall promptly, upon request, furnish to Landlord copies of official receipts or other reasonably satisfactory proof evidencing such payments.  If any such Imposition may, at the option of the taxpayer, lawfully be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Tenant may exercise the option to pay the same (and any accrued interest on the unpaid balance of such Imposition) in installments and, in such event, shall pay, or cause to pay, such installments during the Term as the same become due and before any fine, penalty, premium, further interest or cost may be added thereto.  Landlord, at its expense, shall, to the extent required or permitted by Applicable

20

Law, prepare and file, or cause to be prepared and filed, all tax returns and pay all taxes due in respect of Landlord’s net income, gross receipts, sales and use, single business, transaction privilege, rent, ad valorem, franchise taxes and taxes on its capital stock or other equity interests, and Tenant, at its expense, shall, to the extent required or permitted by Applicable Laws and regulations, prepare and file all other tax returns and reports in respect of any Imposition as may be required by Government Agencies.  Provided no Event of Default shall have occurred and be continuing, if any refund shall be due from any taxing authority in respect of any Imposition paid by or on behalf of Tenant, the same shall be paid over to or retained by Tenant.  Landlord and Tenant shall, upon request of the other, provide such data as is maintained by the party to whom the request is made with respect to the Leased Property as may be necessary to prepare any required returns and reports.  In the event Government Agencies classify any property covered by this Agreement as personal property, Tenant shall file, or cause to be filed, all personal property tax returns in such jurisdictions where it may legally so file.  Each party shall, to the extent it possesses the same, provide the other, upon request, with cost and depreciation records necessary for filing returns for any property so classified as personal property.  Where Landlord is legally required to file personal property tax returns for property covered by this Agreement, Landlord shall provide Tenant with copies of assessment notices in sufficient time for Tenant to file a protest.  All Impositions assessed against such personal property shall be (irrespective of whether Landlord or Tenant shall file the relevant return) paid by Tenant not later than the last date on which the same may be made without interest or penalty, subject to the provisions of Article 8.

Landlord shall give prompt Notice to Tenant of all Impositions payable by Tenant hereunder of which Landlord at any time has knowledge; provided, however, that Landlord’s failure to give any such notice shall in no way diminish Tenant’s obligation hereunder to pay such Impositions.

(b)           Utility Charges.  Tenant shall pay or cause to be paid all charges for electricity, power, gas, oil, water and other utilities used in connection with the Leased Property.

(c)           Insurance Premiums.  Tenant shall pay or cause to be paid all premiums for the insurance coverage required to be maintained pursuant to Article 9.

(d)           Other Charges.  Tenant shall pay or cause to be paid all other amounts, liabilities and obligations, including, without limitation, ground rents, if any, and all amounts payable under any equipment leases and all agreements to indemnify Landlord under Sections 4.4.2 and 9.5.

21

(e)           Reimbursement for Additional Charges.  If Tenant pays or causes to be paid property taxes or similar or other Additional Charges attributable to periods after the end of the Term, whether upon expiration or sooner termination of this Agreement (other than termination by reason of an Event of Default), Tenant may, within a reasonable time after the end of the Term, provide Notice to Landlord of its estimate of such amounts.  Landlord shall promptly reimburse Tenant for all payments of such taxes and other similar Additional Charges that are attributable to any period after the Term of this Agreement.

3.2          Late Payment of Rent, Etc.  If any installment of Minimum Rent, Additional Rent or Additional Charges (but only as to those Additional Charges which are payable directly to Landlord) shall not be paid within ten (10) days after its due date, Tenant shall pay Landlord, on demand, as Additional Charges, a late charge (to the extent permitted by law) computed at the Overdue Rate on the amount of such installment, from the due date of such installment to the date of payment thereof. To the extent that Tenant pays any Additional Charges directly to Landlord or any Facility Mortgagee pursuant to any requirement of this Agreement, Tenant shall be relieved of its obligation to pay such Additional Charges to the Entity to which they would otherwise be due.  If any payments due from Landlord to Tenant shall not be paid within ten (10) days after its due date, Landlord shall pay to Tenant, on demand, a late charge (to the extent permitted by law) computed at the Overdue Rate on the amount of such installment from the due date of such installment to the date of payment thereof.

In the event of any failure by Tenant to pay any Additional Charges when due, Tenant shall promptly pay and discharge, as Additional Charges, every fine, penalty, interest and cost which is added for non-payment or late payment of such items.  Landlord shall have all legal, equitable and contractual rights, powers and remedies provided either in this Agreement or by statute or otherwise in the case of non-payment of the Additional Charges as in the case of non-payment of the Minimum Rent and Additional Rent.

3.3          Net Lease.  The Rent shall be absolutely net to Landlord so that this Agreement shall yield to Landlord the full amount of the installments or amounts of the Rent throughout the Term, subject to any other provisions of this Agreement which expressly provide otherwise, including those provisions for adjustment or abatement of such Rent.

3.4          No Termination, Abatement, Etc.   Except as otherwise specifically provided in this Agreement, each of Landlord and Tenant, to the maximum extent permitted by law, shall remain bound by this Agreement in accordance with its terms and shall not take any action without the consent of the other to modify, surrender or terminate this Agreement.  In addition, except as otherwise expressly provided in this Agreement, Tenant shall not seek, or be entitled to, any abatement, deduction, deferment or reduction of the Rent, or set-off against the Rent, nor shall the respective obligations of Landlord and

22

Tenant be otherwise affected by reason of (a) any damage to or destruction of the Leased Property, or any portion thereof, from whatever cause or any Condemnation, (b) the lawful or unlawful prohibition of, or restriction upon, Tenant’s use of the Leased Property, or any portion thereof, or the interference with such use by any Person or by reason of eviction by paramount title; (c) any claim which Tenant may have against Landlord by reason of any default (other than a monetary default) or breach of any warranty by Landlord under this Agreement or any other agreement between Landlord and Tenant, or to which Landlord and Tenant are parties; (d) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceedings affecting Landlord or any assignee or transferee of Landlord; or (e) for any other cause whether similar or dissimilar to any of the foregoing (other than a monetary default by Landlord).  Except as otherwise specifically provided in this Agreement, Tenant hereby waives all rights arising from any occurrence whatsoever, which may now or hereafter be conferred upon it by law (a) to modify, surrender or terminate this Agreement or quit or surrender the Leased Property, or any portion thereof, or (b) which would entitle Tenant to any abatement, reduction, suspension or deferment of the Rent or other sums payable or other obligations to be performed by Tenant hereunder.  The obligations of Tenant hereunder shall be separate and independent covenants and agreements, and the Rent and all other sums payable by Tenant hereunder shall continue to be payable in all events unless the obligations to pay the same shall be terminated pursuant to the express provisions of this Agreement.

ARTICLE 4USE OF THE LEASED PROPERTY

4.1          Permitted Use.

4.1.1           Permitted Use.

(a)           Tenant shall, at all times during the Term, and at any other time that Tenant shall be in possession of any Property, continuously use and operate, or cause to be used and operated, such Property as a skilled nursing/intermediate care/independent living/assisted living/special care/group home facility as currently operated, and any uses incidental thereto.  Tenant shall not use (and shall not permit any Person to use) any Property, or any portion thereof, for any other use without the prior written consent of Landlord, which approval shall not be unreasonably withheld, delayed or conditioned.  No use shall be made or permitted to be made of any Property and no acts shall be done thereon which will cause the cancellation of any insurance policy covering such Property or any part thereof (unless another adequate policy is available) or which would constitute a default under any ground lease affecting such Property, nor shall Tenant sell or otherwise provide to residents or patients therein, or permit to be kept, used or sold in or about any Property any article which may be prohibited by law or by the standard form of

23

fire insurance policies, or any other insurance policies required to be carried hereunder, or fire underwriter’s regulations.  Tenant shall, at its sole cost (except as expressly provided in Section 5.1.2(b)), comply or cause to be complied with all Insurance Requirements.  Tenant shall not take or omit to take, or permit to be taken or omitted to be taken, any action, the taking or omission of which materially impairs the value or the usefulness of any Property or any part thereof for its Permitted Use.

(b)           In the event that, in the reasonable determination of Tenant, it shall no longer be economically practical to operate any Property as currently operated,Tenant shall give Landlord Notice thereof, which Notice shall set forth in reasonable detail the reasons therefor.  Thereafter, Landlord and Tenant shall negotiate in good faith to agree on an alternative use for such Property, appropriate adjustments to the Additional Rent and other related matters; provided, however, in no event shall the Minimum Rent be reduced or abated as a result thereof.  If Landlord and Tenant fail to agree on an alternative use for such Property within sixty (60) days after commencing negotiations as aforesaid, Tenant may market such Property for sale to a third party.  If Tenant receives a bona fide offer (an “Offer”) to purchase such Property from a Person having the financial capacity to implement the terms of such Offer, Tenant shall give Landlord Notice thereof, which Notice shall include a copy of the Offer executed by such third party.  In the event that Landlord shall fail to accept or reject such Offer within thirty (30) days after receipt of such Notice, such Offer shall be deemed to be rejected by Landlord.  If Landlord shall sell the Property pursuant to such Offer, then, effective as of the date of such sale, this Agreement shall terminate with respect to such Property, and the Minimum Rent shall be reduced by an amount equal to ten percent (10%) of the net proceeds of sale received by Landlord.  If Landlord shall reject (or be deemed to have rejected) such Offer, then, effective as of the proposed date of such sale, this Agreement shall terminate with respect to such Property, and the Minimum Rent shall be reduced by an amount equal to ten percent (10%) of the projected net proceeds determined by reference to such Offer.

4.1.2           Necessary Approvals.  Tenant shall proceed with all due diligence and exercise reasonable efforts to obtain and maintain, or cause to be obtained and maintained, all approvals necessary to use and operate, for its Permitted Use, each Property and the Facility located thereon under applicable law and, without limiting the foregoing, shall exercise reasonable efforts to maintain (or cause to be maintained) appropriate certifications for reimbursement and licensure.

4.1.3           Lawful Use, Etc.  Tenant shall not, and shall not permit any Person to use or suffer or permit the use of any Property or Tenant’s Personal Property, if any, for any unlawful purpose.

24

Tenant shall not, and shall not permit any Person to, commit or suffer to be committed any waste on any Property, or in any Facility, nor shall Tenant cause or permit any unlawful nuisance thereon or therein.  Tenant shall not, and shall not permit any Person to, suffer nor permit any Property, or any portion thereof, to be used in such a manner as (i) may materially and adversely impair Landlord’s title thereto or to any portion thereof, or (ii) may reasonably allow a claim or claims for adverse usage or adverse possession by the public, as such, or of implied dedication of such Property, or any portion thereof.

4.2          Compliance with Legal/Insurance Requirements, Etc.  Subject to the provisions of Section 5.1.2(b) and Article 8, Tenant, at its sole expense, shall (i) comply with (or cause to be complied with) all material Legal Requirements and Insurance Requirements in respect of the use, operation, maintenance, repair, alteration and restoration of any Property and with the terms and conditions of any ground lease affecting any Property, (ii) perform (or cause to be performed) in a timely fashion all of Landlord’s obligations under any ground lease affecting any Property and (iii) procure, maintain and comply with (or cause to be procured, maintained and complied with) all material licenses, certificates of need, permits, provider agreements and other authorizations and agreements required for any use of any Property and Tenant’s Personal Property, if any, then being made, and for the proper erection, installation, operation and maintenance of the Leased Property or any part thereof.

4.3          Compliance with Medicaid and Medicare Requirements.  Tenant, at its sole cost and expense, shall make (or shall cause to be made), whatever improvements (capital or ordinary) as are required to each Property to such standards as may, from time to time, be required by Federal Medicare (Title 18) or Medicaid (Title 19) for skilled and/or intermediate care nursing programs, to the extent Tenant is a participant in such programs with respect to such Property, or any other applicable programs or legislation, or capital improvements required by any other governmental agency having jurisdiction over any Property as a condition of the continued operation of such Property for its Primary Intended Use.

4.4          Environmental Matters.

4.4.1           Restriction on Use, Etc.  During the Term and any other time that Tenant shall be in possession of any Property, Tenant shall not, and shall not permit any Person to, store, spill upon, dispose of or transfer to or from such Property any Hazardous Substance, except in compliance with all Applicable Laws.  During the Term and any other time that Tenant shall be in possession of any Property, Tenant shall maintain (or shall cause to be maintained) such Property at all times free of any Hazardous Substance (except in compliance with all Applicable Laws).  Tenant shall promptly:  (a) upon receipt of notice or knowledge, notify Landlord in writing of any material change in the nature or extent of Hazardous Substances at any Property, (b) transmit to Landlord a copy of any report which is

25

required to be filed by Tenant or any Manager with respect to any Property pursuant to SARA Title III or any other Applicable Law, (c) transmit to Landlord copies of any citations, orders, notices or other governmental communications received by Tenant or any Manager or their respective agents or representatives with respect thereto (collectively, “Environmental Notice”), which Environmental Notice requires a written response or any action to be taken and/or if such Environmental Notice gives notice of and/or presents a material risk of any material violation of any Applicable Law and/or presents a material risk of any material cost, expense, loss or damage (an “Environmental Obligation”), (d) observe and comply with (or cause to be observed and complied with) all Applicable Laws relating to the use, maintenance and disposal of Hazardous Substances and all orders or directives from any official, court or agency of competent jurisdiction relating to the use or maintenance or requiring the removal, treatment, containment or other disposition thereof, and (e) pay or otherwise dispose (or cause to be paid or otherwise disposed) of any fine, charge or Imposition related thereto, unless Tenant or any Manager shall contest the same in good faith and by appropriate proceedings and the right to use and the value of any of the Leased Property is not materially and adversely affected thereby.

If, at any time prior to the termination of this Agreement, Hazardous Substances (other than those maintained in accordance with Applicable Laws) are discovered on any Property, subject to Tenant’s right to contest the same in accordance with Article 8, Tenant shall take (and shall cause to be taken) all actions and incur any and all expenses, as are required by any Government Agency and by Applicable Law, (i) to clean up and remove from and about such Property all Hazardous Substances thereon, (ii) to contain and prevent any further release or threat of release of Hazardous Substances on or about such Property and (iii) to use good faith efforts to eliminate any further release or threat of release of Hazardous Substances on or about such Property.

4.4.2           Indemnification of Landlord.  Tenant shall protect, indemnify and hold harmless Landlord and each Facility Mortgagee, their trustees, officers, agents, employees and beneficiaries, and any of their respective successors or assigns with respect to this Agreement (collectively, the “Indemnitees” and, individually, an “Indemnitee”) for, from and against any and all debts, liens, claims, causes of action, administrative orders or notices, costs, fines, penalties or expenses (including, without limitation, reasonable attorney’s fees and expenses) imposed upon, incurred by or asserted against any Indemnitee resulting from, either directly or indirectly, the presence in, upon or under the soil or ground water of any Property or any properties surrounding such Property of any Hazardous Substances in violation of any Applicable Law, except to the extent the same arise from the acts or omissions of Landlord or any other Indemnitee or during any period that Landlord or a Person designated by Landlord (other than Tenant) is in possession of such Property from and after the date hereof.  Tenant’s duty herein includes, but is not limited to, costs associated with personal injury or property damage

26

claims as a result of the presence prior to the expiration or sooner termination of the Term and the surrender of such Property to Landlord in accordance with the terms of this Agreement of Hazardous Substances in, upon or under the soil or ground water of such Property in violation of any Applicable Law.  Upon Notice from Landlord and any other of the Indemnitees, Tenant shall undertake the defense, at Tenant’s sole cost and expense, of any indemnification duties set forth herein, in which event, Tenant shall not be liable for payment of any duplicative attorneys’ fees incurred by any Indemnitee.

Tenant shall, upon demand, pay (or cause to be paid) to Landlord, as an Additional Charge, any cost, expense, loss or damage (including, without limitation, reasonable attorneys’ fees) reasonably incurred by Landlord and arising from a failure of Tenant to observe and perform  (or to cause to be observed and performed) the requirements of this Section 4.4, which amounts shall bear interest from the date ten (10) Business Days after written demand therefor is given to Tenant until paid by Tenant to Landlord at the Overdue Rate.

4.4.3           Survival.  The provisions of this Section 4.4 shall survive the expiration or sooner termination of this Agreement.

ARTICLE 5

MAINTENANCE AND REPAIRS

5.1          Maintenance and Repair.

5.1.1           Tenant’s General Obligations.  Tenant shall keep (or cause to be kept), at Tenant’s sole cost and expense, the Leased Property and all private roadways, sidewalks and curbs appurtenant thereto (and Tenant’s Personal Property) in good order and repair, reasonable wear and tear excepted (whether or not the need for such repairs occurs as a result of Tenant’s or any Manager’s use, any prior use, the elements or the age of the Leased Property or Tenant’s Personal Property or any portion thereof), and shall promptly make or cause to be made all necessary and appropriate repairs and replacements thereto of every kind and nature, whether interior or exterior, structural or nonstructural, ordinary or extraordinary, foreseen or unforeseen or arising by reason of a condition existing prior to the commencement of the Term (concealed or otherwise).  All repairs shall be made in a good, workmanlike manner, consistent with industry standards for comparable Facilities in like locales, in accordance with all applicable federal, state and local statutes, ordinances, codes, rules and regulations relating to any such work.  Tenant shall not take or omit to take (or permit any Person to take or omit to take) any action, the taking or omission of which would materially and adversely impair the value or the usefulness of the Leased Property or any material part thereof for its Permitted Use.  Tenant’s obligations under this Section 5.1.1 shall be limited in the event of any casualty or Condemnation as set forth in Article 10 and Article 11 and Tenant’s obligations with respect to Hazardous Substances are as set forth in Section 4.4.

27

5.1.2           Landlord’s Obligations.

(a)           Except as otherwise expressly provided in this Agreement, Landlord shall not, under any circumstances, be required to build or rebuild any improvement on the Leased Property, or to make any repairs, replacements, alterations, restorations or renewals of any nature or description to the Leased Property, whether ordinary or extraordinary, structural or nonstructural, foreseen or unforeseen, or to make any expenditure whatsoever with respect thereto, or to maintain the Leased Property in any way.  Except as otherwise expressly provided in this Agreement, Tenant hereby waives, to the maximum extent permitted by law, the right to make repairs at the expense of Landlord pursuant to any law in effect on the date hereof or hereafter enacted.  Landlord shall have the right to give, record and post, as appropriate, notices of nonresponsibility under any mechanic’s lien laws now or hereafter existing.

(b)           If, pursuant to the terms of this Agreement, Tenant is required to make any expenditures in connection with any repair, maintenance or renovation with respect to any Property, Tenant may, at its election, advance such funds or give Landlord Notice thereof, which Notice shall set forth, in reasonable detail, the nature of the required repair, renovation or replacement, the estimated cost thereof and such other information with respect thereto as Landlord may reasonably require.  Provided that no Event of Default shall have occurred and be continuing and Tenant shall otherwise comply with the applicable provisions of Article 6, Landlord shall, within ten (10) Business Days after such Notice, subject to and in accordance with the applicable provisions of Article 6, disburse such required funds to Tenant (or, if Tenant shall so elect, directly to the Manager or any other Person performing the required work) and, upon such disbursement, the Minimum Rent shall be adjusted as provided in Section 3.1.1(c).  Notwithstanding the foregoing, Landlord may elect not to disburse such required funds to Tenant; provided, however, that if Landlord shall elect not to disburse such required funds as aforesaid, Tenant’s obligation to make such required repair, renovation or replacement shall be deemed waived by Landlord, and, notwithstanding anything contained in this Agreement to the contrary, Tenant shall have no obligation to make such required repair, renovation or replacement.

5.1.3           Nonresponsibility of Landlord, Etc.  All materialmen, contractors, artisans, mechanics and laborers and other persons contracting with Tenant with respect to the Leased Property, or any part thereof, are hereby charged with notice that liens on the Leased Property or on Landlord’s interest therein are expressly prohibited and that they must look solely to Tenant to secure payment for any work done or material furnished to Tenant or any Manager or for any other purpose during the term of this Agreement.

28

Nothing contained in this Agreement shall be deemed or construed in any way as constituting the consent or request of Landlord, express or implied, by inference or otherwise, to any contractor, subcontractor, laborer or materialmen for the performance of any labor or the furnishing of any materials for any alteration, addition, improvement or repair to the Leased Property or any part thereof or as giving Tenant any right, power or authority to contract for or permit the rendering of any services or the furnishing of any materials that would give rise to the filing of any lien against the Leased Property or any part thereof nor to subject Landlord’s estate in the Leased Property or any part thereof to liability under any mechanic’s lien law of any State in any way, it being expressly understood Landlord’s estate shall not be subject to any such liability.

5.2          Tenant’s Personal Property.  Tenant shall provide and maintain (or cause to be provided and maintained) throughout the Term all such Tenant’s Personal Property as shall be necessary in order to operate in compliance with applicable material Legal Requirements and Insurance Requirements and otherwise in accordance with customary practice in the industry for the Permitted Use.  If, from and after the Commencement Date, Tenant acquires an interest in any item of tangible personal property (other than motor vehicles) on, or in connection with, the Leased Property, or any portion thereof, which belongs to anyone other than Tenant, Tenant shall require the agreements permitting such use to provide that Landlord or its designee may assume Tenant’s rights and obligations under such agreement upon Landlord’s purchase of the same in accordance with the provisions of Article 15 and the assumption of management or operation of the Facility by Landlord or its designee.

5.3          Yield Up.  Upon the expiration or sooner termination of this Agreement, Tenant shall vacate and surrender the Leased Property to Landlord in substantially the same condition in which the Leased Property was in on the Commencement Date, except as repaired, rebuilt, restored, altered or added to as permitted or required by the provisions of this Agreement, reasonable wear and tear excepted (and casualty damage and Condemnation, in the event that this Agreement is terminated following a casualty or Condemnation in accordance with Article 10 or Article 11 excepted).

In addition, upon the expiration or earlier termination of this Agreement, Tenant shall, at Landlord’s sole cost and expense, use its good faith efforts to transfer (or cause to be transferred) to and cooperate with Landlord or Landlord’s nominee in connection with the processing of all applications for licenses, operating permits and other governmental authorizations and all contracts, including contracts with governmental or quasi-governmental Entities which may be necessary for the use and operation of the Facility as then operated.  If requested by Landlord, Tenant shall continue to manage one or more of the Facilities after the expiration of the Term for up to one hundred eighty (180) days, on such reasonable terms (which shall include an agreement to reimburse Tenant for its reasonable

29

out-of-pocket costs and expenses, and reasonable administrative costs), as Landlord shall reasonably request.

5.4          Management Agreement.  Tenant shall not, without Landlord’s prior written consent (which consent shall not be unreasonably withheld, delayed or conditioned), enter into, amend or modify the provisions of any Management Agreement with respect to any Property.  Any Management Agreement entered into pursuant to the provisions of this Section 5.4 shall be subordinate to this Agreement and shall provide, inter alia, that all amounts due from Tenant to Manager thereunder shall be subordinate to all amounts due from Tenant to Landlord (provided that, as long as no Event of Default has occurred and is continuing, Tenant may pay all amounts due to Manager thereunder pursuant to such Management Agreement) and for termination thereof, at Landlord’s option, upon the termination of this Agreement.  Tenant shall not take any action, grant any consent or permit any action under any such Management Agreement which might have a material adverse effect on Landlord, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, delayed or conditioned.

ARTICLE 6

IMPROVEMENTS, ETC.

6.1          Improvements to the Leased Property.  Tenant shall not make, construct or install (or permit to be made, constructed or installed) any Capital Additions without, in each instance, obtaining Landlord’s prior written consent, which consent shall not be unreasonably withheld, delayed or conditioned provided that (a) construction or installation of the same would not adversely affect or violate any material Legal Requirement or Insurance Requirement applicable to any Property and (b) Landlord shall have received an Officer’s Certificate certifying as to the satisfaction of the conditions set out in clause (a) above; provided, however, that no such consent shall be required in the event immediate action is required to prevent imminent harm to person or property.  Prior to commencing construction of any Capital Addition, Tenant shall submit to Landlord, in writing, a proposal setting forth, in reasonable detail, any such proposed improvement and shall provide to Landlord such plans and specifications, and such permits, licenses, contracts and such other information concerning the same as Landlord may reasonably request.  Landlord shall have thirty (30) days to review all materials submitted to Landlord in connection with any such proposal.  Failure of Landlord to respond to Tenant’s proposal within thirty (30) days after receipt of all information and materials requested by Landlord in connection with the proposed improvement shall be deemed to constitute approval of the same.  Without limiting the generality of the foregoing, such proposal shall indicate the approximate projected cost of constructing such proposed improvement and the use or uses to which it will be put.  No Capital Addition shall be made which would tie in or connect any Leased Improvements with any other improvements on property adjacent to any Property (and

30

not part of the Land) including, without limitation, tie-ins of buildings or other structures or utilities.  Except as permitted herein, Tenant shall not finance the cost of any construction of such improvement by the granting of a lien on or security interest in the Leased Property or such improvement, or Tenant’s interest therein, without the prior written consent of Landlord, which consent may be withheld by Landlord in Landlord’s sole discretion.  Any such improvements shall, upon the expiration or sooner termination of this Agreement, remain or pass to and become the property of Landlord, free and clear of all encumbrances other than Permitted Encumbrances.

6.2          Salvage.  All materials which are scrapped or removed in connection with the making of either Capital Additions or non-Capital Additions or repairs required by Article 5 shall be or become the property of the party that paid for such work.

ARTICLE 7

LIENS

7.1          Liens.  Subject to Article 8, Tenant shall use its best efforts not, directly or indirectly, to create or allow to remain and shall promptly discharge (or cause to be discharged), at its expense, any lien, encumbrance, attachment, title retention agreement or claim upon the Leased Property, or any portion thereof, or Tenant’s leasehold interest therein or any attachment, levy, claim or encumbrance in respect of the Rent, other than (a) Permitted Encumbrances, (b) restrictions, liens and other encumbrances which are consented to in writing by Landlord, (c) liens for those taxes of Landlord which Tenant is not required to pay hereunder, (d) subleases permitted by Article 16, (e) liens for Impositions or for sums resulting from noncompliance with Legal Requirements so long as (i) the same are not yet due and payable, or (ii) are being contested in accordance with Article 8, (f) liens of mechanics, laborers, materialmen, suppliers or vendors incurred in the ordinary course of business that are not yet due and payable or are for sums that are being contested in accordance with Article 8, (g) any Facility Mortgages or other liens which are the responsibility of Landlord pursuant to the provisions of Article 20 and (h) Landlord Liens and any other voluntary liens created by Landlord.

7.2          Landlord’s Lien.  In addition to any statutory landlord’s lien and in order to secure payment of the Rent and all other sums payable hereunder by Tenant, and to secure payment of any loss, cost or damage which Landlord may suffer by reason of Tenant’s breach of this Agreement, Tenant hereby grants unto Landlord, to the maximum extent permitted by Applicable Law, a security interest in and an express contractual lien upon Tenant’s Personal Property (except motor vehicles), and Tenant’s interest in all ledger sheets, files, records, documents and instruments (including, without limitation, computer programs, tapes and related electronic data processing) relating to the operation of the Facilities (the “Records”) and all proceeds therefrom, subject to any Permitted Encumbrances; and such Tenant’s

31

Personal Property shall not be removed from the Leased Property at any time when an Event of Default has occurred and is continuing.

Upon Landlord’s request, Tenant shall execute and deliver to Landlord financing statements in form sufficient to perfect the security interest of Landlord in Tenant’s Personal Property and the proceeds thereof in accordance with the provisions of the applicable laws of the State.  During the continuance of an Event of Default, Tenant hereby grants Landlord an irrevocable limited power of attorney, coupled with an interest, to execute all such financing statements in Tenant’s name, place and stead.  The security interest herein granted is in addition to any statutory lien for the Rent.

ARTICLE 8PERMITTED CONTESTS

Tenant shall have the right to contest the amount or validity of any Imposition, Legal Requirement, Insurance Requirement, Environmental Obligation, lien, attachment, levy, encumbrance, charge or claim (collectively, “Claims”) as to the Leased Property, by appropriate legal proceedings, conducted in good faith and with due diligence, provided that (a) the foregoing shall in no way be construed as relieving, modifying or extending Tenant’s obligation to pay (or cause to be paid) any Claims as finally determined, (b) such contest shall not cause Landlord or Tenant to be in default under any mortgage or deed of trust encumbering the Leased Property, or any portion thereof (Landlord agreeing that any such mortgage or deed of trust shall permit Tenant to exercise the rights granted pursuant to this Article 8) or any interest therein or result in or reasonably be expected to result in a lien attaching to the Leased Property, or any portion thereof, (c) no part of the Leased Property nor any Rent therefrom shall be in any immediate danger of sale, forfeiture, attachment or loss, and (d) Tenant shall indemnify and hold harmless Landlord from and against any cost, claim, damage, penalty or reasonable expense, including reasonable attorneys’ fees, incurred by Landlord in connection therewith or as a result thereof.  Landlord agrees to join in any such proceedings if required legally to prosecute such contest, provided that Landlord shall not thereby be subjected to any liability therefor (including, without limitation, for the payment of any costs or expenses in connection therewith) unless Tenant agrees by agreement in form and substance reasonably satisfactory to Landlord, to assume and indemnify Landlord with respect to the same.  Tenant shall be entitled to any refund of any Claims and such charges and penalties or interest thereon which have been paid by Tenant or paid by Landlord to the extent that Landlord has been fully reimbursed by Tenant.  If Tenant shall fail (x) to pay or cause to be paid any Claims when finally determined, (y) to provide reasonable security therefor or (z) to prosecute or cause to be prosecuted any such contest diligently and in good faith, Landlord may, upon reasonable notice to Tenant (which notice shall not be required if Landlord shall reasonably determine that the same is not practicable), pay such charges, together with interest and penalties

32

 due with respect thereto, and Tenant shall reimburse Landlord therefor, upon demand, as Additional Charges.

ARTICLE 9

INSURANCE AND INDEMNIFICATION

9.1          General Insurance Requirements.  Tenant shall, at all times during the Term and at any other time Tenant shall be in possession of any Property, or any portion thereof, keep (or cause to be kept) such Property and all property located therein or thereon, insured against the risks and in such amounts as is against such risks and in such amounts as Landlord shall reasonably require and may be commercially reasonable.  Tenant shall prepare a proposal setting forth the insurance Tenant proposes to be maintained with respect to each Property during the ensuing Fiscal Year, and shall submit such proposal to Landlord on or before December 1 of the preceding Lease Year, for Landlord’s review and approval, which approval shall not be unreasonably withheld, delayed or conditioned.  In the event that Landlord shall fail to respond within thirty (30) days after receipt of such proposal, such proposal shall be deemed approved.

9.2          Waiver of Subrogation.  Landlord and Tenant agree that (insofar as and to the extent that such agreement may be effective without invalidating or making it impossible to secure insurance coverage from responsible insurance companies doing business in any State) with respect to any property loss which is covered by insurance then being carried by Landlord or Tenant, the party carrying such insurance and suffering said loss releases the others of and from any and all claims with respect to such loss; and they further agree that their respective insurance companies (and, if Landlord or Tenant shall self insure in accordance with the terms hereof, Landlord or Tenant, as the case may be) shall have no right of subrogation against the other on account thereof, even though extra premium may result therefrom.  In the event that any extra premium is payable by Tenant as a result of this provision, Landlord shall not be liable for reimbursement to Tenant for such extra premium.

9.3          Form Satisfactory, Etc.  All insurance policies and endorsements required pursuant to this Article 9 shall be fully paid for, nonassessable, and issued by reputable insurance companies authorized to do business in the State and having a general policy holder’s rating of no less than A in Best’s latest rating guide.  All property, business interruption, liability and flood insurance policies with respect to each Property shall include no deductible in excess of Two Hundred Fifty Thousand Dollars ($250,000).  At all times, all property, business interruption, liability and flood insurance policies, with the exception of worker’s compensation insurance coverage, shall name Landlord and any Facility Mortgagee as additional insureds, as their interests may appear.  All loss adjustments shall be payable as provided in Article 10, except that losses under liability  and worker’s compensation insurance policies shall be payable directly to the party entitled thereto.  Tenant shall

33

cause all insurance premiums to be paid and shall deliver (or cause to be delivered) policies or certificates thereof to Landlord prior to their effective date (and, with respect to any renewal policy, prior to the expiration of the existing policy).  All such policies shall provide Landlord (and any Facility Mortgagee if required by the same) thirty (30) days prior written notice of any material change or cancellation of such policy.  In the event Tenant shall fail to effect (or cause to be effected) such insurance as herein required, to pay (or cause to be paid) the premiums therefor or to deliver (or cause to be delivered) such policies or certificates to Landlord or any Facility Mortgagee at the times required, Landlord shall have the right, upon Notice to Tenant, but not the obligation, to acquire such insurance and pay the premiums therefor, which amounts shall be payable to Landlord, upon demand, as Additional Charges, together with interest accrued thereon at the Overdue Rate from the date such payment is made until (but excluding) the date repaid.

9.4          No Separate Insurance; Self-Insurance.  Tenant shall not take (or permit any Person to take) out separate insurance, concurrent in form or contributing in the event of loss with that required by this Article 9, or increase the amount of any existing insurance by securing an additional policy or additional policies, unless all parties having an insurable interest in the subject matter of such insurance, including Landlord and all Facility Mortgagees, are included therein as additional insureds and the loss is payable under such insurance in the same manner as losses are payable under this Agreement.  In the event Tenant shall take out any such separate insurance or increase any of the amounts of the then existing insurance, Tenant shall give Landlord prompt Notice thereof.  Tenant shall not self-insure (or permit any Person to self-insure).

9.5          Indemnification of Landlord.  Notwithstanding the existence of any insurance provided for herein and without regard to the policy limits of any such insurance, Tenant shall protect, indemnify and hold harmless Landlord for, from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and reasonable expenses (including, without limitation, reasonable attorneys’ fees), to the maximum extent permitted by law, imposed upon or incurred by or asserted against Landlord by reason of the following, except to the extent caused by Landlord’s gross negligence or willful misconduct:  (a) any accident, injury to or death of persons or loss of or damage to property occurring on or about any Property or portion thereof or adjoining sidewalks or rights of way, (b) any past, present or future use, misuse, non-use, condition, management, maintenance or repair by Tenant, any Manager or anyone claiming under any of them or Tenant’s Personal Property or any litigation, proceeding or claim by governmental entities or other third parties to which Landlord is made a party or participant relating to the any Property or portion thereof or Tenant’s Personal Property or such use, misuse, non-use, condition, management, maintenance, or repair thereof including, failure to perform obligations (other than Condemnation proceedings) to which Landlord is made a party, (c) any Impositions that are the obligations of Tenant to pay pursuant to the applicable provisions of this

34

Agreement, and (d) any failure on the part of Tenant or anyone claiming under Tenant to perform or comply with any of the terms of this Agreement.  Tenant, at its expense, shall contest, resist and defend any such claim, action or proceeding asserted or instituted against Landlord (and shall not be responsible for any duplicative attorneys’ fees incurred by Landlord) or may compromise or otherwise dispose of the same, with Landlord’s prior written consent (which consent may not be unreasonably withheld, delayed or conditioned).  The obligations of Tenant under this Section 9.5 are in addition to the obligations set forth in Section 4.4 and shall survive the termination of this Agreement.

ARTICLE 10

CASUALTY

10.1        Insurance Proceeds.  Except as provided in the last clause of this sentence, all proceeds payable by reason of any loss or damage to any Property, or any portion thereof, and insured under any policy of insurance required by Article 9 (other than the proceeds of any business interruption insurance) shall be paid directly to Landlord (subject to the provisions of Section 10.2) and all loss adjustments with respect to losses payable to Landlord shall require the prior written consent of Landlord, which consent shall not be unreasonably withheld, delayed or conditioned; provided, however, that, so long as no Event of Default shall have occurred and be continuing, all such proceeds less than or equal to Two Hundred Fifty Thousand Dollars ($250,000) shall be paid directly to Tenant and such losses may be adjusted without Landlord’s consent.  If Tenant is required to reconstruct or repair any Property as provided herein, such proceeds shall be paid out by Landlord from time to time for the reasonable costs of reconstruction or repair of such Property necessitated by such damage or destruction, subject to and in accordance with the provisions of Section 10.2.4.  Provided no Default or Event of Default has occurred and is continuing, any excess proceeds of insurance remaining after the completion of the restoration shall be paid to Tenant.  In the event that the provisions of Section 10.2.1 are applicable, the insurance proceeds shall be retained by the party entitled thereto pursuant to Section 10.2.1.

10.2        Damage or Destruction.

10.2.1         Damage or Destruction of Leased Property.  If, during the Term, any Property shall be totally or partially destroyed and the Facility located thereon is thereby rendered Unsuitable for Its Permitted Use, either Landlord or Tenant may, by the giving of Notice thereof to the other, terminate this Agreement with respect to such affected Property, whereupon, this Agreement shall terminate with respect to such affected Property and Landlord shall be entitled to retain the insurance proceeds payable on account of such damage.  In such event, Tenant shall pay to Landlord the amount of any deductible under the insurance policies covering such Facility, the amount of any

35

uninsured loss and any difference between the replacement cost of the affected Property and the casualty insurance proceeds therefor.

10.2.2         Partial Damage or Destruction.  If, during the Term, any Property shall be totally or partially destroyed but the Facility is not rendered Unsuitable for Its Permitted Use, Tenant shall, subject to Section 10.2.3, promptly restore such Facility as provided in Section 10.2.4.

10.2.3         Insufficient Insurance Proceeds.  If the cost of the repair or restoration of the applicable Facility exceeds the amount of insurance proceeds received by Landlord and Tenant pursuant to Section 9.1, Tenant shall give Landlord Notice thereof which notice shall set forth in reasonable detail the nature of such deficiency and whether Tenant shall pay and assume the amount of such deficiency (Tenant having no obligation to do so, except that, if Tenant shall elect to make such funds available, the same shall become an irrevocable obligation of Tenant pursuant to this Agreement).  In the event Tenant shall elect not to pay and assume the amount of such deficiency, Landlord shall have the right (but not the obligation), exercisable at Landlord’s sole election by Notice to Tenant, given within sixty (60) days after Tenant’s notice of the deficiency, to elect to make available for application to the cost of repair or restoration the amount of such deficiency; provided, however, in such event, upon any disbursement by Landlord thereof, the Minimum Rent shall be adjusted as provided in Section 3.1.1(c).  In the event that neither Landlord nor Tenant shall elect to make such deficiency available for restoration, either Landlord or Tenant may terminate this Agreement with respect to the affected Property by Notice to the other, whereupon, this Agreement shall so terminate and insurance proceeds shall be distributed as provided in Section 10.2.1.  It is expressly understood and agreed, however, that, notwithstanding anything in this Agreement to the contrary, Tenant shall be strictly liable and solely responsible for the amount of any deductible and shall, upon any insurable loss, pay over the amount of such deductible to Landlord at the time and in the manner herein provided for payment of the applicable proceeds to Landlord.

10.2.4         Disbursement of Proceeds.  In the event Tenant is required to restore any Property pursuant to Section 10.2 and this Agreement is not terminated as to such Property pursuant to this Article 10, Tenant shall commence (or cause to be commenced) promptly and continue diligently to perform (or cause to be performed) the repair and restoration of such Property (hereinafter called the “Work”), so as to restore (or cause to be restored) the applicable Property in material compliance with all Legal Requirements and so that such Property shall be, to the extent practicable, substantially equivalent in value and general utility to its general utility and value immediately prior to such damage or destruction.  Subject to the terms hereof, Landlord shall advance the insurance proceeds and any additional amounts payable by Landlord pursuant to Section 10.2.3 or otherwise deposited with Landlord to Tenant regularly during the repair and restoration period so as to permit payment for the cost of

36

any such restoration and repair.  Any such advances shall be made not more than monthly within ten (10) Business Days after Tenant submits to Landlord a written requisition and substantiation therefor on AIA Forms G702 and G703 (or on such other form or forms as may be reasonably acceptable to Landlord).  Landlord may, at its option, condition advancement of such insurance proceeds and other amounts on (i) the absence of any Event of Default, (ii) its approval of plans and specifications of an architect satisfactory to Landlord (which approval shall not be unreasonably withheld, delayed or conditioned), (iii) general contractors’ estimates, (iv) architect’s certificates, (v) conditional lien waivers of general contractors, if available, (vi) evidence of approval by all governmental authorities and other regulatory bodies whose approval is required, (vii), if Tenant has elected to advance deficiency funds pursuant to Section 10.2.3, Tenant depositing the amount thereof with Landlord and (viii) such other certificates as Landlord may, from time to time, reasonably require.

Landlord’s obligation to disburse insurance proceeds under this Article 10 shall be subject to the release of such proceeds by any Facility Mortgagee to Landlord.

Tenant’s obligation to restore the applicable Property pursuant to this Article 10 shall be subject to the release of available insurance proceeds by the applicable Facility Mortgagee to Landlord or directly to Tenant and, in the event such proceeds are insufficient, Landlord electing to make such deficiency available therefor (and disbursement of such deficiency).

10.3        Damage Near End of Term.  Notwithstanding any provisions of Section 10.1 or 10.2 to the contrary, if damage to or destruction of any Property occurs during the last twelve (12) months of the Term and if such damage or destruction cannot reasonably be expected to be fully repaired and restored prior to the date that is six (6) months prior to the end of the Term, the provisions of Section 10.2.1 shall apply as if such Property had been totally or partially destroyed and the Facility thereon rendered Unsuitable for its Permitted Use.

10.4        Tenant’s Property.  All insurance proceeds payable by reason of any loss of or damage to any of Tenant’s Personal Property shall be paid to Tenant and, to the extent necessary to repair or replace Tenant’s Personal Property in accordance with Section 10.5, Tenant shall hold such proceeds in trust to pay the cost of repairing or replacing damaged Tenant’s Personal Property.

10.5        Restoration of Tenant’s Property.  If Tenant is required to restore any Property as hereinabove provided, Tenant shall either (a) restore all alterations and improvements made by Tenant and Tenant’s Personal Property, or (b) replace such alterations and improvements and Tenant’s Personal Property with improvements or items of the same or better quality and utility in the operation of such Property.

10.6        No Abatement of Rent.  This Agreement shall remain in full force and effect and Tenant’s obligation to make all payments of Rent

37

and to pay all other charges as and when required under this Agreement shall remain unabated during the Term notwithstanding any damage involving the Leased Property, or any portion thereof (provided that Landlord shall credit against such payments any amounts paid to Landlord as a consequence of such damage under any business interruption insurance obtained by Tenant hereunder).  The provisions of this Article 10 shall be considered an express agreement governing any cause of damage or destruction to the Leased Property, or any portion thereof, and, to the maximum extent permitted by law, no local or State statute, laws, rules, regulation or ordinance in effect during the Term which provide for such a contingency shall have any application in such case.

10.7        Waiver.  Tenant hereby waives any statutory rights of termination which may arise by reason of any damage or destruction of the Leased Property, or any portion thereof.

ARTICLE 11

CONDEMNATION

11.1        Total Condemnation, Etc.  If either (i) the whole of any Property shall be taken by Condemnation or (ii) a Condemnation of less than the whole of any Property renders any Property Unsuitable for Its Permitted Use, this Agreement shall terminate with respect to such Property, Tenant and Landlord shall seek the Award for their interests in the applicable Property as provided in Section 11.5.

11.2        Partial Condemnation.  In the event of a Condemnation of less than the whole of any Property such that such Property is still suitable for its Permitted Use, Tenant shall, to the extent of the Award and any additional amounts disbursed by Landlord as hereinafter provided, commence (or cause to be commenced) promptly and continue diligently to restore (or cause to be restored) the untaken portion of the applicable Leased Improvements so that such Leased Improvements shall constitute a complete architectural unit of the same general character and condition (as nearly as may be possible under the circumstances) as such Leased Improvements existing immediately prior to such Condemnation, in material compliance with all Legal Requirements, subject to the provisions of this Section 11.2.  If the cost of the repair or restoration of the affected Property exceeds the amount of the Award, Tenant shall give Landlord Notice thereof which notice shall set forth in reasonable detail the nature of such deficiency and whether Tenant shall pay and assume the amount of such deficiency (Tenant having no obligation to do so, except that if Tenant shall elect to make such funds available, the same shall become an irrevocable obligation of Tenant pursuant to this Agreement).  In the event Tenant shall elect not to pay and assume the amount of such deficiency, Landlord shall have the right (but not the obligation), exercisable at Landlord’s sole election by Notice to Tenant given within sixty (60) days after Tenant’s Notice of the deficiency, to elect to make available for application to the cost of repair or restoration the amount of such deficiency; provided, however, in such

38

event, upon any disbursement by Landlord thereof, the Minimum Rent shall be adjusted as provided in Section 3.1.1(c).  In the event that neither Landlord nor Tenant shall elect to make such deficiency available for restoration, either Landlord or Tenant may terminate this Agreement with respect to the affected Property and the entire Award shall be allocated as set forth in Section 11.5.

Subject to the terms hereof, Landlord shall contribute to the cost of restoration that part of the Award necessary to complete such repair or restoration, together with severance and other damages awarded for the taken Leased Improvements and any deficiency Landlord has agreed to disburse, to Tenant regularly during the restoration period so as to permit payment for the cost of such repair or restoration.  Landlord may, at its option, condition advancement of such Award and other amounts on (a) the absence of any Event of Default, (b) its approval of plans and specifications of an architect satisfactory to Landlord (which approval shall not be unreasonably withheld, delayed or conditioned), (c) general contractors’ estimates, (iv) architect’s certificates, (d) conditional lien waivers of general contractors, if available, (e) evidence of approval by all governmental authorities and other regulatory bodies whose approval is required, (f), if Tenant has elected to advance deficiency funds pursuant to the preceding paragraph, Tenant depositing the amount thereof with Landlord and (g) such other certificates as Landlord may, from time to time, reasonably require.  Landlord’s obligation under this Section 11.2 to disburse the Award and such other amounts shall be subject to (x) the collection thereof by Landlord and (y) the satisfaction of any applicable requirements of any Facility Mortgage, and the release of such Award by the applicable Facility Mortgagee.  Tenant’s obligation to restore the Leased Property shall be subject to the release of the Award by the applicable Facility Mortgagee to Landlord.

11.3        Abatement of Rent.  Other than as specifically provided in this Agreement, this Agreement shall remain in full force and effect and Tenant’s obligation to make all payments of Rent and to pay all other charges as and when required under this Agreement shall remain unabated during the Term notwithstanding any Condemnation involving the Leased Property, or any portion thereof.  The provisions of this Article 11 shall be considered an express agreement governing any Condemnation involving the Leased Property and, to the maximum extent permitted by law, no local or State statute, law, rule, regulation or ordinance in effect during the Term which provides for such a contingency shall have any application in such case.

11.4        Temporary Condemnation.  In the event of any temporary Condemnation of any Property or Tenant’s interest therein, this Agreement shall continue in full force and effect and Tenant shall continue to pay (or cause to be paid), in the manner and on the terms herein specified, the full amount of the Rent.  Tenant shall continue to perform and observe (or cause to be performed and observed) all of the other terms and conditions of this Agreement on the part of the Tenant to be performed and observed.  Provided no Event of Default has

39

occurred and is continuing, the entire amount of any Award made for such temporary Condemnation allocable to the Term, whether paid by way of damages, rent or otherwise, shall be paid to Tenant.  Tenant shall, promptly upon the termination of any such period of temporary Condemnation, at its sole cost and expense, restore the affected Property to the condition that existed immediately prior to such Condemnation, in material compliance with all applicable Legal Requirements, unless such period of temporary Condemnation shall extend beyond the expiration of the Term, in which event Tenant shall not be required to make such restoration.

11.5        Allocation of Award.  Except as provided in Section 11.4 and the second sentence of this Section 11.5, the total Award shall be solely the property of and payable to Landlord.  Any portion of the Award made for the taking of Tenant’s leasehold interest in the Leased Property, loss of business during the remainder of the Term, the taking of Tenant’s Personal Property, the taking of Capital Additions paid for by Tenant and Tenant’s removal and relocation expenses shall be the sole property of and payable to Tenant (subject to the provisions of Section 11.2).  In any Condemnation proceedings, Landlord and Tenant shall each seek its own Award in conformity herewith, at its own expense.

ARTICLE 12

DEFAULTS AND REMEDIES

12.1        Events of Default.  The occurrence of any one or more of the following events shall constitute an “Event of Default” hereunder:

(a)           should Tenant fail to make any payment of the Rent or any other sum payable hereunder when due; or

(b)           should Tenant fail to maintain the insurance coverages required under Article 9; or

(c)           should Tenant default in the due observance or performance of any of the terms, covenants or agreements contained herein to be performed or observed by it (other than as specified in clauses (a) and (b) above) and should such default continue for a period of thirty (30) days after Notice thereof from Landlord to Tenant; provided, however, that if such default is susceptible of cure but such cure cannot be accomplished with due diligence within such period of time and if, in addition, Tenant commences to cure or cause to be cured such default within thirty (30) days after Notice thereof from Landlord and thereafter prosecutes the curing of such default with all due diligence, such period of time shall be extended to such period of time (not to exceed an additional ninety (90) days in the aggregate) as may be necessary to cure such default with all due diligence; or

40

(d)           should any obligation of Tenant in respect of any Indebtedness for money borrowed or for any material property or services, or any guaranty relating thereto, be declared to be or become due and payable prior to the stated maturity thereof, or should there occur and be continuing with respect to any such Indebtedness any event of default under any instrument or agreement evidencing or securing the same, the effect of which is to permit the holder or holders of such instrument or agreement or a trustee, agent or other representative on behalf of such holder or holders, to cause any such obligations to become due prior to its stated maturity; or

(e)           should an event of default by Tenant, any Guarantor or any Affiliated Person as to Tenant or any Guarantor occur and be continuing beyond the expiration of any applicable cure period under any of the Incidental Documents; or

(f)            should Tenant or any Guarantor generally not be paying its debts as they become due or should Tenant or any Guarantor make a general assignment for the benefit of creditors; or

(g)           should any petition be filed by or against Tenant or any Guarantor under the Federal bankruptcy laws, or should any other proceeding be instituted by or against Tenant or any Guarantor seeking to adjudicate Tenant or any Guarantor a bankrupt or insolvent, or seeking liquidation, reorganization, arrangement, adjustment or composition of Tenant’s debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for Tenant or any Guarantor or for any substantial part of the property of Tenant or any Guarantor and such proceeding is not dismissed within one hundred eighty (180) days after institution thereof; or

(h)           should Tenant or any Guarantor cause or institute any proceeding for its dissolution or termination; or

(i)            should the estate or interest of Tenant in the Leased Property or any part thereof be levied upon or attached in any proceeding and the same shall not be vacated or discharged within the later of (x) ninety (90) days after commencement thereof, unless the amount in dispute is less than $250,000, in which case Tenant shall give notice to Landlord of the dispute but Tenant may defend in any suitable way, and (y) two hundred seventy (270) days after receipt by Tenant of Notice thereof from Landlord (unless Tenant shall be contesting such lien or attachment in good faith in accordance with Article 8); or

(j)            should there occur any direct or indirect Change in Control of Tenant or any Guarantor, except as otherwise permitted by Article 16; or

41

(k)           should a final unappealable determination be made by the applicable Government Agency that Tenant shall have failed to comply with applicable Medicare and/or Medicaid regulations in the operation of any Facility, as a result of which failure Tenant is declared ineligible to receive reimbursements under the Medicare and/or Medicaid programs for such Facility;

then, and in any such event, Landlord, in addition to all other remedies available to it, may terminate this Agreement with respect to any or all of the Leased Property by giving Notice thereof to Tenant and upon the expiration of the time, if any, fixed in such Notice, this Agreement shall terminate with respect to all or the designated portion of the Leased Property and all rights of Tenant under this Agreement with respect thereto shall cease.  Landlord shall have and may exercise all rights and remedies available at law and in equity to Landlord as a result of Tenant’s breach of this Agreement.

Upon the occurrence of an Event of Default, Landlord may, in addition to any other remedies provided herein, enter upon the Leased Property, or any portion thereof, and take possession of any and all of Tenant’s Personal Property, if any, and the Records, without liability for trespass or conversion (Tenant hereby waiving any right to notice or hearing prior to such taking of possession by Landlord) and sell the same at public or private sale, after giving Tenant reasonable Notice of the time and place of any public or private sale, at which sale Landlord or its assigns may purchase all or any portion of Tenant’s Personal Property, if any, unless otherwise prohibited by law.  Unless otherwise provided by law and without intending to exclude any other manner of giving Tenant reasonable notice, the requirement of reasonable Notice shall be met if such Notice is given at least ten (10) days before the date of sale.  The proceeds from any such disposition, less all expenses incurred in connection with the taking of possession, holding and selling of such property (including, reasonable attorneys’ fees) shall be applied as a credit against the indebtedness which is secured by the security interest granted in Section 7.2.  Any surplus shall be paid to Tenant or as otherwise required by law and Tenant shall pay any deficiency to Landlord, as Additional Charges, upon demand.

12.2        Remedies.  None of (a) the termination of this Agreement pursuant to Section 12.1, (b) the repossession of the Leased Property, or any portion thereof, (c) the failure of Landlord to relet the Leased Property, or any portion thereof, nor (d) the reletting of all or any of portion of the Leased Property, shall relieve Tenant of its liability and obligations hereunder, all of which shall survive any such termination, repossession or reletting.  In the event of any such termination, Tenant shall forthwith pay to Landlord all Rent due and payable with respect to the Leased Property, or terminated portion thereof, through and including the date of such termination.  Thereafter, Tenant, until the end of what would have been the Term of this Agreement in the absence of such termination, and whether or not the Leased Property, or any portion thereof, shall have been relet, shall be liable to Landlord for, and shall pay to Landlord, as current

42

damages, the Rent (Additional Rent to be reasonably calculated by Landlord based on historical Net Patient Revenues) and other charges which would be payable hereunder for the remainder of the Term had such termination not occurred, less the net proceeds, if any, of any reletting of the Leased Property, or any portion thereof, after deducting all reasonable expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys’ fees, advertising, expenses of employees, alteration costs and expenses of preparation for such reletting.  Tenant shall pay such current damages to Landlord monthly on the days on which the Minimum Rent would have been payable hereunder if this Agreement had not been so terminated with respect to such of the Leased Property.

At any time after such termination, whether or not Landlord shall have collected any such current damages, as liquidated final damages beyond the date of such termination, at Landlord’s election, Tenant shall pay to Landlord an amount equal to the present value (as reasonably determined by Landlord) of the excess, if any, of the Rent and other charges which would be payable hereunder from the date of such termination (assuming that, for the purposes of this paragraph, annual payments by Tenant on account of Impositions and Additional Rent would be the same as payments required for the immediately preceding twelve calendar months, or if less than twelve calendar months have expired since the Commencement Date, the payments required for such lesser period projected to an annual amount) for what would be the then unexpired term of this Agreement if the same remained in effect, over the fair market rental for the same period.  Nothing contained in this Agreement shall, however, limit or prejudice the right of Landlord to prove and obtain in proceedings for bankruptcy or insolvency an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater than, equal to, or less than the amount of the loss or damages referred to above.

In case of any Event of Default, re-entry, expiration and dispossession by summary proceedings or otherwise, Landlord may, (a) relet the Leased Property or any part or parts thereof, either in the name of Landlord or otherwise, for a term or terms which may at Landlord’s option, be equal to, less than or exceed the period which would otherwise have constituted the balance of the Term and may grant concessions or free rent to the extent that Landlord considers advisable and necessary to relet the same, and (b) may make such reasonable alterations, repairs and decorations in the Leased Property, or any portion thereof, as Landlord, in its sole and absolute discretion, considers advisable and necessary for the purpose of reletting the Leased Property; and the making of such alterations, repairs and decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid.  Landlord shall in no event be liable in any way whatsoever for any failure to relet all or any portion of the Leased Property, or, in the event that the Leased Property is relet, for failure to collect the rent under such

43

reletting.  To the maximum extent permitted by law, Tenant hereby expressly waives any and all rights of redemption granted under any present or future laws in the event of Tenant being evicted or dispossessed, or in the event of Landlord obtaining possession of the Leased Property, by reason of the occurrence and continuation of an Event of Default hereunder.

12.3        Tenant’s Waiver.  IF THIS AGREEMENT IS TERMINATED PURSUANT TO SECTION 12.1 OR 12.2, TENANT WAIVES, TO THE EXTENT PERMITTED BY LAW, ANY RIGHT TO A TRIAL BY JURY IN THE EVENT OF SUMMARY PROCEEDINGS TO ENFORCE THE REMEDIES SET FORTH IN THIS ARTICLE 12, AND THE BENEFIT OF ANY LAWS NOW OR HEREAFTER IN FORCE EXEMPTING PROPERTY FROM LIABILITY FOR RENT OR FOR DEBT.

12.4        Application of Funds.  Any payments received by Landlord under any of the provisions of this Agreement during the existence or continuance of any Event of Default (and any payment made to Landlord rather than Tenant due to the existence of any Event of Default) shall be applied to Tenant’s current and past due obligations under this Agreement in such order as Landlord may determine or as may be prescribed by the laws of the State.  Any balance shall be paid to Tenant.

12.5        Landlord’s Right to Cure Tenant’s Default.  If an Event of Default shall have occurred and be continuing, Landlord, after Notice to Tenant (which Notice shall not be required if Landlord shall reasonably determine immediate action is necessary to protect person or property), without waiving or releasing any obligation of Tenant and without waiving or releasing any Event of Default, may (but shall not be obligated to), at any time thereafter, make such payment or perform such act for the account and at the expense of Tenant, and may, to the maximum extent permitted by law, enter upon the Leased Property, or any portion thereof, for such purpose and take all such action thereon as, in Landlord’s sole and absolute discretion, may be necessary or appropriate therefor.  No such entry shall be deemed an eviction of Tenant.  All reasonable costs and expenses (including, without limitation, reasonable attorneys’ fees) incurred by Landlord in connection therewith, together with interest thereon (to the extent permitted by law) at the Overdue Rate from the date such sums are paid by Landlord until repaid, shall be paid by Tenant to Landlord, on demand.

ARTICLE 13

HOLDING OVER

Any holding over by Tenant after the expiration or sooner termination of this Agreement shall be treated as a daily tenancy at sufferance at a rate equal to two (2) times the Minimum Rent and other charges herein provided (prorated on a daily basis).  Tenant shall also pay to Landlord all damages (direct or indirect) sustained by reason of any such holding over.  Otherwise, such holding over shall be on the terms and conditions set forth in this Agreement, to the

44

extent applicable.  Nothing contained herein shall constitute the consent, express or implied, of Landlord to the holding over of Tenant after the expiration or earlier termination of this Agreement.

ARTICLE 14

LANDLORD DEFAULT

If Landlord shall default in the performance or observance of any of its covenants or obligations set forth in this Agreement or any obligation of Landlord, if any, under any agreement affecting the Leased Property, the performance of which is not Tenant’s obligation pursuant to this Agreement, and any such default shall continue for a period of thirty (30) days after Notice thereof from Tenant to Landlord and any applicable Facility Mortgagee, or such additional period as may be reasonably required to correct the same, Tenant may declare the occurrence of a “Landlord Default” by a second Notice to Landlord and to such Facility Mortgagee.  Thereafter, Tenant may forthwith cure the same and, subject to the provisions of the following paragraph, invoice Landlord for costs and expenses (including reasonable attorneys’ fees and court costs) incurred by Tenant in curing the same, together with interest thereon (to the extent permitted by law) from the date Landlord receives Tenant’s invoice until paid, at the Overdue Rate.  Tenant shall have no right to terminate this Agreement for any default by Landlord hereunder and no right, for any such default, to offset or counterclaim against any Rent or other charges due hereunder.

If Landlord shall in good faith dispute the occurrence of any Landlord Default and Landlord, before the expiration of the applicable cure period, shall give Notice thereof to Tenant, setting forth, in reasonable detail, the basis therefor, no Landlord Default shall be deemed to have occurred and Landlord shall have no obligation with respect thereto until final adverse determination thereof.  If Tenant and Landlord shall fail, in good faith, to resolve any such dispute within ten (10) days after Landlord’s Notice of dispute, either may submit the matter for resolution in accordance with Article 22.

ARTICLE 15

PURCHASE RIGHTS

Landlord shall have the option to purchase Tenant’s Personal Property, at the expiration or sooner termination of this Agreement, for an amount equal to the then fair market value thereof (current replacement cost as determined by agreement of the parties or, in the absence of such agreement, appraisal), subject to, and with appropriate price adjustments for, all equipment leases, conditional sale contracts, UCC-1 financing statements and other encumbrances to which such Personal Property is subject.  Upon the expiration or sooner termination of this Agreement, Tenant shall use its reasonable efforts to transfer and assign, or cause to be transferred and assigned, to Landlord or its designee, or assist Landlord or its

45

designee in obtaining, any contracts, licenses, and certificates required for the then operation of the Leased Property.  Notwithstanding the foregoing, Tenant expressly acknowledges and agrees that nothing contained in this Article 15 shall diminish, impair or otherwise modify Landlord’s rights under the Security Agreement and that any amounts paid by Landlord in order to purchase Tenant’s Personal Property in accordance with this Article 15 shall be applied first to Tenant’s current and past due obligations under this Agreement in such order as Landlord may reasonably determine or as may be prescribed by the laws of the State and any balance shall be paid to Tenant.

ARTICLE 16

SUBLETTING AND ASSIGNMENT

16.1        Subletting and Assignment.  Except as provided in Section 16.3, Tenant shall not, without Landlord’s prior written consent (which consent may be given or withheld in Landlord’s sole and absolute discretion), assign, mortgage, pledge, hypothecate, encumber or otherwise transfer this Agreement or sublease or permit the sublease (which term shall be deemed to include the granting of concessions, licenses and the like), of the Leased Property, or any portion thereof, or suffer or permit this Agreement or the leasehold estate created hereby or any other rights arising under this Agreement to be assigned, transferred, mortgaged, pledged, hypothecated or encumbered, in whole or in part, whether voluntarily, involuntarily or by operation of law, or permit the use or operation of the Leased Property, or any portion thereof, by anyone other than Tenant, any Manager approved by Landlord pursuant to the applicable provisions of this Agreement or residents and patients of Tenant, or the Leased Property, or any portion thereof, to be offered or advertised for assignment or subletting.

For purposes of this Section 16.1, an assignment of this Agreement shall be deemed to include, without limitation, any direct or indirect Change in Control of Tenant.

If this Agreement is assigned or if the Leased Property, or any portion, thereof is sublet (or occupied by anybody other than Tenant or any Manager, their respective employees or residents or patients of Tenant), Landlord may collect the rents from such assignee, subtenant or occupant, as the case may be, and apply the net amount collected to the Rent herein reserved, but no such collection shall be deemed a waiver of the provisions set forth in the first paragraph of this Section 16.1, the acceptance by Landlord of such assignee, subtenant or occupant, as the case may be, as a tenant, or a release of Tenant from the future performance by Tenant of its covenants, agreements or obligations contained in this Agreement.

Any assignment or transfer of Tenant’s interest under this Agreement (including any sublease which is permitted pursuant to the

46

terms of Section 16.3 below) shall be subject to such assignee’s or transferee’s delivery to Landlord of (i) a Guaranty, which Guaranty shall be in form and substance satisfactory to Landlord in its sole discretion and which Guaranty shall constitute an Incidental Document hereunder; (ii) a pledge of the stock, partnership, membership or other ownership interests of such assignee or other transferee to secure Tenant’s obligations under this Agreement and the Incidental Documents, which pledge shall be in form and substance satisfactory to Landlord in its sole discretion and which pledge shall constitute an Incidental Document hereunder; (iii) a security agreement granting Landlord a security interest in all of such assignee’s or transferee’s right, title and interest in and to any personal property, intangibles and fixtures (other than accounts receivable) with respect to any Property which is subject to any such assignment or transfer to secure Tenant’s obligations under this Agreement and the Incidental Documents, which security agreement shall be in form and substance satisfactory to Landlord in its sole discretion and which security agreement shall constitute an Incidental Document hereunder; and (iv) in the case of a sublease, an assignment which assigns all of such subtenant’s right, title and interest in such sublease to Landlord to secure Tenant’s obligations under this Agreement and the Incidental Documents, which assignment shall be in form and substance satisfactory to Landlord in its sole discretion and which assignment shall constitute an Incidental Document hereunder.

No subletting or assignment shall in any way impair the continuing primary liability of Tenant hereunder (unless Landlord and Tenant expressly otherwise agree that Tenant shall be released from all obligations hereunder), and no consent to any subletting or assignment in a particular instance shall be deemed to be a waiver of the prohibition set forth in this Section 16.1.  No assignment, subletting or occupancy shall affect any Permitted Use.  Any subletting, assignment or other transfer of Tenant’s interest under this Agreement in contravention of this Section 16.1 shall be voidable at Landlord’s option.

16.2        Required Sublease Provisions.  Any sublease of all or any portion of the Leased Property entered into on or after the date hereof shall provide (a) that it is subject and subordinate to this Agreement and to the matters to which this Agreement is or shall be subject or subordinate; (b) that in the event of termination of this Agreement or reentry or dispossession of Tenant by Landlord under this Agreement, Landlord may, at its option, terminate such sublease or take over all of the right, title and interest of Tenant, as sublessor under such sublease, and such subtenant shall, at Landlord’s option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that neither Landlord nor any Facility Mortgagee, as holder of a mortgage or as Landlord under this Agreement, if such mortgagee succeeds to that position, shall (i) be liable for any act or omission of Tenant under such sublease, (ii) be subject to any credit, counterclaim, offset or defense which theretofore accrued to such subtenant against Tenant, (iii) be bound by any previous modification of such sublease not consented to in writing by Landlord

47

or by any previous prepayment of more than one (1) month’s rent, (iv) be bound by any covenant of Tenant to undertake or complete any construction of the applicable Property, or any portion thereof, (v) be required to account for any security deposit of the subtenant other than any security deposit actually delivered to Landlord by Tenant, (vi) be bound by any obligation to make any payment to such subtenant or grant any credits, except for services, repairs, maintenance and restoration provided for under the sublease that are performed after the date of such attornment, (vii) be responsible for any monies owing by Tenant to the credit of such subtenant unless actually delivered to Landlord by Tenant, or (viii) be required to remove any Person occupying any portion of the Leased Property; and (c), in the event that such subtenant receives a written Notice from Landlord or any Facility Mortgagee stating that an Event of Default has occurred and is continuing, such subtenant shall thereafter be obligated to pay all rentals accruing under such sublease directly to the party giving such Notice or as such party may direct.  All rentals received from such subtenant by Landlord or the Facility Mortgagee, as the case may be, shall be credited against the amounts owing by Tenant under this Agreement and such sublease shall provide that the subtenant thereunder shall, at the request of Landlord, execute a suitable instrument in confirmation of such agreement to attorn.  An original counterpart of each such sublease and assignment and assumption, duly executed by Tenant and such subtenant or assignee, as the case may be, in form and substance reasonably satisfactory to Landlord, shall be delivered promptly to Landlord and (a) in the case of an assignment, the assignee shall assume in writing and agree to keep and perform all of the terms of this Agreement on the part of Tenant to be kept and performed and shall be, and become, jointly and severally liable with Tenant for the performance thereof and (b) in case of either an assignment or subletting, Tenant shall remain primarily liable, as principal rather than as surety, for the prompt payment of the Rent and for the performance and observance of all of the covenants and conditions to be performed by Tenant hereunder.

The provisions of this Section 16.2 shall not be deemed a waiver of the provisions set forth in the first paragraph of Section 16.1.

16.3        Permitted Sublease Notwithstanding the foregoing, including, without limitation, Section 16.2, but subject to the provisions of Section 16.4 and any other express conditions or limitations set forth herein, Tenant may, in each instance after Notice to Landlord, (a) enter into third party residency agreements with respect to the units located at the Facilities, (b) sublease space at any Property for laundry, commissary or child care purposes or other concessions in furtherance of the Permitted Use, so long as such subleases will not reduce the number of units at any Facility, will not violate or affect any Legal Requirement or Insurance Requirement, and Tenant shall provide such additional insurance coverage applicable to the activities to be conducted in such subleased space as Landlord and any Facility Mortgagee may reasonably require, and (c) enter into one or more subleases with Affiliated Persons of Tenant with respect to the Leased Property, or any portion

48

thereof, provided Tenant gives Landlord Notice of the material terms and conditions thereof.  Landlord and Tenant acknowledge and agree that if Tenant enters into one (1) or more subleases with Affiliated Persons of Tenant with respect to any Property, or any portion thereof, in accordance with the preceding clause (c), Tenant may allocate the rent and other charges with respect to the affected Property in any reasonable manner; provided, however, that such allocation shall not affect Tenant’s (nor any Guarantor’s) liability for the Rent and other obligations of Tenant under this Agreement; and, provided, further, that Tenant shall give Landlord prompt written notice of any allocation or reallocation of the rent and other charges with respect to the affected Property and, in any event, Tenant shall give Landlord written notice of the amount of such allocations at least ten (10) Business Days prior to the date that Landlord or Senior Housing Properties Trust is required to file any tax returns in any State where such affected Lease Property is located.

16.4        Sublease Limitation.  Anything contained in this Agreement to the contrary notwithstanding, Tenant shall not sublet the Leased Property, or any portion thereof, on any basis such that the rental to be paid by any sublessee thereunder would be based, in whole or in part, on the net income or profits derived by the business activities of such sublessee, any other formula such that any portion of such sublease rental would fail to qualify as “rents from real property” within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto or would otherwise disqualify Landlord for treatment as a real estate investment trust.

ARTICLE 17

ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS

17.1        Estoppel Certificates.  At any time and from time to time, but not more than a reasonable number of times per year, upon not less than ten (10) Business Days prior Notice by either party, the party receiving such Notice shall furnish to the other an Officer’s Certificate certifying that this Agreement is unmodified and in full force and effect (or that this Agreement is in full force and effect as modified and setting forth the modifications), the date to which the Rent has been paid, that no Default or an Event of Default has occurred and is continuing or, if a Default or an Event of Default shall exist, specifying in reasonable detail the nature thereof, and the steps being taken to remedy the same, and such additional information as the requesting party may reasonably request.  Any such certificate furnished pursuant to this Section 17.1 may be relied upon by the requesting party, its lenders and any prospective purchaser or mortgagee of the Leased Property, or any portion thereof, or the leasehold estate created hereby.

17.2        Financial Statements.  Tenant shall furnish or cause Five Star to furnish, as applicable, the following statements to Landlord:

49

(a)           within forty-five (45) days after each of the first three fiscal quarters of any Fiscal Year, the most recent Consolidated Financials, accompanied by the Financial Officer’s Certificate;

(b)           within ninety (90) days after the end of each Fiscal Year, the most recent Consolidated Financials and financials of Tenant for such year, certified by an independent certified public accountant reasonably satisfactory to Landlord and accompanied by a Financial Officer’s Certificate;

(c)           within forty-five (45) days after the end of each month, an unaudited operating statement and statement of capital expenditures prepared on a Facility by Facility basis and a combined basis, including occupancy percentages and average rate, accompanied by a Financial Officer’s Certificate;

(d)           at any time and from time to time upon not less than twenty (20) days Notice from Landlord or such additional period as may be reasonable under the circumstances, any Consolidated Financials, Tenant financials or any other audited or unaudited financial reporting information required to be filed by Landlord with any securities and exchange commission, the SEC or any successor agency, or any other governmental authority, or required pursuant to any order issued by any court, governmental authority or arbitrator in any litigation to which Landlord is a party, for purposes of compliance therewith; provided, however, that, except as to calculations pertaining to Net Patient Revenues, Tenant shall not be required to provide audited financials with respect to any individual Facility unless Landlord shall agree to pay for the cost thereof;

(e)           promptly, after receipt or sending thereof, copies of all notices given or received by Tenant under any Management Agreement; and

(f)            promptly, upon Notice from Landlord, such other information concerning the business, financial condition and affairs of Tenant and any Guarantor as Landlord reasonably may request from time to time.

Landlord may at any time, and from time to time, provide any Facility Mortgagee with copies of any of the foregoing statements, subject to Landlord obtaining the agreement of such Facility Mortgagee to maintain such statements and the information therein as confidential.

17.3        General Operations.  Tenant covenants and agrees to furnish to Landlord, within thirty (30) days after receipt or modification thereof, copies of:

(a)           all licenses authorizing Tenant or any Manager to operate any Facility for its Primary Intended Use;

50

(b)           all Medicare and Medicaid certifications, together with provider agreements and all material correspondence relating thereto with respect to any Facility (excluding, however, correspondence which may be subject to any attorney client privilege);

(c)           if required under Applicable Law with respect to any Facility, a license for each individual employed as administrator with respect to such Facility;

(d)           all reports of surveys, statements of deficiencies, plans of correction, and all material correspondence relating thereto, including, without limitation, all reports and material correspondence concerning compliance with or enforcement of licensure, Medicare/Medicaid, and accreditation requirements, including physical environment and Life Safety Code survey reports (excluding, however, correspondence which may be subject to any attorney client privilege); and

(e)           with reasonable promptness, such other confirmation as to the licensure and Medicare and Medicaid participation of Tenant as Landlord may reasonably request from time to time.

ARTICLE 18

LANDLORD’S RIGHT TO INSPECT

Tenant shall permit Landlord and its authorized representatives to inspect the Leased Property, or any portion thereof, during usual business hours upon not less than forty-eight (48) hours’ notice and to make such repairs as Landlord is permitted or required to make pursuant to the terms of this Agreement, provided that any inspection or repair by Landlord or its representatives will not unreasonably interfere with Tenant’s use and operation of the Leased Property and further provided that in the event of an emergency, as determined by Landlord in its reasonable discretion, prior Notice shall not be necessary.

ARTICLE 19

EASEMENTS

19.1        Grant of Easements.  Provided no Event of Default has occurred and is continuing, Landlord will join in granting and, if necessary, modifying or abandoning such rights-of-way, easements and other interests as may be reasonably requested by Tenant for ingress and egress, and electric, telephone, gas, water, sewer and other utilities so long as:

(a)           the instrument creating, modifying or abandoning any such easement, right-of-way or other interest is satisfactory to and approved by Landlord (which approval shall not be unreasonably withheld, delayed or conditioned);

51

(b)           Landlord receives an Officer’s Certificate from Tenant stating (i) that such grant, modification or abandonment is not detrimental to the proper conduct of business on such Property, (ii) the consideration, if any, being paid for such grant, modification or abandonment (which consideration shall be paid by Tenant), (iii) that such grant, modification or abandonment does not impair the use or value of such Property for the Permitted Use, and (iv) that, for as long as this Agreement shall be in effect, Tenant will perform all obligations, if any, of Landlord under any such instrument; and

(c)           Landlord receives evidence satisfactory to Landlord that the Manager has granted its consent to such grant, modification or abandonment in accordance with the requirements of such Manager’s Management Agreement or that such consent is not required.

19.2        Exercise of Rights by Tenant.  So long as no Event of Default has occurred and is continuing, Tenant shall have the right to exercise all rights of Landlord under the Easement Agreements and, in connection therewith, Landlord shall execute and promptly return to Tenant such documents as Tenant shall reasonably request.  Tenant shall perform all obligations of Landlord under the Easement Agreements.

19.3        Permitted Encumbrances.  Any agreements entered into in accordance with this Article 19 shall be deemed a Permitted Encumbrance.

ARTICLE 20

FACILITY MORTGAGES

20.1        Landlord May Grant Liens.  Without the consent of Tenant, Landlord may, from time to time, directly or indirectly, create or otherwise cause to exist any lien, encumbrance or title retention agreement (“Encumbrance”) upon the Leased Property, or any portion thereof, or interest therein, whether to secure any borrowing or other means of financing or refinancing.

20.2        Subordination of Lease.  This Agreement and any and all rights of Tenant hereunder are and shall be subject and subordinate to any ground or master lease, and all renewals, extensions, modifications and replacements thereof, and to all mortgages and deeds of trust, which may now or hereafter affect the Leased Property, or any portion thereof, or any improvements thereon and/or any of such leases, whether or not such mortgages or deeds of trust shall also cover other lands and/or buildings and/or leases, to each and every advance made or hereafter to be made under such mortgages and deeds of trust, and to all renewals, modifications, replacements and extensions of such leases and such mortgages and deeds of trust and all consolidations of such mortgages and deeds of trust.  This section shall be self-operative and no further instrument of subordination

52

shall be required.  In confirmation of such subordination, Tenant shall promptly execute, acknowledge and deliver any instrument that Landlord, the lessor under any such lease or the holder of any such mortgage or the trustee or beneficiary of any deed of trust or any of their respective successors in interest may reasonably request to evidence such subordination.  Any lease to which this Agreement is, at the time referred to, subject and subordinate is herein called “Superior Lease” and the lessor of a Superior Lease or its successor in interest at the time referred to is herein called “Superior Landlord” and any mortgage or deed of trust to which this Agreement is, at the time referred to, subject and subordinate is herein called “Superior Mortgage” and the holder, trustee or beneficiary of a Superior Mortgage is herein called “Superior Mortgagee”.  Tenant shall have no obligations under any Superior Lease or Superior Mortgage other than those expressly set forth in this Section 20.2.

If any Superior Landlord or Superior Mortgagee or the nominee or designee of any Superior Landlord or Superior Mortgagee shall succeed to the rights of Landlord under this Agreement (any such person, “Successor Landlord”), whether through possession or foreclosure action or delivery of a new lease or deed, or otherwise, at such Successor Landlord’s request, Tenant shall attorn to and recognize the Successor Landlord as Tenant’s landlord under this Agreement and Tenant shall promptly execute and deliver any instrument that such Successor Landlord may reasonably request to evidence such attornment (provided that such instrument does not alter the terms of this Agreement), whereupon, this Agreement shall continue in full force and effect as a direct lease between the Successor Landlord and Tenant upon all of the terms, conditions and covenants as are set forth in this Agreement, except that the Successor Landlord (unless formerly the landlord under this Agreement or its nominee or designee) shall not be (a) liable in any way to Tenant for any act or omission, neglect or default on the part of any prior Landlord under this Agreement, (b) responsible for any monies owing by or on deposit with any prior Landlord to the credit of Tenant (except to the extent actually paid or delivered to the Successor Landlord), (c) subject to any counterclaim or setoff which theretofore accrued to Tenant against any prior Landlord, (d) bound by any modification of this Agreement subsequent to such Superior Lease or Mortgage, or by any previous prepayment of Rent for more than one (1) month in advance of the date due hereunder, which was not approved in writing by the Superior Landlord or the Superior Mortgagee thereto, (e) liable to Tenant beyond the Successor Landlord’s interest in the Leased Property and the rents, income, receipts, revenues, issues and profits issuing from the Leased Property, (f) responsible for the performance of any work to be done by the Landlord under this Agreement to render the Leased Property ready for occupancy by Tenant (subject to Landlord’s obligations under Section 5.1.2(b) or with respect to any insurance or Condemnation proceeds), or (g) required to remove any Person occupying the Leased Property or any part thereof, except if such person claims by, through or under the Successor Landlord.  Tenant agrees at any time and from time to time to execute a suitable instrument in confirmation of Tenant’s agreement to attorn, as aforesaid and

53

Landlord agrees to provide Tenant with an instrument of nondisturbance and attornment from each such Superior Mortgagee and Superior Landlord (other than the lessors under any ground leases with respect to the Leased Property, or any portion thereof) in form and substance reasonably satisfactory to Tenant.  Notwithstanding the foregoing, any Successor Landlord shall be liable (a) to pay to Tenant any amounts owed under Section 5.1.2(b), and (b) to pay to Tenant any portions of insurance proceeds or Awards received by Landlord or the Successor Landlord required to be paid to Tenant pursuant to the terms of this Agreement, and, as a condition to any mortgage, lien or lease in respect of the Leased Property, or any portion thereof, and the subordination of this Agreement thereto, the mortgagee, lienholder or lessor, as applicable, shall expressly agree, for the benefit of Tenant, to make such payments, which agreement shall be embodied in an instrument in form reasonably satisfactory to Tenant.

20.3        Notice to Mortgagee and Superior Landlord.  Subsequent to the receipt by Tenant of Notice from Landlord as to the identity of any Facility Mortgagee or Superior Landlord under a lease with Landlord, as ground lessee, which includes the Leased Property, or any portion thereof, as part of the demised premises and which complies with Section 20.1 (which Notice shall be accompanied by a copy of the applicable mortgage or lease), no Notice from Tenant to Landlord as to a default by Landlord under this Agreement shall be effective with respect to a Facility Mortgagee or Superior Landlord unless and until a copy of the same is given to such Facility Mortgagee or Superior Landlord at the address set forth in the above described Notice, and the curing of any of Landlord’s defaults within the applicable notice and cure periods set forth in Article 14 by such Facility Mortgagee or Superior Landlord shall be treated as performance by Landlord.

ARTICLE 21

ADDITIONAL COVENANTS OF TENANT

21.1        Prompt Payment of Indebtedness.  Tenant shall (a) pay or cause to be paid when due all payments of principal of and premium and interest on Tenant’s Indebtedness for money borrowed and shall not permit or suffer any such Indebtedness to become or remain in default beyond any applicable grace or cure period, (b) pay or cause to be paid when due all lawful claims for labor and rents with respect to the Leased Property, (c) pay or cause to be paid when due all trade payables and (d) pay or cause to be paid when due all other of Tenant’s Indebtedness upon which it is or becomes obligated, except, in each case, other than that referred to in clause (a), to the extent payment is being contested in good faith by appropriate proceedings in accordance with Article 8 and if Tenant shall have set aside on its books adequate reserves with respect thereto in accordance with GAAP, if appropriate, or unless and until foreclosure, distraint sale or other similar proceedings shall have been commenced.

21.2        Conduct of Business.  Tenant shall not engage in any business other than the leasing and operation of the Leased Property

54

(including any incidental or ancillary business relating thereto) and shall do or cause to be done all things necessary to preserve, renew and keep in full force and effect and in good standing its corporate existence and its rights and licenses necessary to conduct such business.

21.3        Maintenance of Accounts and Records.  Tenant shall keep true records and books of account of Tenant in which full, true and correct entries will be made of dealings and transactions in relation to the business and affairs of Tenant in accordance with GAAP.  Tenant shall apply accounting principles in the preparation of the financial statements of Tenant which, in the judgment of and the opinion of its independent public accountants, are in accordance with GAAP, where applicable, except for changes approved by such independent public accountants.  Tenant shall provide to Landlord either in a footnote to the financial statements delivered under Section 17.2 which relate to the period in which such change occurs, or in separate schedules to such financial statements, information sufficient to show the effect of any such changes on such financial statements.

21.4        Notice of Litigation, Etc.  Tenant shall give prompt Notice to Landlord of any litigation or any administrative proceeding to which it may hereafter become a party of which Tenant has notice or actual knowledge which involves a potential liability equal to or greater than Two Hundred Fifty Thousand Dollars ($250,000) or which may otherwise result in any material adverse change in the business, operations, property, prospects, results of operation or condition, financial or other, of Tenant.  Forthwith upon Tenant obtaining knowledge of any Default, Event of Default or any default or event of default under any agreement relating to Indebtedness for money borrowed in an aggregate amount exceeding, at any one time, Two Hundred Fifty Thousand Dollars ($250,000), or any event or condition that would be required to be disclosed in a current report filed by Tenant on Form 8-K or in Part II of a quarterly report on Form 10-Q if Tenant were required to file such reports under the Securities Exchange Act of 1934, as amended, Tenant shall furnish Notice thereof to Landlord specifying the nature and period of existence thereof and what action Tenant has taken or is taking or proposes to take with respect thereto.

21.5        Indebtedness of Tenant.  Tenant shall not create, incur, assume or guarantee, or permit to exist, or become or remain liable directly or indirectly upon, any Indebtedness except the following:

(a)           Indebtedness of Tenant to Landlord;

(b)           Indebtedness of Tenant for Impositions, to the extent that payment thereof shall not at the time be required to be made in accordance with the provisions of Article 8;

(c)           Indebtedness of Tenant in respect of judgments or awards (i) which have been in force for less than the applicable appeal period and in respect of which execution thereof shall

55

have been stayed pending such appeal or review, or (ii) which are fully covered by insurance payable to Tenant, or (iii) which are for an amount not in excess of $250,000 in the aggregate at any one time outstanding and (x) which have been in force for not longer than the applicable appeal period, so long as execution is not levied thereunder or (y) in respect of which an appeal or proceedings for review shall at the time be prosecuted in good faith in accordance with the provisions of Article 8, and in respect of which execution thereof shall have been stayed pending such appeal or review;

(d)           unsecured borrowings of Tenant from its Affiliated Persons which are by their terms expressly subordinate pursuant to a Subordination Agreement to the payment and performance of Tenant’s obligations under this Agreement; or

(e)           Indebtedness for purchase money financing in accordance with Section 21.8 (a) and other operating liabilities incurred in the ordinary course of Tenant’s business; or

(f)            Indebtedness of Tenant as guarantor or borrower secured by Liens permitted under Section 21.8(c).

21.6        Distributions, Payments to Affiliated Persons, Etc.  Tenant shall not declare, order, pay or make, directly or indirectly, any Distributions or any payment to any Affiliated Person of Tenant (including payments in the ordinary course of business) or set apart any sum or property therefor, or agree to do so, if, at the time of such proposed action, or immediately after giving effect thereto, any Event of Default shall have occurred and be continuing.  Otherwise, as long as no Event of Default shall have occurred and be continuing, Tenant may make Distributions and payments to Affiliated Persons; provided, however, that any such payments shall at all times be subordinate to Tenant’s obligations under this Agreement.

21.7        Prohibited Transactions.  Tenant shall not permit to exist or enter into any agreement or arrangement whereby it engages in a transaction of any kind with any Affiliated Person as to Tenant or any Guarantor, except on terms and conditions which are commercially reasonable.

21.8        Liens and Encumbrances.  Except as permitted by Section 7.1 and Section 21.5, Tenant shall not create or incur or suffer to be created or incurred or to exist any Lien on this Agreement or any of Tenant’s assets, properties, rights or income, or any of its interest therein, now or at any time hereafter owned, other than:

(a)           Security interests securing the purchase price of equipment or personal property whether acquired before or after the Commencement Date; provided, however, that (i) such Lien shall at all times be confined solely to the asset in question and (ii) the aggregate principal amount of Indebtedness secured

56

by any such Lien shall not exceed the cost of acquisition or construction of the property subject thereto;

(b)           Permitted Encumbrances;

(c)           Security interests in Accounts or Chattel Paper, in Support Obligations, General Intangibles or Deposit Accounts relating to such Accounts or Chattel Paper, in any Instruments or Investment Property evidencing or arising from such Accounts or Chattel Paper, in any documents, books, records or other information (including, without limitation, computer programs, tapes, discs, punch cards, data processing software and related property and rights) maintained with respect to any property described in this Section 21.8(c) or in any Proceeds of any of the foregoing (capitalized terms used in this Section 21.8(c) without definition being used as defined in or for purposes of Article 9 of the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts); and

(d)           As permitted pursuant to Section 21.5.

21.9        Merger; Sale of Assets; Etc.  Without Landlord’s prior written consent (which consent may be given or withheld in Landlord’s sole discretion), Tenant shall not (i) sell, lease (as lessor or sublessor), transfer or otherwise dispose of, or abandon, all or any material portion of its assets (including capital stock or other equity interests) or business to any Person, (ii) merge into or with or consolidate with any other Entity, or (iii) sell, lease (as lessor or sublessor), transfer or otherwise dispose of, or abandon, any personal property or fixtures or any real property; provided, however, that, notwithstanding the provisions of clause (iii) preceding, Tenant may dispose of equipment or fixtures which have become inadequate, obsolete, worn-out, unsuitable, undesirable or unnecessary, provided substitute equipment or fixtures having equal or greater value and utility (but not necessarily having the same function) have been provided.

21.10      Bankruptcy Remote Entities.  At Landlord’s request, Tenant shall make such amendments, modifications or other changes to its charter documents and governing bodies (including, without limitation, Tenant’s board of directors), and take such other actions, as may from time to time be necessary to qualify Tenant as a “bankruptcy remote entity,” provided that Landlord shall reimburse Tenant for all costs and expenses reasonably incurred by Tenant in connection with the making of such amendments or modifications.

57

ARTICLE 22

ARBITRATION

Landlord or Tenant may elect to submit any dispute hereunder that has an amount in controversy in excess of $250,000 to arbitration hereunder.  Any such arbitration shall be conducted in Boston, Massachusetts in accordance with the Commercial Arbitration Rules of the American Association then pertaining and the decision of the arbitrators with respect to such dispute shall be binding, final and conclusive on the parties.

In the event Landlord or Tenant shall elect to submit any such dispute to arbitration hereunder, Landlord and Tenant shall each appoint and pay all fees of a fit and impartial person as arbitrator with at least ten (10) years’ recent professional experience in the general subject matter of the dispute.  Notice of such appointment shall be sent in writing by each party to the other, and the arbitrators so appointed, in the event of their failure to agree within thirty (30) days after the appointment of the second arbitrator upon the matter so submitted, shall appoint a third arbitrator.  If either Landlord or Tenant shall fail to appoint an arbitrator, as aforesaid, for a period of twenty (20) days after written notice from the other party to make such appointment, then the arbitrator appointed by the party having made such appointment shall appoint a second arbitrator and the two (2) so appointed shall, in the event of their failure to agree upon any decision within thirty (30) days thereafter, appoint a third arbitrator.  If such arbitrators fail to agree upon a third arbitrator within forty five (45) days after the appointment of the second arbitrator, then such third arbitrator shall be appointed by the American Arbitration Association from its qualified panel of arbitrators, and shall be a person having at least ten (10) years’ recent professional experience as to the subject matter in question.  The fees of the third arbitrator and the expenses incident to the proceedings shall be borne equally between Landlord and Tenant, unless the arbitrators decide otherwise.  The fees of respective counsel engaged by the parties, and the fees of expert witnesses and other witnesses called for the parties, shall be paid by the respective party engaging such counsel or calling or engaging such witnesses.

The decision of the arbitrators shall be rendered within thirty (30) days after appointment of the third arbitrator.  Such decision shall be in writing and in duplicate, one counterpart thereof to be delivered to Landlord and one to Tenant.  A judgment of a court of competent jurisdiction may be entered upon the award of the arbitrators in accordance with the rules and statutes applicable thereto then obtaining.

Landlord and Tenant acknowledge and agree that, to the extent any such dispute shall involve any Manager and be subject to arbitration pursuant to such Manager’s Management Agreement, Landlord and Tenant shall cooperate to consolidate any such arbitration hereunder and under such Management Agreement into a single proceeding.

58

ARTICLE 23

MISCELLANEOUS

23.1        Limitation on Payment of Rent.  All agreements between Landlord and Tenant herein are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of Rent, or otherwise, shall the Rent or any other amounts payable to Landlord under this Agreement exceed the maximum permissible under applicable law, the benefit of which may be asserted by Tenant as a defense, and if, from any circumstance whatsoever, fulfillment of any provision of this Agreement, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law, or if from any circumstances Landlord should ever receive as fulfillment of such provision such an excessive amount, then, ipso facto, the amount which would be excessive shall be applied to the reduction of the installment(s) of Minimum Rent next due and not to the payment of such excessive amount.  This provision shall control every other provision of this Agreement and any other agreements between Landlord and Tenant.

23.2        No Waiver.  No failure by Landlord or Tenant to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no acceptance of full or partial payment of Rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term.  To the maximum extent permitted by law, no waiver of any breach shall affect or alter this Agreement, which shall continue in full force and effect with respect to any other then existing or subsequent breach.

23.3        Remedies Cumulative.  To the maximum extent permitted by law, each legal, equitable or contractual right, power and remedy of Landlord or Tenant, now or hereafter provided either in this Agreement or by statute or otherwise, shall be cumulative and concurrent and shall be in addition to every other right, power and remedy and the exercise or beginning of the exercise by Landlord or Tenant (as applicable) of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by Landlord of any or all of such other rights, powers and remedies.

23.4        Severability.  Any clause, sentence, paragraph, section or provision of this Agreement held by a court of competent jurisdiction to be invalid, illegal or ineffective shall not impair, invalidate or  nullify the remainder of this Agreement, but rather the effect thereof shall be confined to the clause, sentence, paragraph, section or provision so held to be invalid, illegal or ineffective, and this Agreement shall be construed as if such invalid, illegal or ineffective provisions had never been contained therein.

59

23.5        Acceptance of Surrender.  No surrender to Landlord of this Agreement or of the Leased Property or any part thereof, or of any interest therein, shall be valid or effective unless agreed to and accepted in writing by Landlord and no act by Landlord or any representative or agent of Landlord, other than such a written acceptance by Landlord, shall constitute an acceptance of any such surrender.

23.6        No Merger of Title.  It is expressly acknowledged and agreed that it is the intent of the parties that there shall be no merger of this Agreement or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly this Agreement or the leasehold estate created hereby and the fee estate or ground landlord’s interest in the Leased Property.

23.7        Conveyance by Landlord.  If Landlord or any successor owner of all or any portion of the Leased Property shall convey all or any portion of the Leased Property in accordance with the terms hereof other than as security for a debt, and the grantee or transferee of such of the Leased Property shall expressly assume all obligations of Landlord hereunder arising or accruing from and after the date of such conveyance or transfer, Landlord or such successor owner, as the case may be, shall thereupon be released from all future liabilities and obligations of Landlord under this Agreement with respect to such of the Leased Property arising or accruing from and after the date of such conveyance or other transfer and all such future liabilities and obligations shall thereupon be binding upon the new owner.

23.8        Quiet Enjoyment.  Tenant shall peaceably and quietly have, hold and enjoy the Leased Property for the Term, free of hindrance or molestation by Landlord or anyone claiming by, through or under Landlord, but subject to (a) any Encumbrance permitted under Article 20 or otherwise permitted to be created by Landlord hereunder, (b) all Permitted Encumbrances, (c) liens as to obligations of Landlord that are either not yet due or which are being contested in good faith and by proper proceedings, provided the same do not materially interfere with Tenant’s ability to operate any Facility and (d) liens that have been consented to in writing by Tenant.  Except as otherwise provided in this Agreement, no failure by Landlord to comply with the foregoing covenant shall give Tenant any right to cancel or terminate this Agreement or abate, reduce or make a deduction from or offset against the Rent or any other sum payable under this Agreement, or to fail to perform any other obligation of Tenant hereunder.

23.9        No Recordation.  Neither Landlord nor Tenant shall record this Agreement.

23.10      Notices.

(a)           Any and all notices, demands, consents, approvals, offers, elections and other communications required or permitted under this Agreement shall be deemed adequately given if in

60

writing and the same shall be delivered either in hand, by telecopier with written acknowledgment of receipt, or by mail or Federal Express or similar expedited commercial carrier, addressed to the recipient of the notice, postpaid and registered or certified with return receipt requested (if by mail), or with all freight charges prepaid (if by Federal Express or similar carrier).

(b)           All notices required or permitted to be sent hereunder shall be deemed to have been given for all purposes of this Agreement upon the date of acknowledged receipt, in the case of a notice by telecopier, and, in all other cases, upon the date of receipt or refusal, except that whenever under this Agreement a notice is either received on a day which is not a Business Day or is required to be delivered on or before a specific day which is not a Business Day, the day of receipt or required delivery shall automatically be extended to the next Business Day.

(c)           All such notices shall be addressed,

if to Landlord:

c/o Senior Housing Properties Trust

400 Centre Street

Newton, Massachusetts  02458

Attn:  Mr. David J. Hegarty

[Telecopier No. (617) 796-8349]

if to Tenant to:

c/o Five Star Quality Care, Inc.

400 Centre Street

Newton, Massachusetts  02458

Attn:  Evrett W. Benton

[Telecopier No. (617) 796-8385]

(d)           By notice given as herein provided, the parties hereto and their respective successors and assigns shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses effective upon receipt by the other parties of such notice and each shall have the right to specify as its address any other address within the United States of America.

23.11      Construction.  Anything contained in this Agreement to the contrary notwithstanding, all claims against, and liabilities of, Tenant or Landlord arising prior to any date of termination or expiration of this Agreement with respect to the Leased Property shall survive such termination or expiration.  In no event shall Landlord be liable for any consequential damages suffered by Tenant as the result of a breach of this Agreement by Landlord.  Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated except by an instrument in writing signed by the party to be charged.

61

All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Each term or provision of this Agreement to be performed by Tenant shall be construed as an independent covenant and condition.  Time is of the essence with respect to the provisions of this Agreement.  Except as otherwise set forth in this Agreement, any obligations of Tenant (including without limitation, any monetary, repair and indemnification obligations) and Landlord shall survive the expiration or sooner termination of this Agreement.  Whenever it is provided in this Agreement that Tenant shall direct any Manager to take any action, Tenant shall not be deemed to have satisfied such obligation unless Tenant shall have exhausted all applicable rights and remedies of Tenant as “Owner” under such Manager’s Management Agreement.

23.12      Counterparts; Headings.  This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but which, when taken together, shall constitute but one instrument and shall become effective as of the date hereof when copies hereof, which, when taken together, bear the signatures of each of the parties hereto shall have been signed.  Headings in this Agreement are for purposes of reference only and shall not limit or affect the meaning of the provisions hereof.

23.13      Applicable Law, Etc.  This Agreement shall be interpreted, construed, applied and enforced in accordance with the laws of The Commonwealth of Massachusetts applicable to contracts between residents of Massachusetts which are to be performed entirely within Massachusetts, regardless of (i) where this Agreement is executed or delivered; or (ii) where any payment or other performance required by this Agreement is made or required to be made; or (iii) where any breach of any provision of this Agreement occurs, or any cause of action otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, citizenship, domicile, principal place of business, or jurisdiction of organization or domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise would apply the laws of a jurisdiction other than Massachusetts; or (vii) any combination of the foregoing.  Notwithstanding the foregoing, the laws of the State shall apply to the perfection and priority of liens upon and the disposition of any Property.

23.14      Right to Make Agreement.  Each party warrants, with respect to itself, that neither the execution of this Agreement, nor the consummation of any transaction contemplated hereby, shall violate any provision of any law, or any judgment, writ, injunction, order or decree of any court or governmental authority having jurisdiction over it; nor result in or constitute a breach or default under any indenture, contract, other commitment or restriction to which it is a party or by which it is bound; nor require any consent, vote or approval which has not been given or taken, or at the time of the transaction involved shall not have been given or taken.  Each party covenants that it has and will continue to have throughout the term of

62

this Agreement and any extensions thereof, the full right to enter into this Agreement and perform its obligations hereunder.

23.15      Attorneys’ Fees.  If any lawsuit or arbitration or other legal proceeding arises in connection with the interpretation or enforcement of this Agreement, the prevailing party therein shall be entitled to receive from the other party the prevailing party’s costs and expenses, including reasonable attorneys’ fees incurred in connection therewith, in preparation therefor and on appeal therefrom, which amounts shall be included in any judgment therein.

23.16      Property Specific Representations and Warranties.  Tenant represents and warrants to Landlord that, with respect to the Property located in Overland Park, Kansas, as of October 25, 2002, and, with respect to the Property located in Ellicott City, Maryland, as of the date hereof:

(a)           All (if any) leases, subleases, licenses, concessions, and similar agreements granting an interest to any other person or entity for the use and occupancy of any portion of the such Property, and all (if any) agreements in place whereby residents are in occupancy at such Property, are legal, valid, binding, enforceable and in full force and effect, and to the best of Tenant’s knowledge, no party is in breach or default, and no event has occurred which with notice or lapse of time, or both, would constitute a breach of default, or permit termination, modification, or acceleration under such agreements, and no party has repudiated any provision of such agreements;

(b)           Tenant has not received written notice of any pending or threatened condemnation actions with respect to such Property or any part thereof;

(c)           There are no actions, suits or proceedings pending against such Property in any court of law, or in equity or before any court, administrative agency, commission or other public governmental authority;

(d)           To Tenant’s knowledge, each Property is duly licensed and currently complies with licensing under applicable state and local laws to operate such Property in the manner that it is presently being operated, and Tenant has not received any notices of violations of any laws or regulations, other than those violations of law, rules, regulations, ordinances, orders or requirements noted in or issued by any Federal, state, county, municipal or other department or governmental agency having jurisdiction against or affecting either Property whenever noted or issued;

(e)           To Tenant’s knowledge, Tenant has not violated any requirements of law currently applicable to either Property or any part thereof with respect to:  (i) the installation, existence or removal of or exposure to asbestos or asbestos-containing

63

materials; (ii) the existence, discharge or removal of or exposure to hazardous materials; (iii) air emissions, water discharges, noise emissions and any other environmental, health or safety matter; and (iv) effects on the environment of such Property or any part thereof or of any activity heretofore, now or hereafter conducted on such Property (collectively, the “Relevant Environmental Laws”);

(f)            Tenant has not received any notice of any claim or citation of noncompliance with respect to any violation of Relevant Environmental Laws and, to Tenant’s knowledge, there are no facts, circumstances, conditions or occurrences on either Property that could reasonably be expected to result in the violation of any such Relevant Environmental Laws or cause such Property to be subject to any restrictions on the existing or contemplated development, use or transferability thereof under any Relevant Environmental Laws.

(g)           To Tenant’s knowledge, each Property and the uses thereof comply in all material respects with all applicable building and zoning ordinances and codes;

(h)           No governmental authority having jurisdiction over either Property has issued any citations with respect to any material deficiencies or other matters that fail to conform to applicable statutes, regulations or ordinances that have not been corrected as of the date hereof; Tenant has not received written or oral notice from any agency supervising or having authority over either Property requiring such Property or any service, staff, or practice provided at such Property to be modified, restricted or conditioned as to service or eligibility or be reworked or redesigned or additional furniture, fixtures, equipment or inventory to be provided at such Property so as to conform or comply with any existing in any applicable law, code or standard; and

(i)            There has been no material adverse change with respect to the physical condition of the Overland Park Property or the operations at the Overland Park Property since April 1, 2002 and there has been no material adverse change with respect to the physical condition of the Ellicott City Property or the operations at the Ellicott City Property since November 2, 2002.

23.17      Nonliability of Trustees.  THE DECLARATIONS OF TRUST ESTABLISHING CERTAIN ENTITIES COMPRISING LANDLORD, COPIES OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (COLLECTIVELY, THE “DECLARATIONS”), ARE DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDE THAT THE NAMES OF SUCH ENTITIES REFER TO THE TRUSTEES UNDER SUCH DECLARATIONS COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SUCH ENTITIES SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, SUCH ENTITIES.  ALL PERSONS DEALING WITH SUCH

64

ENTITIES, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF SUCH ENTITIES FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

[Remainder of page intentionally left blank.]

65

IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed instrument as of the date above first written.

LANDLORD:
ELLICOTT CITY LAND I LLC
By:	/s/ John R. Hoadley
	John R. Hoadley
	Treasurer
ELLICOTT CITY LAND II LLC
By:	/s/ John R. Hoadley
	John R. Hoadley
	Treasurer
HRES2 PROPERTIES TRUST
By:	/s/ John R. Hoadley
	John R. Hoadley
	Treasurer
SNH CHS PROPERTIES TRUST
By:	/s/ John R. Hoadley
	John R. Hoadley
	Treasurer
SPTIHS PROPERTIES TRUST
By:	/s/ John R. Hoadley
	John R. Hoadley
	Treasurer
SPT-MICHIGAN TRUST
By:	/s/ John R. Hoadley
	John R. Hoadley
	Treasurer
SPTMNR PROPERTIES TRUST
By:	/s/ John R. Hoadley
	John R. Hoadley
	Treasurer

66

TENANT:
FIVE STAR QUALITY CARE TRUST
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer

67

EXHIBIT A-1 through A-67

Land

[See attached copies.]

OMITTED EXHIBITS

The following exhibits to the Amended Master Lease Agreement have been omitted:

Exhibits	Exhibit Title
A-1 through A-67	Land

The Registrant agrees to furnish supplementally a copy of the foregoing omitted exhibits to the Securities and Exchange Commission upon request.

68

EX-10.29

Exhibit 10.30

SECOND AMENDMENT TO AMENDED MASTER LEASE AGREEMENT

                THIS SECOND AMENDMENT TO AMENDED MASTER LEASE AGREEMENT (this “Amendment”) is made and entered into as of March 1, 2004 by and among (i) each of the parties identified on the signature page hereof as landlord (collectively, “Landlord”), and (ii) FS TENANT HOLDING COMPANY TRUST, a Maryland business trust, and FS TENANT POOL III TRUST, a Maryland business trust, as tenant (collectively, “Tenant”).

W I T N E S S E T H:

WHEREAS, pursuant to that certain Amended Master Lease, dated as of January 11, 2002, as amended by that certain First Amendment to Amended Master Lease Agreement dated as of October 1, 2002 (as so amended, the “Lease”), between Landlord and Tenant, Landlord leased to Tenant and Tenant leased from Landlord the Leased Property (as defined therein) subject to and upon the terms and conditions set forth in the Lease; and

WHEREAS, Landlord and Tenant now wish to amend the Lease subject to and upon the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree that the Lease is hereby amended as follows:

1.             Base Net Patient Revenues.  The definition of “Base Net Patient Revenues” set forth in Article 1 of the Lease is hereby deleted in its entirety and replaced with the following:

“Base Net Patient Revenues”  shall mean the amount of Net Patient Revenues for the Leased Property for the Base Year in the event the Base Year consists of 52 weeks, or, in the event the Base Year consists of 53 weeks, (x) Base Net Patient Revenues for the Leased Property for the Base Year, (y) divided by 53 and then (z) multiplied by 52; provided, however, that in the event that, with respect to any Lease Year, or portion thereof, for any reason (including, without limitation, a casualty or Condemnation) there shall be a reduction in the number of units available at any Facility located at the Leased Property or in the

1

services provided at such Facility from the number of such units or the services provided during the Base Year, in determining Additional Rent payable with respect to such Property for such Lease Year, Base Net Patient Revenues shall be reduced as follows:  (a) in the event of the termination of this Agreement with respect to any Property pursuant to Article 10, 11 or 12, all Net Patient Revenues for such Property for the period during the Base Year equivalent to the period after the termination of this Agreement with respect to such Property shall be subtracted from Base Net Patient Revenues; (b) in the event of a partial closing of any Facility affecting the number of units, or the services provided, at such Facility, Net Patient Revenues attributable to units or services at such Facility shall be ratably allocated among all units in service at such Facility during the Base Year and all such Net Patient Revenues attributable to units no longer in service shall be subtracted from Base Net Patient Revenues throughout the period of such closing; and (c) in the event of any other change in circumstances affecting any Facility, Base Net Patient Revenues shall be equitably adjusted in such manner as Landlord and Tenant shall reasonably agree.

2.             Base Year.  The definition of “Base Year” set forth in Article 1 of the Lease is hereby deleted in its entirety and replaced with the following:

“Base Year” shall mean the 2005 Fiscal Year.

3.             Excess Patient Revenues.  The definition of “Excess Patient Revenues” set forth in Article 1 of the Lease is hereby deleted in its entirety and replaced with the following:

“Excess Net Patient Revenues”  shall mean, with respect to any Lease Year, or portion thereof, the amount of Net Patient Revenues for such Lease Year, or portion thereof, in excess of Base Net Patient Revenues for the equivalent period during the Base Year.

4.             Minimum Rent.  The definition of “Minimum Rent” set forth in Article 1 of the Lease is hereby deleted in its entirety and replaced with the following:

2

“Minimum Rent” shall mean Sixty-Three Million Six Hundred Seventy-Four Thousand Three Hundred Forty-Seven and 26/100s Dollars ($63,674,347.26) per annum.

5.             Net Patient Revenues.  The definition of “Net Patient Revenues” set forth in Article 1 of the Lease is hereby deleted in its entirety and replaced with the following:

“Net Patient Revenues”  shall mean, for each Fiscal Year during the Term, all revenues and receipts (determined on an accrual basis and in all material respects in accordance with GAAP) of every kind derived from renting, using and/or operating the Leased Property and parts thereof, including, but not limited to:  all patient, client or resident rents and revenues received or receivable for the use of otherwise by reason of all units, beds and other facilities provided, meals served, services performed, space or facilities subleased or goods sold on the Leased Property, or any portion thereof, including, without limitation, any other arrangements with third parties relating to the possession or use of any portion of the Leased Property; and proceeds, if any, from business interruption or other loss of income insurance; provided, however, that Net Patient Revenues shall not include the following:  revenue from professional fees or charges by physicians and unaffiliated providers of services, when and to the extent such charges are paid over to such physicians and unaffiliated providers of services, or are separately billed and not included in comprehensive fees; contractual allowances (relating to any period during the Term) for billings not paid by or received from the appropriate governmental agencies or third party providers; allowances according to GAAP for uncollectible accounts, including credit card accounts and charity care or other administrative discounts; all proper patient billing credits and adjustments according to GAAP relating to health care accounting; provider discounts for hospital or other medical facility utilization contracts and credit card discounts; any amounts actually paid by Tenant for the cost of any federal, state or local governmental programs imposed specially to provide or finance indigent patient care; federal, state or municipal excise, sales, use, occupancy or similar taxes collected directly from patients, clients or residents or included as part of the sales price of any goods or

3

services; insurance proceeds (other than proceeds from business interruption or other loss of income insurance); Award proceeds (other than for a temporary Condemnation); revenues attributable to services actually provided off-site or otherwise away from the Leased Property, such as home health care, to persons that are not patients, clients or residents at the Leased Property; revenues attributable to child care services provided primarily to employees of the Leased Property; any proceeds from any sale of the Leased Property or from the refinancing of any debt encumbering the Leased Property; proceeds from the disposition of furnishings, fixture and equipment no longer necessary for the operation of the Facility located thereon; any security deposits and other advance deposits, until and unless the same are forfeited to Tenant or applied for the purpose for which they were collected; and interest income from any bank account or investment of Tenant.

6.             Additional Rent.  The first sentence of Section 3.1.2(a) of the Lease is hereby deleted in its entirety and replaced with the following:

Tenant shall pay additional rent “Additional Rent” with respect to each Lease Year during the Term subsequent to the Base Year in an amount, not less than zero, equal to four percent (4%) of Excess Net Patient Revenues at the Leased Property.

7.             Security Agreement.  Subtenant hereby confirms that all references to the “Master Lease” in that certain Security Agreement, dated as of January 7, 2002, made by Subtenant in favor of Landlord shall refer to the Lease as amended by this Amendment.

8.             Stock Pledge Agreement.  FS Tenant Holding Company Trust hereby confirms that all references to the “Master Lease” in that certain Pledge of Shares of Beneficial Interest Agreement, dated as of January 7, 2002, made by FS Tenant Holding Company Trust in favor of Landlord shall refer to the Lease as amended by this Amendment.

4

9.             As amended hereby, the Lease is hereby ratified and confirmed.

[Signatures on following pages]

5

IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the day and year first above written.

LANDLORD:

CCC FINANCING I TRUST,

a Maryland business trust

CCC FINANCING LIMITED, L.P.,

a Delaware limited partnership

CCC INVESTMENTS I, L.L.C.,

a Delaware limited liability company

CCC OF KENTUCKY TRUST,

a Maryland business trust

CCC OHIO HEALTHCARE TRUST,

a Maryland business trust

CCC PUEBLO NORTE TRUST,

a Maryland business trust

CCC RETIREMENT COMMUNITIES II, L.P.,

a Delaware partnership

CCCP SENIOR LIVING LLC,

a Delaware limited liability company

CCDE SENIOR LIVING LLC,

a Delaware limited liability company

CCFL SENIOR LIVING LLC,

a Delaware limited liability company

CCOP SENIOR LIVING LLC,

a Delaware limited liability company

CCSL SENIOR LIVING LLC,

a Delaware limited liability company

6

LEISURE PARK VENTURE LIMITED PARTNERSHIP,
a Delaware limited partnership
LTJ SENIOR COMMUNITIES LLC,
a Delaware limited liability company
PANTHER HOLDINGS LEVEL I, L.P.,
a Delaware limited partnership
By:	PANTHER GENPAR TRUST, its General Partner
By:	/s/ John R. Hoadley
	John R. Hoadley
	Treasurer of each of the foregoing entities
TENANT:
FS TENANT HOLDING COMPANY TRUST,
a Maryland business trust
FS TENANT POOL III TRUST,
a Maryland business trust
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer of each of the foregoing entities

7

ACKNOWLEDGMENTS AND CONSENTS

                The undersigned subtenants under the Lease hereby join in the execution and delivery of this Amendment for the limited purpose of acknowledging their consent to the execution and delivery of this Amendment.

	FS TENANT POOL I TRUST,
	a Maryland business trust
	FS TENANT POOL II TRUST,
	a Maryland business trust
	FS TENANT POOL III TRUST,
	a Maryland business trust
	FS TENANT POOL IV TRUST,
	a Maryland business trust
	FS LAFAYETTE TENANT TRUST,
	a Maryland business trust
	FS LEISURE PARK TENANT TRUST,
	a Maryland business trust
	FS LEXINGTON TENANT TRUST,
	a Maryland business trust
	By:	/s/ Bruce J. Mackey Jr.
		Bruce J. Mackey Jr.
		Treasurer of each of the foregoing entities
FSQ, Inc. hereby joins in the execution and delivery of this Amendment for the limited purposes of (i) acknowledging its consent to the execution and delivery of this Amendment and (ii) confirming that all references to the “Master Lease” in that certain Pledge of Shares of Beneficial Interest Agreement, dated as of January 11, 2002, made by FSQ, Inc. in favor of Landlord shall refer to the Lease as amended by this Amendment.
	FSQ, INC., a Maryland corporation
	By:	/s/ Bruce J. Mackey Jr.
		Bruce J. Mackey Jr.
		Treasurer

8

                Five Star hereby joins in the execution and delivery of this Amendment for the limited purposes of (i) acknowledging its consent to the execution and delivery of this Amendment and (ii) confirming that all references to the “Master Lease” in that certain Guaranty Agreement, dated as of January 11, 2002, made by Five Star in favor of Landlord shall refer to the Lease as amended by this Amendment.

FIVE STAR QUALITY CARE, INC.,
a Maryland corporation
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer

9

EX-12.1

Exhibit 12.1

Senior Housing Properties Trust
Computation of Ratio of Earnings to Fixed Charges
(dollars in thousands)

	Year Ended December 31,
	2003			2002			2001			2000			1999
Earnings:
Net income	$	45,874		$	50,184		$	17,018		$	58,437		$	14,834
Fixed charges	37,899			30,210			7,334			15,366			18,768
Adjusted earnings	$	83,773		$	80,394		$	24,352		$	73,803		$	33,602
Fixed charges:
Interest expense	$	35,088		$	27,399		$	5,879		$	15,366		$	18,768
Distributions on trust preferred securities	2,811			2,811			1,455			—			—
Total fixed charges	$	37,899		$	30,210		$	7,334		$	15,366		$	18,768
Ratio of earnings to fixed charges	2.2		x	2.7		x	3.3		x	4.8		x	1.8		x

EX-21.1

Exhibit 21.1

SENIOR HOUSING PROPERTIES TRUST
SUBSIDIARIES OF THE REGISTRANT

Name	State of Formation
CCC Alpha Investments Trust	Maryland
CCC Delaware Trust	Maryland
CCC Financing I Trust	Maryland
CCC Financing Limited, L.P.	Delaware
CCC Investments I, L.L.C.	Delaware
CCC Leisure Park Corporation	Delaware
CCC of Kentucky Trust	Maryland
CCC Ohio Healthcare Trust	Maryland
CCC Pueblo Norte Trust	Maryland
CCC Retirement Communities II, L.P.	Delaware
CCC Retirement Partners Trust	Maryland
CCC Retirement Trust	Maryland
CCC Senior Living Corporation	Delaware
CCCP Senior Living LLC	Delaware
CCDE Senior Living LLC	Delaware
CCFL Senior Living LLC	Delaware
CCOP Senior Living LLC	Delaware
CCSL Senior Living LLC	Delaware
Crestline Ventures LLC	Delaware
CSL Group, Inc.	Indiana
Ellicott City Land I, LLC	Delaware
Ellicott City Land II, LLC	Delaware
HRES1 Properties Trust	Maryland
HRES2 Properties Trust	Maryland
Leisure Park Venture Limited Partnership	Delaware
LTJ Senior Communities LLC	Delaware
Panther GenPar Trust	Maryland
Panther Holdings Level I L.P.	Delaware
SHOPCO-SD, LLC	Delaware
SNH ALT Leased Properties Trust	Maryland
SNH ALT Mortgaged Properties Trust	Maryland
SNH Capital Trust Holdings	Maryland
SNH Capital Trust I	Maryland
SNH Capital Trust II	Maryland
SNH Capital Trust III	Maryland
SNH/CSL Properties Trust	Maryland
SNH CHS Properties Trust	Maryland
SNH NS Properties Trust	Maryland
SNH NS Mtg Properties 1 Trust	Maryland
SNH NS Mtg Properties 2 Trust	Maryland
SNH NS Mtg Properties 3 Trust	Maryland
SNH NS Mtg Properties 4 Trust	Maryland
SNH TRS, Inc.	Delaware
SNHST.JOE, LLC	Delaware
SPTBROOK Properties Trust	Maryland
SPTGEN Properties Trust	Maryland
SPTIHS Properties Trust	Maryland
SPT-Michigan Trust	Maryland
SPTMISC Properties Trust	Maryland

SPTMNR Properties Trust	Maryland
SPTMRT Properties Trust	Maryland
SPTSUN II Properties Trust	Maryland
SPTSUN Properties Trust	Maryland
2932 North 14 Corp.	Massachusetts

EX-23.2

Exhibit 23.2

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statements (Forms S-3 No. 333-76588 and No. 333-109659) of Senior Housing Properties Trust and in the related Prospectuses of our report dated February 6, 2004, except for Note 14, as to which date is March 1, 2004, with respect to the consolidated financial statements and schedule of Senior Housing Properties Trust included in this Annual Report (Form 10-K) for the year ended December 31, 2003.

	/s/ Ernst & Young LLP
Boston, Massachusetts
March 11, 2004

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Barry M. Portnoy, certify that:

1.I have reviewed this Annual Report on Form 10-K of Senior Housing Properties Trust;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:March 12, 2004	/s/ Barry M. Portnoy
	Barry M. Portnoy
	Managing Trustee

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Gerard M. Martin, certify that:

1.I have reviewed this Annual Report on Form 10-K of Senior Housing Properties Trust;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:March 12, 2004	/s/ Gerard M. Martin
	Gerard M. Martin
	Managing Trustee

EX-31.3

Exhibit 31.3

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David J. Hegarty, certify that:

1.I have reviewed this Annual Report on Form 10-K of Senior Housing Properties Trust;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:March 12, 2004	/s/ David J. Hegarty
	David J. Hegarty
	President and Chief Operating Officer

EX-31.4

Exhibit 31.4

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John R. Hoadley, certify that:

1.             I have reviewed this Annual Report on Form 10-K of Senior Housing Properties Trust;

2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.             The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)    Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.             The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:       March 12, 2004	/s/ John R. Hoadley
	John R. Hoadley
	Treasurer and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C. Sec. 1350
(Section 906 of the Sarbanes – Oxley Act of 2002)

In connection with the filing by Senior Housing Properties Trust (the “Company”) of the Annual Report on Form 10-K for the period ending December 31, 2003 (the “Report”), each of the undersigned hereby certifies, to the best of his knowledge:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.  And

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Barry M. Portnoy	/s/ David J. Hegarty
Barry M. Portnoy	David J. Hegarty
Managing Trustee	President and Chief Operating Officer
/s/ Gerard M. Martin	/s/ John R. Hoadley
Gerard M. Martin	John R. Hoadley
Managing Trustee	Treasurer and Chief Financial Officer