snh_Current folio

snh_Current folio_10Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2014

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

Commission File Number 1-15319

SENIOR HOUSING PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

Maryland

04-3445278

(State or Other Jurisdiction of Incorporation or

Organization)

(IRS Employer Identification No.)

Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458-1634

(Address of Principal Executive Offices) (Zip Code)

617-796-8350

(Registrant’s Telephone Number, Including Area Code)

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):


Large accelerated filer ☒		Accelerated filer ☐

Non—accelerated filer ☐		Smaller reporting company ☐
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of registrant’s common shares outstanding as of November 3, 2014: 203,885,292.

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

FORM 10-Q

September 30, 2014

INDEX


		Page
PART I	Financial Information

Item 1.	Financial Statements (unaudited)	1

	Condensed Consolidated Balance Sheets — September 30, 2014 and December 31, 2013	1

	Condensed Consolidated Statements of Income and Comprehensive Income — Three and Nine Months Ended September 30, 2014 and 2013	2

	Condensed Consolidated Statements of Cash Flows — Three and Nine Months Ended September 30, 2014 and 2013	3

	Notes to Condensed Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4.	Controls and Procedures	50

	Warning Concerning Forward Looking Statements	51

	Statement Concerning Limited Liability	55

PART II	Other Information	56

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 6.	Exhibits	56

	Signatures	58

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

Table of Contents

PART I. Financial Information

Item 1. Financial Statements.

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share and per share data)

(unaudited)


	September 30,		December 31,
	2014		2013
ASSETS
Real estate properties:
Land	$	680,994	$	623,756
Buildings and improvements		5,503,074		4,639,869
		6,184,068		5,263,625
Less accumulated depreciation		(946,566)		(840,760)
		5,237,502		4,422,865
Cash and cash equivalents		80,750		39,233
Restricted cash		10,986		12,514
Deferred financing fees, net		32,021		27,975
Acquired real estate leases and other intangible assets, net		482,564		103,494
Other assets		145,299		158,585
Total assets	$	5,989,122	$	4,764,666

LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility	$	—	$	100,000
Unsecured term loan		350,000		—
Senior unsecured notes, net of discount		1,743,272		1,093,337
Secured debt and capital leases		669,011		699,427
Accrued interest		32,555		15,839
Assumed real estate lease obligations, net		125,493		12,528
Other liabilities		84,576		66,546
Total liabilities		3,004,907		1,987,677

Commitments and contingencies

Shareholders’ equity:
Common shares of beneficial interest, $.01 par value: 220,000,000 shares authorized, 203,872,829 and 188,167,643 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively		2,039		1,882
Additional paid in capital		3,824,237		3,497,589
Cumulative net income		1,308,333		1,194,985
Cumulative other comprehensive income		1,736		8,412
Cumulative distributions		(2,152,130)		(1,925,879)
Total shareholders’ equity		2,984,215		2,776,989
Total liabilities and shareholders’ equity	$	5,989,122	$	4,764,666

See accompanying notes.

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Revenues:
Rental income	$	137,614	$	112,319	$	377,339	$	336,468
Residents fees and services		79,259		74,946		237,740		224,634
Total revenues		216,873		187,265		615,079		561,102

Expenses:
Property operating expenses		82,706		74,729		240,297		222,893
Depreciation		50,074		38,473		135,132		114,472
General and administrative		10,384		7,798		28,250		24,615
Acquisition related costs		15		396		2,649		2,590
Impairment of assets		—		—		—		5,675
Total expenses		143,179		121,396		406,328		370,245

Operating income		73,694		65,869		208,751		190,857

Interest and other income		78		42		336		612
Interest expense		(36,201)		(29,405)		(99,213)		(88,536)
Loss on early extinguishment of debt		—		(692)		—		(797)
Income from continuing operations before income tax expense and equity in earnings of an investee		37,571		35,814		109,874		102,136
Income tax expense		(156)		(125)		(502)		(405)
Equity in earnings of an investee		38		64		59		219
Income from continuing operations		37,453		35,753		109,431		101,950
Discontinued operations:
(Loss) income from discontinued operations		(557)		1,231		1,484		3,762
Impairment of assets from discontinued operations		216		—		(117)		(27,896)
Income before gain on sale of properties		37,112		36,984		110,798		77,816
Gain on sale of properties		—		1,141		2,552		1,141
Net income	$	37,112	$	38,125	$	113,350	$	78,957

Other comprehensive income:
Change in net unrealized (loss) / gain on investments		(5,404)		(2,166)		(6,684)		2,195
Share of comprehensive (loss) income of an investee		(33)		13		17		(68)
Comprehensive income	$	31,675	$	35,972	$	106,683	$	81,084

Weighted average shares outstanding		203,792		188,102		197,317		186,942

Income from continuing operations per share		0.18		0.19		0.56		0.55
Income (loss) from discontinued operations per share		—		0.01		0.01		(0.13)
Basic and diluted net income per share	$	0.18	$	0.20	$	0.57	$	0.42

See accompanying notes.

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)


	Nine Months Ended
	September 30,
	2014		2013
Cash flows from operating activities:
Net income	$	113,350	$	78,957
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		135,132		115,274
Amortization of deferred financing fees and debt discounts		4,709		4,559
Straight line rental income		(6,814)		(5,256)
Amortization of acquired real estate leases and other intangible assets		(1,110)		2,793
Loss on early extinguishment of debt		—		797
Impairment of assets		117		33,571
Gain on sale of properties		(2,552)		(1,141)
Equity in earnings of an investee		(59)		(219)
Change in assets and liabilities:
Restricted cash		1,528		(614)
Other assets		331		569
Accrued interest		16,716		6,006
Other liabilities		20,175		12,884
Cash provided by operating activities		281,523		248,180

Cash flows from investing activities:
Real estate acquisitions and deposits		(1,146,840)		(148,775)
Real estate improvements		(53,197)		(36,820)
Investment in Affiliates Insurance Company		(825)		—
Proceeds from sale of properties		18,575		2,550
Cash used for investing activities		(1,182,287)		(183,045)

Cash flows from financing activities:
Proceeds from issuance of common shares, net		322,962		261,813
Proceeds from issuance of unsecured senior notes, net of discount		648,914		—
Proceeds from unsecured term loan		350,000		—
Proceeds from borrowings on revolving credit facility		90,000		160,000
Repayments of borrowings on revolving credit facility		(190,000)		(225,000)
Repayment of other debt		(45,304)		(33,261)
Payment of deferred financing fees		(8,039)		(3,252)
Distributions to shareholders		(226,252)		(215,559)
Cash provided by (used for) financing activities		942,281		(55,259)

Increase (decrease) in cash and cash equivalents		41,517		9,876
Cash and cash equivalents at beginning of period		39,233		42,382
Cash and cash equivalents at end of period	$	80,750	$	52,258
Supplemental cash flow information:
Interest paid	$	77,788	$	79,552
Income taxes paid		152		536

Non-cash investing activities:
Acquisitions funded by assumed debt		(15,630)		(12,266)

Non-cash financing activities:
Assumption of mortgage notes payable		15,630		12,266
Issuance of common shares		3,997		2,538

See accompanying notes.

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 1. Basis of Presentation

The accompanying condensed consolidated financial statements of Senior Housing Properties Trust and its subsidiaries, or we, us, or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2013, or our Annual Report. In the opinion of our management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation. These reclassifications were made to conform the prior periods’ rental income, property operating expenses, discontinued operations, general and administrative expenses, interest and other income and impairment of assets to the current classification. These reclassifications had no effect on net income or shareholders’ equity.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and impairment of real estate and intangible assets.

Note 2. Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update amends the criteria for reporting discontinued operations to, among other things, raise the threshold for disposals to qualify as discontinued operations. This update is effective for interim and annual reporting periods, beginning after December 15, 2014, with early adoption permitted. We currently expect that, when adopted, this update will reduce the number of any future property dispositions to be presented as discontinued operations in our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. This update is effective for interim and annual reporting periods beginning after December 15, 2016. We are currently in the process of evaluating the impact, if any, the adoption of this ASU will have on our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The update requires an entity to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances. The update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter with early adoption permitted. The implementation of this update is not expected to cause any significant changes to our condensed consolidated financial statements.

Note 3. Real Estate Properties

At September 30, 2014, we owned 371 properties (398 buildings) located in 38 states and Washington, D.C. We have accounted, or expect to account for, the following acquisitions as business combinations unless otherwise noted.

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

MOB Acquisitions:

In April 2014, we acquired one property (one building) leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or an MOB, for approximately $32,658, including the assumption of approximately $15,630 of mortgage debt, and excluding closing costs. This MOB is located in Texas and includes 125,240 square feet of leasable space. We funded this acquisition using cash on hand and borrowings under our revolving credit facility. In May 2014, we acquired one MOB (two buildings) for approximately $1,125,420, excluding closing costs. This MOB is located in Massachusetts and includes approximately 1,651,037 gross building square feet. We funded this acquisition using the proceeds of equity and debt offerings and borrowings under our revolving credit facility.

MOB Acquisitions since January 1, 2014:


				Cash Paid								Acquired
		Number		plus						Acquired		Real Estate				Premium
		of	Square	Assumed				Buildings and		Real Estate		Lease		Assumed		on Assumed
Date	Location	Properties	Feet (000’s)	Debt (1)		Land		Improvements		Leases		Obligations		Debt		Debt
Apr-14	San Antonio, TX	1	125	$	32,932	$	3,141	$	26,421	$	4,393	$	10	$	15,630	$	1,013
May-14	Boston, MA	1	1,651		1,124,031		52,643		944,362		245,511		118,485		—		—
		2	1,776	$	1,156,963	$	55,784	$	970,783	$	249,904	$	118,495	$	15,630	$	1,013

⁽¹⁾

These amounts include the cash we paid plus debt we assumed, if any, as well as other settlement adjustments with respect to the acquisitions but exclude closing costs. The allocation of the purchase price of our acquisitions shown above is based upon preliminary estimates of the fair value of assets acquired and liabilities assumed. Consequently, amounts preliminarily allocated to assets acquired and liabilities assumed may change from those used in these condensed consolidated financial statements.

In July 2014, we entered into an agreement to acquire one senior living community for approximately $7,000, excluding closing costs. The senior living community is located in Jackson, Wisconsin and includes 52 assisted living units. In September 2014, we entered into an agreement to acquire one senior living community for approximately $40,430, excluding closing costs. The senior living community is located in Madison, Wisconsin and includes 176 independent and assisted living units. If these acquisitions are completed, we expect that a subsidiary of Five Star Quality Care, Inc. will manage these communities for our account pursuant to long term management agreements. In this Quarterly Report on Form 10-Q, we refer to Five Star Quality Care, Inc. and its applicable subsidiaries as Five Star.

In August 2014, we entered into an agreement to acquire the entities owning 23 MOBs for approximately $539,000, including the assumption of approximately $30,000 of mortgage debt. The MOBs contain approximately 2,200,000 square feet and are located in 12 states. The closing of this acquisition is subject to various conditions; accordingly, we may not purchase some or all of these properties, these purchases may be delayed or the terms of these purchases may change. See Note 10 for further information about this acquisition.

Impairment:

We periodically evaluate our properties for impairments. Impairment indicators may include declining tenant occupancy, 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 legislative, market or industry changes that could permanently reduce the value of a property. If indicators of impairment are present, we evaluate the carrying value of the affected property by comparing it to the expected future undiscounted net cash flows to be generated from that property. If the sum of these expected future net cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value.

As of September 30, 2014, we had seven senior living communities with 552 living units and one MOB (four buildings) with 323,541 square feet categorized as properties held for sale. During the nine months ended September 30, 2014, we

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

recorded net impairment of assets charges of $117 to adjust the carrying value of four MOBs included in discontinued operations to their aggregate estimated net sale price. The eight properties are included in other assets in our condensed consolidated balance sheets and have a net book value (after impairment) of approximately $12,924 at September 30, 2014. As of December 31, 2013, we had 10 senior living communities with 744 units and four MOBs (seven buildings) with 831,499 square feet categorized as properties held for sale, which were similarly recorded and categorized at September 30, 2014, except that three of the senior living communities and three of the MOBs were sold during the first nine months of 2014, as noted below. These properties are included in other assets in our condensed consolidated balance sheets and had a net book value (after impairment) of approximately $27,888 at December 31, 2013. We decided to sell these properties because of what we believe to be unattractive conditions in the markets in which these properties are located or in which they operate. We classify all properties as held for sale in our condensed consolidated balance sheets that meet the applicable criteria for that treatment as set forth in the Property, Plant and Equipment Topic of the FASB Accounting Standards Codification, or the Codification.

Results of operations for properties sold or held for sale are included in discontinued operations in our condensed consolidated statements of operations once the criteria for discontinued operations in the Presentation of Financial Statements Topic of the Codification are met. The senior living properties which we are or were offering for sale as of the applicable periods do not meet the criteria for discontinued operations as they are included within combination leases with other properties that we expect to continue leasing. Summarized income statement information for the four MOBs (seven buildings) that meet the criteria for discontinued operations is included in discontinued operations as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Rental income	$	111	$	2,189	$	3,837	$	7,284
Property operating expenses		(668)		(958)		(2,353)		(2,723)
Depreciation and amortization		—		—		—		(799)
Income from discontinued operations	$	(557)	$	1,231	$	1,484	$	3,762

In January 2014, we sold a senior living community with 36 units that was previously classified as held for sale for $2,400 and recorded a gain on the sale of this property of approximately $156.

In April 2014, we sold one MOB (one building) with 210,879 square feet that was included in discontinued operations for $5,000 and recorded no gain or loss on the sale.

In June 2014, we sold two senior living communities with 156 units that were previously classified as held for sale for $4,500 and recorded a gain on the sale of these properties of approximately $2,396.

In June 2014, we sold one MOB (one building) with 235,079 square feet that was included in discontinued operations for $6,000 and recorded no gain or loss on the sale.

In September 2014, we sold one MOB ( one building) with 62,000 square feet that was included in discontinued operations for $675 and recorded no gain or loss on the sale.

In October 2014, we sold one senior living community with 70 units that was previously classified as held for sale for $2,850. Also in October 2014, we sold two senior living communities with 177 units that were previously classified as held for sale for $5,900. We will record the gain or loss on these sales during the period ending December 31, 2014 when all of the costs of the sales are known.

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 4. Unrealized Gain / Loss on Investments

As of September 30, 2014, we owned 250,000 common shares of Equity Commonwealth (formerly known as CommonWealth REIT), or EQC, and 4,235,000 common shares of Five Star which are carried at fair market value in other assets on our condensed consolidated balance sheets. Cumulative other comprehensive income shown in our condensed consolidated balance sheets includes the net unrealized gain or loss on investments determined as the net difference between the value at quoted market prices of our EQC and Five Star shares as of September 30, 2014 ($25.71 and $3.77 per share, respectively) and our weighted average costs at the time we acquired these shares, as adjusted to reflect any share splits or combinations ($26.00 and $3.36 per share, respectively).

Note 5. Indebtedness

Our principal debt obligations at September 30, 2014 were: (1) six public issuances of unsecured senior notes, including: (a) $250,000 principal amount at an annual interest rate of 4.30% due 2016, (b) $400,000 principal amount at an annual interest rate of 3.25% due 2019, (c) $200,000 principal amount at an annual interest rate of 6.75% due 2020, (d) $300,000 principal amount at an annual interest rate of 6.75% due 2021, (e) $250,000 principal amount at an annual interest rate of 4.75% due 2024 and (f) $350,000 principal amount at an annual interest rate of 5.625% due 2042; (2) our $350,000 principal amount term loan; and (3) $652,359 aggregate principal amount of mortgages secured by 47 of our properties (50 buildings) with maturity dates from 2015 to 2043. The 47 mortgaged properties (50 buildings) had a carrying value of $881,216 at September 30, 2014. We also had two properties subject to capital leases totaling $12,910 at September 30, 2014; these two properties had a carrying value of $18,375 at September 30, 2014.

We have a $750,000 unsecured revolving credit facility that is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is January 15, 2018 and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to further extend the stated maturity date by an additional one year to January 15, 2019. The revolving credit facility agreement provides that we can borrow, repay and reborrow funds available under the revolving credit facility agreement until maturity, and no principal repayment is due until maturity. The revolving credit facility agreement includes a feature under which maximum borrowings under the facility may be increased to up to $1,500,000 in certain circumstances. The interest rate paid on borrowings under the revolving credit facility agreement is LIBOR plus a premium of 130 basis points, and the facility fee is 30 basis points per annum on the total amount of lending commitments. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of September 30, 2014, the interest rate payable on borrowings under our revolving credit facility was 1.45%, and the weighted average interest rate for borrowings under our revolving credit facility was 1.42% for both the three and nine months ended September 30, 2014. The weighted average interest rate for borrowings under our revolving credit facility was 1.64% and 1.68% for the three and nine months ended September 30, 2013, respectively. As of both September 30, 2014 and November 3, 2014, we had no amounts outstanding and $750,000 available for borrowing by us.

Our revolving credit facility agreement provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as a change of control of us, which includes Reit Management & Research LLC, or RMR, ceasing to act as our business manager and property manager.

In April 2014, we sold $400,000 of 3.25% senior unsecured notes due 2019 and $250,000 of 4.75% senior unsecured notes due 2024, raising net proceeds of approximately $644,889, after underwriting discounts but before expenses. Interest on the notes is payable semi-annually in arrears. We used the net proceeds of this offering for general business purposes, including funding the acquisitions described in Note 3.

On May 30, 2014, we entered into a term loan agreement with Wells Fargo Bank, National Association and a syndicate of other lenders, pursuant to which we obtained a $350,000 unsecured term loan. Our term loan matures on January 15, 2020, and is prepayable without penalty at any time. In addition, our term loan includes a feature under which maximum

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

borrowings may be increased to up to $700,000 in certain circumstances. Our term loan bears interest at a rate of LIBOR plus a premium of 140 basis points that is subject to adjustment based upon changes to our credit ratings. We used the net proceeds of our term loan to repay amounts outstanding under our revolving credit facility, to repay mortgage notes and for general business purposes. As of September 30, 2014, the interest rate payable for amounts outstanding under our term loan was 1.55%. The weighted average annual interest rate for amounts outstanding on our term loan was 1.55% for the three and nine months ended September 30, 2014.

Our public debt indentures and related supplements and our credit facility agreement contain a number of financial and other covenants, including covenants that restrict our ability to incur indebtedness or to make distributions under certain circumstances and require us to maintain financial ratios and a minimum net worth.

In connection with the acquisitions discussed in Note 3 above, in April 2014, we assumed $15,630 of mortgage debt, which we recorded at its fair value of $16,643. This mortgage has a contractual interest rate of 6.28% and matures in July 2022. We recorded the assumed mortgage at its fair value. We determined the fair value of the assumed mortgage using a market approach based upon Level 3 inputs (significant other unobservable inputs) in the fair value hierarchy.

In June 2014, we repaid mortgage notes that encumbered two of our properties that had an aggregate principal balance of $35,300 and a weighted average interest rate of 5.8%.

In October 2014, we prepaid at par our $14,700 loan incurred in connection with certain revenue bonds scheduled to mature on December 1, 2027. That loan had an interest rate of 5.875%.

In October 2014, we repaid a mortgage note that encumbered one of our properties that had a principal balance of $11,900 and an interest rate of 6.25%.

Note 6. Shareholders’ Equity

On February 21, 2014, we paid a distribution to common shareholders of $0.39 per share, or approximately $73,386, that was declared on January 3, 2014 and was payable to shareholders of record on January 13, 2014.

On May 21, 2014, we paid a distribution to common shareholders of $0.39 per share, or approximately $73,397, that was declared on April 2, 2014 and was payable to shareholders of record on April 14, 2014.

On August 21, 2014, we paid a distribution to common shareholders of $0.39 per share, or approximately $79,469, that was declared on July 7, 2014 and was payable to shareholders of record on July 18, 2014.

On October 2, 2014, we declared a distribution payable to common shareholders of record on October 17, 2014, of $0.39 per share, or approximately $79,515. We expect to pay this distribution on or about November 21, 2014 using cash on hand and borrowings under our revolving credit facility.

During the nine months ended September 30, 2014 and the period from October 1, 2014 to November 3, 2014, we issued 85,986 and 12,463, respectively, of our common shares to RMR as part of the business management fee payable by us under our business management agreement. See Note 10 for further information regarding this agreement.

In April 2014, we issued 15,525,000 common shares in a public offering, raising net proceeds of approximately $323,318, after underwriting discounts but before expenses. We used the net proceeds from this offering to repay borrowings outstanding under our revolving credit facility and for general business purposes, including funding the acquisitions described in Note 3.

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

On June 5, 2014, we granted 2,500 common shares valued at $24.50 per share, the closing price of our common shares on the New York Stock Exchange, or NYSE, on that day, to each of our five Trustees.

On September 12, 2014, pursuant to our 2012 Equity Compensation Plan, we granted an aggregate of 81,700 of our common shares to our officers and certain employees of our manager, RMR, valued at $21.42 per share, the closing price of our common shares on the NYSE on that day.

Note 7. Fair Value of Assets and Liabilities

The following table presents certain of our assets and liabilities that are measured at fair value on a recurring and non recurring basis at September 30, 2014 categorized by the level of inputs used in the valuation of each asset or liability.


			Quoted Prices in		Significant		Significant
			Active Markets for		Other		Unobservable
			Identical Assets		Observable Inputs		Inputs

Description	Total		(Level 1)		(Level 2)		(Level 3)

Assets held for sale(1)	$	12,924	$	—	$	12,924	$	—
Investments in available for sale securities(2)	$	22,393	$	22,393	$	—	$	—
Unsecured senior notes(3)	$	1,816,660	$	1,816,660	$	—	$	—
Secured debt(4)	$	726,242	$	—	$	—	$	726,242

⁽¹⁾

Assets held for sale consist of eight properties (11 buildings) that we expect to sell that are reported at fair value less costs to sell. We used offers to purchase these properties made by third parties or comparable sales transactions (Level 2 inputs) to determine the fair value of these properties. We have recorded cumulative impairments of approximately $13,500 to these properties in order to reduce their book value to fair value.

⁽²⁾

Our investments in available for sale securities include our 250,000 common shares of EQC and 4,235,000 common shares of Five Star. The fair values of these shares are based on quoted prices at September 30, 2014 in active markets (Level 1 inputs).

⁽³⁾

We estimate the fair values of our unsecured senior notes using an average of the bid and ask price of our outstanding six issuances of senior notes (Level 1 inputs) on or about September 30, 2014. The fair values of these senior note obligations exceed their aggregate book values of $1,743,272 by $73,387 because these notes were trading at premiums to their face amounts.

⁽⁴⁾

We estimate the fair values of our secured debt by using discounted cash flow analyses and currently prevailing market terms at September 30, 2014 (Level 3 inputs). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

In addition to the assets and liabilities described in the above table, our additional financial instruments include rents receivable, cash and cash equivalents, restricted cash and other unsecured debt. The fair values of these additional financial instruments approximate their carrying values at September 30, 2014 based upon their liquidity, short term maturity, variable rate pricing or our estimate of fair value using discounted cash flow analyses and prevailing interest rates.

Note 8. Segment Reporting

We have four operating segments, of which three are separately reportable operating segments: (1) triple net leased senior living communities that provide short term and long term residential care and dining services for residents that are leased to third parties, (2) managed senior living communities that provide short term and long term residential care and dining services for residents that are managed for our account and (3) MOBs. Our triple net leased and managed senior living communities both include independent living communities, assisted living communities, skilled nursing facilities,

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

or SNFs, and some communities that offer a combination of the independent and assisted living and skilled nursing services. Properties in the MOB segment include buildings leased to medical providers, medical related businesses, clinics and biotech laboratory tenants. The “All Other” category in the following table includes amounts related to corporate business activities and the operating results of certain properties that offer fitness, wellness and spa services to members.


	For the Three Months Ended September 30, 2014
	Triple Net
	Leased		Managed
	Senior Living		Senior Living				All Other
	Communities		Communities		MOBs		Operations		Consolidated

Revenues:
Rental income	$	55,266	$	—	$	77,798	$	4,550	$	137,614
Residents fees and services		—		79,259		—		—		79,259
Total revenues		55,266		79,259		77,798		4,550		216,873

Expenses:
Property operating expenses		—		61,330		21,376		—		82,706
Depreciation		15,372		8,006		25,748		948		50,074
General and administrative		—		—		—		10,384		10,384
Acquisition related costs		—		—		—		15		15
Total expenses		15,372		69,336		47,124		11,347		143,179

Operating income (loss)		39,894		9,923		30,674		(6,797)		73,694

Interest and other income		—		—		—		78		78
Interest expense		(6,446)		(2,416)		(1,484)		(25,855)		(36,201)
Income (loss) before income tax expense and equity in earnings of an investee		33,448		7,507		29,190		(32,574)		37,571
Income tax expense		—		—		—		(156)		(156)
Equity in earnings of an investee		—		—		—		38		38
Income (loss) from continuing operations		33,448		7,507		29,190		(32,692)		37,453
Discontinued operations:
Loss from discontinued operations		—		—		(557)		—		(557)
Impairment of assets from discontinued operations		—		—		216		—		216
Net income (loss)	$	33,448	$	7,507	$	28,849	$	(32,692)	$	37,112

Total assets	$	1,823,234	$	899,545	$	2,953,668	$	312,675	$	5,989,122

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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


	For the Three Months Ended September 30, 2013
	Triple Net
	Leased		Managed
	Senior Living		Senior Living				All Other
	Communities		Communities		MOBs		Operations		Consolidated

Revenues:
Rental income	$	57,073	$	—	$	50,910	$	4,336	$	112,319
Residents fees and services		—		74,946		—		—		74,946
Total revenues		57,073		74,946		50,910		4,336		187,265

Expenses:
Property operating expenses		—		57,708		17,021		—		74,729
Depreciation		16,760		7,251		13,514		948		38,473
General and administrative		—		—		—		7,798		7,798
Acquisition related costs		—		—		—		396		396
Total expenses		16,760		64,959		30,535		9,142		121,396

Operating income (loss)		40,313		9,987		20,375		(4,806)		65,869

Interest and other income		—		—		—		42		42
Interest expense		(6,546)		(3,054)		(1,369)		(18,436)		(29,405)
Loss on early extinguishment of debt		—		—		—		(692)		(692)
Income (loss) before income tax expense and equity in earnings of an investee		33,767		6,933		19,006		(23,892)		35,814
Income tax expense		—		—		—		(125)		(125)
Equity in earnings of an investee		—		—		—		64		64
Income (loss) from continuing operations		33,767		6,933		19,006		(23,953)		35,753
Discontinued operations:
Income from discontinued operations		—		—		1,231		—		1,231
Income (loss) before gain on sale of properties		33,767		6,933		20,237		(23,953)		36,984
Gain on sale of properties		1,141		—		—		—		1,141
Net income (loss)	$	34,908	$	6,933	$	20,237	$	(23,953)	$	38,125

Total assets	$	1,861,729	$	967,187	$	1,732,217	$	246,197	$	4,807,330

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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


	For the Nine Months Ended September 30, 2014
	Triple Net
	Leased		Managed
	Senior Living		Senior Living				All Other
	Communities		Communities		MOBs		Operations		Consolidated

Revenues:
Rental income	$	165,321	$	—	$	198,589	$	13,429	$	377,339
Residents fees and services		—		237,740		—		—		237,740
Total revenues		165,321		237,740		198,589		13,429		615,079

Expenses:
Property operating expenses		—		182,742		57,555		—		240,297
Depreciation		46,525		24,494		61,269		2,844		135,132
General and administrative		—		—		—		28,250		28,250
Acquisition related costs		—		—		—		2,649		2,649
Total expenses		46,525		207,236		118,824		33,743		406,328

Operating income (loss)		118,796		30,504		79,765		(20,314)		208,751

Interest and other income		—		—		—		336		336
Interest expense		(19,307)		(8,210)		(4,328)		(67,368)		(99,213)
Income (loss) before income tax expense and equity in earnings of an investee		99,489		22,294		75,437		(87,346)		109,874
Income tax expense		—		—		—		(502)		(502)
Equity in earnings of an investee		—		—		—		59		59
Income (loss) from continuing operations		99,489		22,294		75,437		(87,789)		109,431
Discontinued operations:
Income from discontinued operations		—		—		1,484		—		1,484
Impairment of assets from discontinued operations		—		—		(117)		—		(117)
Income (loss) before gain on sale of properties		99,489		22,294		76,804		(87,789)		110,798
Gain on sale of properties		2,552		—		—		—		2,552
Net income (loss)	$	102,041	$	22,294	$	76,804	$	(87,789)	$	113,350

Total assets	$	1,823,234	$	899,545	$	2,953,668	$	312,675	$	5,989,122

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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


	For the Nine Months Ended September 30, 2013
	Triple Net
	Leased		Managed
	Senior Living		Senior Living				All Other
	Communities		Communities		MOBs		Operations		Consolidated

Revenues:
Rental income	$	170,794	$	—	$	152,492	$	13,182	$	336,468
Residents fees and services		—		224,634		—		—		224,634
Total revenues		170,794		224,634		152,492		13,182		561,102

Expenses:
Property operating expenses		—		173,844		49,049		—		222,893
Depreciation		50,696		21,128		39,804		2,844		114,472
General and administrative		—		—		—		24,615		24,615
Acquisition related costs		—		—		—		2,590		2,590
Impairment of assets		4,371		—		—		1,304		5,675
Total expenses		55,067		194,972		88,853		31,353		370,245

Operating income (loss)		115,727		29,662		63,639		(18,171)		190,857

Interest and other income		—		—		—		612		612
Interest expense		(20,030)		(9,196)		(4,103)		(55,207)		(88,536)
Loss on early extinguishment of debt		—		—		—		(797)		(797)
Income (loss) before income tax expense and equity in earnings of an investee		95,697		20,466		59,536		(73,563)		102,136
Income tax expense		—		—		—		(405)		(405)
Equity in earnings of an investee		—		—		—		219		219
Income (loss) from continuing operations		95,697		20,466		59,536		(73,749)		101,950
Discontinued operations:
Income from discontinued operations		—		—		3,762		—		3,762
Impairment of assets from discontinued operations		—		—		(27,896)		—		(27,896)
Income (loss) before gain on sale of properties		95,697		20,466		35,402		(73,749)		77,816
Gain on sale of properties		1,141		—		—		—		1,141
Net income (loss)	$	96,838	$	20,466	$	35,402	$	(73,749)	$	78,957

Total assets	$	1,861,729	$	967,187	$	1,732,217	$	246,197	$	4,807,330

Note 9. Significant Tenant

Five Star is our former subsidiary. Rental income from Five Star represented 34.7% of our rental income for the three months ended September 30, 2014, and the properties Five Star leases from us represented 34.5% of our investments, at cost, as of September 30, 2014. As of September 30, 2014, Five Star also managed 44 senior living communities for our account.

Subject to the information in the following paragraph, financial information about Five Star may be found on the website of the Securities and Exchange Commission, or SEC, by entering Five Star’s name at http://www.sec.gov/edgar/searchedgar/companysearch.html. Reference to Five Star’s financial information on this

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

external website is presented to comply with applicable accounting guidance of the SEC. Except for such financial information contained therein as is included herein under such guidance, Five Star’s public filings and other information located in external websites are not incorporated by reference into these financial statements.

In April 2014, Five Star filed with the SEC an amended Annual Report on Form 10-K for the year ended December 31, 2012 and amended Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013 that restated its financial results for 2011, 2012 and the first and second quarters of 2013 to correct certain errors in its previously filed financial reports for those periods. In addition, in April 2014, Five Star filed with the SEC its Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 and in September 2014, Five Star filed with the SEC its Annual Report on Form 10-K for the year ended December 31, 2013. In those filings, Five Star disclosed that it has material weaknesses in its internal control over financial reporting and that Five Star is currently in the process of developing a remediation plan for the material weaknesses. Five Star has not yet filed its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014. Five Star has publicly disclosed that it intends to file with the SEC its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014 on or about the same day, and that it currently expected those filings to occur by December 31, 2014.

See Note 10 for further information relating to our leases and management arrangements with Five Star.

Note 10. Related Person Transactions

Five Star: Five Star was formerly our 100% owned subsidiary. Five Star is our largest tenant, we are Five Star’s largest stockholder and Five Star manages certain senior living communities for us. In 2001, we distributed substantially all of Five Star’s then issued and outstanding shares of common stock to our shareholders. As of September 30, 2014, we owned 4,235,000 shares of common stock of Five Star, or approximately 8.7% of Five Star’s issued and outstanding shares of common stock. One of our Managing Trustees, Mr. Barry Portnoy, is a managing director of Five Star. RMR provides management services to both us and Five Star.

As of September 30, 2014, we leased 184 senior living communities to Five Star under four combination leases. Under Five Star’s leases with us, Five Star pays us rent consisting of minimum annual rent amounts plus percentage rent based on increases in gross revenues at certain properties. We recognized total rental income from Five Star of $47,717 and $49,705 for the three months ended September 30, 2014 and 2013, respectively, and $142,842 and $148,732 for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014 and December 31, 2013, our rents receivable from Five Star were $15,907 and $17,960, respectively, and those amounts are included in other assets in our condensed consolidated balance sheets. We had deferred estimated percentage rent under our Five Star leases of $1,498 and $1,301 for the three months ended September 30, 2014 and 2013, respectively, and $4,317 and $3,823 for the nine months ended September 30, 2014 and 2013, respectively. We determine percentage rent due under our Five Star leases annually and recognize it at year end when all contingencies are met. During the nine months ended September 30, 2014 and 2013, pursuant to the terms of our leases with Five Star, we purchased $23,776 and $22,501, respectively, of improvements made to properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $1,902 and $1,800, respectively.

In June 2013, we and Five Star agreed to offer for sale 11 senior living communities we lease to Five Star. Five Star’s rent payable to us will be reduced if and as these sales occur pursuant to terms set in our leases with Five Star. In August 2013, we sold one of these communities, a SNF, with 112 living units, for a sales price of $2,550, and as a result of this sale, Five Star’s annual minimum rent payable to us decreased by $255, or 10% of the net proceeds of the sale to us, in accordance with the terms of the applicable lease. In January 2014, we sold one senior living community located in Texas with 36 assisted living units, for a sale price of $2,400, and as a result of this sale, Five Star’s annual minimum rent payable to us decreased by $210, or 8.75% of the net proceeds of the sale to us, in accordance with the terms of the applicable lease. In June 2014, we sold two senior living communities located in Wisconsin with 156 SNF units, for a sale price of $4,500, and as a result of this sale, Five Star’s annual minimum rent payable to us decreased by $452, or

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

10% of the net proceeds of the sale to us, in accordance with the terms of the applicable lease. In October 2014, we sold a senior living community located in Virginia with 70 assisted living units for a sale price of $2,850 and, as a result of this sale, Five Star’s annual minimum rent payable to us decreased by $285, or 10% of the net proceeds of the sale to us, in accordance with the terms of the applicable lease. Also in October 2014, we sold two senior living communities located in Arizona with 177 units for a sale price of $5,900 and, as a result of this sale, Five Star’s annual minimum rent payable to us decreased by $590, or 10% of the net proceeds of the sale to us, in accordance with the terms of the applicable lease. We can provide no assurance that the remaining four senior living communities that we and Five Star have agreed to offer for sale will be sold, when any sales may occur or what the terms of any sales may provide.

On July 10, 2014, we and Five Star entered into the Fifth Amendment to the Amended and Restated Master Lease Agreement (Lease No. 4) pursuant to which Five Star exercised the first of its existing lease extension options under Lease No. 4, extending the term from April 30, 2017 to April 30, 2032, and we granted Five Star a third option for Five Star to extend the term of Lease No. 4 from May 1, 2047 to April 30, 2062.

Five Star began managing communities for our account in 2011. We lease certain of our senior living communities that are managed by Five Star to our taxable REIT subsidiaries, or TRSs, and Five Star manages these and other communities for us pursuant to long term management agreements. As of September 30, 2014, Five Star managed 44 senior living communities for our account.

In connection with these management agreements, we and Five Star have entered into four combination agreements, or pooling agreements: three pooling agreements combine our management agreements for communities that include assisted living units, or the AL Pooling Agreements, and a fourth pooling agreement combines our management agreements for communities consisting only of independent living units, or the IL Pooling Agreement. The management agreements that are included in each of our pooling agreements are on substantially similar terms. Our first AL Pooling Agreement includes 20 identified communities and our second AL Pooling Agreement includes 19 identified communities. The third AL Pooling Agreement currently includes the management agreement for a community we acquired in November 2013. The IL Pooling Agreement currently includes management agreements for two communities that have only independent living units. The senior living community in New York and one senior living community in California described below that Five Star manages for our account are not included in any of our pooling agreements. Each of the AL Pooling Agreements and the IL Pooling Agreement aggregates the determination of fees and expenses of the various communities that are subject to such pooling agreement, including determinations of our return on our invested capital and Five Star’s incentive fees. We incurred management fees paid to Five Star of $2,438 and $2,290 for the three months ended September 30, 2014 and 2013, respectively, and $7,295 and $6,866 for the nine months ended September 30, 2014 and 2013, respectively. These amounts are included in property operating expenses in our condensed consolidated statements of income and comprehensive income.

Our second AL Pooling Agreement previously included the management agreement for our assisted living community known as Villa Valencia, which is located in California. On July 10, 2014, we entered into an agreement with Five Star, pursuant to which the management agreement for Villa Valencia was removed from the second AL Pooling Agreement as of July 1, 2014. We expect that the management agreement affecting the Villa Valencia community will not be included in any pooling agreement until after extensive renovations planned at that community are completed.

On July 10, 2014, we entered into an amendment to our management agreements with Five Star that include assisted living communities to (1) extend the term of each of the management agreements between us and Five Star for Villa Valencia and the 19 assisted living communities currently included in the second AL Pooling Agreement from December 31, 2031 to December 31, 2033 and (2) extend the term of the management agreement between us and Five Star for the senior living community known as Willow Pointe, which is currently included in the third AL Pooling Agreement, from December 31, 2031 to December 31, 2035. On July 10, 2014, we also entered into an amendment to our management agreements with Five Star that include only independent living communities to extend the term of the

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

management agreements between us and Five Star for two independent living communities from December 31, 2031 to December 31, 2032.

We own a senior living community in New York with 310 living units, a portion of which is managed by Five Star pursuant to a long term management agreement with us with respect to the living units at this community that are not subject to the requirements of New York healthcare licensing laws. In order to accommodate certain requirements of New York healthcare licensing laws, one of our TRSs subleases the portion of this community that is subject to those requirements to an entity, D&R Yonkers LLC, which is owned by our President and Chief Operating Officer and Treasurer and Chief Financial Officer. Five Star manages this portion of the community pursuant to a long term management agreement with D&R Yonkers LLC. Under the sublease agreement, D&R Yonkers LLC is obligated to pay rent only from available revenues generated by the subleased community. Our TRS is obligated to advance any rent shortfalls to D&R Yonkers LLC, and D&R Yonkers LLC is obligated to repay one of our TRSs only from available revenues generated by the subleased community.

We may enter into additional management arrangements with Five Star for our senior living communities and we may add the management agreements to our existing pooling agreements or enter into additional pooling agreements with Five Star. For example, as noted in Note 3, we entered into purchase agreements to purchase two senior living communities in Wisconsin for a total of $47,430. If these acquisitions are completed, we expect to lease these communities to one of our TRSs and to enter into long term management agreements with Five Star to manage these communities on terms similar to those management arrangements we currently have with Five Star for communities that include assisted living units. We further expect that these management agreements would be added to the third AL Pooling Agreement. These acquisitions are subject to various conditions and there can be no assurance that these acquisitions will be completed.

RMR: We have no employees. Personnel and various services we require to operate our business are provided to us by RMR. We have two agreements with RMR to provide management and administrative services to us: (1) a business management agreement, which relates to our business generally, and (2) a property management agreement, which relates to the property level operations of our MOBs.

One of our Managing Trustees, Mr. Barry Portnoy, is Chairman, majority owner and an employee of RMR. Our other Managing Trustee, Mr. Adam Portnoy, is the son of Mr. Barry Portnoy, and an owner, President, Chief Executive Officer and a director of RMR. Each of our executive officers is also an officer of RMR, and our President and Chief Operating Officer, Mr. David Hegarty, is a director of RMR. Certain of Five Star’s executive officers are officers of RMR. A majority of our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR provides management services. Mr. Barry Portnoy and Mr. Adam Portnoy serve as managing directors or managing trustees of a majority of the companies to which RMR or its affiliates provide management services. In addition, officers of RMR serve as officers of those companies.

Pursuant to our business management agreement with RMR, we recognized business management fees of $8,077 and $6,847 for the three months ended September 30, 2014 and 2013, respectively, and $22,492 and $20,088 for the nine months ended September 30, 2014 and 2013, respectively. These amounts are included in general and administrative expenses in our condensed consolidated financial statements. In accordance with the terms of our business management agreement, we issued 98,449 of our common shares to RMR for the nine months ended September 30, 2014 as payment for a portion of the base business management fee we recognized for such period.

In connection with our property management agreement with RMR, the aggregate property management and construction supervision fees we recognized were $2,211 and $1,678 for the three months ended September 30, 2014 and 2013, respectively, and $5,928 and $4,937 for the nine months ended September 30, 2014 and 2013, respectively. These amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

On May 9, 2014, we and RMR entered into amendments to our business management agreement and property management agreement. As amended, RMR may terminate the agreements upon 120 days’ written notice. Prior to the amendments, RMR could terminate the agreements upon 60 days’ written notice and could also terminate the property management agreement upon five business days’ notice if we underwent a change of control. The amendments also provide for certain termination payments by us to RMR in the event that we terminate the agreements other than for cause. Also, as amended, RMR agrees to provide certain transition services to us for 120 days following an applicable termination by us or notice of termination by RMR.

SIR: On August 30, 2014, we entered into a Purchase and Sale Agreement and Joint Escrow Instructions, or the Purchase Agreement, with SC Merger Sub LLC, or Merger Sub, a Maryland limited liability company and wholly owned subsidiary of Select Income REIT, a Maryland real estate investment trust, or SIR, pursuant to which we have agreed to acquire the entities owning 23 healthcare properties, or the healthcare properties, which we classify as properties leased to MOBs, for approximately $539,000, including the assumption of approximately $30,000 of mortgage debt. The healthcare properties contain approximately 2,200,000 square feet and are located in 12 states. SIR has announced that it has agreed to acquire Cole Corporate Income Trust, Inc., a Maryland corporation, or CCIT, that, through its subsidiaries, owns the healthcare properties we have agreed to acquire from SIR. SIR's acquisition of CCIT would be pursuant to an agreement and plan of merger among SIR, Merger Sub and CCIT, which provides for the merger of CCIT with and into Merger Sub, with Merger Sub surviving as SIR's wholly owned subsidiary, or the Merger. The Merger is expected to be completed in the first half of 2015 and our acquisition of the 23 healthcare properties is expected to close substantially concurrently with the closing of the Merger.

One of our Managing Trustees, Mr. Barry Portnoy, is a managing trustee of SIR and of Government Properties Income Trust, a Maryland real estate investment trust, or GOV, that is SIR's largest shareholder. Our other Managing Trustee, Mr. Adam Portnoy, is the son of Mr. Barry Portnoy and a managing trustee of both SIR and GOV. Two of our Independent Trustees also serve as independent trustees of GOV and one of our Independent Trustees also serves as an independent trustee of SIR. As of September 30, 2014, GOV, RMR and Messrs. Barry Portnoy and Adam Portnoy reported that they collectively beneficially owned 22,066,212.364 common shares of SIR, or approximately 36.8% of the issued and outstanding common shares of SIR. These shareholders of SIR have entered into voting agreements with CCIT and American Realty Capital Properties, Inc., a Maryland corporation and parent of the manager of CCIT, or ARCP, pursuant to which they have agreed, upon and subject to the terms and conditions of such agreements, to vote all common shares of SIR beneficially owned by them in favor of the issuance of additional SIR common shares to CCIT stockholders pursuant to the Merger Agreement. These voting agreements also contain standstill provisions pursuant to which ARCP has agreed, among other things, not to make unsolicited proposals to acquire us, SIR or GOV for a period of 36 months.

AIC: We, RMR, Five Star, and four other companies to which RMR provides management services currently own Affiliates Insurance Company, or AIC, an Indiana insurance company. All of our Trustees and most of the trustees and directors of the other AIC shareholders currently serve on the board of directors of AIC. RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC.

On March 25, 2014, as a result of the removal, without cause, of all of the trustees of EQC, EQC underwent a change in control, as defined in the shareholders agreement among us, the other shareholders of AIC and AIC. As a result of that change in control and in accordance with the terms of the shareholders agreement, on May 9, 2014, we and those other shareholders purchased pro rata the AIC shares EQC owned. Pursuant to that purchase, we purchased 2,857 AIC shares from EQC for $825. Following these purchases, we and the other remaining six shareholders each owned approximately 14.3% of AIC.

In June 2014, we and the other shareholders of AIC renewed our participation in an insurance program arranged by AIC. In connection with that renewal, we purchased a one-year property insurance policy providing $500,000 of coverage,

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

with respect to which AIC is a reinsurer of certain coverage amounts. We paid AIC a premium, including taxes and fees, of approximately $3,118 in connection with that policy, which amount may be adjusted from time to time as we acquire or dispose of properties that are included in the policy.

As of September 30, 2014, we had invested $6,034 in AIC. Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC as all of our Trustees are also directors of AIC. Our investment in AIC had a carrying value of $6,806 and $5,913 as of September 30, 2014 and December 31, 2013, respectively, which amounts are included in other assets on our condensed consolidated balance sheet. We recognized income of $38 and $64 for the three months ended September 30, 2014 and 2013, respectively, and $59 and $219 for the nine months ended September 30, 2014 and 2013, respectively, related to our investment in AIC.

Directors’ and Officers’ Liability Insurance: In June 2014, we, RMR, Five Star and three other companies to which RMR provides management services extended our and their combined directors’ and officers’ liability insurance policy, and we extended our separate directors’ and officers’ liability insurance policy, in each case for an interim period. We paid an aggregate premium of approximately $51 for these extensions. Further information about those policies is contained in Note 5 to our audited financial statements contained in our Annual Report. In September 2014, we purchased a two year combined directors' and officers' insurance policy with RMR and five other companies managed by RMR that provides $10,000 in aggregate primary coverage, including certain errors and omission coverage. At that time, we also purchased separate additional one year directors' and officers' liability insurance policies that provide $20,000 of aggregate excess coverage plus $5,000 of excess non-indemnifiable coverage. The total premium payable by us for these policies purchased in September 2014 was approximately $651.

Note 11. Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We do, however, lease certain managed senior living communities to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated federal corporate income tax return and are subject to federal and state income taxes. Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state income taxes we incur despite our REIT status. During the three and nine months ended September 30, 2014, we recognized income tax expense of $156 and $502, respectively. During the three and nine months ended September 30, 2013 we recognized income tax expense of $125 and $405, respectively.

Note 12. Pro Forma Information

During the nine months ended September 30, 2014, we acquired two properties for an aggregate purchase price of $1,158,078, excluding closing costs. During the second quarter of 2014, we sold 15,525,000 of our common shares in a public offering raising net proceeds of approximately $323,318 after underwriting discounts but before expenses. During the second quarter of 2014, we also sold $400,000 of 3.25% senior unsecured notes due 2019 and $250,000 of 4.75% senior unsecured notes due 2024, raising net proceeds of approximately $644,889, after underwriting discounts but before expenses.

The following table presents our pro forma results of operations for the nine months ended September 30, 2014, as if these acquisitions and financing activities had occurred on January 1, 2014. This pro forma data is not necessarily indicative of what our actual results of operations would have been for the periods presented, nor does it represent the results of operations for any future period. Differences could result from numerous factors, including future changes in our portfolio of investments, changes in interest rates, changes in our capital structure, changes in property level

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

operating expenses, changes in property level revenues, including rents expected to be received on our existing leases or leases we may enter into during and after 2014, and for other reasons.


	Nine Months Ended
	September 30,
	2014
Total revenues	$	649,949
Net income	$	110,583
Net income per share	$	0.54

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and our Annual Report. We are a REIT organized under Maryland law. At September 30, 2014, we owned 371 properties (398 buildings) located in 38 states and Washington, D.C., including eight properties (11 buildings) classified as held for sale. On that date, the undepreciated carrying value of our properties, net of impairment losses, was $6.2 billion, excluding properties classified as held for sale. As of September 30, 2014, 97% of our net operating income, or NOI, came from properties where a majority of the charges are paid from our residents’ and tenants’ private resources.

PORTFOLIO OVERVIEW (1)

The following tables present an overview of our portfolio (dollars in thousands, except per living unit / bed or square foot data):


		Number of						Investment per				% of
	Number of	Units/Beds or		Investment		% of Total		Unit / Bed or		Q3 2014		Q3 2014
(As of September 30, 2014)	Properties	Square Feet		Carrying Value(2)		Investment		Square Foot(3)		NOI(4)		NOI

Facility Type
Independent living(5)	62	15,176		$	1,903,152	30.8	%	$	125,405	$	40,273	30.0	%
Assisted living(5)	155	11,495			1,363,247	22.0	%	$	118,595		28,361	21.1	%
Nursing homes(5)	45	4,763			202,311	3.3	%	$	42,476		4,561	3.4	%
Subtotal senior living communities	262	31,434			3,468,710	56.1	%	$	110,349		73,195	54.5	%
MOBs	98	9,141,579	sq. ft.		2,542,710	41.0	%	$	278		56,422	42.1	%
Wellness centers	10	812,000	sq. ft.		180,017	2.9	%	$	222		4,550	3.4	%
Total	370			$	6,191,437	100.0	%			$	134,167	100.0	%

Tenant / Operator / Managed Properties

Five Star (Lease No. 1)	89	6,590			696,499	11.3	%	$	105,690		14,761	10.9	%
Five Star (Lease No. 2)	49	7,044			689,955	11.2	%	$	97,949		15,656	11.7	%
Five Star (Lease No. 3)	17	3,281			354,271	5.7	%	$	107,977		8,584	6.4	%
Five Star (Lease No. 4)	29	3,335			390,134	6.3	%	$	116,982		8,716	6.5	%
Subtotal Five Star	184	20,250			2,130,859	34.5	%	$	105,228		47,717	35.5	%
Sunrise / Marriott(6)	4	1,619			126,326	2.0	%	$	78,027		3,133	2.3	%
Brookdale	18	894			61,122	1.0	%	$	68,369		1,754	1.3	%
6 private senior living companies (combined)	12	1,620			95,313	1.5	%	$	58,835		2,662	2.0	%
Subtotal triple net leased senior living communities	218	24,383			2,413,620	39.0	%	$	98,988		55,266	41.1	%
Managed senior living communities(7)	44	7,051			1,055,090	17.1	%	$	149,637		17,929	13.4	%
Subtotal senior living communities	262	31,434			3,468,710	56.1	%	$	110,349		73,195	54.5	%
MOBs	98	9,141,579	sq. ft.		2,542,710	41.0	%	$	278		56,422	42.1	%
Wellness centers	10	812,000	sq. ft.		180,017	2.9	%	$	222		4,550	3.4	%
Total	370			$	6,191,437	100.0	%			$	134,167	100.0	%

Table of Contents

Tenant / Managed Property Operating Statistics(8)


	Rent Coverage(9)		Occupancy
	2014	2013	2014		2013

Five Star (Lease No. 1)	NA	1.19x	84.0	%	84.8	%
Five Star (Lease No. 2)	NA	1.15x	81.7	%	81.1	%
Five Star (Lease No. 3)	NA	1.66x	87.2	%	88.6	%
Five Star (Lease No. 4)	NA	1.16x	87.4	%	85.6	%
Subtotal Five Star	NA	1.25x	84.3	%	84.2	%
Sunrise / Marriott(6)	1.97x	1.91x	92.0	%	92.9	%
Brookdale	2.52x	2.51x	94.6	%	95.3	%
6 private senior living companies (combined)	1.89x	2.01x	85.5	%	84.2	%
Subtotal triple net leased senior living communities	NA	1.37x	85.2	%	85.1	%
Managed senior living communities(7)	NA	NA	88.0	%	87.3	%
Subtotal senior living communities	NA	1.37x	85.9	%	85.6	%
MOBs	NA	NA	95.6	%	94.1	%
Wellness centers	2.09x	2.21x	100.0	%	100.0	%
Total	NA	1.42x

⁽¹⁾

Excludes properties classified in discontinued operations.

⁽²⁾

Amounts are before depreciation, but after impairment write downs, if any. Amounts include carrying values as of September 30, 2014 for senior living communities classified as held for sale in the amount of $7,369 which is included in Other Assets on the Condensed Consolidated Balance Sheets.

⁽³⁾

Represents investment carrying value divided by the number of living units, beds or square feet at September 30, 2014, as applicable.

⁽⁴⁾

NOI is defined and calculated by reportable segment and reconciled to net income below in this Item 2.

⁽⁵⁾

Senior living properties are categorized by the type of living units or beds which constitute the largest number of the living units or beds at the property.

⁽⁶⁾

Marriott International, Inc. guarantees the lessee’s obligations under these leases.

⁽⁷⁾

These 44 managed senior living communities are managed by Five Star. The occupancy for the twelve month period ended, or, if shorter, from the date of acquisitions through September 30, 2014 was 88.3%.

⁽⁸⁾

Operating data for MOBs are presented as of September 30, 2014 and 2013; operating data for other properties, tenants and managers are presented based upon the operating results provided by our tenants and managers for the 12 months ended June 30, 2014 and 2013, or the most recent prior period for which tenant operating results are available to us. Rent coverage is calculated as operating cash flow from our tenants’ operations of our properties, before subordinated charges, if any, divided by rents payable to us. We have not independently verified our tenants’ operating data. The table excludes data for periods prior to our ownership of some of these properties.

⁽⁹⁾

Five Star has not filed its 2014 first and second quarter Quarterly Reports on Form 10-Q with the SEC. As a result, we do not provide rent coverage for the 12 months ended June 30, 2014 for this tenant or the portfolio as a whole.

Table of Contents

The following tables set forth information regarding our lease expirations as of September 30, 2014 (dollars in thousands):


									Percent of		Cumulative
	Annualized Rental Income(1) (2)								Total		Percentage of
	Triple Net Leased								Annualized		Annualized
	Senior Living				Wellness				Rental Income		Rental Income
Year	Communities		MOBs		Centers		Total		Expiring		Expiring

2014	$	—	$	7,749	$	—	$	7,749	1.4	%	1.4	%
2015		1,867		20,633		—		22,500	4.1	%	5.5	%
2016		—		21,157		—		21,157	3.8	%	9.3	%
2017		9,275		28,381		—		37,656	6.8	%	16.1	%
2018		14,609		24,686		—		39,295	7.2	%	23.3	%
2019		599		35,173		—		35,772	6.5	%	29.8	%
2020		—		18,951		—		18,951	3.4	%	33.2	%
2021		1,424		6,680		—		8,104	1.5	%	34.7	%
2022		—		7,425		—		7,425	1.3	%	36.0	%
Thereafter		203,926		129,965		17,853		351,744	64.0	%	100.0	%
Total	$	231,700	$	300,800	$	17,853	$	550,353	100.0	%

Average remaining lease term for all senior living community, MOB and wellness center properties (weighted by annualized rental income): 9.6 years

⁽¹⁾

Annualized rental income is rents pursuant to existing leases as of September 30, 2014, including estimated percentage rents, straight line rent adjustments, estimated recurring expense reimbursements for certain net and modified gross leases and excluding lease value amortization at certain of our MOBs and wellness centers. Excludes properties classified in discontinued operations.

⁽²⁾

Excludes rent received from our managed senior living communities leased to our TRSs. If the NOI from our TRSs (three months ended September 30, 2014, annualized) were included in the foregoing table, the percent of total annualized rental income expiring would be: 2014 — 1.2%; 2015 — 3.6%; 2016 — 3.4%, 2017 — 6.1%; 2018 — 6.3%; 2019 — 5.8%; 2020 — 3.0%; 2021 — 1.3%; 2022 — 1.2% and thereafter — 68.1%. In addition, if our leases to our TRSs are included, the average remaining lease term for all properties (weighted by annualized rental income) would be 10.5 years.


					Percent of		Cumulative
					Total		Percentage of
	Number of Tenants (1)				Number of		Number of
	Senior Living		Wellness		Tenancies		Tenancies
Year	Communities(2)	MOBs	Centers	Total	Expiring		Expiring

2014	—	74	—	74	11.7	%	11.7	%
2015	2	107	—	109	17.2	%	28.9	%
2016	—	83	—	83	13.1	%	42.0	%
2017	1	97	—	98	15.5	%	57.5	%
2018	1	78	—	79	12.5	%	70.0	%
2019	1	56	—	57	9.0	%	79.0	%
2020	—	35	—	35	5.5	%	84.5	%
2021	1	20	—	21	3.3	%	87.8	%
2022	—	20	—	20	3.2	%	91.0	%
Thereafter	6	48	2	56	9.0	%	100.0	%
Total	12	618	2	632	100.0	%

⁽¹⁾

Excludes properties classified in discontinued operations.

⁽²⁾

Excludes our managed senior living communities leased to our TRSs as tenants.

Table of Contents


	Number of Living Units / Beds or Square Feet with Leases Expiring (1)
	Living Units / Beds(2)					Square Feet
	Triple Net			Cumulative
	Leased Senior	Percent of		Percentage of			Wellness		Percent of		Cumulative
	Living	Total Living		Living Units /			Centers		Total		Percent of
	Communities	Units / Beds		Beds		MOBs	(Square	Total Square	Square Feet		Total Square
Year	(Units / Beds)	Expiring		Expiring		(Square Feet)	Feet)	Feet	Expiring		Feet Expiring

2014	—	—	%	—	%	221,999	—	221,999	2.3	%	2.3	%
2015	243	1.0	%	1.0	%	816,643	—	816,643	8.5	%	10.8	%
2016	—	—	%	1.0	%	895,865	—	895,865	9.4	%	20.2	%
2017	894	3.7	%	4.7	%	1,057,022	—	1,057,022	11.1	%	31.3	%
2018	1,619	6.6	%	11.3	%	737,934	—	737,934	7.7	%	39.0	%
2019	175	0.7	%	12.0	%	1,128,316	—	1,128,316	11.8	%	50.8	%
2020	—	—	%	12.0	%	858,984	—	858,984	9.0	%	59.8	%
2021	361	1.5	%	13.5	%	249,630	—	249,630	2.6	%	62.4	%
2022	—	—	%	13.5	%	251,238	—	251,238	2.6	%	65.0	%
Thereafter	21,091	86.5	%	100.0	%	2,525,425	812,000	3,337,425	35.0	%	100.0	%
Total	24,383	100.0	%			8,743,056	812,000	9,555,056	100.0	%

⁽¹⁾

Excludes properties classified in discontinued operations.

⁽²⁾

Excludes 7,051 living units from our managed senior living communities leased to our TRSs. If the number of living units included in our TRS leases were included in the foregoing table, the percent of total living units / beds expiring would be: 2014 — 0.0%, 2015 — 0.8%; 2016 — 0.0%; 2017 — 2.8%; 2018 — 5.2%; 2019 — 0.6%; 2020 — 0.0%; 2021 — 1.1%; 2022 — 0.0% and thereafter — 89.5%.

During the three months ended September 30, 2014, we entered into MOB lease renewals for 53,000 square feet and new leases for 25,000 square feet. The weighted average annual rental rate for leases entered into during the quarter was $37.76 per square foot, and these rental rates were, on a weighted average basis, 3.7% below previous rents charged for the same space. Average lease terms for leases entered into during the third quarter of 2014 were 6.3 years based on square footage. Commitments for tenant improvement, leasing commission costs and concessions for leases we entered into during the third quarter of 2014 totaled $2.5 million, or $31.49 per square foot on average (approximately $5.00 per square foot per year of the lease term).

RESULTS OF OPERATIONS (dollars and square feet in thousands, unless otherwise noted)

Table of Contents

biotech laboratory tenants. The “All Other” category in the following table includes amounts related to corporate business activities and the operating results of certain properties that offer fitness, wellness and spa services to members.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013

Revenues:
Triple net leased senior living communities	$	55,266	$	57,073	$	165,321	$	170,794
Managed senior living communities		79,259		74,946		237,740		224,634
MOBs		77,798		50,910		198,589		152,492
All other operations		4,550		4,336		13,429		13,182
Total revenues	$	216,873	$	187,265	$	615,079	$	561,102

Net income:
Triple net leased senior living communities	$	33,448	$	34,908	$	102,041	$	96,838
Managed senior living communities		7,507		6,933		22,294		20,466
MOBs		28,849		20,237		76,804		35,402
All other operations		(32,692)		(23,953)		(87,789)		(73,749)
Net income	$	37,112	$	38,125	$	113,350	$	78,957

The following sections analyze and discuss the results of operations of each of our segments for the periods presented.

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013 (dollars in thousands):

Unless otherwise indicated, references in this section to changes or comparisons of results, income or expenses refer to comparisons of the third quarter 2014 results against the comparable 2013 period.

Triple net leased senior living communities:


	All Properties				Comparable Properties (1)
	As of and for the Three Months				As of and for the Three Months
	Ended September 30,				Ended September 30,
	2014		2013		2014		2013
Total properties	218		223		218		218
# of units / beds	24,383		24,939		24,383		24,383
Tenant operating data(2)
Occupancy	85.2	%	85.1	%	85.2	%	85.6	%
Rent coverage(3)	NA		1.37x		NA		1.39x

⁽¹⁾

Consists of triple net leased senior living communities we have owned continuously since July 1, 2013.

⁽²⁾

All tenant operating data presented are based upon the operating results provided by our tenants for the 12 months ended June 30, 2014 and 2013 or the most recent prior period for which tenant operating results are available to us. Rent coverage is calculated as operating cash flow from our triple-net lease tenants’ operations of our properties, before subordinated charges, if any, divided by triple-net lease minimum rents payable to us. We have not independently verified our tenants’ operating data. The table excludes data for periods prior to our ownership of some of these properties.

⁽³⁾

As noted above, Five Star has not filed its 2014 first and second quarter Quarterly Reports on Form 10-Q. As a result, we do not provide rent coverage for the 12 months ended June 30, 2014 for this tenant or the portfolio as a whole.

Table of Contents

Triple net leased senior living communities, all properties:


	Three Months Ended September 30,
	2014		2013		Change		% Change

Rental income	$	55,266	$	57,073	$	(1,807)	(3.2)	%
Net operating income (NOI)		55,266		57,073		(1,807)	(3.2)	%

Depreciation expense		(15,372)		(16,760)		1,388	8.3	%
Operating income		39,894		40,313		(419)	(1.0)	%

Interest expense		(6,446)		(6,546)		100	1.5	%
Gain on sale of properties		—		1,141		(1,141)	(100.0)	%
Net income	$	33,448	$	34,908	$	(1,460)	(4.2)	%

Except as noted below under “Rental income”, we have not included a discussion and analysis of the results of our comparable properties data for the triple net leased senior living communities segment as we believe that a comparison of the results for our comparable properties for our triple net leased senior living communities segment is generally consistent from quarter to quarter and a separate, comparable properties comparison is not meaningful.

Rental income. Rental income decreased primarily due to the sale of the two rehabilitation hospitals during the fourth quarter of 2013, a senior living community in the third quarter of 2013, a senior living community in the first quarter of 2014 and two senior living communities in the second quarter of 2014. This decrease was partially offset by increased rents resulting from our purchase of approximately $35,083 of improvements made to our properties that are leased by Five Star since July 1, 2013. Rental income increased year over year on a comparable property basis by $1,222, primarily as a result of our improvement purchases at certain of the 218 communities we have owned continuously since July 1, 2013 and the resulting increased rent, pursuant to the terms of the leases.

Net operating income. NOI decreased because of the changes in rental income described above. We do not incur property operating expenses at our triple net leased senior living communities, as these expenses are paid by our tenants. Accordingly, rental income is the same as NOI. The reconciliation of NOI to net income for our triple net leased senior living communities segment is shown in the table above. Our definition of NOI and our reconciliation of consolidated NOI to net income are included below under the heading “Non-GAAP Financial Measures”.

Depreciation expense. Depreciation expense recognized in this segment decreased as a result of the sale of the two rehabilitation hospitals during the fourth quarter of 2013, a senior living community in the third quarter of 2013, a senior living community in the first quarter of 2014 and two senior living communities in the second quarter of 2014. This decrease was partially offset by our purchase of improvements made to our properties that are leased by Five Star since July 1, 2013.

Gain on sale of properties. Gain on sale of properties is a result of the sale of one senior living community in August 2013.

Table of Contents

Managed senior living communities:


	All Properties						Comparable Properties (1)
	As of and for the Three Months						As of and for the Three Months
	Ended September 30,						Ended September 30,
	2014			2013			2014			2013
Total properties		44			40			39			39
# of units / beds		7,051			6,771			6,678			6,678
Occupancy:		88.2	%		87.6	%		88.1	%		87.3	%
Average monthly rate	$	4,152		$	4,140		$	4,198		$	4,150

⁽¹⁾

Consists of managed senior living communities we have owned continuously since July 1, 2013.

Managed senior living communities, all properties:


	Three Months Ended September 30,
	2014		2013		Change		% Change

Residents fees and services	$	79,259	$	74,946	$	4,313	5.8	%
Property operating expenses		(61,330)		(57,708)		(3,622)	(6.3)	%
Net operating income (NOI)		17,929		17,238		691	4.0	%

Depreciation expense		(8,006)		(7,251)		(755)	(10.4)	%
Operating income		9,923		9,987		(64)	(0.6)	%

Interest expense		(2,416)		(3,054)		638	20.9	%
Net income	$	7,507	$	6,933	$	574	8.3	%

Residents fees and services. Residents fees and services are the revenues earned at our managed senior living communities. We recognize these revenues as services are provided. The increase in residents fees and services primarily relates to the acquisition of five managed senior living communities since July 1, 2013.

Property operating expenses. Property operating expenses include expenses incurred at our managed senior living communities and they consist of management fees, real estate taxes, utility expense, insurance, salaries and benefits of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of these operating properties. The increase in property operating expenses primarily relates to the acquisition of five managed senior living communities since July 1, 2013.

Net operating income. NOI increased because of the changes in residents fees and services and property operating expenses described above. The reconciliation of NOI to net income for our managed senior living communities segment is shown in the table above. Our definition of NOI and our reconciliation of consolidated NOI to net income are included below under the heading “Non-GAAP Financial Measures”.

Depreciation expense. Depreciation expense increased primarily as a result of acquisitions of managed senior living communities since July 1, 2013.

Interest Expense. Interest expense for our managed senior living communities arises from mortgage debt secured by certain of these properties. Interest expense decreased as a result of the repayment of two loans at maturity in the second quarter of 2014 that had a total principal balance of $35,300 and a weighted average interest rate of 5.8%, as well as regularly scheduled amortization of our mortgage debt.

Table of Contents

Managed senior living communities, comparable properties (managed senior living communities we have owned continuously since July 1, 2013):


	Three Months Ended September 30,
	2014		2013		Change		% Change

Residents fees and services	$	75,770	$	74,236	$	1,534	2.1	%
Property operating expenses		(58,717)		(57,181)		(1,536)	(2.7)	%
Net operating income (NOI)		17,053		17,055		(2)	(0.0)	%

Depreciation expense		(7,270)		(7,138)		(132)	(1.8)	%
Operating income		9,783		9,917		(134)	(1.4)	%

Interest expense		(2,416)		(3,054)		638	20.9	%
Net income	$	7,367	$	6,863	$	504	7.3	%

Residents fees and services. We recognize residents fees and services as services are provided. Our residents fees and services increased year over year on a comparable property basis primarily because of an increase in occupancy and average daily rate at the 39 communities we have owned continuously since July 1, 2013.

Property operating expenses. Property operating expenses consist of property management fees, real estate taxes, utility expense, insurance, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating properties. Property operating expenses increased principally because of slight increases in utility expenses, real estate taxes, insurance, and other direct costs of operating properties.

Net operating income. NOI remained approximately unchanged and reflects the net changes in residents fees and services less the property operating expenses described above. The reconciliation of NOI to net income for our managed senior living communities segment, comparable properties, is shown in the table above. Our definition of NOI and our consolidated reconciliation of NOI to net income are included below in “Non-GAAP Financial Measures”.

Depreciation expense. Depreciation expense increased as a result of our purchase of improvements at these properties.

Interest expense. Interest expense for our managed senior living communities arises from mortgage debt secured by certain of these properties. Interest expense decreased as a result of the repayment of two loans at maturity in the second quarter of 2014 that had a total principal balance of $35,300 and a weighted average interest rate of 5.8%, as well as regularly scheduled amortization of our mortgage debt.

MOBs:


	All Properties(1)				Comparable Properties (1) (2)
	As of and for the Three Months				As of and for the Three Months
	Ended September 30,				Ended September 30,
	2014		2013		2014		2013
Total properties	98		93		92		92
Total buildings	122		116		115		115
Total square feet(3)	9,142		7,819		7,714		7,714
Occupancy(4)	95.6	%	95.0	%	94.9	%	94.9	%

⁽¹⁾

Excludes properties classified in discontinued operations.

⁽²⁾

Consists of MOBs we have owned continuously since July 1, 2013.

⁽³⁾

Prior periods exclude space remeasurements made subsequent to those periods.

⁽⁴⁾

MOB occupancy includes (1) space being fitted out for occupancy pursuant to existing leases and (2) space which is leased, but is not occupied or is being offered for sublease by tenants.

Table of Contents

MOBs, all properties:


	Three Months Ended September 30,
	2014		2013		Change		% Change

Rental income	$	77,798	$	50,910	$	26,888	52.8	%
Property operating expenses		(21,376)		(17,021)		(4,355)	(25.6)	%
Net operating income (NOI)		56,422		33,889		22,533	66.5	%

Depreciation / amortization expense		(25,748)		(13,514)		(12,234)	(90.5)	%
Operating income		30,674		20,375		10,299	50.5	%

Interest expense		(1,484)		(1,369)		(115)	(8.4)	%
Income from continuing operations		29,190		19,006		10,184	53.6	%
Discontinued operations:
(Loss) income from discontinued operations		(557)		1,231		(1,788)	(145.2)	%
Impairment of assets from discontinued operations		216		—		216	100.0	%
Net income	$	28,849	$	20,237	$	8,612	42.6	%

Rental income. Rental income increased primarily because of rents from six MOBs (seven buildings) we acquired for approximately $1,222,953 since July 1, 2013. Rental income includes non-cash straight line rent adjustments totaling $2,626 and $1,307 and net amortization of approximately $1,209 and $(913) of above and below market lease adjustments for the three months ended September 30, 2014 and 2013, respectively.

Net operating income. NOI increased because of the changes in rental income and property operating expenses described above. The reconciliation of NOI to net income for our MOB segment is shown in the table above. Our definition of NOI and our reconciliation of consolidated NOI to net income are included below under the heading “Non-GAAP Financial Measures”.

Depreciation / amortization expense. Depreciation / amortization expense increased primarily because of our MOB acquisitions since July 1, 2013.

Interest expense. Interest expense for our MOBs arises from mortgage debt secured by certain of these properties. The increase in interest expense is the result of our assumption of $15,630 of mortgage debt in connection with our acquisition of one MOB since July 1, 2013 with an interest rate of 6.3%, partially offset by the regularly scheduled amortization of our mortgage debt.

(Loss) income from discontinued operations. Loss from discontinued operations for the three months ended September 30, 2014 relates to the one MOB (four buildings) which was majority vacant during the period classified as held for sale as of September 30, 2014 as well as the one MOB (one building) sold in the third quarter of 2014. The decrease in income is primarily due to the sale of two MOBs (two buildings) during the second quarter of 2014 and one MOB (one building) in the third quarter of 2014.

Impairment of assets from discontinued operations. During the three months ended September 30, 2014, we recorded impairment of assets adjustments of $216 to write the carrying value of one of our MOBs (one building) up to its net sale price.

Table of Contents

MOBs, comparable properties (MOBs we have owned continuously since July 1, 2013)(1):


	Three Months Ended September 30,
	2014		2013		Change		% Change

Rental income	$	51,139	$	50,433	$	706	1.4	%
Property operating expenses		(16,964)		(16,957)		(7)	(0.0)	%
Net operating income (NOI)		34,175		33,476		699	2.1	%

Depreciation / amortization expense		(13,166)		(13,420)		254	1.9	%
Operating income		21,009		20,056		953	4.8	%

Interest expense		(1,278)		(1,354)		76	5.6	%
Net income	$	19,731	$	18,702	$	1,029	5.5	%

⁽¹⁾

Excludes properties classified in discontinued operations.

Rental income. Rental income increased slightly as a result of an increase in rents at certain comparable properties for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. Rental income includes non-cash straight line rent adjustments totaling $871 and $1,247 and net amortization of approximately $(702) and $(913) of above and below market lease adjustments for the three months ended September 30, 2014 and 2013, respectively.

Net operating income. NOI reflects the net changes in rental income and property operating expenses described above. The reconciliation of NOI to net income for our MOB segment for comparable properties is shown in the table above. Our definition of NOI and our reconciliation of consolidated NOI to net income are included below under the heading “Non-GAAP Financial Measures”.

Depreciation / amortization expense. Depreciation / amortization expense decreased primarily because of a reduction in amortization of acquired in place real estate leases that we amortize over the respective lease terms, partially offset by an increase in the amortization of leasing costs.

Interest expense. Interest expense for our MOBs arises from mortgage debt secured by certain of these properties. The decrease in interest expense is the result of the regularly scheduled amortization of our mortgage debt.

Table of Contents

All other operations: (1)


	Three Months Ended September 30,
	2014		2013		Change		% Change

Rental income	$	4,550	$	4,336	$	214	4.9	%

Expenses:
Depreciation		(948)		(948)		—	—
General and administrative		(10,384)		(7,798)		(2,586)	(33.2)	%
Acquisition related costs		(15)		(396)		381	96.2	%
Total expenses		(11,347)		(9,142)		(2,205)	(24.1)	%
Operating loss		(6,797)		(4,806)		(1,991)	(41.4)	%

Interest and other income		78		42		36	85.7	%
Interest expense		(25,855)		(18,436)		(7,419)	(40.2)	%
Loss on early extinguishment of debt		—		(692)		692	100.0	%
Loss before income tax expense and equity in earnings of an investee		(32,574)		(23,892)		(8,682)	(36.3)	%
Income tax expense		(156)		(125)		(31)	(24.8)	%
Equity in earnings of an investee		38		64		(26)	(40.6)	%
Net loss	$	(32,692)	$	(23,953)	$	(8,739)	(36.5)	%

⁽¹⁾

All other operations includes our wellness center operations that we do not consider a significant, separately reportable segment of our business, corporate business activities, and operating expenses that are not attributable to a specific reportable segment.

Rental income. Rental income increased due to scheduled rent increases at certain of our wellness centers. Rental income includes non-cash straight line rent adjustments totaling approximately $138 and $262 for the three months ended September 30, 2014 and 2013, respectively. Rental income also includes net amortization of approximately $55 of acquired real estate leases and obligations in both the three months ended September 30, 2014 and 2013.

Depreciation expense. Depreciation expense remained consistent as we did not make any wellness center acquisitions or other capital improvements in this segment for the three months ended September 30, 2014 and 2013 and we generally depreciate our long lived wellness center assets on a straight line basis.

General and administrative expense. General and administrative expenses consist of fees and expenses of our trustees, fees paid to RMR under our business management agreement, equity compensation expense, legal and accounting fees and other costs relating to our status as a publicly owned company. General and administrative expenses increased principally as a result of property acquisitions made since July 1, 2013.

Acquisition related costs. Acquisition related costs represent legal and due diligence costs incurred in connection with our acquisition activity during the three months ended September 30, 2014 and 2013. Acquisition related costs decreased as a result of less acquisition activity during the three months ended September 30, 2014 than the prior year period.

Interest and other income. The increase in interest and other income is a result of more investable cash during the period compared to the prior year, partially offset by less dividend income from our shares of EQC.

Interest expense. Interest expense increased due to our issuance of $400,000 of 3.25% senior unsecured notes and $250,000 of 4.75% senior unsecured notes in April 2014 as well as our May 2014 term loan borrowing of $350,000 at LIBOR plus 140 basis points, partially offset by the prepayment of four mortgage loans in September 2013 encumbering four of our wellness centers for $10,377 with a weighted average interest rate of 6.1% and lower borrowing costs and fees under our revolving credit facility.

Table of Contents

Loss on early extinguishment of debt. In September 2013, we prepaid a mortgage loan encumbering two of our properties for $13,579 that had a maturity date later in 2013. We recorded a loss on early extinguishment of debt of $154 as a result of the premium paid to prepay this mortgage prior to its maturity date. In September 2013, we amended our revolving credit facility, resulting in a loss on early extinguishment of debt of $538.

Equity in earnings of an investee. Equity in earnings of an investee represents our proportionate share of earnings from AIC.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013 (dollars in thousands):

Triple net leased senior living communities:


	All Properties				Comparable Properties (1)
	As of and for the Nine Months				As of and for the Nine Months
	Ended September 30,				Ended September 30,
	2014		2013		2014		2014
Total properties	218		223		217		217
# of units / beds	24,383		24,939		24,233		24,233
Tenant operating data(2)
Occupancy	85.2	%	85.1	%	85.1	%	85.6	%
Rent coverage(3)	NA		1.37x		NA		1.39x

⁽¹⁾

Consists of triple net leased senior living communities we have owned continuously since January 1, 2013.

⁽²⁾

⁽³⁾

Triple net leased senior living communities, all properties:


	Nine Months Ended September 30,
	2014		2013		Change		% Change

Rental income	$	165,321	$	170,794	$	(5,473)	(3.2)	%
Net operating income (NOI)		165,321		170,794		(5,473)	(3.2)	%

Depreciation expense		(46,525)		(50,696)		4,171	8.2	%
Impairment of assets		—		(4,371)		4,371	100.0	%
Operating income		118,796		115,727		3,069	2.7	%

Interest expense		(19,307)		(20,030)		723	3.6	%
Gain on sale of properties		2,552		1,141		1,411	100.0	%
Net income	$	102,041	$	96,838	$	5,203	5.4	%

Except as noted below under “Rental income”, we have not included a discussion and analysis of the results of our comparable properties data for the triple net leased senior living communities segment as we believe that a comparison of the results for our comparable properties for our triple net leased senior living communities segment is generally consistent from period to period and a separate, comparable properties comparison is not meaningful.

Table of Contents

Rental income. Rental income decreased primarily due to the sale of the two rehabilitation hospitals during the fourth quarter of 2013, a senior living community in the third quarter of 2013, a senior living community in the first quarter of 2014 and two senior living communities in the second quarter of 2014. This decrease was partially offset by increased rents resulting from our purchase of approximately $50,984 of improvements made to our properties that are leased by Five Star since January 1, 2013. Rental income increased year over year on a comparable property basis by $3,394, primarily as a result of our improvement purchases at certain of the 217 communities we have owned continuously since January 1, 2013 and the resulting increased rent, pursuant to the terms of the leases.

Net operating income. NOI decreased because of the changes in rental income described above. We do not incur property operating expenses at our triple net leased senior living communities, as these expenses are paid by our tenants. Accordingly, rental income is the same as NOI. The reconciliation of NOI to net income for our triple net leased senior living communities segment is shown in the table above. Our definition of NOI and our consolidated reconciliation of NOI to net income are included below in “Non-GAAP Financial Measures”.

Impairment of assets. During the nine months ended September 30, 2013, we recorded impairment of assets charges of $4,371 to reduce the carrying value of four of our senior living properties classified as held for sale as of September 30, 2013 to their estimated net sale price.

Interest expense. Interest expense for our triple net leased senior living communities arises from mortgage debt secured by certain of these properties. The decrease in interest expense is the result of the prepayment of four loans in the second quarter of 2013 that had a total principal balance of $10,377 and a weighted average interest rate of 6.1%, as well as the regularly scheduled amortization of our mortgage debt.

Gain on sale of properties. Gain on sale of properties is a result of the sale of one senior living community in January 2014, two senior living communities in June 2014, and one senior living community in August 2013.

Managed senior living communities:


	All Properties						Comparable Properties (1)
	As of and for the Nine Months						As of and for the Nine Months
	Ended September 30,						Ended September 30,
	2014			2013			2014			2013
Total properties		44			40			39			39
# of units / beds		7,051			6,771			6,678			6,678
Occupancy		88.5	%		87.3	%		88.3	%		87.3	%
Average monthly rate	$	4,185		$	4,217		$	4,231		$	4,220

⁽¹⁾

Consists of managed senior living communities we have owned continuously since January 1, 2013.

Table of Contents

Managed senior living communities, all properties:


	Nine Months Ended September 30,
	2014		2013		Change		% Change

Residents fees and services	$	237,740	$	224,634	$	13,106	5.8	%
Property operating expenses		(182,742)		(173,844)		(8,898)	(5.1)	%
Net operating income (NOI)		54,998		50,790		4,208	8.3	%

Depreciation expense		(24,494)		(21,128)		(3,366)	(15.9)	%
Operating income		30,504		29,662		842	2.8	%

Interest expense		(8,210)		(9,196)		986	10.7	%
Net income	$	22,294	$	20,466	$	1,828	8.9	%

Depreciation expense. Depreciation expense increased primarily as a result of acquisitions of managed senior living communities since January 1, 2013.

Managed senior living communities, comparable properties (managed senior living communities we have owned continuously since January 1, 2013):


	Nine Months Ended September 30,
	2014		2013		Change		% Change

Residents fees and services	$	227,102	$	223,923	$	3,179	1.4	%
Property operating expenses		(174,631)		(173,223)		(1,408)	(0.8)	%
Net operating income (NOI)		52,471		50,700		1,771	3.5	%

Depreciation expense		(22,306)		(21,010)		(1,296)	(6.2)	%
Operating income		30,165		29,690		475	1.6	%

Interest expense		(8,210)		(9,196)		986	10.7	%
Net income	$	21,955	$	20,494	$	1,461	7.1	%

Table of Contents

Residents fees and services. We recognize residents fees and services as services are provided. Our residents fees and services increased year over year on a comparable property basis because of an increase in occupancy and average daily rate at the 39 communities we have owned continuously since January 1, 2013.

Net operating income. NOI increased because of the net changes in residents fees and services less the property operating expenses described above. The reconciliation of NOI to net income for our managed senior living communities segment, comparable properties, is shown in the table above. Our definition of NOI and our consolidated reconciliation of NOI to net income are included below in “Non-GAAP Financial Measures”.

Depreciation expense. Depreciation expense increased as a result of our purchase of improvements at these properties.

MOBs:


	All Properties(1)				Comparable Properties (1) (2)
	As of and for the Nine Months				As of and for the Nine Months
	Ended September 30,				Ended September 30,
	2014		2013		2014		2013
Total properties	98		93		90		90
Total buildings	122		116		112		112
Total square feet(3)	9,142		7,819		7,497		7,497
Occupancy(4)	95.6	%	95.0	%	94.8	%	94.8	%

⁽¹⁾

Excludes properties classified in discontinued operations.

⁽²⁾

Consists of MOBs we have owned continuously since January 1, 2013.

⁽³⁾

Prior periods exclude space remeasurements made during the periods presented.

⁽⁴⁾

MOB occupancy includes (1) space being fitted out for occupancy pursuant to existing leases and (2) space which is leased, but is not occupied or is being offered for sublease by tenants.

Table of Contents

MOBs, all properties:


	Nine Months Ended September 30,
	2014		2013		Change		% Change

Rental income	$	198,589	$	152,492	$	46,097	30.2	%
Property operating expenses		(57,555)		(49,049)		(8,506)	(17.3)	%
Net operating income (NOI)		141,034		103,443		37,591	36.3	%

Depreciation / amortization expense		(61,269)		(39,804)		(21,465)	(53.9)	%
Operating income		79,765		63,639		16,126	25.3	%

Interest expense		(4,328)		(4,103)		(225)	(5.5)	%
Income from continuing operations		75,437		59,536		15,901	26.7	%
Discontinued operations:
Income from discontinued operations		1,484		3,762		(2,278)	(60.6)	%
Impairment of assets from discontinued operations		(117)		(27,896)		27,779	99.6	%
Net income	$	76,804	$	35,402	$	41,402	116.9	%

Rental income. Rental income increased primarily because of rents from eight MOBs (ten buildings) we acquired for approximately $1,275,553 since January 1, 2013. Rental income includes non-cash straight line rent adjustments totaling $6,198 and $4,416 and net amortization of approximately $945 and $(2,858) of above and below market lease adjustments for the nine months ended September 30, 2014 and 2013, respectively.

Depreciation / amortization expense. Depreciation / amortization expense increased primarily because of our MOB acquisitions since January 1, 2013.

Interest expense. Interest expense for our MOBs arises from mortgage debt secured by certain of these properties. The increase in interest expense is the result of our assumption of $15,630 of mortgage debt in connection with our acquisition of one MOB since January 1, 2013 with an interest rate of 6.3%, partially offset by the regularly scheduled amortization of our mortgage debt.

Income from discontinued operations. Income from discontinued operations relates to the one MOB (four buildings) classified as held for sale as of September 30, 2014 as well as the two MOBs (two buildings) sold in the second quarter of 2014 and one MOB (one building) sold in the third quarter of 2014. The decrease in income is primarily due to the sale of two MOBs (two buildings) during the second quarter of 2014 and one MOB (one building) sold in the third quarter of 2014.

Impairment of assets from discontinued operations. During the nine months ended September 30, 2014, we recorded net impairment of assets charges of $117 to reduce the carrying value of one of our MOBs (four buildings) to its estimated net sale price, partially offset by writing the carrying value of three of our MOBs (three buildings) up to their net sale prices. During the nine months ended September 30, 2013, we recorded impairment of assets charges of $27,896 to reduce the carrying value of four of our MOBs (seven buildings) to their estimated net sale prices.

Table of Contents

MOBs, comparable properties (MOBs we have owned continuously since January 1, 2013)(1):


	Nine Months Ended September 30,
	2014		2013		Change		% Change

Rental income	$	149,003	$	147,852	$	1,151	0.8	%
Property operating expenses		(48,904)		(48,063)		(841)	(1.7)	%
Net operating income (NOI)		100,099		99,789		310	0.3	%

Depreciation / amortization expense		(37,779)		(38,179)		400	1.0	%
Operating income		62,320		61,610		710	1.2	%

Interest expense		(3,910)		(4,081)		171	4.2	%
Net income	$	58,410	$	57,529	$	881	1.5	%

⁽¹⁾

Excludes properties classified in discontinued operations.

Rental income. Rental income increased slightly as a result of an increase in rents at certain of our comparable properties for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. Rental income includes non-cash straight line rent adjustments totaling $3,037 and $4,179 and net amortization of approximately $(2,066) and $(2,777) of above and below market lease adjustments for the nine months ended September 30, 2014 and 2013, respectively.

Property operating expenses. Property operating expenses consist of property management fees, real estate taxes, utility expense, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating properties. Property operating expenses increased principally because of increases in utility expenses from unusually cold temperatures, landscaping (which includes snow removal), repairs and maintenance expense and other direct costs of operating properties experienced during the 2014 period.

Depreciation / amortization expense. Depreciation / amortization expense decreased slightly primarily because of a reduction in amortization of acquired in place real estate leases that we amortize over the respective lease terms, partially offset by an increase in the amortization of leasing costs.

Table of Contents

All other operations: (1)


	Nine Months Ended September 30,
	2014		2013		Change		% Change

Rental income	$	13,429	$	13,182	$	247	1.9	%

Expenses:
Depreciation		(2,844)		(2,844)		—	—
General and administrative		(28,250)		(24,615)		(3,635)	(14.8)	%
Acquisition related costs		(2,649)		(2,590)		(59)	(2.3)	%
Impairment of assets		—		(1,304)		1,304	100.0	%
Total expenses		(33,743)		(31,353)		(2,390)	(7.6)	%
Operating loss		(20,314)		(18,171)		(2,143)	(11.8)	%

Interest and other income		336		612		(276)	(45.1)	%
Interest expense		(67,368)		(55,207)		(12,161)	(22.0)	%
Loss on early extinguishment of debt		—		(797)		797	100.0	%
Loss before income tax expense and equity in earnings of an investee		(87,346)		(73,563)		(13,783)	(18.7)	%
Income tax expense		(502)		(405)		(97)	(24.0)	%
Equity in earnings of an investee		59		219		(160)	(73.1)	%
Net loss	$	(87,789)	$	(73,749)	$	(14,040)	(19.0)	%

⁽¹⁾

Rental income. Rental income increased due to scheduled rent increases at certain of our wellness centers. Rental income includes non-cash straight line rent adjustments totaling approximately $413 and $992 for the nine months ended September 30, 2014 and 2013, respectively. Rental income also includes amortization of approximately $165 of acquired real estate leases and obligations in both the nine months ended September 30, 2014 and 2013.

Depreciation expense. Depreciation expense remained consistent as there were no wellness center acquisitions or other capital improvements in this segment for the nine months ended September 30, 2014 and 2013 and we generally depreciate our long lived wellness center assets on a straight line basis.

Acquisition related costs. Acquisition related costs represent legal and due diligence costs incurred in connection with our acquisition activity during the nine months ended September 30, 2014 and 2013. Acquisition related costs increased as a result of more MOB acquisition activity during the nine months ended September 30, 2014 than the prior year period.

Impairment of assets. During the nine months ended September 30, 2013, we recorded an impairment of assets charge of $1,304 related to one property to reduce its carrying value to its estimated net sale price.

Interest and other income. The decline in interest and other income reflects reduced interest earned as a result of reduced dividend income from the 250,000 common shares of EQC that we own for the 2014 period compared with the 2013 period as well as less investable cash during the period.

Table of Contents

Loss on early extinguishment of debt. In June 2013, we prepaid four mortgage loans encumbering four of our wellness center properties for $10,377 that had maturity dates in 2013. In September 2013, we prepaid a mortgage loan encumbering two of our properties for $13,579 that had a maturity date later in 2013. As a result of the premiums paid to prepay these mortgages, we recorded an aggregate loss on early extinguishment of debt of $259. In September 2013, we amended our revolving credit facility, resulting in a loss on early extinguishment of debt of $538.

Equity in earnings of an investee. Equity in earnings of an investee represents our proportionate share of earnings from AIC.

Non-GAAP Financial Measures (dollars in thousands, except per share amounts)

We provide below calculations of our funds from operations, or FFO, Normalized FFO and NOI for the three and nine months ended September 30, 2014 and 2013. These measures should be considered in conjunction with net income, operating income and cash flow from operating activities as presented in our condensed consolidated statements of income and comprehensive income and condensed consolidated statements of cash flows. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income, operating income or cash flow from operating activities, determined in accordance with GAAP, or as indicators of our financial performance or liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of our needs. Other REITs and real estate companies may calculate FFO, Normalized FFO or NOI differently than we do.

Funds From Operations and Normalized Funds From Operations

We calculate FFO and Normalized FFO as shown below. FFO is calculated on the basis defined by the National Association of Real Estate Investment Trusts, or NAREIT, which is net income, calculated in accordance with GAAP, excluding any gain or loss on sale of properties and impairment of real estate assets, plus real estate depreciation and amortization, as well as certain other adjustments currently not applicable to us. Our calculation of Normalized FFO differs from NAREIT’s definition of FFO because we include estimated percentage rent in the period to which we estimate that it relates rather than when it is recognized as income in accordance with GAAP and exclude acquisition related costs, gain or loss on early extinguishment of debt, gain or loss on lease terminations, estimated business management incentive fees and loss on impairment of intangible assets, if any. We consider FFO and Normalized FFO to be appropriate measures of operating performance for a REIT, along with net income, operating income and cash flow from operating activities. We believe that FFO and Normalized FFO provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO and Normalized FFO may facilitate a comparison of our operating performance between periods and with other REITs. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our status as a REIT, limitations in our revolving credit facility agreement, term loan agreement and public debt covenants, the availability of debt and equity capital, our expectation of our future capital requirements and operating performance, and our expected needs and availability of cash to pay our obligations.

Table of Contents

Our calculations of FFO and Normalized FFO for the three and nine months ended September 30, 2014 and 2013 and reconciliations of net income, the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, to FFO and Normalized FFO appear in the following table.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013

Net income	$	37,112	$	38,125	$	113,350	$	78,957
Depreciation expense from continuing operations		50,074		38,473		135,132		114,472
Depreciation expense from discontinued operations		—		—		—		799
Gain on sale of properties		—		(1,141)		(2,552)		(1,141)
Impairment of assets from continuing operations		—		—		—		5,675
Impairment of assets from discontinued operations		(216)		—		117		27,896
FFO		86,970		75,457		246,047		226,658
Estimated business management incentive fees(1)		—		—		—		75
Acquisition related costs from continuing operations		15		396		2,649		2,590
Loss on early extinguishment of debt		—		692		—		797
Percentage rent adjustment(2)		2,600		2,300		7,600		6,800
Normalized FFO	$	89,585	$	78,845	$	256,296	$	236,920

Weighted average shares outstanding		203,792		188,102		197,317		186,942

FFO per share	$	0.43	$	0.40	$	1.25	$	1.21
Normalized FFO per share	$	0.44	$	0.42	$	1.30	$	1.27
Net income per share	$	0.18	$	0.20	$	0.57	$	0.42
Distributions declared per share	$	0.39	$	0.39	$	1.17	$	1.17

⁽¹⁾

Amounts represent estimated incentive fees under our business management agreement payable in common shares after the end of each calendar year calculated: (1) prior to 2014 based upon increases in annual Normalized FFO per share and (2) beginning in 2014 based on common share total return. In calculating net income in accordance with GAAP, we recognize estimated business management incentive fee expense, if any, each quarter. Although we recognize this expense, if any, each quarter for purposes of calculating net income, we do not include these amounts in the calculation of Normalized FFO until the fourth quarter, which is when the actual expense amount for the year is determined. Adjustments were made to prior period amounts to conform to the current period Normalized FFO calculation.

⁽²⁾

In calculating net income in accordance with GAAP, we recognize percentage rental income received for the first, second and third quarters in the fourth quarter, which is when all contingencies are met and the income is earned. Although we defer recognition of this revenue until the fourth quarter for purposes of calculating net income, we include these estimated amounts in our calculation of Normalized FFO for each quarter of the year. The fourth quarter Normalized FFO calculation excludes the amounts included during the first three quarters.

Property Net Operating Income (NOI)

We calculate NOI as shown below. We define NOI as income from our real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions. We consider NOI to be an appropriate supplemental measure to net income because it may help both investors and management to understand the operations of our properties. We use NOI internally to evaluate individual and company wide property level performance, and we believe that NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are incurred at the property level and may facilitate comparisons of our operating performance between periods and with other REITs. The calculation of NOI excludes certain components of net income in order to provide results that are more closely related to our properties’ results of operations.

Table of Contents

The calculation of NOI by reportable segment is included above in this Item 2. The following table includes the reconciliation of our consolidated NOI to net income, the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, for the three and nine months ended September 30, 2014 and 2013.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Reconciliation of NOI to Net Income:
Triple net leased communities NOI	$	55,266	$	57,073	$	165,321	$	170,794
Managed communities NOI		17,929		17,238		54,998		50,790
MOB NOI		56,422		33,889		141,034		103,443
All other operations NOI		4,550		4,336		13,429		13,182
Total NOI		134,167		112,536		374,782		338,209
Depreciation expense		(50,074)		(38,473)		(135,132)		(114,472)
General and administrative expense		(10,384)		(7,798)		(28,250)		(24,615)
Acquisition related costs		(15)		(396)		(2,649)		(2,590)
Impairment of assets		—		—		—		(5,675)
Operating income		73,694		65,869		208,751		190,857

Interest and other income		78		42		336		612
Interest expense		(36,201)		(29,405)		(99,213)		(88,536)
Loss on early extinguishment of debt		—		(692)		—		(797)
Income before income tax expense and equity in earnings of an investee		37,571		35,814		109,874		102,136
Income tax expense		(156)		(125)		(502)		(405)
Equity in earnings of an investee		38		64		59		219
Income from continuing operations		37,453		35,753		109,431		101,950
(Loss) income from discontinued operations		(557)		1,231		1,484		3,762
Impairment of assets from discontinued operations		216		—		(117)		(27,896)
Income before gain on sale of assets		37,112		36,984		110,798		77,816
Gain on sale of assets		—		1,141		2,552		1,141
Net income	$	37,112	$	38,125	$	113,350	$	78,957

LIQUIDITY AND CAPITAL RESOURCES

Rental income and residents fees and services revenues from our leased and managed properties and borrowings under our revolving credit facility are our principal sources of funds to pay operating expenses, debt service and distributions to shareholders. We believe that our operating cash flow will be sufficient to meet our operating expenses and debt service and pay distributions on our shares for the next 12 months and for the foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon our ability to:

maintain or improve the occupancy of, and the current rental rates and resident fees and services at, our properties;

control operating cost increases at our properties and other expenses; and

purchase additional properties which produce cash flows in excess of our cost of acquisition capital and property operating expenses.

Table of Contents

Our Operating Liquidity and Resources

We generally receive minimum rents monthly or quarterly from our tenants, we receive percentage rents from our triple net leased senior living community tenants monthly, quarterly or annually and we receive residents fees and services revenues, net of expenses, from our managed senior living communities monthly. During the nine months ended September 30, 2014 and 2013, we generated $281.5 million and $248.2 million, respectively, of cash from operations. The increase in our cash from operations over the prior year primarily resulted from our property acquisitions, as further described below.

Our Investment and Financing Liquidity and Resources

At September 30, 2014, we had $80.8 million of cash and cash equivalents and $750.0 million available to borrow under our revolving credit facility. We expect to use cash balances, borrowings under our revolving credit facility, net proceeds from our property sales, net proceeds from offerings of equity or debt securities and the cash flow from our operations to fund our operations, debt repayments, distributions, future property acquisitions and expenditures related to the repair, maintenance or renovation of our properties and for other general business purposes. We believe such amounts will be sufficient to fund these activities for the next 12 months and the foreseeable future thereafter.

In order to fund acquisitions and to meet cash needs that may result from timing differences between our receipts of rents and our need or desire to make distributions or pay operating or capital expenses, we maintain a $750.0 million unsecured revolving credit facility with a group of lenders. The maturity date of our revolving credit facility is January 15, 2018 and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to extend the stated maturity date of our revolving credit facility by one year to January 15, 2019. In addition, our revolving credit facility includes a feature under which maximum borrowings may be increased to up to $1.5 billion in certain circumstances. Borrowings under our revolving credit facility bear interest at LIBOR plus a premium, which was 130 basis points as of September 30, 2014. We also pay a facility fee of 30 basis points per annum on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of September 30, 2014, the interest rate payable on borrowings under our revolving credit facility was 1.45%. As of both September 30, 2014 and November 3, 2014, we had no amounts outstanding and $750.0 million available under our revolving credit facility. We also have sometimes assumed mortgage debt in connection with our acquisitions and we may do so in the future. For more information, see Note 5 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

When significant amounts are outstanding under our revolving credit facility or as the maturity dates of our revolving credit facility and term debts approach, we intend to explore alternatives for the repayment of amounts due. Such alternatives may include incurring additional debt, issuing new equity securities, extending the maturity date of our revolving credit facility and entering into a new credit facility. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities.

In October 2014, we prepaid at par our $14.7 million loan incurred in connection with certain revenue bonds scheduled to mature on December 1, 2027. That loan had an interest rate of 5.875%.

In October 2014, we repaid a mortgage note that encumbered one of our properties that had a principal balance of $11.9 million and an interest rate of 6.25%.

In April 2014, we acquired one MOB (one building) for approximately $32.7 million, including the assumption of approximately $15.6 million of mortgage debt, and excluding closing costs. The MOB is located in Texas and includes 125,240 square feet. We funded this acquisition using cash on hand and borrowings under our revolving credit facility.

Table of Contents

In May 2014, we acquired one MOB (two buildings) for approximately $1.125 billion, excluding closing costs. This MOB is located in Massachusetts and includes 1,651,037 gross building square feet. We funded this acquisition using the proceeds of equity and debt offerings and borrowings under our revolving credit facility.

In July 2014, we entered into an agreement to acquire one senior living community for approximately $7.0 million, excluding closing costs; this senior living community is located in Jackson, Wisconsin and includes 52 assisted living units. In September 2014, we entered into an agreement to acquire one senior living community for approximately $40.4 million, excluding closing costs; this senior living community is located in Madison, Wisconsin and includes 176 independent and assisted living units. The closings of these acquisitions are contingent upon other customary closing conditions; accordingly, we may not purchase one or both of these properties, these purchases may be delayed or the terms of these purchases may change. If these acquisitions are completed, we expect that Five Star will manage these communities for our account pursuant to long term management agreements.

In August 2014, we entered into an agreement with Merger Sub pursuant to which we have agreed to acquire the entities owning 23 healthcare properties, which we classify as properties leased to MOBs, for approximately $539.0 million, including the assumption of approximately $30.0 million of mortgage debt. The MOBs contain approximately 2.2 million square feet and are located in 12 states. SIR has announced that it has agreed to acquire CCIT that, through its subsidiaries, owns the MOBs we have agreed to acquire from SIR. SIR's acquisition of CCIT would be pursuant to an agreement and plan of merger among SIR, Merger Sub and CCIT, which provides for the merger of CCIT with and into Merger Sub, with Merger Sub surviving as SIR's wholly owned subsidiary. The closing of this acquisition is contingent upon various conditions, including the completion of SIR’s acquisition of CCIT; accordingly, we may not purchase some or all of these properties, these purchases may be delayed or the terms of these purchases may change. We currently expect to fund the purchase price using cash on hand and drawings under our unsecured credit facility. On a longer term basis, we expect to finance this acquisition with an appropriate mix of debt and equity capital, depending on the cost of such financings and future market conditions.

As of September 30, 2014, we had eight properties (11 buildings) held for sale, including seven senior living communities with 552 units and one MOB (four buildings) with 323,541 square feet. We decided to sell these properties because of what we believe to be unattractive conditions in the markets in which these properties are located or in which they operate. In aggregate, the seven senior living communities that are held for sale receive a majority of their revenues from government funded programs, such as Medicare and Medicaid payments. All seven of these communities are leased to Five Star, and our rents from Five Star will be reduced if and as these sales occur, as determined pursuant to our leases with Five Star. The eight properties had a net book value (after impairment) of $12.9 million as of September 30, 2014. In October 2014, we sold one of the senior living communities that was held for sale as of September 30, 2014, for $2.85 million. Also in October 2014, we sold two of the senior living communities that were held for sale as of September 30, 2014, for $5.9 million. We are in the process of offering the remaining five properties for sale, but we can provide no assurance as to when or if sales of these properties will occur or what the terms of any sale may provide. During the nine months ended September 30, 2014, we recorded net impairment of assets charges of $0.1 million to adjust the carrying value of four MOBs (one property being held for sale and three properties which we sold) included in discontinued operations to their aggregate estimated net sale price. For more information about these completed and pending acquisitions and potential sales, see Note 3 to our condensed consolidated financial statements appearing in Item 1 above.

During the three and nine months ended September 30, 2014, pursuant to the terms of our existing leases with Five Star, we purchased $6.4 million and $23.8 million, respectively, of improvements to our properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $0.5 million and $1.9 million, respectively. We used cash on hand to fund these purchases.

Table of Contents

During the three and nine months ended September 30, 2014 and 2013, amounts capitalized for leasing costs and building improvements at our MOBs and our capital expenditures at our managed senior living communities were as follows (dollars in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
MOB tenant improvements(1) (2)	$	2,294	$	1,066	$	5,431	$	2,037
MOB leasing costs(1) (3)		907		2,490		2,882		3,336
MOB building improvements(1) (4)		1,813		1,511		4,847		3,872
Managed senior living communities capital improvements		2,509		2,612		7,041		8,331
Development, redevelopment and other activities(5)		4,206		2,965		12,472		9,597
Total capital expenditures	$	11,729	$	10,644	$	32,673	$	27,173

⁽¹⁾

Excludes expenditures at properties classified in discontinued operations.

⁽²⁾

MOB tenant improvements generally include capital expenditures to improve tenants’ space or amounts paid directly to tenants to improve their space.

⁽³⁾

MOB leasing costs generally include leasing related costs, such as brokerage commissions and other tenant inducements.

⁽⁴⁾

MOB building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets.

⁽⁵⁾

Development, redevelopment and other activities generally include (1) major capital expenditures that are identified at the time of a property acquisition and incurred within a short period after acquiring the property; and (2) major capital expenditure projects that reposition a property or result in new sources of revenue.

During the three months ended September 30, 2014, commitments made for expenditures in connection with leasing space in our MOBs, such as tenant improvements and leasing costs were as follows (dollars and square feet in thousands, except per square foot amounts):


	New
	Leases		Renewals		Total
Square feet leased during the quarter		25		53		78
Total leasing costs and concession commitments(1)	$	1,716	$	740	$	2,456
Total leasing costs and concession commitments per square foot(1)	$	68.64	$	13.96	$	31.49
Weighted average lease term (years)(2)		8.3		5.4		6.3
Total leasing costs and concession commitments per square foot per year(1)	$	8.27	$	2.59	$	5.00

⁽¹⁾

Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. Excludes expenditures at properties classified in discontinued operations.

⁽²⁾

Weighted based on annualized rental income pursuant to existing leases as of September 30, 2014, including straight line rent adjustments and estimated recurring expense reimbursements and excluding lease value amortization.

Table of Contents

In April 2014, we issued 15,525,000 common shares in a public offering, raising net proceeds of approximately $323.3 million, after underwriting discounts but before expenses. We used the net proceeds from this offering to repay borrowings outstanding under our revolving credit facility and for general business purposes, including funding the acquisitions described above.

In April 2014, we sold $400.0 million of 3.25% senior unsecured notes due 2019 and $250.0 million of 4.75% senior unsecured notes due 2024, raising net proceeds of approximately $644.9 million, after underwriting discounts but before expenses. We used the net proceeds of this offering for general business purposes, including funding the acquisitions described above.

On May 30, 2014, we entered into an agreement pursuant to which we obtained a $350.0 million unsecured term loan. Our term loan matures on January 15, 2020, and is prepayable without penalty at any time. In addition, our term loan includes a feature under which maximum borrowings may be increased to up to $700.0 million in certain circumstances. Our term loan bears interest at a rate of LIBOR plus a premium of 140 basis points that is subject to adjustment based upon changes to our credit ratings. As of September 30, 2014, the interest rate payable on borrowings under our term loan was 1.55%. We used the net proceeds of our term loan to repay amounts outstanding under our revolving credit facility, to repay mortgage notes and for general business purposes.

We believe we will have access to various types of financings, including equity or debt offerings, to fund our future acquisitions and to pay our debts and other obligations as they become due. Our ability to complete and the costs of our future debt transactions will depend primarily upon market conditions and our credit ratings. We have no control over market conditions. Our credit ratings depend upon evaluations by credit rating agencies of our business practices and plans and, in particular, whether we appear to have the ability to maintain our earnings and service our debt funding obligations, to space our debt maturities and to balance our use of equity and debt capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipatable adverse changes. We intend to conduct our business activities in a manner which will continue to afford us reasonable access to capital for investment and financing activities. However, there can be no assurance that we will be able to complete any equity or debt offerings or that our cost of any future public or private financings will not increase.

Off Balance Sheet Arrangements

As of September 30, 2014, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

Debt Covenants

Our principal debt obligations at September 30, 2014 were: (1) six public issuances of unsecured senior notes, including: (a) $250.0 million principal amount at an annual interest rate of 4.30% due 2016, (b) $400.0 million principal amount at an annual interest rate of 3.25% due 2019, (c) $200.0 million principal amount at an annual interest rate of 6.75% due 2020, (d) $300.0 million principal amount at an annual interest rate of 6.75% due 2021, (e) $250.0 million principal amount at an annual interest rate of 4.75% due 2024 and (f) $350.0 million principal amount at an annual interest rate of 5.625% due 2042; (2) our $350.0 million principal amount term loan; and (3) $652.4 million aggregate principal amount of mortgages secured by 47 of our properties (50 buildings) with maturity dates from 2015 to 2043. We had no amounts outstanding under our unsecured revolving credit facility as of September 30, 2014. We also had two properties subject to capital leases totaling $12.9 million at September 30, 2014. Our unsecured senior notes are governed by an indenture. The indenture for our unsecured senior notes and related supplements, our revolving credit facility and our term loan contain a number of covenants which 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 generally require us to maintain certain other financial ratios. As of September 30, 2014, we believe we

Table of Contents

were in compliance with all of the covenants under our indenture and related supplements, our revolving credit facility and our other debt obligations.

None of our indenture and related supplements, our revolving credit facility, our term loan or our other debt obligations contain provisions for acceleration which could be triggered by a change in our debt ratings.

Our public debt indenture and related supplements contain cross default provisions, which are generally triggered upon default of any of our other debts of at least $10.0 million or, with respect to certain notes under such indenture and supplements, higher amounts. Similarly, our revolving credit facility and our term loan each contain a cross default provision that is triggered upon default of any other debts of $25.0 million or more that are recourse debts and to any other debts of $75.0 million or more that are non-recourse debts. Our revolving credit facility agreement provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as a change of control of us, which includes RMR ceasing to act as our business manager and property manager.

Related Person Transactions

We have relationships and historical and continuing transactions with our Trustees, our executive officers, RMR, Five Star, AIC and other companies to which RMR provides management services and others affiliated with them. For example, we have no employees and personnel and various services we require to operate our business are provided to us by RMR pursuant to management agreements; and RMR is owned by our Managing Trustees. Also, as a further example, we have relationships with other companies to which RMR provides management services and which have trustees, directors and officers who are also trustees, directors or officers of us or RMR, including: Five Star is our former subsidiary, our largest tenant and a manager of certain of our senior living communities, and we are Five Star’s largest stockholder; D&R Yonkers LLC is owned by our executive officers and one of our TRSs subleases a portion of a senior living community we own to it in order to accommodate certain requirements of New York healthcare licensing laws; we have agreed to acquire 23 healthcare properties from SIR; and we, RMR, Five Star, and four other companies to which RMR provides management services each currently own approximately 14.3% of AIC, and we and the other shareholders of AIC have property insurance in place providing $500.0 million of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts. For further information about these and other such relationships and related person transactions, please see Note 10 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. In addition, for more information about these transactions and relationships, please see elsewhere in this Quarterly Report on Form 10-Q, including “Warning Concerning Forward Looking Statements” in Part I, and our Annual Report, definitive Proxy Statement for our 2014 Annual Meeting of Shareholders, or our Proxy Statement, our Current Reports on Form 8-K dated May 12, 2014 and August 30, 2014, and our other filings with the SEC, including Note 5 to our consolidated financial statements included in our Annual Report, the sections captioned “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” and “Warning Concerning Forward Looking Statements” of our Annual Report and the section captioned “Related Person Transactions” and the information regarding our Trustees and executive officers in our Proxy Statement. In addition, please see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. Our filings with the SEC, including our Annual Report and our Proxy Statement, are available at the SEC’s website at www.sec.gov. Copies of certain of our agreements with these related parties, including our business management agreement and property management agreement with RMR, our leases, forms of management agreements and related pooling agreements with Five Star, our agreements with D&R Yonkers LLC and its owners, the purchase and sale agreement with Merger Sub and SIR and our shareholders agreement with AIC and its shareholders, are publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website.

We believe that our agreements with RMR, Five Star, D&R Yonkers LLC and its owners, SIR and AIC are on commercially reasonable terms. We also believe that our relationships with RMR, Five Star, D&R Yonkers LLC and its owners, SIR and AIC and their affiliated and related persons and entities benefit us and, in fact, provide us with competitive advantages in operating and growing our business.

Table of Contents

Impact of Government Reimbursement

As of September 30, 2014, approximately 97% of our NOI was generated from properties where a majority of the NOI is derived from our tenants’ and residents’ private resources, and the remaining 3% of our NOI was generated from properties where a majority of the NOI was derived from Medicare and Medicaid payments. We and our tenants operate facilities in many states and participate in federal and state healthcare payment programs, including the federal Medicare and state Medicaid programs for services in SNFs and other similar facilities, state Medicaid programs for services in certain assisted living communities, and other federal and state healthcare payment programs. Because of the current federal budget deficit and other federal spending priorities and challenging state fiscal conditions, there have been numerous recent legislative and regulatory actions or proposed actions with respect to federal Medicare rates and state Medicaid rates and federal payments to states for Medicaid programs. Examples of these, and other information regarding such programs, are provided below as well as under the caption “Business—Government Regulation and Reimbursement” in our Annual Report.

The Centers for Medicare and Medicaid Services, or CMS, issued updated Medicare prospective payment system rates for SNFs effective October 1, 2013, which CMS estimated would result in a net increase of approximately 1.3% in aggregate Medicare payments for SNFs, or approximately $470 million, in federal fiscal year 2014. On July 31, 2014, CMS released its final rule for the Medicare prospective payment system for SNFs for federal fiscal year 2015, which went into effect on October 1, 2014. As part of this rule, CMS will apply a net increase of 2.0% to Medicare payment rates for SNFs, which takes into account a 2.5% increase for inflation reduced by a 0.5% productivity adjustment and will result in an aggregate increase of approximately $750 million in payments for SNFs from federal fiscal year 2014.

On April 1, 2014, the Protecting Access to Medicare Act of 2014, or PAMA, extended the Medicare outpatient therapy cap exception process through March 31, 2015, further postponing the implementation of limits on Medicare payments for outpatient therapies. PAMA also extended the 0.5% increase to the Medicare Physician Fee Schedule, or MPFS, rates through December 31, 2014 and provided no increase in the MPFS rates, to which Medicare outpatient therapy rates are tied, for the period between January 1, 2015 and March 31, 2015. Unless further delayed, the MPFS rates are scheduled to be reduced by up to 24% effective April 1, 2015. Additionally, PAMA established a SNF value-based purchasing program. Under this program, the United States Department of Health and Human Services, or HHS, will assess SNFs based on hospital readmissions measures and make these assessments available to the public no later than October 1, 2017. Beginning in federal fiscal year 2019, SNFs will face a 2% withholding of SNF payments and will receive incentive payments based on the higher of their performance or improvement on certain hospital readmission measures. The collective amount of incentive payments to all SNFs are anticipated to be between 50% and 70% of the total payment amounts withheld.

On October 6, 2014, President Obama signed into law the Improving Medicare Post-Acute Care Transformation Act of 2014, or the IMPACT Act, which requires certain post-acute care providers, including SNFs, to begin collecting and reporting various types of data. Specifically, the Secretary of HHS will require SNFs to begin reporting certain quality measures and resource use measures in a standardized and interoperable format by October 1, 2016 and begin reporting certain patient assessment data in such a format by October 1, 2018. Beginning in federal fiscal year 2018, SNFs that fail to comply with the reporting requirements by the established timeframes will be subject to a 2% reduction in their Medicare payment rates for that fiscal year. Beginning October 1, 2018, the Secretary of HHS will make this data publicly available pursuant to certain procedures to be established. The IMPACT Act also requires the Secretary of HHS and the Medicare Payment Advisory Commission to submit reports to Congress recommending a future Medicare prospective payment system for post-acute care providers and analyzing both its effects on the reported metrics and financial effect on post-acute care providers. We are unable to predict the overall impact on us of these or other recent legislative and regulatory actions or proposed actions with respect to federal Medicare payment systems and rates.

Under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the ACA, the federal government will pay for 100% of a state’s Medicaid expansion costs for the first three years (2014-2016) and gradually reduce its subsidy to 90% for 2020 and future years. As of August 28, 2014, 21 states have elected not to broaden Medicaid eligibility under the ACA at this time, and two remain undecided; those states choosing not to participate in Medicaid expansion are forgoing the federal funds that would otherwise be available for

Table of Contents

that purpose. We are unable to predict the impact on us of these or other recent legislative and regulatory actions or proposed actions with respect to state Medicaid rates and payments to states for Medicaid programs.

The ACA also includes various provisions affecting Medicare and Medicaid providers, including expanded public disclosure requirements for SNFs and other providers, enforcement reforms, and increased funding for Medicare and Medicaid program integrity control initiatives. The ACA has resulted in several changes to existing healthcare fraud and abuse laws, established additional enforcement processes and funding to the government, and provided for increased cooperation between agencies by establishing mechanisms for sharing information relating to noncompliance. Furthermore, the ACA has resulted in enhanced criminal and administrative penalties for noncompliance. We are unable to predict the impact on us, our tenants and our managers of the insurance reforms, payment reforms, and healthcare delivery systems reforms contained in and to be developed pursuant to the ACA. Expanded insurance availability may provide more paying customers to us, our tenants and managers. If the changes to be implemented under the ACA result in reduced payments for services that our tenants or our managers provide or the failure of Medicare, Medicaid or insurance payment rates to cover our or our tenants’ costs, including the rents and management fees paid to us, our future financial results could be adversely and materially affected.

We cannot estimate the type and magnitude of the potential regulatory changes discussed above, but they may be material to and adversely affect the ability of our tenants to pay us rent, the profitability of our managed senior living communities and the values of our properties. The changes implemented or to be implemented could result in the failure of Medicare, Medicaid or private payment rates to cover our or our tenants’ costs of providing required services to residents, in reductions in payments or other circumstances that could have a material adverse effect on the ability of our tenants to pay rent to us, the profitability of our managed senior living communities and the values of our properties.

Item 3. 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 has not materially changed since December 31, 2013. Other than as described below, we do not currently foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.

Table of Contents

At September 30, 2014, our outstanding fixed rate debt included the following (dollars in thousands):


			Annual		Annual
	Principal		Interest		Interest			Interest
Debt	Balance(1)		Rate(1)		Expense		Maturity	Payments Due
Unsecured senior notes	$	400,000	3.25	%	$	13,000	2019	Semi-Annually
Unsecured senior notes		350,000	5.63	%		19,688	2042	Quarterly
Unsecured senior notes		300,000	6.75	%		20,250	2021	Semi-Annually
Unsecured senior notes		250,000	4.3	%		10,750	2016	Semi-Annually
Unsecured senior notes		250,000	4.75	%		11,875	2024	Semi-Annually
Unsecured senior notes		200,000	6.75	%		13,500	2020	Semi-Annually
Mortgage		289,581	6.71	%		19,431	2019	Monthly
Mortgages		85,811	5.924	%		5,083	2016	Monthly
Mortgages		52,000	5.64	%		2,933	2016	Monthly
Mortgages		44,960	6.54	%		2,940	2017	Monthly
Mortgage		29,572	6.02	%		1,779	2015	Monthly
Mortgage		15,437	6.28	%		969	2022	Monthly
Mortgages		12,555	5.66	%		711	2015	Monthly
Mortgage		12,231	6.25	%		764	2016	Monthly
Mortgage		11,944	6.25	%		747	2015	Monthly
Mortgage		11,349	6.37	%		722	2015	Monthly
Mortgage		11,107	6.15	%		683	2017	Monthly
Mortgage		9,254	6.73	%		623	2018	Monthly
Mortgage		9,243	5.95	%		550	2038	Monthly
Mortgage		6,411	5.81	%		373	2015	Monthly
Mortgage		6,274	5.97	%		375	2016	Monthly
Mortgage		5,650	5.86	%		331	2017	Monthly
Mortgage		4,941	5.65	%		279	2015	Monthly
Mortgage		4,614	4.38	%		202	2043	Monthly
Mortgage		4,429	5.81	%		257	2015	Monthly
Mortgage		3,372	6.25	%		211	2033	Monthly
Mortgage		2,796	7.31	%		204	2022	Monthly
Mortgage		2,748	5.88	%		162	2015	Monthly
Mortgage		1,380	7.85	%		108	2022	Monthly
Bonds		14,700	5.88	%		864	2027	Semi-Annually
	$	2,402,359			$	130,364

⁽¹⁾

The principal balances and interest rates are the amounts stated in the applicable contracts. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we assumed these debts. This table does not include obligations under capital leases.

No principal repayments are due under our unsecured notes or bonds until maturity. Our mortgages require principal and interest payments through maturity pursuant to amortization schedules. Because these debts bear interest at a fixed rate, changes in market interest rates during the term of these debts will not affect our interest obligations. If these debts were refinanced at interest rates which are 100 basis points higher or lower than shown above, our annual interest cost would increase or decrease by approximately $24.0 million.

Changes in market interest rates would affect the fair value of our fixed rate 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. Based on the balances outstanding at September 30, 2014, and discounted cash flow analyses through the respective maturity dates and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligations, a hypothetical immediate 100 basis point change in interest rates would change the fair value of those obligations by approximately $24.3 million.

Our unsecured senior notes and some of our mortgages contain provisions that allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date

Table of Contents

and we are generally allowed to make prepayments only at a premium equal to a make whole amount, as defined, which is generally designed to preserve a stated yield to the noteholder. In the past, we have repurchased and retired some of our outstanding debts and we may do so again in the future. These prepayment rights and our ability to repurchase and retire outstanding debt may afford us opportunities to mitigate the risk of refinancing our debts at maturity at higher rates by refinancing prior to maturity.

At September 30, 2014, our current floating rate obligations consisted of our $750.0 million unsecured revolving credit facility, under which we had no outstanding borrowings, and our $350.0 million unsecured term loan. Our revolving credit facility matures in January 2018, and, subject to our meeting certain conditions, including our payment of an extension fee, we have the option to extend the stated maturity date by one year to January 2019. No principal repayments are required under our revolving credit facility prior to maturity, and repayments may be made, and redrawn subject to conditions, at any time without penalty. Our term loan matures on January 15, 2020, and is prepayable without penalty at any time. In addition, our term loan includes a feature under which maximum borrowings may be increased to up to $700.0 million in certain circumstances.

Borrowings under our revolving credit facility and term loan are in U.S. dollars and bear interest at LIBOR plus premiums that are subject to adjustment based upon changes to our credit ratings. Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR. In addition, upon renewal or refinancing of our revolving credit facility or our term loan, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit characteristics. Generally, a change in interest rates would not affect the value of our floating rate debt but would affect our operating results.

The following table presents the impact a 100 basis point increase in interest rates would have on our annual floating rate interest expense as of September 30, 2014 (dollars in thousands):


	Impact of Changes in Interest Rates						Annual
			Outstanding		Total Interest		Earnings per
	Interest Rate		Debt		Expense Per Year		Share Impact (1)
At September 30, 2014	1.55	%	$	350,000	$	5,425	$	0.03
100 basis point increase	2.55	%	$	350,000	$	8,925	$	0.05

⁽¹⁾

Based on weighted average number of shares outstanding for the nine months ended September 30, 2014.

The following table presents the impact a 100 basis point increase in interest rates would have on our annual floating rate interest expense as of September 30, 2014 if we were fully drawn on our revolving credit facility and our term loan remained outstanding (dollars in thousands):


	Impact of Changes in Interest Rates
			Outstanding		Total Interest		Annual Earnings
	Interest Rate(1)		Debt		Expense Per Year		per Share Impact(2)
At September 30, 2014	1.46	%	$	1,100,000	$	16,060	$	0.08
100 basis point increase	2.46	%	$	1,100,000	$	27,060	$	0.14

⁽¹⁾

Weighted based on the respective interest rates and outstanding borrowings under our credit agreement (assuming fully drawn) and term loan as of September 30, 2014.

⁽²⁾

Based on weighted average number of shares outstanding for the nine months ended September 30, 2014.

The foregoing tables show 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 of our borrowings under our revolving credit facility or other floating rate debt.

Table of Contents

Item 4. 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 the Securities Exchange Act of 1934, as amended, 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 September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

WARNING CONCERNING FORWARD LOOKING STATEMENTS

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE” OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. FORWARD LOOKING STATEMENTS IN THIS REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:

OUR ACQUISITIONS AND SALES OF PROPERTIES,

OUR ABILITY TO COMPETE FOR ACQUISITIONS AND TENANCIES EFFECTIVELY,

OUR ABILITY TO RAISE EQUITY OR DEBT CAPITAL,

OUR ABILITY TO PAY DISTRIBUTIONS TO OUR SHAREHOLDERS AND THE AMOUNT OF SUCH DISTRIBUTIONS,

OUR ABILITY TO RETAIN OUR EXISTING TENANTS, ATTRACT NEW TENANTS AND MAINTAIN OR INCREASE CURRENT RENTAL RATES,

THE CREDIT QUALITIES OF OUR TENANTS,

OUR POLICIES AND PLANS REGARDING INVESTMENTS AND FINANCINGS,

THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY,

OUR ABILITY TO PAY INTEREST ON AND PRINCIPAL OF OUR DEBT,

OUR TAX STATUS AS A REIT,

OUR BELIEF THAT FIVE STAR, OUR FORMER SUBSIDIARY, WHICH IS OUR LARGEST TENANT AND WHICH MANAGES CERTAIN OF OUR SENIOR LIVING COMMUNITIES FOR OUR ACCOUNT, HAS ADEQUATE FINANCIAL RESOURCES AND LIQUIDITY TO MEET ITS OBLIGATIONS TO US AND TO MANAGE OUR SENIOR LIVING COMMUNITIES SUCCESSFULLY,

OUR EXPECTATION THAT WE WILL BENEFIT FINANCIALLY BY PARTICIPATING IN AIC WITH RMR AND COMPANIES TO WHICH RMR PROVIDES MANAGEMENT SERVICES, AND

OTHER MATTERS.

OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, FFO, NORMALIZED FFO, NOI, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:

THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR TENANTS,

Table of Contents

THE IMPACT OF THE ACA AND OTHER RECENTLY ENACTED, ADOPTED OR PROPOSED LEGISLATION OR REGULATIONS ON US, ON OUR TENANTS AND MANAGERS AND ON THEIR ABILITY TO PAY OUR RENTS AND RETURNS,

ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR MANAGING TRUSTEES, FIVE STAR, RMR, AIC, D&R YONKERS LLC, SIR AND THEIR RELATED PERSONS AND ENTITIES,

COMPLIANCE WITH, AND CHANGES TO, FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS, ACCOUNTING RULES, TAX LAWS AND SIMILAR MATTERS,

LIMITATIONS IMPOSED ON OUR BUSINESS AND OUR ABILITY TO SATISFY COMPLEX RULES IN ORDER FOR US TO QUALIFY AS A REIT FOR U.S. FEDERAL INCOME TAX PURPOSES,

COMPETITION WITHIN THE HEALTHCARE AND REAL ESTATE INDUSTRIES, AND

ACTS OF TERRORISM, OUTBREAKS OF SO CALLED PANDEMICS OR OTHER MANMADE OR NATURAL DISASTERS BEYOND OUR CONTROL.

FOR EXAMPLE:

FIVE STAR IS OUR LARGEST TENANT AND MANAGES CERTAIN OF OUR SENIOR LIVING COMMUNITIES FOR OUR ACCOUNT AND FIVE STAR MAY EXPERIENCE FINANCIAL DIFFICULTIES AS A RESULT OF A NUMBER OF FACTORS, INCLUDING, BUT NOT LIMITED TO:

MATERIAL WEAKNESSES IN ITS FINANCIAL REPORTING,

CHANGES IN MEDICARE AND MEDICAID PAYMENTS, INCLUDING THOSE THAT MAY RESULT FROM THE ACA AND OTHER RECENTLY ENACTED OR PROPOSED LEGISLATION OR REGULATIONS, WHICH COULD RESULT IN REDUCED RATES OR A FAILURE OF SUCH RATES TO COVER FIVE STAR’S COSTS,

CHANGES IN REGULATIONS AFFECTING FIVE STAR’S OPERATIONS,

CHANGES IN THE ECONOMY GENERALLY OR GOVERNMENTAL POLICIES WHICH REDUCE THE DEMAND FOR THE SERVICES FIVE STAR OFFERS,

INCREASES IN INSURANCE AND TORT LIABILITY AND OTHER COSTS, AND

INEFFECTIVE INTEGRATION OF NEW ACQUISITIONS,

IF FIVE STAR’S OPERATIONS BECOME UNPROFITABLE, FIVE STAR MAY BECOME UNABLE TO PAY OUR RENTS AND WE MAY NOT RECEIVE OUR EXPECTED RETURN ON OUR INVESTED CAPITAL OR ADDITIONAL AMOUNTS FROM OUR SENIOR LIVING COMMUNITIES THAT ARE MANAGED BY FIVE STAR,

OUR OTHER TENANTS MAY EXPERIENCE LOSSES AND BECOME UNABLE TO PAY OUR RENTS,

Table of Contents

CONTINUED AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY IS SUBJECT TO OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND MEETING OTHER CUSTOMARY CREDIT FACILITY CONDITIONS,

ACTUAL COSTS UNDER OUR REVOLVING CREDIT FACILITY WILL BE HIGHER THAN LIBOR PLUS A PREMIUM BECAUSE OF OTHER FEES AND EXPENSES ASSOCIATED WITH OUR REVOLVING CREDIT FACILITY,

INCREASING THE MAXIMUM BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY AND OUR TERM LOAN IS SUBJECT TO OUR OBTAINING ADDITIONAL COMMITMENTS FROM LENDERS, WHICH MAY NOT OCCUR,

THIS QUARTERLY REPORT STATES THAT WE MAY EXTEND THE MATURITY DATE OF OUR REVOLVING CREDIT FACILITY SUBJECT TO MEETING CERTAIN CONDITIONS AND PAYMENT OF A FEE. WE CAN PROVIDE NO ASSURANCE THAT THE APPLICABLE CONDITIONS WILL BE MET,

CONTINGENCIES IN OUR ACQUISITION AND SALES AGREEMENTS MAY NOT BE SATISFIED AND OUR PENDING PROPERTY SALES, ACQUISITIONS AND ANY RELATED MANAGEMENT AGREEMENTS MAY NOT OCCUR, MAY BE DELAYED OR THE TERMS OF SUCH TRANSACTIONS MAY CHANGE,

WE MAY BE UNABLE TO REPAY OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE,

OUR ABILITY TO MAKE FUTURE DISTRIBUTIONS DEPENDS UPON A NUMBER OF FACTORS, INCLUDING OUR FUTURE EARNINGS, CAPITAL COSTS TO LEASE AND OPERATE OUR PROPERTIES AND WORKING CAPITAL REQUIREMENTS. WE MAY BE UNABLE TO MAINTAIN OUR CURRENT RATE OF DISTRIBUTIONS AND FUTURE DISTRIBUTIONS MAY BE SUSPENDED,

OUR ABILITY TO GROW OUR BUSINESS AND INCREASE OUR DISTRIBUTIONS DEPENDS IN LARGE PART UPON OUR ABILITY TO BUY PROPERTIES AND ARRANGE FOR THEIR PROFITABLE OPERATION OR LEASE THEM FOR RENTS, LESS PROPERTY OPERATING EXPENSES, THAT EXCEED OUR CAPITAL COSTS. WE MAY BE UNABLE TO IDENTIFY PROPERTIES THAT WE WANT TO ACQUIRE OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES, ACQUISITION FINANCING, MANAGEMENT CONTRACTS OR LEASE TERMS FOR NEW PROPERTIES,

SOME OF OUR TENANTS MAY NOT RENEW EXPIRING LEASES, AND WE MAY BE UNABLE TO LOCATE NEW TENANTS TO MAINTAIN OR INCREASE THE HISTORICAL OCCUPANCY RATES OF, OR RENTS FROM, OUR PROPERTIES,

RENTS THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE BECAUSE OF CHANGING MARKET CONDITIONS OR OTHERWISE,

THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE MAY ENTER INTO ADDITIONAL MANAGEMENT AGREEMENTS OR POOLING AGREEMENTS WITH FIVE STAR FOR FIVE STAR TO MANAGE ADDITIONAL SENIOR LIVING COMMUNITIES THAT WE ACQUIRE OR THAT WE CURRENTLY OWN. HOWEVER, THERE CAN BE NO ASSURANCE THAT WE AND FIVE STAR WILL ENTER INTO ANY ADDITIONAL MANAGEMENT AGREEMENTS OR POOLING AGREEMENTS,

THIS QUARTERLY REPORT STATES THAT APPROXIMATELY 97% OF OUR NOI WAS GENERATED FROM PROPERTIES WHERE A MAJORITY OF THE NOI IS DERIVED FROM OUR

Table of Contents

TENANTS’ AND RESIDENTS’ PRIVATE RESOURCES. THIS MAY IMPLY THAT WE WILL MAINTAIN OR INCREASE THE PERCENTAGE OF OUR NOI GENERATED FROM PRIVATE RESOURCES AT OUR SENIOR LIVING COMMUNITIES. HOWEVER, RESIDENTS’ AND PATIENTS’ ABILITY TO FUND CHARGES WITH PRIVATE RESOURCES MAY BECOME MORE LIMITED IN THE FUTURE AND WE MAY BE REQUIRED OR MAY ELECT FOR BUSINESS REASONS TO ACCEPT OR PURSUE REVENUES FROM GOVERNMENT PAYMENT SOURCES, WHICH COULD RESULT IN AN INCREASED PART OF OUR NOI BEING GENERATED FROM GOVERNMENT PAYMENTS,

THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE HAVE ENTERED INTO AGREEMENTS TO ACQUIRE TWO SENIOR LIVING COMMUNITIES. THESE TRANSACTIONS ARE SUBJECT TO VARIOUS CONDITIONS TYPICAL OF COMMERCIAL REAL ESTATE TRANSACTIONS. THESE CONDITIONS MAY NOT BE MET. AS A RESULT, THESE TRANSACTIONS MAY NOT OCCUR OR MAY BE DELAYED OR THEIR TERMS MAY CHANGE,

THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE HAVE AGREED TO ACQUIRE 23 MOBS FROM MERGER SUB, A WHOLLY OWNED SUBSIDIARY OF SIR. THE CLOSING OF THIS TRANSACTION IS SUBJECT TO CONDITIONS AND CONTINGENCIES, INCLUDING THE CLOSING OF THE MERGER OF MERGER SUB AND CCIT WHICH IS EXPECTED TO OCCUR IN THE FIRST HALF OF 2015. THE MERGER IS ITSELF SUBJECT TO CONDITIONS AND CONTINGENCIES, INCLUDING APPROVALS BY THE SHAREHOLDERS OF SIR AND STOCKHOLDERS OF CCIT. WE CAN PROVIDE NO ASSURANCE THAT THE CONDITIONS AND CONTINGENCIES TO THE MERGER OR THE OTHER CONDITIONS AND CONTINGENCIES TO OUR ACQUISITION OF THE 23 MOBS WILL BE SATISFIED. ACCORDINGLY, WE CAN PROVIDE NO ASSURANCE THAT OUR ACQUISITION OF THE 23 MOBS WILL BE CONSUMMATED, THAT IT WILL NOT BE DELAYED OR THAT ITS TERMS WILL NOT CHANGE,

THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE CURRENTLY EXPECT TO ASSUME APPROXIMATELY $30 MILLION OF MORTGAGE DEBT IN CONNECTION WITH THE 23 MOBS WE HAVE AGREED TO ACQUIRE FROM MERGER SUB AND TO FUND THE BALANCE OF THE PURCHASE PRICE USING CASH ON HAND AND DRAWINGS UNDER OUR UNSECURED REVOLVING CREDIT FACILITY. OUR ASSUMPTION OF THE $30 MILLION OF MORTGAGES WILL REQUIRE THE APPROVAL OF THE MORTGAGEES WHICH MAY NOT BE OBTAINED. ALSO, ALTHOUGH WE CURRENTLY HAVE CASH ON HAND AND THE FULL $750 MILLION AVAILABLE FOR DRAWINGS UNDER OUR UNSECURED REVOLVING BANK CREDIT FACILITY, THE AMOUNTS OF CASH AND AVAILABLE DRAWINGS MAY BE LESS THAN REQUIRED TO CLOSE WHEN OUR PURCHASE OF THE 23 MOBS OCCURS. FOR THESE REASONS OR IN OUR DISCRETION, WE MAY FUND THIS ACQUISITION THROUGH DIFFERENT MEANS,

THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE EXPECT TO LONG TERM FINANCE THE ACQUISITION OF THE 23 MOBS WITH AN APPROPRIATE MIX OF DEBT AND EQUITY CAPITAL. OUR ACTUAL MIX OF DEBT AND EQUITY FINANCING WILL DEPEND ON THE AVAILABILITY AND COST OF SUCH FINANCING, AND THE FINAL MIX OF FINANCING MAY BE DIFFERENT FROM CURRENT EXPECTATIONS,

THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE HAVE FIVE PROPERTIES (EIGHT BUILDINGS) CLASSIFIED AS HELD FOR SALE. WE MAY NOT BE ABLE TO SELL THESE PROPERTIES ON TERMS ACCEPTABLE TO US OR OTHERWISE, AND THE SALE OF ANY OR ALL OF THESE PROPERTIES MAY NOT OCCUR, AND

THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE BELIEVE THAT OUR CONTINUING RELATIONSHIPS WITH FIVE STAR, RMR, AIC, D&R YONKERS LLC, SIR AND

Table of Contents

THEIR AFFILIATED AND RELATED PERSONS AND ENTITIES MAY BENEFIT US AND PROVIDE US WITH COMPETITIVE ADVANTAGES IN OPERATING AND GROWING OUR BUSINESS. IN FACT, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY NOT MATERIALIZE.

THESE RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH ARE BEYOND OUR CONTROL, SUCH AS CHANGED MEDICARE AND MEDICAID RATES, NEW LEGISLATION OR REGULATIONS AFFECTING OUR BUSINESS OR THE BUSINESSES OF OUR TENANTS OR MANAGERS, CHANGES IN OUR TENANTS’ OR MANAGERS’ REVENUES OR COSTS, CHANGES IN OUR TENANTS’ OR MANAGERS’ FINANCIAL CONDITIONS, CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY, OR NATURAL DISASTERS.

THE INFORMATION CONTAINED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q OR IN OUR FILINGS WITH THE SEC, INCLUDING UNDER THE CAPTION “RISK FACTORS”, OR INCORPORATED HEREIN OR THEREIN, IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE DIFFERENCES FROM OUR FORWARD LOOKING STATEMENTS. OUR FILINGS WITH THE SEC ARE AVAILABLE ON THE SEC’S WEBSITE AT WWW.SEC.GOV.

YOU SHOULD NOT PLACE UNDUE RELIANCE UPON OUR FORWARD LOOKING STATEMENTS.

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

STATEMENT CONCERNING LIMITED LIABILITY

THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING SENIOR HOUSING PROPERTIES TRUST, DATED SEPTEMBER 20, 1999, AS AMENDED AND SUPPLEMENTED, AS FILED WITH THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES 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.

Table of Contents

PART II. Other Information

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On July 8, August 7 and September 8, 2014, we issued 11,223, 11,782 and 12,144 of our common shares, respectively, to RMR as payment of a portion of the management fee due to RMR pursuant to our business management agreement with RMR. We issued these shares pursuant to an exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended.

Item 6. Exhibits.

2.1		Purchase and Sale Agreement and Joint Escrow Instructions, dated as of August 30, 2014, between SC Merger Sub LLC, the Company and, to evidence its agreement to be bound by the terms of Section 11.2, Select Income REIT. (Incorporated by reference to the Company’s Current Report on Form 8-K dated August 30, 2014.)
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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.)

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, File Number 001-15319.)

3.3		Articles Supplementary, dated April 17, 2014. (Incorporated by reference to the Company’s Current Report on Form 8-K dated April 17, 2014.)

3.4		Amended and Restated Bylaws of the Company, adopted April 10, 2014. (Incorporated by reference to the Company’s Current Report on Form 8-K dated April 10, 2014.)

4.1		Form of Common Share Certificate. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.)

4.2		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.)

4.3		Supplemental Indenture No. 4, dated as of April 9, 2010, between the Company and U.S. Bank National Association, relating to 6.75% Senior Notes due 2020, including form thereof. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.)

4.4		Supplemental Indenture No. 5, dated as of January 13, 2011, between the Company and U.S. Bank National Association, relating to 4.30% Senior Notes due 2016, including form thereof. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.)

4.5		Supplemental Indenture No. 6, dated as of December 8, 2011, between the Company and U.S. Bank National Association, relating to 6.75% Senior Notes due 2021, including form thereof. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.)

4.6		Supplemental Indenture No. 7, dated as of July 20, 2012, between the Company and U.S. Bank National Association, related to 5.625% Senior Notes due 2042, including form thereof. (Incorporated by reference to the Company’s Registration Statement on Form 8-A dated July 20, 2012.)

Table of Contents

4.7		Supplemental Indenture No. 8, dated as of April 28, 2014, between the Company and U.S. Bank National Association, related to 3.25% Senior Notes due 2019, including form thereof. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.)

4.8		Supplemental Indenture No. 9, dated as of April 28, 2014, between the Company and U.S. Bank National Association, related to 4.75% Senior Notes due 2024, including form thereof. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.)
10.1		Partial Termination of and Eleventh Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of October 1, 2014, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Filed herewith.)

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

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

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

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

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

32.1		Section 1350 Certification. (Furnished herewith.)

99.1		Agreement and Plan of Merger, dated as of August 30, 2014, among Select Income REIT, SC Merger Sub LLC and Cole Corporate Income Trust, Inc. (Incorporated by reference to Select Income REIT’s Current Report on Form 8-K dated August 30, 2014.)

101.1		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income and Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes to these financial statements, tagged as blocks of text and in detail. (Filed herewith.)

Table of Contents

SIGNATURES

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


	SENIOR HOUSING PROPERTIES TRUST


	By:	/s/ David J. Hegarty
		David J. Hegarty
		President and Chief Operating Officer

Dated: November 3, 2014


	By:	/s/ Richard A. Doyle
		Richard A. Doyle
		Treasurer and Chief Financial Officer
		(principal financial and accounting officer)

Dated: November 3, 2014