10-K 1 a05-2043_110k.htm 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 2004

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

Commission File Number 1-15319

SENIOR HOUSING PROPERTIES TRUST

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 $901.0 million based on the $16.79 closing price per common share on the New York Stock Exchange on June 30, 2004. For purposes of this calculation, 9,660,738 common shares of beneficial interest, $0.01 par value, held by HRPT Properties Trust and an aggregate of 165,649 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 3, 2005: 68,495,908.

In this Annual Report on Form 10-K, the terms “SNH”, “Senior Housing”, “the Company”, “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 to be held on May 10, 2005, or our definitive Proxy Statement.

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 REPRESENT OUR PRESENT BELIEFS AND EXPECTATIONS, BUT THEY MAY NOT OCCUR FOR VARIOUS REASONS. FOR EXAMPLE:

• WE BELIEVE THAT FIVE STAR QUALITY CARE, INC., OR FIVE STAR, HAS ADEQUATE FINANCIAL RESOURCES AND LIQUIDITY TO MEET ITS OBLIGATIONS TO US. HOWEVER, FIVE STAR MAY EXPERIENCE FINANCIAL OR OTHER DIFFICULTIES AS A RESULT OF A NUMBER OF THINGS, INCLUDING, BUT NOT LIMITED TO:

• INCREASES IN INSURANCE AND TORT LIABILITY COSTS;

• INEFFECTIVE INTEGRATION OF NEW ACQUISITIONS;

• EXTENSIVE REGULATION OF THE HEALTH CARE INDUSTRY;

• SUNRISE SENIOR LIVING, INC.’S INABILITY TO PROFITABLY OPERATE THE 30 COMMUNITIES MANAGED FOR FIVE STAR’S ACCOUNT; AND

• CHANGES IN MEDICARE AND MEDICAID PAYMENTS WHICH COULD RESULT IN A REDUCTION OF RATES OR A FAILURE OF THESE RATES TO MATCH FIVE STAR’S COST INCREASES.

IF FIVE STAR’S OPERATIONS BECOME CONSISTENTLY UNPROFITABLE, IT COULD ADVERSELY AFFECT FIVE STAR’S ABILITY TO PAY OUR RENTS.

• WE ARE CURRENTLY INVOLVED IN LITIGATION WITH HEALTHSOUTH CORPORATION, OR HEALTHSOUTH. WE HAVE SENT HEALTHSOUTH A LEASE TERMINATION NOTICE AND HEALTHSOUTH HAS DISPUTED THE LEASE TERMINATION AND CONTINUED TO PAY US MONTHLY AMOUNTS EQUAL TO THE DISPUTED AMOUNTS DUE UNDER THE TERMINATED LEASE. WE CANNOT PREDICT HOW OR WHEN OUR DISPUTES WITH HEALTHSOUTH WILL BE RESOLVED. DISCOVERY DURING LAWSUITS OR DECISIONS BY COURTS MAY CREATE RESULTS THAT ARE DIFFERENT FROM ANY IMPLICATIONS HEREIN.

YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.

EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW, WE DO NOT INTEND TO IMPLY THAT WE WILL RELEASE PUBLICLY THE RESULT OF ANY REVISION TO THE FORWARD LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT TO REFLECT THE FUTURE OCCURRENCE OF PRESENTLY UNANTICIPATED EVENTS.

STATEMENT CONCERNING LIMITED LIABILITY

THE ARTICLES OF AMENDMENT AND RESTATEMENT ESTABLISHING SENIOR HOUSING PROPERTIES TRUST, DATED SEPTEMBER 20, 1999, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS THERETO, IS 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, JOINTLY OR SEVERALLY, 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
2004 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 Shares, Related Shareholder Matters and Issuer Purchases of Securities
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
Item 9B.	Other Information

	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 Shareholder Matters
Item 13.	Certain Relationships and Related Transactions
Item 14.	Principal Accountant Fees and Services

	Part IV

Item 15.	Exhibits and Financial Statement Schedules

	Signatures

* Incorporated by reference from our Proxy Statement to be filed pursuant to Regulation 14A for the Annual Meeting of Shareholders to be held on May 10, 2005.

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, 2004, we owned 181 properties located in 32 states. On that date, the undepreciated carrying value of our properties, net of impairment losses, was $1.6 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 demand for existing senior apartments, independent living properties, assisted living properties and nursing homes and encourage development of new properties. Our business plan is to profit from this demand by purchasing additional properties and leasing them at initial rents that are greater than our costs of capital and by structuring leases that provide for periodic rental increases.

Our present business plan contemplates investments in age restricted apartment buildings, independent living properties, assisted living properties and nursing homes. Some properties combine more than one type of service in a single building or campus. 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 care 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 included in the base charge. 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 Properties. Assisted living properties are typically comprised of one bedroom units 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 rooms with a separate bathroom in each room and shared dining and bathing facilities. Some private rooms are often available for those residents who can afford to pay higher rates or for residents whose medical conditions require segregation. Nursing homes are 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 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 may again explore such alternative investments.

Tenants.

Each of our properties is included in one of 12 separate leases. The following chart presents a summary of these leases as of December 31, 2004 (dollars in thousands). This summary should be read in conjunction with the more detailed description of our leases set forth below.

Tenant	Number of Properties (units/beds)		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 (7,307	)	$		626,761	$	581,200	$	63,993	12/31/17	1 for 10 years. 1 for 5 years.
Five Star Quality Care, Inc.	98 (7,731	)	407,304			362,589		31,841		12/31/20	1 for 15 years.
Sunrise Senior Living, Inc. /Marriott International, Inc.(2)	14 (4,091	)	325,473			248,561		31,197		12/31/13	4 for 5 years each.
NewSeasons Assisted Living Communities, Inc./Independence Blue Cross(3)	10 (1,019	)	87,641			85,585		9,287		4/30/17	2 for 15 years each.
HealthSouth Corporation(4)	2 (364	)	43,553			34,549		8,700		12/31/11	2 for 10 years each.
Alterra Healthcare Corporation	18 (894	)	61,126			58,180		7,136		12/31/17	2 for 15 years each.
Genesis HealthCare Corporation	1 (156	)	13,007			10,299		1,522		12/31/06	2 for 10 years each. 1 for 5 years.
ABE Briarwood Corp. (formerly Integrated Health Services, Inc.)	1 (140	)	15,598			6,468		1,244		12/31/10	3 for 10 years each.
HealthQuest, Inc.	3 (361	)	7,589			5,099		1,075		1/31/13	2 for 10 years each.
Covenant Care, Inc.	1 (180	)	3,503			2,401		984		9/30/15	1 for 15 years.
Evergreen Washington Healthcare, LLC	1 (103	)	5,193			3,488		961		12/31/15	1 for 10 years.
The MacIntosh Company	1 (200	)	4,204			3,301		700		6/30/19	1 for 10 years.
	181 (22,546	)	$	1,600,952		$	1,401,720	$	158,640

(1)These properties are leased to Five Star Quality Care, Inc., or Five Star. Senior living operations at one of these properties (111 living units) have been terminated by mutual agreement of us, Five Star and Sunrise Senior Living, Inc., or Sunrise. We and Five Star are currently considering the future use or disposition of this property while Five Star continues to pay all rent due for the property. The remaining 30 properties are managed for Five Star by Sunrise.

(2)These properties are leased to Sunrise; this lease is guaranteed by Marriott International, Inc., or Marriott.

(3)This lease is guaranteed by Independence Blue Cross, a Pennsylvania health insurance company.

(4)As discussed further in “Item 3. Legal Proceedings”, we terminated our lease with HealthSouth for these hospitals on October 26, 2004. The termination of the lease is one of the subjects of litigation between us and HealthSouth. The post-termination provisions of the lease require HealthSouth to manage the hospitals for our account for a management fee and remit the net cash flow to us. Since October 26, 2004, HealthSouth has continued to pay to us a disputed rent amount, which we have applied against the net cash flow due to us.

Sunrise Senior Living, Inc. Until 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 $31.2 million; and (ii) 31 properties leased to Five Star until 2017 for annual rent of $64.0 million. In March 2003, Marriott, sold MSLS to Sunrise, and MSLS changed its name to Sunrise Senior Living Services, Inc., or SLS. SLS is a 100% owned subsidiary of Sunrise. Marriott continues to guaranty the lease for the 14 properties. Neither Sunrise nor Marriott has guaranteed Five Star’s lease for the properties managed by SLS for Five Star.

The following table presents summary financial information reported by Marriott in its Annual Report on Form 10-K for its 2004 and 2003 fiscal years:

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

	As of or for the year ended
	December 31, 2004		January 2, 2004		January 3, 2003
Sales	$	10,099	$	9,014	$	8,415
Net income	596		502		277
Total assets	8,668		8,177		8,296
Long-term debt	836		1,391		1,553
Shareholders’ equity	4,081		3,838		3,573

At the time of this report, Sunrise has not filed its Annual Report on Form 10-K for the year ended December 31, 2004. Therefore, summary audited financial information regarding Sunrise is not now available. We expect to furnish such information by an amendment to this Annual Report on 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 $64.0 million. Additional rent to be paid to us is 4% of the increase in revenues at these properties beginning in 2006. As discussed above, 30 of 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 properties managed by SLS have declined from Marriott’s historical results and become more volatile. During some periods, the cash flows which Five Star has realized from the operations of these properties has been less than the rent which Five Star is contractually obligated to pay us. Five Star continues to work with SLS to improve the financial results of these operations, and we continue to monitor their discussions.

In March 2004, we combined two other leases that we had with Five Star. In November 2004, 11 properties were added to the combined lease, and we entered into two additional leases, on material terms substantially similar to the combined lease, covering 16 and 4 properties, respectively. These properties are secured by mortgages, and the leases provide that upon the repayment of the mortgaged debt, the properties will be added to the combined lease. For the purposes of this Annual Report on Form 10-K, we discuss these two leases as part of the combined lease. At December 31, 2004, this combined lease included 98 senior living properties consisting of 53 nursing homes and 45 independent and assisted living properties leased until 2020 for annual rent of $31.8 million. Additional rent to be paid to us is 4% of the increase in revenues at these properties beginning in 2007 for the 31 properties added to the combined lease in November 2004 and in 2006 for the remaining properties. These 98 properties are operated by Five Star.

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 been consistently profitable, although in its September 30, 2004 Quarterly Report on Form 10-Q, Five Star reported that it was profitable for the nine months ended September 30,

2004. We believe Five Star has adequate financial resources and liquidity to continue its business and to meet its obligations to us.

As of the time of this report, Five Star, which for 2004 was not an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, has not filed its Annual Report on Form 10-K. Therefore, summary audited financial information regarding Five Star is not now available. We expect to furnish such information by an amendment to this Annual Report on Form 10-K when it becomes available to us.

NewSeasons Assisted Living Communities, Inc. We lease 10 assisted living properties to NewSeasons Assisted Living Communities, Inc., or NewSeasons, until 2017, plus renewal options. The rent payable to us will average approximately $9.3 million per year during the initial lease term, although it is currently $8.0 million per year and will 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 $9.1 billion in 2003. IBC has guaranteed NewSeasons’ rent to us.

HealthSouth. We own two rehabilitation hospitals that we leased to HealthSouth for annual rent of $8.7 million. Since 2003, we have been in litigation with HealthSouth seeking, among other matters, to increase the rent payable to us. In October 2004, we terminated our lease with HealthSouth for default because HealthSouth failed to deliver to us accurate and timely financial information as required. HealthSouth has disputed our lease termination, but was denied a preliminary injunction to prevent termination. We are currently seeking an expedited judicial determination that the lease termination was valid and we are pursuing damages against HealthSouth in the lawsuit which we brought in 2003. We have also begun work to identify and qualify a new tenant operator for the hospitals. Our lease with HealthSouth requires that, after termination, HealthSouth manage the hospitals for our account for a management fee during the period of the transition to a new tenant and remit the net cash flow to us. During the pendency of these disputes, HealthSouth has continued to pay us at the disputed rent amount and we have applied the payments received against the net cash flow due, but we do not know how long HealthSouth may continue to make payments. 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 base rent payable to us under this lease is $7.0 million per year. Additional rent is based upon increases in the revenues at these properties. A majority of the revenues at these Alterra operated properties are paid by residents from their private resources. Alterra has guaranteed the rent payable to us. Alterra is a privately owned company. As of March 3, 2005, this tenant is current on its rent obligations to us.

Genesis HealthCare Corporation. We lease one nursing home to a subsidiary of Genesis HealthCare Corporation, or Genesis, for $1.5 million of annual rent until 2006, plus renewal options. Genesis has guaranteed the rent payable to us under this lease. We also hold a cash security deposit of $235,000 to secure payment of this rent. Genesis is a public company listed on the NASDAQ under the symbol “GHCI”. As of March 3, 2005, this tenant is current on its rent obligations to us.

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, until 2010, plus renewal options. The stock of subsidiaries of Integrated Health, which included our tenant, was acquired by ABE Briarwood Corp., a private company, in 2003. Our property is sub-leased to THI of Pennsylvania at Greenery of Canonsburg, LLC, a subsidiary of another private company, THI of Baltimore, Inc. Our lease is guaranteed by ABE Briarwood Corp., IHS Long Term Care, Inc. and THI of Baltimore, Inc. and secured by a cash security deposit of $600,000. As of March 3, 2005, 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, until 2013, plus a renewal option. The lease is guaranteed by the sole shareholder of HealthQuest, Inc. As of March 3, 2005, 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. until 2015, plus a renewal option. 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 3, 2005, 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. During 2004, this tenant exercised one of its renewal options, extending the lease until 2015, and has one renewal option remaining. 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 3, 2005, this tenant is current on its rent obligations to us.

The MacIntosh Company. We lease one skilled nursing facility in Grove City, Ohio to The MacIntosh Company, a privately owned company, until 2019 plus a renewal option. 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 3, 2005, this tenant is current on its rent obligations to us.

Lease Terms.

Our leases are so-called “triple net” leases which require the tenants 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 investment in that property.

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:

• the use and size of the property;

• 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;

• 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-venturers 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 may again explore such possibilities in the future.

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 2004 and 2003, we sold two nursing homes which had been leased to Five Star. One was sold to an unaffiliated party and one was sold to Five Star. 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 one additional nursing home to Five Star. We expect the sale of this property to occur during the first half of 2005, however, this sale is conditioned upon Five Star obtaining Department of Housing and Urban Development insured financing for its purchase. We are also considering with Five Star whether to sell one assisted living property which is leased to Five Star and was managed by Sunrise; with our consent, Five Star and Sunrise closed the facility because its historical operations were not economically viable.

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 which, among other things, restrict our ability to incur indebtedness and require us to maintain financial ratios and a 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 facility or to seek additional capital through equity offerings, debt financings, 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.

Manager.

Our day to day operations are conducted by Reit Management & Research LLC, or RMR. 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 manager to HRPT, a New York Stock Exchange, or NYSE, listed real estate company which owns office buildings and is the holder of 8,660,738 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; John C. Popeo, Vice President and Treasurer; and Adam D. Portnoy, Vice President. Messrs. Hegarty and Hoadley are also our officers. Other officers of RMR also serve as officers of other companies to which RMR provides management or other services, including Five Star and HRPT.

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 3, 2005, RMR had approximately 400 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 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.

Independent Living Communities. Government benefits generally are not available for services at independent living communities and the resident charges in these communities 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 communities. 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 communities and assisted living communities. Because independent living communities 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 communities are licensed by state or county health departments, social service agencies, or offices on aging with jurisdiction over group residential communities for seniors. To the extent that independent living communities include units in which assisted living or nursing services are provided, these units are subject to applicable state licensing regulations, and if the communities receive Medicaid or Medicare funds, to certification standards. In some states, insurance or consumer protection agencies regulate independent living communities in which residents pay entrance fees or prepay for services.

Assisted Living. According to the National Academy for State Health Policy, a majority of states provide or are approved to provide Medicaid payments for residents in some assisted living communities under waivers granted by the Federal Centers for Medicare and Medicaid Services, or CMS, or under Medicaid state plans, and certain other states are planning some Medicaid funding by preparing or requesting waivers to fund assisted living demonstration projects. Because rates paid to assisted living community operators are generally 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 communities are responsible for monitoring the services at, and physical conditions of, the participating communities. Different states apply different standards in these matters, but generally we believe these monitoring processes are similar to the concerned states’ inspection processes for nursing homes.

In light of the large number of states using Medicaid to purchase services at assisted living communities and the growth of assisted living in recent years, a majority of states have adopted licensing standards applicable to assisted living communities. A majority of states have licensing statutes or standards specifically using the term “assisted living” and have requirements for communities 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 communities. Most state licensing standards apply to assisted living communities whether or not they accept Medicaid funding. Also, according to the National Academy for State Health Policy, a few states require certificates of need from state health planning authorities before new assisted living communities may be developed. Based on our analysis of current economic and regulatory trends, we believe that assisted living communities 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 communities located in states that adopt certificate of need requirements or otherwise restrict the development of new assisted living communities may increase in value because these limitations upon development may help ensure higher occupancy and higher non-governmental rates.

The US. Department of Health and Human Services, the Government Accountability Office, and the Senate Special Committee on Aging have recently studied and reported on the development of assisted living and its role in the continuum of long-term care and as an alternative to nursing homes. In 2003, the Government Accountability Office recommended that CMS strengthen its oversight of state Medicaid waiver programs and state quality assurance programs. Also in 2003, a working group of assisted living providers, consumers, and regulatory organizations made recommendations to the Senate Special Committee on Aging on a range of subjects, including staffing, funding and regulation of assisted living. 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 communities 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 61% of all nursing home revenues in the U.S. in 2003 came from publicly funded programs, including about 46% from Medicaid programs and 12% 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 Medicare prospective payment system, or PPS, was phased in over three years beginning with cost reporting years starting on or after July 1, 1998. Under PPS, capital costs are part of the prospective rate and are not facility specific. PPS and other recent legislative and regulatory actions with respect to state Medicaid rates are limiting the reimbursement levels for some nursing home services. At the same time federal and state enforcement and oversight of nursing homes are increasing, making licensing and certification of these communities more rigorous. These actions have adversely affected the revenues and increased the expenses of many nursing home operators, including our tenants.

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 PPS, Medicare rates were facility specific and cost based. Under PPS, skilled nursing 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. 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 PPS. According to the Government Accountability Office, between fiscal year 1998 and fiscal year 1999, the first full year of the PPS phase in, the average Medicare payment per day declined by about 9%.

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% and allowed nursing facilities to transition more rapidly to the then new federal payment system. This Act also increased the new Medicare payment rates by 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 16.7%. This Act also increased annual inflation adjustments for fiscal year 2001, increased rehabilitation care group rates by 6.7%, maintained the previously temporary 20% increase in the other care group rates established in 1999 and extended the moratorium on some therapy reimbursement rate caps through 2002. However, as of October 1, 2002, the 4% across the board increase in Medicare payment rates and the 16.7% increase in the nursing component of the rates expired. Effective October 1, 2003, CMS increased the annual inflation update to skilled nursing facility rates by 3% per year, and added an additional 3.3% 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, currently anticipated to be effective October 1, 2005, for fiscal year 2006. Effective December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 set a new moratorium on implementation of some therapy reimbursement rate caps 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 revenue shortfalls, budget deficits and cost containment measures in numerous states, we expect Medicaid rate increases will be less than cost increases experienced by some of our tenants in 2005 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 undertaken an initiative to increase the effectiveness of Medicare and Medicaid nursing home survey and enforcement activities. CMS’ initiative follows a July 1998 Government Accountability Office investigation which found inadequate care in a significant proportion of California nursing homes and 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 Government Accountability Office issued reports in 1999, 2000, 2002, 2003 and 2004 which recommended that CMS and the states strengthen their compliance and enforcement practices, including federal oversight of state actions, 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 also 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

Medicare website at www.medicare.gov. CMS plans to post fire safety survey results and sprinkler status of nursing homes on the Medicare website in 2005. 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.

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 our tenants’ licenses or eligibility for Medicare or Medicaid reimbursement or the costs of required compliance with applicable federal or state regulations could adversely affect these tenants’ abilities to pay our rent.

Certificates Of Need. Most states limit the number of nursing homes by requiring developers to obtain certificates of need before new facilities may be built. Also, 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 and are being considered by some state governments, such as programs for national health insurance, the option of block grants for states rather than federal matching money for certain state Medicaid services, additional Medicare and Medicaid reforms and federal and state cost containment measures. In connection with recent fiscal pressures on state governments, legislation and regulation to reduce Medicaid nursing home payment rates in some states are possible in the future. We cannot predict whether any of these legislative or regulatory 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 at our properties. We reviewed environmental conditions 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 website address is www.snhreit.com. Copies of our governance guidelines, code of business conduct and 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 Centre Street, Newton, MA 02458 or at our website. We make available, free of charge, on our website, our annual reports 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 on 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 be found on 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. The American Jobs Creation Act of 2004 (the “2004 Act”), which President Bush signed into law in October of 2004, made a number of significant changes to these provisions, some of which have retroactive effect; we have summarized these changes in more detail below. Future legislative, judicial, or administrative actions or decisions could also 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

• 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 then applicable qualification tests, 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 of our dividends is 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 2004 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 continued 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.

• 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 and to the extent we invest in properties in foreign jurisdictions, our income from those properties will generally be subject to tax in those jurisdictions. If we continue to operate as we do, then we will distribute our taxable income to our shareholders each year and we will generally not pay federal income tax. As a result, we cannot recover the cost of foreign income taxes imposed on our foreign investments 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 potentially eligible for the 15% income tax rate discussed below in “Taxation of U.S. Shareholders” 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. For our 2005 taxable year and beyond, the 2004 Act provides certain relief provision under which we might avoid automatically ceasing to be a REIT for failure to meet certain REIT requirements, all as discussed in more detail below.

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;

(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, 2004, 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.

The 2004 Act provides that, for our 2005 taxable year and beyond, we will not automatically fail to be a REIT if we do not meet conditions (1) through (6), provided we can establish reasonable cause for any such failure. Each such excused failure will result in the imposition of a $50,000 penalty instead of REIT disqualification. It is impossible to state whether in all circumstances we would be entitled to the benefit of this relief provision.

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 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 generally 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.

As of January 1, 2001, we acquired 100% ownership of several 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 our spin-off of Five Star and our associated 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, gains from the sale or disposition of stock, securities, or real property or, for our 2004 and earlier taxable years, certain payments under interest rate swap or cap agreements, options, futures contracts, forward rate agreements or similar financial instruments. The 95% income test has been modified for our taxable years beginning after 2004 so that gross income, except as may be provided in Treasury regulations, no longer includes income from a “hedging transaction” as defined under clauses (ii) and (iii) of Section 1221(b)(2)(A) of the Internal Revenue Code, but only to the extent that the transaction hedges indebtedness we incur to acquire or carry real estate assets. This modification to the 95% income test only applies to hedging transactions that are “clearly identified,” meaning that the transaction must be identified as a hedging transaction before the end of the day on which it is entered and the risks being hedged must be identified generally within 35 days after the date the transaction is entered.

For purposes of the 75% and 95% gross income tests outlined above, 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.

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.

We will be subject to tax at the maximum corporate rate (currently 35%) on any income from foreclosure property, other than income that otherwise would be qualifying income for purposes of the 75% gross income test, less expenses directly connected with the production of that income. However, gross income from foreclosure property will qualify under the 75% and 95% gross income tests.

Foreclosure property is any real property, including interests in real property and any personal property incident to the real property, acquired by us as the result of our having bid on the property at foreclosure, or having otherwise reduced the property to ownership or possession by agreement or process of law after actual or imminent default on a lease of the property or on indebtedness secured by the property.

Foreclosure property also includes any “qualified health care property” acquired by us as the result of the termination or expiration of a lease of the property, other than a termination by reason of a default or the imminence of a default. A “qualified health care property” means a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients and which is operated by a provider which is eligible for participation in the Medicare program under Title XVIII of the Social Security Act with respect to the facility or any real property or personal property necessary or incidental to the use of the facility.

Property will not be considered foreclosure property if we acquire the property as a result of indebtedness arising from the sale or other disposition of property held for sale to customers in the ordinary course of business, or if we enter into the lease or loan with the intent to foreclose on the property or in circumstances where we had reason to know a default would occur. The determination of prohibited intent or reason to know must be based on all relevant facts and circumstances, but we do not believe that any of our intended foreclosure property will be disqualified from that status on account of these prohibitions. For property to be treated as foreclosure property under the REIT taxation rules, we must affirmatively elect to treat the property as foreclosure property by attaching a proper statement to our federal income tax return for the year in which we acquire possession of the property.

Property generally ceases to be foreclosure property at the end of the third taxable year following the taxable year in which we acquire possession of the property, but an extension may be granted by the Secretary of the Treasury. The foreclosure property period terminates, and foreclosure property thus ceases to be so classified, on the first day: (i) on which we enter into a lease for the property that, by its terms, will give rise to income that does not qualify for purposes of the 75% gross income test, or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day that will give rise to income that does not qualify for purposes of the 75% gross income test; (ii) on which any construction takes place on the property, other than completion of a building or any other improvement where more than 10% of the construction was completed before default became imminent; or (iii) which is more than 90 days after the day on which we acquired possession of the property and the property is used in a trade or business conducted by us other than through an independent contractor from whom we do not derive or receive any income. However, in the case of a qualified health care property, we may operate the facility as foreclosure property after this initial 90 day period through an independent contractor from whom we have received, and will continue to receive, certain grandfathered rents.

Although there can be no assurance on these matters, we believe that property which we have elected to treat as foreclosure property will so qualify for the periods of time that we intend.

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.

For our 2004 and prior taxable years, if we failed to satisfy one or both of the 75% or 95% gross income tests, 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 for our 2004 taxable year 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 100% tax 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.

The 2004 Act has modified this relief provision for failures to satisfy either or both of the 75% or the 95% gross income tests in the case of failures for our 2005 taxable year or later. Specifically, if we fail to satisfy either or both of the gross income tests for a taxable year after 2004, we may nevertheless qualify as a REIT for that year if our failure to meet the test is due to reasonable cause and not due to willful neglect and, after we identify the failure, we file a schedule describing each item of our gross income included in the 75% or 95% gross income tests for that taxable year. It is impossible to state whether in all circumstances we would be entitled to the benefit of this revised relief provision for the 75% and 95% gross income tests. Even if this relief provision did apply, a 100% tax is imposed upon the greater of the amount by which we failed the 75% test or the 95% test, 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 the following 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 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 or otherwise excepted as discussed below.

• 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. In addition, for our 2005 taxable year and thereafter, the 2004 Act provides that if we fail the 5% value test or the 10% vote or value tests at the close of any quarter and do not cure such failure within 30 days after the close of that quarter, that failure will nevertheless be excused if (a) the failure is de minimis and (b) within 6 months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy the 5% value and 10% vote and value asset tests. For purposes of this relief provision, the failure will be “de minimis” if the value of the

assets causing the failure does not exceed the lesser of (a) 1% of the total value of our assets at the end of the relevant quarter or (b) $10,000,000. If our failure is not de minimis, we may nevertheless qualify as a REIT if (a) we provide the IRS with a description of each asset causing the failure, (b) the failure was due to reasonable cause and not willful neglect, (c) we pay a tax equal to the greater of (i) $50,000 or (ii) the highest rate of corporate tax imposed (currently 35%) on the net income generated by the assets causing the failure during the period of the failure, and (d) within 6 months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy the 5% value and 10% vote and value asset tests.

The 2004 Act clarifies and expands, on a retroactive basis so as to be effective for our 2001 taxable year forward, an excepted securities safe harbor to the 10% value test that includes among other items (a) “straight debt” securities, (b) certain rental agreements in which payment is to be made in subsequent years, (c) any obligation to pay rents from real property, (d) securities issued by governmental entities that are not dependent in whole or in part on the profits of or payments from a nongovernmental entity, and (e) any security issued by another REIT.

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 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 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 a present or former C corporation, and if we subsequently recognize gain on the disposition of that 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 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 the asset ceased to be owned by the C corporation, 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 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 have any undistributed C corporation earnings and profits at the end of any taxable year. 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 12 years. 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 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.

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.

The 2004 Act imposes a penalty, effective for federal tax returns with due dates after October 22, 2004, for the failure to properly disclose a “reportable transaction.” A reportable transaction currently includes, among other things, a sale or exchange of our shares resulting in a tax loss in excess of (i) $10 million in any single year or $20 million in any combination of years in the case of our shares held by a C corporation or by a partnership with only C corporation partners or (ii) $2 million in any single year or $4 million in any combination of years in the case of our shares held by any other partnership or an S corporation, trust or individual, including losses that flow through pass through entities to individuals. A taxpayer discloses a reportable transaction by filing IRS Form 8886 with its federal income tax return and, in the first year of filing, a copy of Form 8886 must be sent to the IRS’s Office of Tax Shelter Analysis. The penalty for failing to disclose a reportable transaction is generally $10,000 in the case of a natural person and $50,000 in any other case.

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 of 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.

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 this type will generally be subject to United States federal income tax and withholding at the rate of 30%, or at a 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.

Except as discussed below with respect to certain capital gains dividends in taxable years after 2004, 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 the non-U.S. shareholder may file for a refund from the IRS of any amount of withheld tax in excess of that tax liability. 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. 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.

Capital gain dividends that are received by a non-U.S. shareholder, including dividends attributable to our sales of United States real property interests, and that are deductible by us in respect of our 2005 taxable year and thereafter will be subject to the taxation and withholding regime applicable to ordinary income dividends and the branch profits tax will not apply, provided that (1) the capital gain dividends are received with respect to a class of shares that is “regularly traded,” as defined by applicable Treasury regulations, on an established securities market like the New York Stock Exchange and (2) the foreign shareholder does not own more than 5% of that class of shares at any time during the taxable year in which the capital gain dividends are received. As such, qualifying non-U.S. shareholders will no longer be subject to withholding on capital gain dividends as though those amounts were effectively connected with a United States trade or business, and qualifying non-U.S. shareholders will no longer be required to file United States federal income tax returns or pay branch profits tax in respect of these capital gain dividends. These recharacterized dividends will still be subject to United States federal income tax and withholding as ordinary dividends, currently at a 30% tax rate as reduced by applicable treaty.

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 by the IRS 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.

Other Tax Consequences

Our tax treatment and that of our shareholders 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. Likewise, the rules regarding taxes other than federal income taxes may also be modified. 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 tax laws and interpretations of these laws could adversely affect the tax or other consequences of an investment in our shares. We and our shareholders may also be subject to taxation by state, local or other jurisdictions, including those in which we or our shareholders transact business or reside. These tax consequences may not be comparable to the federal income tax consequences discussed above.

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 Exchange Act or sold under an effective registration statement under the Securities Act of 1933, as amended, provided the securities are

registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred. Each class of our outstanding shares has been registered under the Exchange Act.

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 each class of our currently outstanding shares is publicly offered and our assets will not be deemed to be “plan assets” of any ERISA plan or non-ERISA plan that invests in our shares.

Item 2. Properties

At December 31, 2004, we had real estate investments totaling $1.6 billion, at cost and after impairment write-downs, in 181 properties. At December 31, 2004, 24 properties with an aggregate cost of $206.4 million were mortgaged or subject to capital lease obligations totaling $76.2 million.

The following table summarizes some information about our properties as of December 31, 2004. 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
Alabama	3	132	$	11,626	$	11,588
Arizona	8	1,403	95,509		84,219
California	10	1,624	126,545		109,188
Colorado	8	864	34,046		25,763
Connecticut	2	300	13,031		7,734
Delaware	5	875	60,162		55,741
Florida	12	3,043	224,251		186,232
Georgia	10	625	44,089		41,371
Illinois	1	364	36,743		28,231
Indiana	2	263	23,414		21,811
Iowa	7	495	13,016		9,743
Kansas	3	402	32,574		30,190
Kentucky	7	799	60,309		56,937
Maryland	7	953	92,164		81,904
Massachusetts	3	489	66,446		55,811
Michigan	6	394	21,261		19,953
Minnesota	2	92	7,014		6,647
Missouri	2	180	4,290		3,115
Nebraska	14	814	16,285		13,659
New Jersey	6	984	87,264		81,167
New Mexico	1	209	26,752		24,812
North Carolina	2	197	12,973		12,323
Ohio	2	516	36,171		32,911
Pennsylvania	9	811	67,009		56,554
South Carolina	10	552	48,014		47,390
South Dakota	3	361	7,589		5,099
Tennessee	8	391	37,720		37,261
Texas	6	1,716	158,478		145,032
Virginia	12	1,543	95,942		81,184
Washington	1	103	5,193		3,488
Wisconsin	7	861	27,349		19,350
Wyoming	2	191	7,723		5,312
Total	181	22,546	$	1,600,952	$	1,401,720

Item 3. Legal Proceedings

In January 2002, HealthSouth settled a default under its lease 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 and we entered an amended lease, which included extending the lease to December 2011 from January 2006, reducing the annual rent from $10.3 million to $8.7 million and changing other lease terms between HealthSouth and us. 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.

In March 2003, the SEC accused HealthSouth and some of its executives of publishing false financial information; since then, according to published reports, at least 15 former HealthSouth executives, including all five of its former chief financial officers, have pled guilty to various crimes. In April 2003, we commenced a lawsuit against HealthSouth in the Land Court of the Commonwealth of Massachusetts seeking, among other matters, to reform the amended lease, based upon HealthSouth’s fraud, by increasing the rent payable to us back to $10.3 million and to change the lease term back to expire on January 1, 2006, among other matters. HealthSouth has defended this lawsuit and asserted counterclaims against us arising from this and unrelated matters. This litigation is pending at this time. In June 2004, we declared an event of default under the amended lease because HealthSouth failed to deliver to us accurate and timely financial information as required by the amended lease. On October 26, 2004, we terminated the amended lease because of this event of default by sending a notice of lease termination to HealthSouth. On November 2, 2004, HealthSouth brought a new lawsuit against us in the Massachusetts Superior Court for Middlesex County seeking to prevent our termination of the amended lease; on November 9, 2004, after a hearing, the court denied HealthSouth’s request for a preliminary injunction to prevent termination of the amended lease. We are currently seeking an expedited judicial determination that the lease termination was valid and we are pursuing damages against HealthSouth in the lawsuit which we brought in 2003. We have also begun work to identify and qualify a new tenant operator for the hospitals. Our lease with HealthSouth requires that, after termination, HealthSouth manage the hospitals for our account for a management fee during the period of the transition to a new tenant and remit the net cash flow to us. During the pendency of these disputes, HealthSouth has continued to pay us at the disputed rent amount and we have applied the payments received against the net cash flow due, but we do not know how long HealthSouth may continue to make payments.

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.

PART II

Item 5. Market for Registrant’s Common Shares, Related Shareholder Matters and Issuer Purchases of Securities

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

	High		Low
2003
First Quarter	$	12.21	$	10.50
Second Quarter	13.71		11.47
Third Quarter	14.58		13.19
Fourth Quarter	17.60		14.39

2004
First Quarter	$	19.55	$	17.00
Second Quarter	20.05		13.50
Third Quarter	18.24		16.10
Fourth Quarter	20.34		17.85

The closing price of our common shares on the NYSE on March 3, 2005 was $17.99.

As of March 3, 2005, there were 3,200 record holders of our common shares, and we estimate that as of that date there were in excess of 70,000 beneficial owners of our common shares.

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

	Distributions Per Common Share
	2004		2003
First Quarter	$	0.31	$	0.31
Second Quarter	0.31		0.31
Third Quarter	0.32		0.31
Fourth Quarter	0.32		0.31

All distributions shown in the table above have been paid. Our distributions to our shareholders are generally paid in the quarterly period following the quarter to which the distribution relates. We currently intend to continue to declare and pay future cash distributions to our shareholders on a quarterly basis.

Distributions to our shareholders are made at the discretion of our board of trustees and depend on our earnings, cash available for distribution, financial condition, capital market conditions, growth prospects and other factors that our board of trustees deems relevant.

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,
	2004		2003		2002		2001		2000

Total revenues(1)	$	148,523	$	131,148	$	122,297	$	274,644	$	75,632
Income from continuing operations(2)	55,523		47,034		52,013		18,021		31,208
Net income(2) (3)	56,742		45,874		50,184		17,018		58,437
Cash distributions to common shareholders(4)	77,791		72,472		72,457		42,640		31,121

Weighted average shares outstanding	63,406		58,445		56,416		30,859		25,958

Per common share data:
Income from continuing operations(2)	$	0.88	$	0.80	$	0.92	$	0.58	$	1.20
Net income(2) (3)	0.89		0.78		0.89		0.55		2.25
Cash distributions to common shareholders(4)	1.26		1.24		1.24		1.20		1.20

Balance Sheet Data:	At December 31,
Balance Sheet Data:	2004		2003		2002		2001		2000

Real estate properties, at cost, net of impairment losses	$	1,600,952	$	1,418,241	$	1,238,487	$	593,199	$	593,395
Total assets	1,447,730		1,304,100		1,158,200		867,303		530,573
Total indebtedness(5)	535,178		554,823		384,758		280,101		97,000
Total shareholders’ equity	890,667		727,906		752,326		574,624		422,310

(1) 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 one of our tenants 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.

(2) 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 and $3.5 million ($0.14 per share) of non-recurring general and administrative expenses related to foreclosures and lease terminations in 2000.

(3) Includes a gain on sale of properties of $1.2 million ($0.01 per share) in 2004, 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.

(4) In addition to the cash distributions to common shareholders, 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.

(5) Amounts for the periods ended 2003, 2002 and 2001 include $27.4 million of junior subordinated debentures that were classified as trust preferred securities prior to 2004. See Note 2 and Note 6 to our consolidated financial statements for further discussion.

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 on Form 10-K.

PORTFOLIO OVERVIEW

(dollars in thousands)

	# of Properties	# of Units/Beds	Investment: carrying value before depreciation		% of Investment		Annualized Current Rent		% of Annualized Current Rent
Facility Type
Independent living communities(1)	36	10,412	$	900,102	56.2	%	$	90,392	57.0	%
Assisted living facilities	81	5,337	433,430		27.1	%	42,396		26.8	%
Skilled nursing facilities	62	6,433	223,867		14.0	%	17,152		10.8	%
Hospitals	2	364	43,553		2.7	%	8,700		5.4	%
Total	181	22,546	$	1,600,952	100.0	%	$	158,640	100.0	%

Tenant/Operator
Five Star/Sunrise(2)	31	7,307	$	626,756	39.2	%	$	63,993	40.3	%
Five Star	98	7,731	407,309		25.4	%	31,841		20.1	%
Sunrise/Marriott(3)	14	4,091	325,473		20.3	%	31,197		19.7	%
NewSeasons/IBC(4)	10	1,019	87,641		5.5	%	9,287		5.9	%
HealthSouth(5)	2	364	43,553		2.7	%	8,700		5.4	%
Alterra Healthcare	18	894	61,126		3.8	%	7,136		4.5	%
Genesis HealthCare	1	156	13,007		0.8	%	1,522		1.0	%
5 private companies (combined)	7	984	36,087		2.3	%	4,964		3.1	%
Total	181	22,546	$	1,600,952	100.0	%	$	158,640	100.0	%

Tenant Operating Statistics (Year Ended December 31)(6)

									Percentage of Operating Revenue Sources
	Rent Coverage				Occupancy				Private Pay				Medicare				Medicaid
	2004		2003		2004		2003		2004		2003		2004		2003		2004		2003
Five Star/Sunrise(2)	1.1	x	1.0	x	90	%	90	%	85	%	86	%	11	%	10	%	4	%	4	%
Five Star(7)	1.7	x	1.4	x	88	%	89	%	42	%	43	%	18	%	15	%	40	%	42	%
Sunrise/Marriott(3)	1.3	x	1.2	x	90	%	87	%	82	%	83	%	13	%	13	%	5	%	4	%
NewSeasons/IBC(4) (7)	1.1	x	1.1	x	79	%	79	%	100	%	100	%	—		—		—		—
HealthSouth(5)(8)	NA		NA		NA		NA		NA		NA		NA		NA		NA		NA
Alterra Healthcare(7)	1.6	x	1.6	x	83	%	86	%	98	%	98	%	—		—		2	%	2	%
Genesis HealthCare	1.9	x	1.5	x	96	%	97	%	22	%	23	%	32	%	34	%	46	%	43	%
5 private companies (combined)	2.1	x	1.9	x	86	%	87	%	25	%	23	%	21	%	20	%	54	%	57	%

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

(2) These 31 properties are leased to Five Star and 30 of them are managed by Sunrise. Senior living operations at one of these properties has ceased. Sunrise does not guaranty our lease with Five Star. Rent coverage is after non-subordinated management fees of $20.2 million and $17.1 million in the year ended December 31, 2004 and 2003, respectively.

(3) Marriott guarantees the lease for the 14 properties leased to Sunrise.

(4) IBC, a Pennsylvania health insurer, guarantees the lease for the 10 properties leased to NewSeasons.

(5) Effective January 2, 2002, we entered an amended lease with HealthSouth for two hospitals. In April 2003, we commenced a lawsuit against HealthSouth seeking, among other matters, to reform the amended lease, based upon HealthSouth’s fraud, by increasing the rent payable to us from the date of amendment forward. This litigation is pending at this time. On October 26, 2004, we terminated the amended lease for default because HealthSouth failed to deliver to us accurate and timely financial information as required by the amended lease. On November 2, 2004, HealthSouth brought a new lawsuit against us seeking to prevent our termination of the amended lease. On November 9, 2004, after a hearing, the court denied HealthSouth’s request for a preliminary injunction to prevent the lease termination. We are currently seeking an expedited judicial determination that the lease termination was valid and we are pursuing damages against HealthSouth in the lawsuit which we brought in 2003. We have also begun work to identify and qualify a new tenant operator for the hospitals. Our lease with HealthSouth requires that, after termination, HealthSouth manage the hospitals for our account for a management fee during the period of the transition to a new tenant and remit the net cash flow to us. During the pendency of these disputes, HealthSouth has continued to pay us at the disputed rent amount and we have applied the payments received against the net cash flow due, but we do not know how long HealthSouth may continue to make payments.

(6) All tenant operating data presented are based upon the operating results provided by our tenants for the indicated periods ending December 31, 2004, or the most recent prior period for which tenant operating results are available to us from our tenants. Rent coverage is calculated as operating cash flow from our tenants’ facility operations, before subordinated charges and capital expenditure reserves, divided by rent payable to us. We have not independently verified our tenants’ operating data.

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

(8) During 2003, HealthSouth issued a press release stating that its historical financial information should not be relied upon. In 2004, HealthSouth issued a press release stating that audited financial information would not be available until 2005. Because we have reason to doubt whatever information we have from HealthSouth, we do not disclose any operating data for this tenant.

RESULTS OF OPERATIONS

Year Ended December 31, 2004, Compared to Year Ended December 31, 2003

	Year Ended December 31,
	2004		2003		$ Change		% Change
	(in thousands, except per share amounts)
Rental income	$	145,731	$	129,188	$	16,543	12.8	%
Interest and other income	2,792		1,960		832		42.4	%

Interest expense	$	41,836	$	37,899	$	3,937	10.4	%
Depreciation expense	39,301		35,728		3,573		10.0	%
General and administrative expense	11,863		10,487		1,376		13.1	%

Net income	$	56,742	$	45,874	$	10,868	23.7	%
Weighted average shares outstanding	63,406		58,445		4,961		8.5	%
Net income per share	$	0.89	$	0.78	$	0.11	14.1	%

Rental income increased because of rents from our real estate acquisitions totaling $187.9 million during 2004 and the full impact of rents from our $179.4 million of acquisitions in 2003. Interest and other income for the year ended December 31, 2004, includes a $1.25 million settlement payment we received from Marriott in January 2004. For the year ended December 31, 2003, interest and other income includes $750,000 of proceeds from the sale of a mortgage note.

Interest expense increased because of our issuance of $150.0 million of 7 7/8% senior unsecured notes in April 2003. Our weighted average balance outstanding and interest rate under our revolving bank facility was $45.0 million and 3.0% and $45.7 million and 2.8% for the years ended December 31, 2004 and 2003, respectively.

Depreciation expense increased because of 2004 real estate acquisitions totaling $187.9 million and because of depreciation for a full year of 2003 real estate acquisitions totaling $179.4 million. General and administrative expenses include, in 2004, $1.1 million of due diligence costs incurred in connection with a failed potential acquisition and HealthSouth litigation costs, and in 2003, $1.2 million in connection with our litigations with Marriott and HealthSouth. General and administrative expense, exclusive of due diligence and litigation costs, increased in 2004 by $1.5 million, or 15.9% due to advisory fees associated with our acquisitions, and accounting and other costs incurred for the implementation of the requirements of Section 404 of the Sarbanes Oxley-Act of 2002 and related SEC rules.

During the year ended December 31, 2004, we recorded a gain of $1.2 million from the sale of one property. During the year ended December 31, 2003, we recorded a loss of $1.2 million from the sale of one property.

Net income and net income per share increased because of the changes described above in revenues and expenses offset by the increase in the weighted average number of shares outstanding that resulted from our issuance of common shares during 2004.

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

	Year Ended December 31,
	2003		2002		$ Change			% Change
	(in thousands, except per share amounts)
Rental income	$	129,188	$	115,560	$	13,628		11.8	%
FF&E reserve income	—		5,345		(5,345		)	(100.0	)%
Interest and other income	1,960		1,392		568			40.8	%

Interest expense	$	37,899	$	30,210	$	7,689		25.5	%
Depreciation expense	35,728		31,596		4,132			13.1	%
General and administrative expense	10,487		8,478		2,009			23.7	%

Net income	$	45,874	$	50,184	$	(4,310	)	(8.6	)%
Weighted average shares outstanding	58,445		56,416		2,029			3.6	%
Net income per share	$	0.78	$	0.89	$	(0.11	)	(12.4	)%

Rental income increased because of our acquisitions totaling $179.4 million during 2003 and the full impact of rents from our $671.5 million of acquisitions during 2002.

We recorded FF&E reserve income in 2002 because 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. Accordingly, we no longer record FF&E reserve income. We have security and remainder interests in these accounts and in property purchased with funding from these accounts.

Interest and other income for the year ended December 31, 2003, includes $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 a third party. The mortgage note was allocated 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. Interest and other income for the year ended December 31, 2003, 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 increased because of 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. Our weighted average balance outstanding and interest rate under our revolving bank credit facility was $45.7 million and 2.8% and $54.5 million and 3.6% for the years ended December 31, 2003 and 2002, respectively.

Depreciation expense increased because of 2003 real estate acquisitions totaling $179.4 million and because of depreciation for a full year of 2002 real estate acquisitions totaling $671.5 million. General and administrative expenses include, in 2003, $1.2 million in connection with our litigations with Marriott and HealthSouth. In January 2004, we settled our litigation with Marriott. General and administrative expense, exclusive of litigation costs, increased in 2003 by $809,000, or 9.5%, due to advisory fees associated with our acquisitions.

During the year ended December 31, 2003, we recorded a loss of $1.2 million from 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.

Net income and net income per share decreased because of the changes described above in revenues and expenses and the increase in the weighted average number of shares outstanding resulting from our issuance of our common shares during 2002.

LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources

Rents from our properties are our principal sources of funds for current expenses and distributions to shareholders. We generally receive minimum rents monthly or quarterly from our tenants and we receive percentage rents monthly, quarterly or annually. This flow of funds has historically been sufficient for us to pay our operating expenses, debt service and distributions to our shareholders. 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 our need to pay operating expenses and our desire to make distributions to our shareholders, we maintain a revolving bank credit facility with a group of commercial banks and other lenders. Our revolving bank credit facility matures in November 2005, but we may extend it to November 2006 upon payment of an extension fee. The revolving bank credit facility permits us to borrow up to $250.0 million and includes a feature under which we may expand the maximum borrowing to $500.0 million, in certain circumstances. Borrowings under our revolving bank credit facility are unsecured. We may borrow, repay and reborrow funds until maturity. No principal repayment is due until maturity. We pay interest on borrowings under the revolving bank credit facility at LIBOR plus a margin.

In January 2004, we issued five million of our common shares in a public offering. We used the net proceeds of $86.1 million to repay borrowings outstanding on our revolving bank credit facility.

In April 2004, we sold one of our nursing home properties for $5.9 million. We used the proceeds to repay borrowings outstanding on our revolving bank credit facility and for general business purposes.

In June 2004, we purchased for $3.6 million the land under one of our properties that we had previously leased. During 2004, we purchased $10.1 million of improvements made to some of our properties. We borrowed on our revolving bank credit facility and used cash on hand to fund these purchases.

In November 2004, we purchased 31 assisted living properties from Five Star for $148.2 million and loaned Five Star $16.8 million secured by five properties, which Five Star repaid in December 2004. This purchase and loan were funded by our assumption of $49.2 million of mortgage debt and borrowing on our revolving bank credit facility.

In December 2004, we issued five million of our common shares in a public offering, raising net proceeds of $94.1 million. We used the net proceeds from the offering and the Five Star mortgage repayment to repay borrowings outstanding on our revolving bank credit facility and for general business purposes.

At December 31, 2004, we had $3.4 million of cash and cash equivalents and $213.0 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 and expenditures related to the repair, maintenance or renovation of our properties.

When significant amounts are outstanding on our revolving bank credit facility or as the maturity dates of our revolving bank credit facility and term debts approach, we will explore alternatives for the repayment of amounts due. Such alternatives may include incurring additional debt and issuing new equity securities. As of December 31, 2004, we had $1.5 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 financings, including debt or equity offerings, with which to finance future acquisitions and to pay our debts and other obligations.

On January 6, 2005, we declared a distribution of $0.32 per common share with respect to our 2004 fourth quarter results. This distribution was paid to shareholders on February 22, 2005, using cash on hand and borrowings under our revolving bank credit facility.

As of December 31, 2004, our contractual payment obligations were as follows (dollars in thousands):

	Payments 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)	$	529,177	$	41,170	$	—	$	—	$	488,007
Capital lease obligations	7,226		852		1,905		2,210		2,259
Ground lease obligations	3,212		142		284		284		2,502
Total	$	539,615	$	42,164	$	2,189	$	2,494	$	492,768

(1) Our term debt maturities are as follows: $41.2 million in 2005; $282.4 million in 2012; $12.6 million in 2013; $150.0 million in 2015; $14.7 million in 2027; and $28.2 million in 2041.

As of March 3, 2005, we have no commercial paper, derivatives, swaps, hedges, joint ventures or partnerships. We have no off balance sheet arrangements other than our trust preferred securities issued by an unconsolidated subsidiary of ours. See Note 6 to our consolidated financial statements for further discussion.

Debt Covenants

Our principal debt obligations at December 31, 2004, were our unsecured revolving bank credit facility, two issues totaling $395.0 million of unsecured senior notes and our $28.2 million of junior subordinated debentures. 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 junior subordinated debentures are governed by an indenture which is generally less restrictive than the indenture governing our senior notes and the terms of our revolving bank credit facility. As of December 31, 2004, we believe we were in compliance with all of the covenants under our indentures and related supplements and our revolving bank credit facility.

In addition to our unsecured debt obligations, we had $68.9 million of mortgage debt and secured bonds outstanding at December 31, 2004. Our mortgage debt and secured bonds are secured by 22 of our properties.

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, our revolving bank credit facility uses our senior debt rating 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 indenture or junior subordinated debentures indenture would be a default under our revolving bank credit facility.

Related Party Transactions

In 1999, HRPT distributed a majority of our shares to its shareholders. 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 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 interests. As of March 3, 2005, HRPT owns 12.6% of our outstanding common shares.

On December 31, 2001, we distributed substantially all of our shares of Five Star to our shareholders. 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 currently directors of Five Star.

As of December 31, 2004, we leased 129 senior living communities to Five Star for total annual minimum rent of $95.8 million.

During 2003, we and Five Star were jointly involved in litigation with Marriott, which was 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.

Since January 1, 2004, we have entered or agreed to enter into several transactions with Five Star, including the following:

• During 2004, pursuant to the terms of our leases with Five Star, we purchased $9.5 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 $946,000.

• On March 1, 2004, we purchased from Five Star one senior living community 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 communities were combined into one lease and the 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 communities 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.

• During 2003, we agreed to sell to Five Star two nursing homes in Michigan that we leased to Five Star. The purchase price for both properties is $10.5 million, the appraised value of the properties. In April 2004, we sold one of these properties to Five Star for $5.9 million. The properties were leased on a combined basis with other properties we lease to Five Star. Under the terms of our lease with Five Star, upon the sale of each property, the annual rent payable under the combined lease is reduced by 10% of the net proceeds that we receive from the sale. We expect the sale of the second property to occur during the first half of 2005. However, this sale is contingent upon Five Star’s obtaining Department of Housing and Urban Development insured financing for its purchase. This sale may not close because of a failure of this condition or for some other reason.

• During 2003, one of our private company tenants defaulted its lease for a nursing home in Missouri. We terminated this lease and Five Star managed this property for our account until May 2004. Effective May 1, 2004, this property was added to a pre-existing Five Star lease from us and the annual rent under that lease was increased by $180,000. All other lease terms remained unchanged.

• One of our properties leased to Five Star was subject to a ground lease from an unaffiliated third party. Five Star has been responsible for paying the ground rent of $307,000 per year. On June 3, 2004, we exercised an option to purchase this land for $3.6 million and we acquired the landlord’s rights and obligations under the ground lease. Five Star remains obligated for the ground lease payments to us.

• In November 2004, we loaned Five Star $117.0 million which Five Star used to fund its acquisition of LTA Holdings, Inc., or LTA. In the same month, this loan was repaid in full from the proceeds of our purchase of 31 assisted living properties with 1,613 units from Five Star for $148.2 million. Simultaneously, Five Star leased these properties from us for annual rent of $13.3 million, plus the possibility of additional rent starting in 2007 calculated as a percentage of revenue increases at the leased properties. The lease for 11 of the 31 properties was combined with another lease between us and Five Star. Two additional leases covering 16 and 4 properties, respectively, were entered into with Five Star. These leases provide that the 20 properties will be added to the lease covering the other 11 properties upon the repayment of the mortgages secured by the 20 properties. In connection with Five Star’s purchase of LTA, we also loaned Five Star $16.8 million secured by five properties; this loan was repaid in full in December 2004.

In January and December 2004, we completed two public offerings for a total of 10 million of our common shares. Simultaneous with these offerings, HRPT sold 4,148,500 of our shares which it owned. We and HRPT were parties to joint underwriting agreements in connection with these offerings. We did not receive any proceeds from the sale of our shares by HRPT, and HRPT paid its pro-rata share of the expenses of these offerings. The shares sold by HRPT were offered pursuant to an effective registration statement filed by us pursuant to an agreement with HRPT. HRPT paid the expenses of this registration.

RMR provides investment, management and administrative services to us under an agreement which is subject to annual renewal by our compensation committee, which is comprised 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 $250.0 million of investments made since our spin off from HRPT is 0.7% and thereafter is 0.5%, plus 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 during 2004 for services were $8.1 million, including $761,000 as an incentive fee which will be paid in common shares in April 2005. Our compensation committee has approved the renewal of the RMR agreement for its current term which will end December 31, 2005. RMR also provides the internal audit function for us and for other publicly owned companies to which it provides management services. We pay a pro rata share of RMR’s costs in providing that function. Our audit committee approves the identity and salary of the individual serving as our internal audit manager, as well as the pro rata share of the costs which we pay.

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 and Five Star described above. All transactions between us and RMR or Five Star are approved by our independent trustees.

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. 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.

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.

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 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 80% or more of the operating revenues are derived from residents who pay from their own private resources. The remaining 16% of our rents 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 3, 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.

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, 2003. Other than as described below, we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the future.

At December 31, 2004, our outstanding debt included $245.0 million of 8 5/8% senior unsecured notes due in 2012, $150.0 million of 7 7/8% senior unsecured notes due in 2015 and $28.2 million of 10.125% junior subordinated debentures due 2041. The interest is payable semi-annually on the senior notes and quarterly on the debentures. No principal payments are due under these notes or debentures until maturity. Because these notes and debentures bear interest at a fixed rate, changes in market interest rates during the term of this debt will not affect our operating results. If these notes and debentures are refinanced at interest rates which are 10% higher or lower than the current rate, our per annum interest cost would change by approximately $3.6 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. 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. 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, 2004, was $488.0 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, $28.2 million of 10.125% junior subordinated debentures due in 2041 and mortgage notes totaling $64.8 million due between 2012 and 2027. Based on the balances outstanding at December 31, 2004, 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 $20.0 million. 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, 2004 to the first par prepayment option date for debentures would change the value of that debt by approximately $400,000.

Our unsecured revolving bank credit facility accrues interest at floating rates and matures in November 2005. As of December 31, 2004, we had $37.0 million outstanding and $213.0 million available for borrowing under our revolving bank credit facility. We may make repayments under our revolving bank credit facility at any time without penalty. We borrow in U.S. dollars and borrowings under our revolving bank credit facility accrue interest at LIBOR plus a margin. 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 revolving indebtedness of $37.0 million at December 31, 2004, was 3.86% per annum. The following table presents the impact a 10% change in interest rates would have on our floating rate interest expense at December 31, 2004 (dollars in thousands):

	Impact of Changes in Interest Rates
	Interest Rate Per Year		Outstanding Debt		Total Interest Expense Per Year
At December 31, 2004	3.86	%	$	37,000	$	1,428
10% reduction	3.47	%	37,000		1,284
10% increase	4.25	%	37,000		1,573

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.

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, 2004, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management Report on Assessment of Internal Control Over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and board of trustees regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on our assessment, we believe that, as of December 31, 2004, our internal control over financial reporting is effective.

Ernst & Young LLP, the independent registered public accounting firm that audited our 2004 consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on our assessment of our internal control over financial reporting. Its report appears elsewhere herein.

Item 9B. Other Information

None.

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. A printed copy of our code of business conduct and ethics is also available free of charge to any shareholder who requests a copy. We intend to disclose any amendments or waivers to our code of business conduct and ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller (or any person performing similar functions) on our website.

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 Shareholder 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, collectively referred to as the Award Plans. In addition, our independent trustees receive 1,000 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 is as of December 31, 2004.

	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.	2,833,520	(1)

Equity compensation plans not approved by security holders	None.	None.	2,833,520	(1)

Total	None.	None.	2,833,520	(1)

(1) Pursuant to the terms of the Award Plans, in no event shall the number of shares issued under both plans combined exceed 2,921,920.

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.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(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:

Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheet as of December 31, 2004 and 2003
Consolidated Statement of Income for each of the three years in the period ended December 31, 2004
Consolidated Statement of Shareholders’ Equity for each of the three years in the period ended December 31, 2004
Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2004
Notes to Consolidated Financial Statements
Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2004

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) 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		Articles Supplementary dated March 10, 2004. (Incorporated by reference to the Company’s Registration Statement on Form 8-A dated March 18, 2004.)

3.4		Certificate of Correction dated March 29, 2004. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.)

3.5		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.)

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.)

4.12		Appointment of Successor Rights Agent, dated as of December 13, 2004, by and between the Company and Wells Fargo Bank, National Association. (Incorporated by reference to the Company’s Current Report on Form 8-K dated December 13, 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 Reit Management and Research LLC. (+) (Incorporated by reference 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 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.)

10.7		Representative Indemnification Agreement. (+) (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.)

10.8		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.)

10.9		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.)

10.10		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.)

10.11		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.)

10.12		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.)

10.13		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.)

10.14		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.)

10.15		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.)

10.16		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.)

10.17		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.)

10.18		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.)

10.19		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.)

10.20		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.)

10.21		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.)

10.22		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., 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.)

10.23		Amended and Restated Master Lease Agreement by and among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant, dated March 1, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.)

10.24		Partial Termination and Amendment to Lease by and among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant, dated April 19, 2004. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.)

10.25		First Amendment to Amended and Restated Master Lease Agreement by and among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant, dated June 23, 2004. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.)

10.26		Second Amended and Restated Master Lease Agreement by and among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant, dated November 19, 2004. (Filed herewith.)

10.27		Guaranty Agreement made by Five Star Quality Care, Inc., as Guarantor, for the benefit of certain subsidiaries of the Company, dated December 31, 2001, relating to the Maser Lease Agreement by and among certain subsidiaries 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.)

10.28		Guaranty Agreement made by Five Star Quality Care, Inc., as Guarantor, for the benefit of the Company and certain subsidiaries of the Company, dated October 25, 2002, relating to the Amended and Restated Master Lease Agreement by and among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant, dated March 1, 2004, as amended. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.)

10.29		Amended Master Lease Agreement by and among certain subsidiaries 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.)

10.30		Guaranty Agreement made by Five Star Quality Care, Inc., as Guarantor, for the benefit of certain subsidiaries of the Company, dated January 11, 2002, relating to the Amended Master Lease Agreement by and among certain subsidiaries 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.)

10.31		First Amendment to Amended Master Lease Agreement by and among certain subsidiaries 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.)

10.32		Second Amendment to Master Lease Agreement by and among certain subsidiaries of the Company, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust as Tenants, dated March 1, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.)

10.33		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.)

10.34		Letter Agreement among the Company, Five Star and FVE Acquisition Inc., dated September 23, 2004, regarding FVE Acquisition Inc.’s merger with LTA Holdings, Inc. (Incorporated by reference to the Company’s Current Report on 8-K dated September 23, 2004.)

10.35		Letter Agreement between the Company and LTA Holdings, Inc., dated September 23, 2004. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)

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.)

99.1		Amended and restated Charter of the Compensation Committee adopted on December 14, 2004. (Furnished herewith.)

99.2		Composite Copy of Governance Guidelines, effective December 14, 2004. (Furnished herewith.)

(+) Management contract or compensatory plan or arrangement

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (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, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. 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.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Senior Housing Properties Trust’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts
March 3, 2005

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Trustees and Shareholders of Senior Housing Properties Trust

We have audited management’s assessment, included in the accompanying Management Report on Assessment of Internal Control Over Financial Reporting, that Senior Housing Properties Trust maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Senior Housing Properties Trust’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures for the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Senior Housing Properties Trust maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, Senior Housing Properties Trust maintained, in material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2004 consolidated financial statements of Senior Housing Properties Trust and our report dated March 3, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts
March 3, 2005

F-2

SENIOR HOUSING PROPERTIES TRUST

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

	December 31,
	2004			2003

ASSETS
Real estate properties, at cost:
Land	$	178,353		$	162,512
Buildings and improvements	1,422,599			1,255,729
	1,600,952			1,418,241
Less accumulated depreciation	199,232			160,426
	1,401,720			1,257,815

Cash and cash equivalents	3,409			3,530
Restricted cash	6,176			10,108
Investments	13,126			10,244
Deferred financing fees, net	9,367			11,311
Due from affiliate	7,961			6,062
Other assets	5,971			5,030
Total assets	$	1,447,730		$	1,304,100

LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving bank credit facility	$	37,000		$	102,000
Senior unsecured notes due 2012 and 2015, net of discount	393,775			393,612
Junior subordinated debentures due 2041	28,241			27,394
Secured debt and capital leases	76,162			31,817
Accrued interest	12,519			12,468
Due to affiliate	1,516			894
Other liabilities	7,850			8,009
Total liabilities	557,063			576,194

Commitments and contingencies

Shareholders’ equity:
Common shares of beneficial interest, $0.01 par value: 80,000,000 shares authorized, 68,495,908 and 58,453,338 shares issued and outstanding at December 31, 2004 and 2003, respectively	685			585
Additional paid-in capital	1,034,686			853,858
Cumulative net income	208,491			151,749
Cumulative distributions	(359,567		)	(281,776		)
Unrealized gain on investments	6,372			3,490
Total shareholders’ equity	890,667			727,906
Total liabilities and shareholders’ equity	$	1,447,730		$	1,304,100

See accompanying notes

F-3

SENIOR HOUSING PROPERTIES TRUST

CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

	Year Ended December 31,
	2004		2003			2002

Revenues:
Rental income	$	145,731	$	129,188		$	115,560
FF&E reserve income	—		—			5,345
Interest and other income	2,792		1,960			1,392
Total revenues	148,523		131,148			122,297

Expenses:
Interest	41,836		37,899			30,210
Depreciation	39,301		35,728			31,596
General and administrative	11,863		10,487			8,478
Total expenses	93,000		84,114			70,284
Income from continuing operations	55,523		47,034			52,013
Loss from discontinued operations	—		—			(1,829		)
Gain (loss) on sale of properties	1,219		(1,160		)	—
Net income	$	56,742	$	45,874		$	50,184

Weighted average shares outstanding	63,406		58,445			56,416

Basic and diluted earnings per share:
Income from continuing operations	$	0.88	$	0.80		$	0.92
Gain (loss) from sale of properties or discontinued operations	$	0.01	$	(0.02	)	$	(0.03	)
Net income	$	0.89	$	0.78		$	0.89

See accompanying notes

F-4

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			Unrealized Gain on Investments			Totals
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 gain 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
Comprehensive income:
Net income	—		—		—		56,742		—			—			56,742
Unrealized gain on investments	—		—		—		—		—			2,882			2,882
Total comprehensive income	—		—		—		56,742		—			2,882			59,624
Distributions	—		—		—		—		(77,791		)				(77,791		)
Issuance of shares	10,000,000		100		180,095		—		—			—			180,195
Stock grants	27,000		—		470		—		—			—			470
Incentive fee	15,571		—		263		—		—			—			263
Retired shares	(1	)	—		—		—		—			—			—
Balance at December 31, 2004	68,495,908		$	685	$	1,034,686	$	208,491	$	(359,567	)	$	6,372		$	890,667

See accompanying notes

F-5

SENIOR HOUSING PROPERTIES TRUST

CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)

	Year Ended December 31,
	2004			2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	56,742		$	45,874		$	50,184
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation	39,301			35,728			31,596
(Gain) loss on sale of properties	(1,219		)	1,160			—
Loss from discontinued operations	—			—			1,829
Amortization of deferred finance fees and debt discounts	2,107			2,034			1,324
FF&E reserve income	—			—			(5,345		)
Changes in assets and liabilities:
Restricted cash	(998		)	105			(3,955		)
Due from affiliate	(1,899		)	(6,124		)	3,275
Other assets	377			1,125			11,730
Accrued interest	51			2,398			9,217
Due to affiliate	885			303			387
Other liabilities	(159		)	(2,984		)	(1,131		)
Cash provided by operating activities	95,188			79,619			99,111

CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate acquisitions	(137,748		)	(179,391		)	(622,462		)
Increase in security deposits	—			600			65
Mortgage financing provided	133,849			(6,900		)	—
Mortgage financing repaid by mortgagor	(133,849		)	6,900			—
Proceeds from sale of real estate	5,900			288			728
Cash used for investing activities	(131,848		)	(178,503		)	(621,669		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares, net	180,194			—			195,210
Proceeds from issuance of senior notes, net of discount	—			149,709			—
Proceeds from borrowings on revolving bank credit facility	184,000			234,000			415,000
Repayments of borrowings on revolving bank credit facility	(249,000		)	(213,000		)	(334,000		)
Repayment of debt	(864		)	(801		)	(25,537		)
Deferred financing fees	—			(3,676		)	(4,119		)
Distributions to shareholders	(77,791		)	(72,472		)	(67,368		)
Cash provided by financing activities	36,539			93,760			179,186
Decrease in cash and cash equivalents	(121		)	(5,124		)	(343,372		)
Cash and cash equivalents at beginning of period	3,530			8,654			352,026
Cash and cash equivalents at end of period	$	3,409		$	3,530		$	8,654

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	39,678		$	30,695		$	18,182

NON-CASH INVESTING ACTIVITIES:
Debt assumed in acquisition	50,139			—			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		)

NON-CASH FINANCING ACTIVITIES:	—
Issuance of common shares	733			222			229
Release of restricted cash to us	4,930			—			—
Repayment of debt with cash previously restricted	(4,930		)	—			—

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, 2004, we owned 181 senior living properties located in 32 states.

Note 2. Summary of Significant Accounting Policies

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

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 revised 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 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 $4.3 million bank certificate of deposit which matures in July 2005 pledged as security for a $4.2 million mortgage debt plus amounts escrowed for real estate taxes, insurance and capital expenditures at 20 of our mortgaged properties.

INVESTMENTS. We own 1,000,000 common shares, or 0.56%, of HRPT Properties Trust, or HRPT. We also own 35,000 common shares, or 0.29%, of Five Star Quality Care, Inc., or Five Star, which we retained or received in connection with the Five Star spin-off. These investments are classified as available for sale and carried at fair value, with unrealized gains and losses reported as a separate component of shareholders’ equity. 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, 2004 ($12.83 and $8.47 per share, respectively). At December 31, 2004, our investment in HRPT had a fair value of $12.8 million and unrealized holding gains of $6.3 million. At March 3, 2005, this investment had a fair value of $12.7 million and unrealized holding gains of $6.2 million. At December 31, 2004, our investment in Five Star had a fair value of $296,000 and an unrealized holding gain of $42,000. At March 3, 2005, this investment had a fair value of $307,000 and an unrealized holding gain of $53,000.

F-7

DEFERRED FINANCING FEES. Issuance costs related to borrowings are capitalized and amortized over the terms of the respective loans. The unamortized balance of deferred financing fees and accumulated amortization were $14.5 million and $5.1 million and $14.5 million and $3.2 million at December 31, 2004 and 2003, respectively. The weighted average amortization period is approximately 12 years. The amortization expense to be incurred over the five years subsequent to December 31, 2004 is $1.8 million in 2005, $916,000 in 2006, $916,000 in 2007, $916,000 in 2008 and $916,000 in 2009.

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 when realizable and earned. For the years ended December 31, 2004, 2003 and 2002, percentage rents earned aggregated $3.4 million, $3.3 million, and $3.2 million, respectively.

FF&E RESERVE INCOME. 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.

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.

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 2004, 2003 and 2002 was 65.69%, 52.62% and 62.32% ordinary income, respectively, 32.64%, 47.38% and 37.68% return of capital, respectively, 1.19%, 0% and 0% capital gain, respectively, and 0.48%, 0% and 0% uncaptured Section 1250 gain, respectively.

NEW ACCOUNTING PRONOUNCEMENTS. During the first quarter of 2004, we adopted Revised Financial Accounting Standards Board, or FASB, Interpretation No. 46, “Consolidation of Variable Interest Entities” that was issued by the FASB in December 2003. As a result, we no longer consolidate our wholly owned subsidiary that issued our trust preferred securities, or the trust preferred issuer, and we no longer present the trust preferred securities on our Consolidated Balance Sheet. Instead, we present our junior subordinated debentures issued by us to, and held by, the trust preferred issuer as debt. See Note 6 for a further discussion of these trust preferred securities and the related junior subordinated debentures. The debentures had previously been eliminated in

F-8

our consolidated financial statements. In addition, distributions on the trust preferred securities are no longer presented in our Consolidated Statement of Income, but interest on the debentures, which is equal to the distributions on the trust preferred securities, is included in interest expense.

SEGMENT REPORTING. We operate in one segment, leasing operations.

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 2006 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 $1.6 billion and $1.4 billion at December 31, 2004, respectively. The future minimum lease payments that we expect to receive during the current terms of our leases as of December 31, 2004, are $156.1 million in 2005, $156.3 million in 2006, $154.8 million in 2007, $154.9 million in 2008, $154.9 million in 2009 and $1.2 billion, thereafter.

On March 1, 2004, we purchased from Five Star one independent and assisted living community 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 communities were combined into one lease with the property acquired on March 1, 2004;

• 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 communities 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.

During 2003, we agreed to sell to Five Star two nursing homes in Michigan that we leased to Five Star. The purchase price for both properties is $10.5 million, the appraised value of the properties. On April 19, 2004, we sold one of these properties to Five Star for $5.9 million and recognized a gain of $1.2 million. The properties were leased on a combined basis with other properties we lease to Five Star. Under the terms of our lease with Five Star, upon the sale of each property, the annual rent payable under the combined lease is reduced by 10% of the net proceeds that we receive from the sale. We expect the sale of the second property to occur in 2005. However, this sale is contingent upon Five Star’s obtaining Department of Housing and Urban Development, or HUD, insured financing for its purchase. This sale may not close because of a failure of this condition or for some other reason.

In 2003, we evicted a nursing home tenant that had defaulted on its obligations to us. Until May 2004, Five Star managed this nursing home for our account. Effective on May 1, 2004, we and Five Star agreed to add this nursing home to the Five Star lease of independent and assisted living communities and nursing homes and to increase the annual rent by $180,000. All other lease terms remained unchanged. The facility revenues, expenses and net operating income (loss) for this property for the period from January 1, 2004, to April 30, 2004, were $1.4 million, $1.2 million and $154,000, and for the period March 17, 2003, to December 31, 2003, were $2.6 million, $2.7 million and

F-9

$(150,000), respectively. The net operating income (loss) is included in Interest and Other Income in our Consolidated Statement of Income.

One of our properties leased to Five Star was subject to a ground lease with an unaffiliated third party. Five Star has been responsible for paying the ground rent of $307,000 per year. On June 3, 2004, we exercised an option to purchase this land for $3.6 million and we acquired the landlord’s rights and obligations under the ground lease. Five Star remains obligated for the ground lease payments to us.

In November 2004, we loaned Five Star $117.0 million which Five Star used to fund its acquisition of LTA Holdings, Inc. In the same month, this loan was repaid in full from the proceeds of our purchase of 31 assisted living properties with 1,613 units from Five Star for $148.2 million. We funded this acquisition by the assumption of $49.2 million of secured debt and by borrowing under our revolving bank credit facility. Simultaneously, Five Star leased these properties from us for annual rent of $13.3 million, plus the possibility of additional rent starting in 2007 calculated as a percentage of revenue increases at the leased properties. Substantially all of the revenues at these properties are paid by residents from their private resources. The leases for these 31 communities were combined with another lease between us and Five Star. We also loaned Five Star $16.8 million secured by five properties; this loan was repaid in full in December 2004.

During 2004, pursuant to the terms of our leases with Five Star, we purchased $9.5 million of improvements made 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 $946,000.

In June 2003, we sold for $300,000 a nursing home in Georgia 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 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:

	2002
Depreciation expense	$	(40	)
Impairment loss	(2,450		)
Gain on sale of property	661
Loss from discontinued operations	$	(1,829	)

Note 4. Shareholders’ Equity

We originally had an aggregate of 2,921,920 shares of our common shares available 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, 2004, 24,000 common shares were awarded to our officers and certain employees of our manager pursuant to these plans. In addition, our independent trustees are each awarded 1,000 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 manager vest over a three year period. At December 31, 2004, 2,833,520 of our common shares remain available for issuance under the Award Plans. All share awards are expensed at the time of the grants.

F-10

Cash distributions paid or payable by us to our common shareholders for the years ended December 31, 2004, 2003 and 2002, were $1.26 per share, $1.24 per share and $1.24 per share, respectively.

Note 5. 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 subject to annual renewal by our compensation committee, which is comprised 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, 2004, 2003 and 2002, were $8.1 million, $7.3 million and $6.6 million, respectively. Incentive fees to RMR incurred for the years ended December 31, 2004, 2003 and 2002, were $761,000, $263,000 and zero, respectively.

As discussed in Note 3, during 2004, we purchased 32 properties from Five Star and leased them to Five Star. We also sold to Five Star one nursing property previously leased to Five Star and have agreed to sell another one. During 2004, we purchased $9.5 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 $946,000.

Note 6. 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 revolving bank credit facility permits borrowings up to $250.0 million, which amount may be expanded to $500.0 million in certain circumstances. Borrowings under our revolving bank credit facility are unsecured. We can borrow, repay and reborrow until maturity, and no principal repayment is due until maturity. The interest rate (3.86% at December 31, 2004) on borrowings under our revolving bank credit facility is calculated as LIBOR plus a margin. Our revolving bank credit facility is available for acquisitions, working capital and general business purposes. As of December 31, 2004, $37.0 million was outstanding and $213.0 million was available for borrowing under this revolving bank credit facility.

At December 31, 2004, our additional outstanding debt consisted of the following (dollars in thousands):

Unsecured Debt	Coupon		Maturity	Face Amount		Unamortized Discount
Senior notes	8.625	%	2012	$	245,000	$	975
Senior notes	7.875	%	2015	150,000		250
Total unsecured senior notes				$	395,000	$	1,225

F-11

Secured and Other Debt	Balance		Interest Rate		Maturity	Number of properties as Security	Initial Cost of Collateral		Net Book Value of Collateral
Mortgage	$	4,170	Prime minus 2	%	July 2005	1	$	4,425	$	3,914
Mortgages	37,422		6.97	%	June 2012	16	134,053		133,620
Mortgages	12,644		6.11	%	November 2013	4	15,882		15,831
Bonds	14,700		5.875	%	December 2027	1	34,118		31,660
Capital leases	7,226		7.7	%	May 2016	2	17,895		16,408
Total secured	$	76,162					$	206,373	$	201,433

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. No principal repayments are due until maturity on our mortgage due July 2005. Our monthly payments on our mortgages due 2012 and 2013 include principal and interest. Payments due under our capital leases are made monthly.

As part of our acquisition of 31 assisted living properties in November 2004, we assumed $49.2 million of secured debt which was recorded at its fair value of $50.2 million. The premium ascribed to the assumed debt is being amortized to interest expense over the contractual term of the debt.

Required principal payments on our outstanding debt as of December 31, 2004, are as follows (dollars in thousands):

2005	$	43,021
2006	1,982
2007	2,123
2008	2,265
2009	2,435
Thereafter	$	484,577

At December 31, 2004, 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. We own $847,250 of the finance subsidiary’s common securities. This finance subsidiary exists solely to issue the trust preferred securities and its own common securities and to hold as its sole assets $28.2 million of 10.125% junior subordinated debentures due June 15, 2041 that we issued. 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, the finance subsidiary will redeem a like amount of trust preferred securities. 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-12

Note 7. Fair Value of Financial Instruments and Commitments

The financial statements presented include rents receivable, senior notes, mortgages payable, other liabilities, security deposits and junior subordinated debentures. The fair values of the financial instruments were not materially different from their carrying values at December 31, 2004 and 2003, except as follows (dollars in thousands):

	2004				2003
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Senior notes	$	393,775	$	446,888	$	393,612	$	426,150
Junior subordinated debentures	28,241		30,105		27,394		30,024

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 junior subordinated debentures is based on the quoted per share prices of the related trust preferred securities of $26.65 and $27.40 at December 31, 2004 and 2003, respectively.

Note 8. 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, 2004 and 2003 (dollars in thousands):

	At December 31, 2004				Year Ended December 31, 2004
	Investment(1)		% of Total		Revenue		% of Total
Five Star	$	1,034,065	65	%	$	83,169	57	%
Sunrise Senior Living, Inc.	325,473		20	%	32,194		22	%
All others	241,414		15	%	30,368		21	%
	$	1,600,952	100	%	$	145,731	100	%

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

(1)Historical costs exclusive of depreciation and, in certain instances, after impairment losses.

F-13

Note 9. Selected Quarterly Financial Data (unaudited)

The following is a summary of our unaudited quarterly results of operations for 2004 and 2003 (dollars in thousands, except per share amounts):

	2004
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Revenues	$	36,543	$	35,506	$	35,744	$	40,730
Income from continuing operations	13,269		12,822		12,919		16,513
Net income	13,269		14,041		12,919		16,513
Per share data:
Income from continuing operations	$	0.21	$	0.20	$	0.20	$	0.26
Net income	$	0.21	$	0.22	$	0.20	$	0.26

	2003
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Revenues	$	31,350	$	31,842	$	32,101	$	35,855
Income from continuing operations	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	$	0.21	$	0.19	$	0.18	$	0.23
Net income	$	0.21	$	0.17	$	0.18	$	0.23

Note 10. Commitments and Contingencies

In January 2002, HealthSouth Corporation, or HealthSouth, settled a default under its lease 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 and we entered an amended lease, which included extending the lease to December 2011 from January 2006, reducing the annual rent from $10.3 million to $8.7 million and changing other lease terms between HealthSouth and us. 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.

F-14

brought a new lawsuit against us in the Massachusetts Superior Court for Middlesex County seeking to prevent our termination of the amended lease; on November 9, 2004, after a hearing, the court denied HealthSouth’s request for a preliminary injunction to prevent termination of the amended lease. We are currently seeking an expedited judicial determination that the lease termination was valid and we are pursuing damages against HealthSouth in the lawsuit which we brought in 2003. We have also begun work to identify and qualify a new tenant operator for the hospitals. Our lease with HealthSouth requires that, after termination, HealthSouth manage the hospitals for our account for a management fee during the period of the transition to a new tenant and remit the net cash flow to us. During the pendency of these disputes, HealthSouth has continued to pay us at the disputed rent amount and we have applied the payments received against the net cash flow due, but we do not know how long HealthSouth may continue to make payments.

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 the operator, Sunrise Senior Living Services, Inc., 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 11. Pro Forma Information (unaudited)

We purchased 32 properties in 2004 for $187.9 million, including closing costs and 32 properties in 2003 for $179.4 million, including closing costs.

The following table presents our pro forma results of operations as if our 2004 and 2003 acquisitions and financings were completed on January 1, 2003. This pro forma data is not necessarily indicative of what actual results of operations would have been for the years presented, nor do they purport to represent the results of operations for any future period. Differences could result from, but are not limited to, additional property sales or investments, changes in interest rates and changes in our debt or equity structure. Amounts are in thousands, except per share data.

	Year Ended December 31,
	2004		2003
Total revenues	$	160,591	$	158,588
Income from continuing operations	63,674		62,388
Net income	64,893		61,228

Per common share data:
Income from continuing operations	$	0.93	$	0.91
Net income	$	0.95	$	0.89

F-15

SENIOR HOUSING PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2004
(Dollars in Thousands)

		Initial Cost to Company										Cost Amount Carried at Close of Period 12/31/04
Location	State	Land		Buildings and Equipment		Costs Capitalized Subsequent to Acquisition			Impairment			Land		Buildings and Equipment		Total (1)		(2) Accumulated Depreciation		(3) Date Acquired	Original Construction Date

Beaufort	AL	$	188	$	2,320	$	—		$	—		$	188	$	2,320	$	2,508	$	8	11/19/2004	1999
Knoxville	AL	304		3,587		—			—			304		3,587		3,891		13		11/19/2004	1998
Seneca	AL	396		4,831		—			—			396		4,831		5,227		17		11/19/2004	2000
Peoria	AZ	2,687		15,843		390			—			2,687		16,233		18,920		1,382		1/11/2002	1990
Scottsdale	AZ	2,315		13,650		416			—			2,315		14,066		16,381		1,201		1/11/2002	1984
Scottsdale	AZ	979		8,807		91			—			941		8,936		9,877		2,373		5/16/1994	1990
Sun City	AZ	1,174		10,569		173			—			1,189		10,727		11,916		2,827		6/17/1994	1990
Sun City West	AZ	400		3,305		2			—			400		3,307		3,707		176		2/28/2003	1998
Tucson	AZ	4,429		26,119		746			—			4,429		26,865		31,294		2,317		1/2/2002	1989
Yuma	AZ	223		2,100		(1,517		)	—			103		703		806		244		6/30/1992	1984
Yuma	AZ	103		604		1,900			—			223		2,384		2,607		770		6/30/1992	1984
Arleta	CA	230		2,070		308			—			230		2,378		2,608		280		11/1/2000	1976
Fresno	CA	738		2,577		188			—			738		2,765		3,503		1,102		12/28/1990	1963
Laguna Hills	CA	3,132		28,184		475			—			3,172		28,619		31,791		7,365		9/9/1994	1975
Lancaster	CA	601		1,859		1,203			—			601		3,061		3,663		1,141		12/28/1990	1969
San Diego	CA	9,142		53,904		550			—			9,142		54,454		63,596		4,565		1/11/2002	1987
Stockton	CA	382		2,750		313			—			382		3,063		3,445		1,021		6/30/1992	1968
Stockton	CA	1,176		11,171		177			—			1,176		11,348		12,524		421		9/30/2003	1988
Thousand Oaks	CA	622		2,522		771			—			622		3,293		3,915		1,155		12/28/1990	1965
Van Nuys	CA	716		378		406			—			718		782		1,500		307		12/28/1990	1969
Canon City	CO	292		6,228		329			(3,512		)	292		3,045		3,337		379		9/26/1997	1970
Colorado Springs	CO	245		5,236		460			(3,031		)	245		2,665		2,910		338		9/26/1997	1972
Delta	CO	167		3,570		285			—			167		3,854		4,022		730		9/26/1997	1963
Grand Junction	CO	36		2,583		1,654			—			166		4,107		4,273		1,230		12/30/1993	1978
Grand Junction	CO	204		3,875		513			—			204		4,388		4,592		1,479		12/30/1993	1968
Lakewood	CO	232		3,766		998			—			232		4,764		4,996		1,750		12/28/1990	1972
Littleton	CO	185		5,043		(1,321		)	—			400		3,507		3,907		186		12/28/1990	1965
Littleton	CO	400		3,505		2,103			—			184		5,824		6,008		2,191		2/28/2003	1998
New Haven	CT	1,681		14,953		2,205			(12,154		)	1,681		5,004		6,685		2,641		5/11/1992	1971
Waterbury	CT	1,003		9,023		2,014			(5,694		)	1,003		5,343		6,346		2,656		5/11/1992	1974
Newark	DE	2,010		11,852		362			—			2,010		12,214		14,224		1,050		1/11/2002	1991
Wilmington	DE	4,365		25,739		453			—			4,365		26,192		30,557		2,209		1/11/2002	1988
Wilmington	DE	1,179		6,950		290			—			1,179		7,240		8,419		619		1/11/2002	1974
Wilmington	DE	38		227		161			—			38		388		426		48		1/11/2002	1965
Wilmington	DE	869		5,126		541			—			869		5,667		6,536		494		1/11/2002	1989
Boca Raton	FL	4,404		39,633		798			—			4,474		40,362		44,835		10,718		5/20/1994	1994
Cape Coral	FL	400		2,904		3			—			400		2,907		3,307		155		2/28/2003	1998

S-1

		Initial Cost to Company				Cost Amount Carried at Close of Period 12/31/04
Location	State	Land	Buildings and Equipment	Costs Capitalized Subsequent to Acquisition	Impairment	Land	Buildings and Equipment	Total (1)	(2) Accumulated Depreciation	(3) Date Acquired	Original Construction Date
Coral Springs	FL	3,410	20,104	572	—	3,410	20,676	24,086	1,740	1/11/2002	1984
Deerfield Beach	FL	3,196	18,848	636	—	3,196	19,484	22,680	1,643	1/11/2002	1990
Deerfield Beach	FL	1,664	14,972	298	—	1,690	15,245	16,934	4,048	5/16/1994	1986
Fort Lauderdale	FL	22	129	161	—	22	290	312	36	1/11/2002	1949
Fort Myers	FL	369	2,174	113	—	369	2,287	2,656	196	1/1/2002	1990
Fort Myers	FL	2,349	21,137	419	—	2,385	21,520	23,905	5,582	8/16/1994	1984
Palm Harbor	FL	3,327	29,945	591	—	3,379	30,484	33,863	8,095	5/16/1994	1992
Palm Harbor	FL	3,449	20,336	369	—	3,449	20,705	24,154	1,753	1/11/2002	1989
Port St. Lucie	FL	1,223	11,009	219	—	1,242	11,209	12,451	2,977	5/20/1994	1993
West Palm Beach	FL	2,061	12,153	854	—	2,061	13,007	15,068	1,076	1/11/2002	1988
Athens	GA	337	4,008	—	—	337	4,008	4,345	14	11/19/2004	1998
Bowling Green	GA	365	4,489	—	—	365	4,489	4,854	16	11/19/2004	1999
Camden	GA	322	3,957	—	—	322	3,957	4,279	14	11/19/2004	1999
College Park	GA	300	2,702	259	—	300	2,961	3,261	769	5/15/1996	1985
Conyers	GA	342	4,180	—	—	342	4,180	4,522	15	11/19/2004	1997
Dublin	GA	442	3,982	345	—	442	4,327	4,769	1,096	5/15/1996	1968
Jackson	GA	295	3,482	—	—	295	3,482	3,776	12	11/19/2004	1999
Marietta	GA	300	2,702	311	—	300	3,013	3,313	747	5/15/1996	1967
Mayfield	GA	268	3,195	—	—	268	3,195	3,464	11	11/19/2004	1999
Newport News	GA	581	6,924	—	—	581	6,924	7,505	24	11/19/2004	1998
Clarinda	IA	77	1,453	630	—	77	2,083	2,160	674	12/30/1993	1968
Council Bluffs	IA	225	893	370	—	225	1,263	1,488	395	4/1/1995	1963
Des Moines	IA	123	627	234	—	123	862	984	129	7/1/2000	1965
Glenwood	IA	322	2,098	289	—	322	2,387	2,709	333	7/1/2000	1964
Mediapolis	IA	94	1,776	462	—	94	2,239	2,332	730	12/30/1993	1973
Pacific Junction	IA	32	306	60	—	32	365	398	107	4/1/1995	1978
Winterset	IA	111	2,099	735	—	111	2,834	2,945	903	12/30/1993	1973
Arlington Heights	IL	3,621	32,587	535	—	3,665	33,077	36,743	8,512	9/9/1994	1986
Indianapolis	IN	2,781	16,396	730	—	2,785	17,122	19,907	1,438	1/11/2002	1986
South Bend	IN	400	3,105	2	—	400	3,107	3,507	165	2/28/2003	1988
Ellinwood	KS	130	1,137	235	—	130	1,372	1,502	344	4/1/1995	1972
Overland Park	KS	1,274	11,426	300	—	1,274	11,726	13,000	726	10/25/2002	1985
Overland Park	KS	2,568	15,140	364	—	2,568	15,504	18,072	1,314	1/11/2002	1984
Columbus	KY	294	3,506	—	—	294	3,506	3,800	12	11/19/2004	1999
Franklin	KY	322	3,825	—	—	322	3,825	4,147	13	11/19/2004	1997
Lafayette(4)	KY	—	10,848	342	—	—	11,190	11,190	920	1/11/2002	1985
Lexington(4)	KY	—	6,394	312	—	—	6,706	6,706	567	1/11/2002	1980
Lexington	KY	363	4,429	—	—	363	4,429	4,792	15	11/19/2004	1999
Louisville	KY	3,524	20,779	1,387	—	3,524	22,166	25,690	1,830	1/11/2002	1984

S-2

		Initial Cost to Company						Cost Amount Carried at Close of Period 12/31/04
Location	State	Land	Buildings and Equipment	Costs Capitalized Subsequent to Acquisition		Impairment		Land	Buildings and Equipment	Total (1)	(2) Accumulated Depreciation	(3) Date Acquired	Original Construction Date
Orangeburg	KY	303	3,681	—		—		303	3,681	3,984	13	11/19/2004	1999
Braintree	MA	3,193	16,652	17		—		3,193	16,669	19,862	4,106	1/2/2002	1975
Winchester	MA	3,218	18,988	686		—		3,218	19,674	22,892	1,631	1/11/2002	1980
Woburn	MA	3,809	19,862	20		—		3,809	19,882	23,691	4,898	1/2/2002	1984
Bowie	MD	408	3,421	107		—		408	3,528	3,936	220	10/25/2002	2000
Easton	MD	383	4,555	143		—		383	4,699	5,081	292	10/25/2002	2000
Ellicott City	MD	1,410	22,691	247		—		1,410	22,938	24,348	507	3/1/2004	1997
Frederick	MD	385	3,444	127		—		385	3,572	3,956	222	10/25/2002	1998
Severna Park	MD	229	9,798	292		—		229	10,090	10,319	621	10/25/2002	1998
Silver Spring	MD	1,192	9,288	965		—		1,200	10,245	11,445	613	10/25/2002	1996
Silver Spring	MD	3,229	29,065	786		—		3,301	29,779	33,080	7,786	7/25/1994	1992
Farmington(5)	MI	474	3,682	269		—		474	3,951	4,425	512	7/1/2000	1969
Midland	MI	300	2,404	(198	)	—		300	2,206	2,506	140	2/28/2003	1988
Monroe	MI	400	2,604	2		—		400	2,606	3,006	134	2/28/2003	1988
Monroe	MI	300	2,504	102		—		300	2,606	2,906	118	2/28/2003	1988
Portage	MI	600	4,807	205		—		600	5,012	5,612	266	2/28/2003	1998
Saginaw	MI	300	2,604	(98	)	—		300	2,506	2,806	138	2/28/2003	1998
Eagan	MN	400	2,504	2		—		400	2,506	2,906	166	2/28/2003	1998
West St. Paul	MN	400	3,705	3		—		400	3,708	4,108	200	2/28/2003	1998
St. Joseph	MO	111	1,027	471		—		111	1,498	1,609	361	6/4/1993	1976
Tarkio	MO	102	1,938	640		—		102	2,578	2,680	814	12/30/1993	1970
Cary	NC	713	4,628	418		—		713	5,046	5,759	310	10/25/2002	1999
Chapel Hill	NC	800	6,409	5		—		800	6,414	7,214	341	2/28/2003	1996
Ainsworth	NE	25	420	257		—		25	677	702	131	7/1/2000	1966
Ashland	NE	28	1,823	187		—		28	2,010	2,038	307	7/1/2000	1965
Blue Hill	NE	56	1,063	291		—		56	1,353	1,410	181	7/1/2000	1967
Central City	NE	21	919	259		—		21	1,178	1,199	175	7/1/2000	1969
Columbus	NE	89	561	217		—		88	778	867	111	7/1/2000	1955
Edgar	NE	1	138	135		—		1	273	274	69	7/1/2000	1971
Exeter	NE	4	626	118		—		4	744	748	135	7/1/2000	1965
Grand Island	NE	119	1,446	686		—		119	2,132	2,251	493	4/1/1995	1963
Gretna	NE	267	673	139		(29	)	237	813	1,050	163	7/1/2000	1972
Lyons	NE	13	797	224		—		13	1,021	1,034	169	7/1/2000	1969
Milford	NE	24	880	179		—		24	1,059	1,083	189	7/1/2000	1967
Sutherland	NE	19	1,251	199		—		19	1,450	1,469	210	7/1/2000	1970
Utica	NE	21	569	116		—		21	685	706	123	7/1/2000	1966
Waverly	NE	529	686	240		—		529	926	1,455	169	7/1/2000	1989

S-3

		Initial Cost to Company					Cost Amount Carried at Close of Period 12/31/04
Location	State	Land	Buildings and Equipment	Costs Capitalized Subsequent to Acquisition		Impairment	Land	Buildings and Equipment	Total (1)	(2) Accumulated Depreciation	(3) Date Acquired	Original Construction Date
Burlington	NJ	1,300	11,700	7		—	1,300	11,707	13,007	2,708	9/29/1995	1994
Cherry Hill	NJ	1,001	8,176	(1	)	—	1,001	8,175	9,176	213	12/29/2003	1999
Lakewood(6)	NJ	4,885	28,803	430		—	4,885	29,233	34,118	2,458	1/11/2002	1987
Mt. Arlington	NJ	1,375	11,235	(3	)	—	1,375	11,232	12,607	292	12/29/2003	2001
Voorhees	NJ	1,001	8,179	(2	)	—	1,001	8,177	9,178	213	12/29/2003	1998
Washington Twp	NJ	1,001	8,179	(2	)	—	1,001	8,177	9,178	213	12/29/2003	1999
Albuquerque	NM	3,828	22,572	352		—	3,828	22,924	26,752	1,940	1/11/2002	1986
Columbus	OH	3,623	27,778	565		—	3,623	28,343	31,966	2,356	1/11/2002	1989
Grove City	OH	332	3,081	791		—	332	3,872	4,204	903	6/4/1993	1965
Canonsburg	PA	1,499	13,493	606		—	1,518	14,080	15,598	9,130	3/1/1991	1985
Clarks Summitt	PA	1,001	8,235	(2	)	—	1,001	8,233	9,234	214	12/29/2003	2001
Devon	PA	550	4,537	(1	)	—	550	4,536	5,086	118	12/29/2003	2001
Exton	PA	1,001	8,235	(2	)	—	1,001	8,233	9,234	217	12/29/2003	2000
Glen Mills	PA	1,001	8,235	(2	)	—	1,001	8,233	9,234	224	12/29/2003	2001
Kingston	PA	—	5,683	—		—	—	5,683	5,683	142	12/29/2003	1997
Murraysville	PA	300	2,504	2		—	300	2,506	2,806	147	12/29/2003	1998
New Britain	PA	979	8,054	(2	)	—	979	8,052	9,031	210	12/29/2003	1998
Penn Hills	PA	200	901	3		—	200	904	1,104	53	12/29/2003	1997
Anderson	SC	295	3,511	—		—	295	3,511	3,806	12	11/19/2004	1999
Bellgrade	SC	1,103	13,133	—		—	1,103	13,133	14,235	46	11/19/2004	1996
Columbia	SC	300	1,903	2		—	300	1,905	2,205	101	2/28/2003	1998
Cullman	SC	287	3,482	—		—	287	3,482	3,769	12	11/19/2004	1998
Dalton	SC	262	3,121	—		—	262	3,121	3,383	11	11/19/2004	1997
Hopkinsville	SC	316	3,751	—		—	316	3,751	4,067	13	11/19/2004	1999
Madison	SC	334	4,115	—		—	334	4,115	4,449	14	11/19/2004	1998
Myrtle Beach	SC	543	3,202	342		—	543	3,544	4,087	298	1/11/2002	1980
Paducah	SC	450	5,558	—		—	450	5,558	6,008	19	11/19/2004	2000
Rock Hill	SC	300	1,703	2		—	300	1,705	2,005	97	2/28/2003	1998
Huron	SD	144	3,108	4		—	144	3,112	3,256	1,082	6/30/1992	1968
Huron	SD	45	968	1		—	45	969	1,014	337	6/30/1992	1968
Sioux Falls	SD	253	3,062	4		—	253	3,066	3,319	1,070	6/30/1992	1960
Cleveland	TN	305	3,739	—		—	305	3,739	4,044	13	11/19/2004	1998
Cookeville	TN	322	3,948	—		—	322	3,948	4,269	14	11/19/2004	1998
Gainesville	TN	268	3,264	—		—	268	3,264	3,531	11	11/19/2004	1998
Gallatin	TN	280	3,329	—		—	280	3,329	3,609	12	11/19/2004	1998
Goodlettsville	TN	400	3,495	(288	)	—	300	3,307	3,607	186	2/28/2003	1998
Hartsville	TN	401	4,898	—		—	401	4,898	5,300	17	11/19/2004	1999
Maryville	TN	300	3,315	292		—	400	3,507	3,907	176	2/28/2003	1998
West End	TN	732	8,721	—		—	732	8,721	9,453	31	11/19/2004	1999

S-4

		Initial Cost to Company									Cost Amount Carried at Close of Period 12/31/04
Location	State	Land		Buildings and Equipment		Costs Capitalized Subsequent to Acquisition		Impairment			Land		Buildings and Equipment		Total (1)		(2) Accumulated Depreciation		(3) Date Acquired	Original Construction Date
Bellaire	TX	1,223		11,010		178		—			1,238		11,172		12,411		2,967		5/16/1994	1991
Dallas	TX	4,709		27,768		1,354		—			4,709		29,121		33,831		2,405		1/11/2002	1990
El Paso	TX	2,301		13,567		333		—			2,301		13,900		16,201		1,179		1/11/2002	1987
Houston	TX	5,537		32,647		861		—			5,537		33,508		39,045		2,825		1/11/2002	1989
San Antonio	TX	4,283		25,256		857		—			4,283		26,112		30,396		2,170		1/11/2002	1989
Woodlands	TX	3,694		21,782		1,119		—			3,694		22,901		26,595		1,901		1/11/2002	1988
Arlington	VA	1,859		16,734		295		—			1,885		17,004		18,888		4,446		7/25/1994	1992
Charlottesville	VA	641		7,637		—		—			641		7,637		8,278		27		11/19/2004	1998
Charlottesville	VA	2,936		26,422		472		—			2,976		26,853		29,830		7,076		6/17/1994	1991
Chesapeake	VA	160		1,498		66		—			160		1,564		1,724		72		5/30/2003	1988
Evans	VA	230		2,739		—		—			230		2,739		2,969		10		11/19/2004	1998
Fredericksburg	VA	287		8,480		241		—			287		8,721		9,008		551		10/25/2002	1998
Macon	VA	183		2,278		—		—			183		2,278		2,461		8		11/19/2004	1998
Poquoson	VA	220		2,041		58		—			220		2,099		2,319		95		5/30/2003	1987
Richmond	VA	134		3,191		171		—			134		3,362		3,496		204		10/25/2002	1999
Sheffield	VA	395		4,817		—		—			395		4,817		5,212		17		11/19/2004	1998
Virginia Beach	VA	881		7,926		140		—			893		8,054		8,947		2,139		5/16/1994	1990
Williamsburg	VA	270		2,468		73		—			270		2,541		2,811		114		5/30/2003	1987
Seattle	WA	256		4,869		68		—			256		4,936		5,193		1,705		11/1/1993	1964
Brookfield	WI	832		3,849		8,394		(6,552		)	832		5,691		6,523		1,408		12/28/1990	1964
Clintonville	WI	49		1,625		225		—			30		1,869		1,899		710		12/28/1990	1965
Clintonville	WI	14		1,695		270		—			14		1,965		1,979		710		12/28/1990	1960
Madison	WI	144		1,633		377		—			144		2,011		2,154		708		12/28/1990	1920
Milwaukee	WI	277		3,883		936		—			277		4,819		5,096		1,509		3/27/1992	1969
Pewaukee	WI	984		2,432		307		—			984		2,739		3,723		982		9/10/1998	1963
Waukesha	WI	68		3,452		2,455		—			68		5,907		5,975		1,972		12/28/1990	1958
Laramie	WY	191		3,632		469		—			191		4,101		4,292		1,366		12/30/1993	1964
Worland	WY	132		2,503		796		—			132		3,299		3,431		1,044		12/30/1993	1970

	Total	$	177,810	$	1,391,468	$	62,646	$	(30,972	)	$	178,353	$	1,422,599	$	1,600,952	$	199,232

(1) Aggregate cost for federal income tax purposes is approximately $1.77 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 $7.2 million of capital leases.

(5) These properties are collateral for our $54.2 million of mortgage notes.

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

S-5

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, 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
Additions	187,887			39,301
Disposals	(5,176		)	(495		)
Balance at December 31, 2004	$	1,600,952		$	199,232

S-6

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 9, 2005

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 9, 2005
David J. Hegarty

/s/ John R. Hoadley	Treasurer and Chief Financial Officer	March 9, 2005
John R. Hoadley

/s/ Frank J. Bailey	Trustee	March 9, 2005
Frank J. Bailey

/s/ John L. Harrington	Trustee	March 9, 2005
John L. Harrington

/s/ Gerard M. Martin	Trustee	March 9, 2005
Gerard M. Martin

/s/ Barry M. Portnoy	Trustee	March 9, 2005
Barry M. Portnoy

/s/ Frederick N. Zeytoonjian	Trustee	March 9, 2005
Frederick N. Zeytoonjian