10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2013

or

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

Commission File Number 001-16817

FIVE STAR QUALITY CARE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland	04-3516029
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

400 Centre Street, Newton, Massachusetts 02458

(Address of Principal Executive Offices) (Zip Code)

(Registrant’s Telephone Number, Including Area Code): 617-796-8387

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 o  No x

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No x

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 o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(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 o  No x

Number of registrant’s shares of common stock, $.01 par value, outstanding as of April 14, 2014: 48,613,442.

FIVE STAR QUALITY CARE, INC.

FORM 10-Q

SEPTEMBER 30, 2013

INDEX

		Page
PART I	Financial Information
Item 1.	Condensed Consolidated Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets — September 30, 2013 and December 31, 2012 (Restated)	1
	Condensed Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2013 and 2012 (Restated)	2
	Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2013 and 2012 (Restated)	3
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2013 and 2012 (Restated)	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
	Warning Concerning Forward Looking Statements	31
PART II	Other Information
Item 1A.	Risk Factors	34
Item 6.	Exhibits	35
	Signatures	36

As used herein the terms “we”, “us” or “our” mean Five Star Quality Care, Inc. and its consolidated subsidiaries unless the context otherwise requires.

Part I.    Financial Information

Item 1.  Condensed Consolidated Financial Statements

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

	September 30, 2013			December 31, 2012 (Restated)
ASSETS
Current assets:
Cash and cash equivalents	$	19,580		$	24,638
Accounts receivable, net of allowance of $4,308 and $2,792 at September 30, 2013 and December 31, 2012, respectively	38,226			39,205
Due from related persons	6,884			6,881
Investments in available for sale securities, of which $5,100 and $3,684 are restricted at September 30, 2013 and December 31, 2012, respectively	19,042			12,920
Restricted cash	8,913			6,548
Prepaid expenses and other current assets	34,534			38,318
Assets of discontinued operations	21,499			30,100
Total current assets	148,678			158,610
Property and equipment, net	331,108			337,494
Equity investment in Affiliates Insurance Company	5,781			5,629
Restricted cash	8,184			12,166
Restricted investments in available for sale securities	11,597			10,580
Goodwill and other intangible assets	26,829			27,708
Other long term assets	40,548			40,382
	$	572,725		$	592,569
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Revolving credit facility, secured, principally by real estate	$	10,000		$	—
Revolving credit facility, secured, principally by accounts receivable	—			—
Convertible senior notes	—			24,872
Accounts payable	30,743			38,035
Accrued expenses	26,780			28,010
Accrued compensation and benefits	39,302			35,302
Due to related persons	21,227			19,484
Mortgage notes payable	1,142			1,092
Accrued real estate taxes	14,058			10,723
Security deposit liability	8,493			9,057
Other current liabilities	15,675			14,775
Liabilities of discontinued operations, of which $0 and $7,547 relate to mortgage notes payable at September 30, 2013 and December 31, 2012, respectively	9,232			16,977
Total current liabilities	176,652			198,327
Long term liabilities:
Mortgage notes payable	36,758			37,621
Continuing care contracts	1,635			1,708
Accrued self-insurance obligations	35,148			34,647
Other long term liabilities	5,583			6,712
Total long term liabilities	79,124			80,688
Commitments and contingencies
Shareholders’ equity:
Common stock, par value $.01; 75,000,000 shares authorized, 48,271,522 and 48,234,022 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively	482			482
Additional paid in capital	354,956			354,164
Accumulated deficit	(41,715		)	(44,455		)
Accumulated other comprehensive income	3,226			3,363
Total shareholders’ equity	316,949			313,554
	$	572,725		$	592,569

See accompanying notes.

1

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (in thousands, except per share data)

(unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2013			2012 (Restated)			2013			2012 (Restated)
Revenues:
Senior living revenue	$	269,839		$	268,645		$	807,906		$	804,543
Management fee revenue	2,290			1,277			6,873			3,667
Reimbursed costs incurred on behalf of managed communities	51,983			27,247			156,194			76,750
Total revenues	324,112			297,169			970,973			884,960
Operating expenses:
Senior living wages and benefits	130,824			131,384			393,641			393,446
Other senior living operating expenses	68,227			64,579			200,317			192,636
Costs incurred on behalf of managed communities	51,983			27,247			156,194			76,750
Rent expense	48,743			47,659			145,035			142,451
General and administrative	15,081			14,647			45,664			45,580
Depreciation and amortization	6,736			6,175			19,691			18,196
Gain on settlement	—			—			—			(3,365		)
Total operating expenses	321,594			291,691			960,542			865,694
Operating income	2,518			5,478			10,431			19,266
Interest, dividend and other income	191			199			599			638
Interest and other expense	(1,179		)	(1,762		)	(3,990		)	(4,793		)
Acquisition related costs	(78		)	(100		)	(119		)	(100		)
(Loss) gain on early extinguishment of debt	(599		)	—			(599		)	45
Gain on sale of available for sale securities reclassified from other comprehensive income	36			63			6			62
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company	889			3,878			6,328			15,118
Provision for income taxes	(226		)	(905		)	(582		)	(5,523		)
Equity in earnings of Affiliates Insurance Company	64			115			219			236
Income from continuing operations	727			3,088			5,965			9,831
(Loss) income from discontinued operations	(925		)	13,125			(3,225		)	11,764
Net income (loss)	$	(198	)	$	16,213		$	2,740		$	21,595
Weighted average shares outstanding - basic	48,272			47,927			48,253			47,913
Weighted average shares outstanding - diluted	48,417			49,840			49,571			50,185
							.
Basic income per share from:
Continuing operations	$	0.02		$	0.06		$	0.12		$	0.21
Discontinued operations	(0.02		)	0.28			(0.06		)	0.24
Net income per share - basic	$	—		$	0.34		$	0.06		$	0.45
Diluted income per share from:
Continuing operations	$	0.02		$	0.06		$	0.12		$	0.21
Discontinued operations	(0.02		)	0.27			(0.06		)	0.23
Net income per share - diluted	$	—		$	0.33		$	0.06		$	0.44

See accompanying notes.

2

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 (in thousands)

(unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2013			2012 (Restated)			2013			2012 (Restated)
Net income (loss)	$	(198	)	$	16,213		$	2,740		$	21,595
Other comprehensive income:
Unrealized gain (loss) on investments in available for sale securities, net of tax	108			112			(65		)	280
Unrealized gain (loss) on equity investment in Affiliates Insurance Company	13			35			(68		)	31
Realized gain on investments in available for sale securities reclassified and included in net income, net of tax	(22		)	(38		)	(4		)	(37		)
Other comprehensive income (loss)	99			109			(137		)	274
Comprehensive income (loss)	$	(99	)	$	16,322		$	2,603		$	21,869

See accompanying notes.

3

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine months ended September 30,
	2013			2012 (Restated)
Cash flows from operating activities:
Net income	$	2,740		$	21,595
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	19,691			18,196
Loss (gain) on early extinguishment of debt	599			(45		)
Loss (income) from discontinued operations	5,382			(17,726		)
Gain on sale of available for sale securities	(6		)	(62		)
Equity in earnings of Affiliates Insurance Company	(219		)	(236		)
Stock-based compensation	792			783
Provision for losses on receivables	4,414			2,958
Changes in assets and liabilities:
Accounts receivable	(3,435		)	(3,127		)
Prepaid expenses and other assets	3,319			2,296
Accounts payable and accrued expenses	(3,627		)	1,199
Accrued compensation and benefits	4,000			7,269
Due from (to) related persons, net	1,740			(5,667		)
Other current and long term liabilities	2,970			4,757
Cash provided by operating activities	38,360			32,190
Cash flows from investing activities:
Acquisition of property and equipment	(37,267		)	(36,520		)
Payments from (to) restricted cash and investment accounts, net	1,617			(6,236		)
Purchase of available for sale securities	(13,416		)	(5,076		)
Proceeds from sales of improvements to Senior Housing Properties Trust	19,934			14,888
Proceeds from sale of available for sale securities	5,925			928
Cash (used in) provided by investing activities	(23,207		)	(32,016		)
Cash flows from financing activities:
Proceeds from borrowings on credit facilities	60,000			47,500
Repayments of borrowings on credit facilities	(50,000		)	(47,500		)
Repayments of borrowings on bridge loan from Senior Housing Properties Trust	—			(38,000		)
Purchase and retirement of convertible senior notes	(24,872		)	(12,038		)
Repayments of mortgage notes payable	(813		)	(765		)
Cash used in financing activities	(15,685		)	(50,803		)
Net cash flows from discontinued operations:
Net cash (used in) provided by operating activities	(4,595		)	1,463
Net cash provided by investing activities	7,603			35,193
Net cash used in financing activities	(7,534		)	(106		)
Net cash (used in) provided by discontinued operations	(4,526		)	36,550
Change in cash and cash equivalents during the period	(5,058		)	(14,079		)
Cash and cash equivalents at beginning of period	24,638			28,374
Cash and cash equivalents at end of period	$	19,580		$	14,295
Supplemental cash flow information:
Cash paid for interest	$	2,656		$	3,711
Cash paid for income taxes	$	1,775		$	1,552
Non-cash activities:
Issuance of common stock	$	182		$	114

See accompanying notes.

4

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 1.  Basis of Presentation and Organization

General

The accompanying condensed consolidated financial statements of Five Star Quality Care, Inc. and its subsidiaries, which we refer to as we, us or our, have been prepared without audit.  Certain information and disclosures required by U.S. generally accepted accounting principles 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 financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2012, Items 1, 1A, 2, 6, 7, 9A and 15 of which were subsequently amended and restated to, among other things, correct errors in our accounting for income taxes.  Specifically, the accounting for income tax errors relate to, among other things, the measurement of deferred tax assets for net operating losses and tax credits and the measurement of deferred tax assets and liabilities for temporary differences related to fixed assets, intangible assets and investments.  In addition, as part of the restatement we have corrected certain other errors related to insurance receivables, security deposits, accrual of fixed asset additions, classification of senior living operating expenses, and certain other immaterial items.  We have also corrected the footnote presentation in Note 6 of certain of our available for sale debt securities from Level 1 assets to Level 2 assets as defined in the fair value hierarchy. Those amended and restated items, including our restated financial statements for the years ended December 31, 2012 and 2011 and related interim periods, are included in our Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2012, which was filed with the Securities and Exchange Commission, or SEC, on April 15, 2014.  We refer in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, or this Quarterly Report, to our Annual Report on Form 10-K for the year ended December 31, 2012, as amended and restated in part by our Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2012, as our Annual Report.  We have also restated our condensed consolidated financial statements for the quarters ended March 31, 2013 and June 30, 2013, and those restated financial statements are included in our Amendment No.1 to each of our Quarterly Reports on Form 10-Q/A for the quarters ended March 31, 2013 and June 30, 2013, respectively.  In the opinion of our management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.  All material intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated.  Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

We operate senior living communities, including independent living communities, assisted living communities and skilled nursing facilities, or SNFs.  As of September 30, 2013, we operated 251 senior living communities (excluding those senior living communities we have classified as discontinued operations) located in 31 states containing 29,743 living units, including 220 primarily independent and assisted living communities with 26,921 living units and 31 SNFs with 2,822 living units.  As of September 30, 2013, we owned and operated 30 communities (2,946 living units), we leased and operated 181 communities (20,026 living units) and we managed 40 communities (6,771 living units).  These 251 senior living communities included 10,368 independent living apartments, 14,119 assisted living suites and 5,256 skilled nursing units.  We have excluded from the amounts above 48 living units of one senior living community that has been temporarily closed for renovations, but that senior living community is included in the 251 total senior living communities referenced above.  We have classified as discontinued operations one assisted living community owned and operated by us containing 32 living units as well as six SNFs and four assisted living communities we lease from Senior Housing Properties Trust or its subsidiaries, or SNH, and operate containing 712 living units; the 251 total senior living communities referenced above excludes these 11 communities classified as discontinued operations.

As of September 30, 2013, we also leased from SNH and operated two rehabilitation hospitals with 321 available beds that provide in-patient rehabilitation services to patients at the two hospitals and at three satellite locations.  In addition, as of that date, we leased and operated 13 out-patient clinics affiliated with these rehabilitation hospitals.  On December 31, 2013, we transferred the operations of these rehabilitation hospitals and the affiliated clinics to a third party in connection with SNH’s sale of the real estate associated with these rehabilitation hospitals.  We have classified our rehabilitation hospital business as discontinued operations as of the quarter ended September 30, 2013 (see Notes 9 and 10).

Restatement of Previously Issued Financial Statements

As discussed further in Note 12, we are restating our condensed consolidated financial statements for the three and nine months ended September 30, 2012 and for the year ended December 31, 2012, to correct certain errors in the accounting for income taxes. In addition, as part of the restatement we have corrected certain other errors related to insurance receivables, security deposits, accrual of fixed asset additions, classification of senior living operating expenses and certain other immaterial items. We corrected the presentation and disclosure of our consolidated statements of cash flows to separately identify the net cash flows from discontinued operations, by category and in total. We have also corrected the footnote presentation of certain of our available for sale debt securities from Level 1 assets to Level 2 assets as defined in the fair value hierarchy and corrected the disclosure of the fair value of our mortgage notes payable.

Recently Issued Accounting Pronouncements

In April 2014, the FASB issued Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, or ASU 2014-08.  ASU 2014-08 changes the criteria for reporting a discontinued operation.  Under the new pronouncement, a disposal of a part of an organization that has a major effect on its operations and financial results is a discontinued operation.  We are required to adopt ASU 2014-08 prospectively for all disposals or components of our business classified as held for sale during fiscal periods beginning after December 15, 2014 and are currently evaluating what impact, if any, its adoption will have to the presentation of our condensed consolidated financial statements.

Segment Information

We have three operating segments: senior living communities, rehabilitation and wellness and rehabilitation hospitals. In the senior living community segment, we operate for our own account or manage for the account of SNH independent living communities, assisted living communities and SNFs that are subject to centralized oversight and provide housing and services to elderly residents. Our rehabilitation and wellness operating segment does not meet any of the quantitative thresholds of a reportable segment as prescribed under Financial Accounting Standards Board, or FASB, Accounting Standards CodificationTM, or ASC, Topic 280, and as discussed further in Note 10, our rehabilitation hospital operating segment has been reclassified as discontinued operations. After the reclassification of our rehabilitation hospital business as discontinued operations, our business is comprised of one reportable segment, senior living.  All of our operations and assets are located in the United States, except for the operations of our captive insurance company subsidiary, which participates in our workers’ compensation, professional liability and automobile insurance programs and which is organized in the Cayman Islands.

5

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 2. Property and Equipment

Property and equipment, at cost, consists of the following:

	September 30, 2013			December 31, 2012 (Restated)
Land	$	21,714		$	21,714
Buildings and improvements	275,948			277,330
Furniture, fixtures and equipment	113,704			103,707
	411,366			402,751
Accumulated depreciation	(80,258		)	(65,257		)
	$	331,108		$	337,494

We recorded depreciation expense of $6,442 and $5,889 for the three months ended September 30, 2013 and 2012, respectively, and $18,824 and $16,884 for the nine months ended September 30, 2013 and 2012, respectively, relating to our property and equipment.

As of September 30, 2013, we had $4,870 of assets included in our property and equipment that we expected to request that SNH purchase from us for an increase in future rent pursuant to the terms of our leases with SNH; however, we are not obligated to make these sales and SNH is not obligated to purchase those assets.

Note 3. Accumulated Other Comprehensive Income

The following table details the changes in accumulated other comprehensive income, net of tax, for the nine months ended September 30, 2013:

	Equity Investment in Affiliates Insurance Company			Investments in Available for Sale Securities (Restated)			Accumulated Other Comprehensive Income (Restated)
Balance at January 1, 2013	$	99		$	3,264		$	3,363
Unrealized gain on investments, net of tax	—			60			60
Equity interest in investee’s unrealized loss on investments	(8		)	—			(8		)
Reclassification adjustment:
Realized gain on investments, net of tax	—			(52		)	(52		)
Balance at March 31, 2013	$	91		$	3,272		$	3,363
Unrealized loss on investments, net of tax	—			(233		)	(233		)
Equity interest in investee’s unrealized loss on investments	(73		)	—			(73		)
Reclassification adjustment:
Realized loss on investments, net of tax	—			70			70
Balance at June 30, 2013	$	18		$	3,109		$	3,127
Unrealized gain on investments, net of tax	—			108			108
Equity interest in investee’s unrealized gain on investments	13			—			13
Reclassification adjustment:
Realized gain on investments, net of tax	—			(22		)	(22		)
Balance at September 30, 2013	$	31		$	3,195		$	3,226

Accumulated other comprehensive income represents the unrealized appreciation of our investments, net of tax, and our share of other comprehensive income of Affiliates Insurance Company, or AIC.

6

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 4.  Income Taxes

For the nine months ended September 30, 2013, we recognized tax expense from continuing operations of $582, which includes a tax benefit of $1,468 related to the work opportunity tax credit program that expired in 2012 and was retroactively reinstated on January 3, 2013 and extended by the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013.  As prescribed by FASB ASC Topic 740, Accounting for Income Taxes, the effects of tax law changes are recognized in the period in which new legislation is enacted.  The total effect of the reinstatement of work opportunity tax credits related to 2012 employee wages was required to be recorded as a component of income tax expense in continuing operations during the first quarter of 2013.  For the nine months ended September 30, 2013, we also recognized a tax benefit from discontinued operations of $2,157.  As of December 31, 2012, our federal net operating loss carry forward, which begins to expire in 2026 if unused, was approximately $70,765, and our tax credit carry forward, which begins to expire in 2022 if unused, was approximately $11,729.  Our net operating loss carry forwards and tax credit carry forwards may be subject to audit and adjustments by the Internal Revenue Service.

We maintain a partial valuation allowance against our state net operating losses and certain deferred tax assets related to impaired investments.  When we believe that we will more likely than not realize the benefit of these deferred tax assets, we will record deferred tax assets as an income tax benefit in our condensed consolidated statements of income, which will affect our results of operations.

Note 5.  Earnings Per Share

We computed basic earnings per common share, or EPS, for the three and nine months ended September 30, 2013 and 2012 using the weighted average number of shares of our common stock, $.01 par value per share, or our common shares, outstanding during the periods.  Diluted EPS reflects the more dilutive earnings per common share amount calculated using the two-class method or the treasury stock method. The treasury stock method reflects dilutive potential common shares related to the Notes that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income applicable to common shareholders that would result from their assumed issuance.  The weighted average shares outstanding used to calculate basic and diluted EPS include 540 and 553 unvested common shares as of September 30, 2013 and 2012, respectively, issued to our officers and others under our equity compensation plan, or the Share Award Plan.  Unvested shares issued under the Share Award Plan are deemed participating securities because they participate equally in earnings with all of our other common shares.

The following table provides a reconciliation of income from continuing operations to diluted income (loss) from discontinued operations and a reconciliation of the number of common shares used in the computations of EPS from continuing operations to diluted EPS from continuing operations and diluted loss per share from discontinued operations:

7

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,
	2013							2012 (Restated)
	Income (loss)			Shares	Per Share			Income		Shares	Per Share
Income from continuing operations	$	727		48,272	$	0.02		$	3,088	47,927	$	0.06
Effect of the Notes	13			145				149		1,913
Diluted income from continuing operations	$	727		48,417	$	0.02		$	3,237	49,840	$	0.06
Diluted (loss) income from discontinued operations	$	(925	)	48,417	$	(0.02	)	$	13,125	49,840	$	0.27

	Nine Months Ended September 30,
	2013							2012 (Restated)
	Income (loss)			Shares	Per Share			Income		Shares	Per Share
Income from continuing operations	$	5,965		48,253	$	0.12		$	9,831	47,913	$	0.21
Effect of the Notes	344			1,318				528		2,272
Diluted income from continuing operations	$	5,965		49,571	$	0.12		$	9,831	50,185	$	0.21
Diluted (loss) income from discontinued operations	$	(3,225	)	49,571	$	(0.06	)	$	11,764	50,185	$	0.23

Note 6.  Fair Values of Assets and Liabilities

Our assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with ASC Topic 820.  We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels.

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in inactive markets.

Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date. 

The table below presents the assets measured at fair value at September 30, 2013 and December 31, 2012 categorized by the level of inputs used in the valuation of each asset.

	As of September 30, 2013								As of December 31, 2012
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1) (Restated)		Significant Other Observable Inputs (Level 2) (Restated)		Significant Unobservable Inputs (Level 3)
Cash equivalents (1)	$	13,075	$	13,075	$	—	$	—	$	22,149	$	22,149	$	—	$	—
Available for sale securities: (2)
Equity securities
Financial services industry	3,711		3,711		—		—		6,025		6,025		—		—
Non-equity investment instrument	1,021		1,021		—		—		—		—		—		—
REIT industry	606		606		—		—		484		484		—		—
Utilities industry	512		512		—		—		—		—		—		—
Other	2,177		2,177		—		—		775		775		—		—
Total equity securities	8,027		8,027		—		—		7,284		7,284		—		—
Debt securities
International bond fund (3)	2,322		—		2,322		—		2,345		—		2,345		—
High yield fund (4)	2,233		—		2,233		—		2,168		—		2,168		—
Industrial bonds	5,271		—		5,271		—		5,186		—		5,186		—
Government bonds	7,104		4,574		2,530		—		4,666		4,666		—		—
Energy industry bonds	1,876		—		1,876		—		—		—		—		—
Financial bonds	963		—		963		—		982		—		982		—
Other	2,843		—		2,843		—		869		—		869		—
Total debt securities	22,612		4,574		18,038		—		16,216		4,666		11,550		—
Total available for sale securities	30,639		12,601		18,038		—		23,500		11,950		11,550		—
Total	$	43,714	$	25,676	$	18,038	$	—	$	45,649	$	34,099	$	11,550	$	—

8

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

(1) Cash equivalents, consisting of money market funds held principally for obligations arising from our self-insurance programs.

(2) Investments in available for sale securities are reported on our balance sheet as current and long term investments in available for sale securities and are reported at fair value of $19,042 and $11,597, respectively, at September 30, 2013 and $12,920 and $10,580, respectively, at December 31, 2012.  We estimate the fair value of our available for sale securities by reviewing each security’s current market price, the ratings of the security, the financial condition of the issuer and our intent and ability to retain the investment during temporary market price fluctuations or until maturity.   In evaluating the factors described above, we presume a decline in value to be an “other than temporary impairment” if the quoted market price of the security is below the security’s cost basis for an extended period.  However, this presumption may be overcome if there is persuasive evidence indicating the value decline is temporary in nature, such as when the operating performance of the obligor is strong or if the market price of the security is historically volatile.  Additionally, there may be instances in which impairment losses are recognized even if the decline in value does not fall within the criteria described above, such as if we plan to sell the security in the near term and the fair value is below our cost basis.  When we believe that a change in fair value of an available for sale security is temporary, we record a corresponding credit or charge to other comprehensive income for any unrealized gains and losses.  When we determine that an impairment in the fair value of an available for sale security is an “other than temporary impairment”, we record a charge to earnings.

(3) The investment strategy of this fund is to invest principally in fixed income securities.  The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of U.S.dollar investment grade fixed income securities. There are no unfunded commitments and the investment can be redeemed weekly.

(4) The investment strategy of this fund is to invest principally in fixed income securities.  The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of primarily fixed income securities issued by companies with below investment grade ratings.  There are no unfunded commitments and the investment can be redeemed weekly.

Our investments in available for sale securities had amortized costs of $28,974 and $21,720 as of September 30, 2013 and December 31, 2012, respectively, had unrealized gains of $1,947 and $2,050 as of September 30, 2013 and December 31, 2012, respectively, and had unrealized losses of $282 and $270 as of September 30, 2013 and December 31, 2012, respectively.  At September 30, 2013, 37 of the securities we hold, with a fair value of $5,391, have been in a loss position for less than 12 months.  At September 30, 2013, none of the securities we hold have been in a loss position for 12 months or longer.  We do not believe these securities are impaired primarily because the financial conditions of the issuers of these securities remain strong with solid fundamentals, we currently intend to hold these securities until recovery and other factors that support our conclusion that the loss is temporary.  During the nine months ended September 30, 2013 and 2012, we received gross proceeds of $5,925 and $928, respectively, in connection with the sales of available for sale securities and recorded gross realized gains totaling $314 and $65, respectively, and gross realized losses totaling $308 and $3, respectively.  We record gains and losses on the sales of our available for sale securities using the specific identification method.

During the nine months ended September 30, 2013, we did not change the type of inputs used to determine the fair value of any of our assets and liabilities that we measure at fair value; however, we did correct the classification of $11,550 of our available for sale debt securities from Level 1 assets to Level 2 assets presented as of December 31, 2012 and corrected the disclosure of the fair value of our mortage notes which increased $9,947 at December 31, 2012. There were no other transfers of assets or liabilities between levels of the fair value hierarchy during the nine months ended September 30, 2013.

The carrying values of accounts receivable and accounts payable approximate fair value as of September 30, 2013 and December 31, 2012.  The carrying value and fair value of the Notes were $24,872 and $24,623, respectively, as of December 31, 2012 and were categorized in Level 2 of the fair value hierarchy in their entirety.  We estimated the fair value of the Notes using an average of the bid and ask prices of our then outstanding Notes.  The carrying value and fair value of our mortgage notes payable were $37,900 and $40,834, respectively, as of September 30, 2013 and $46,260 and $53,115 respectively, as of December 31, 2012 and are categorized in Level 3 of the fair value hierarchy in their entirety.  We estimate the fair values of our mortgage notes payable by using discounted cash flow analyses and

9

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

currently prevailing market terms as of the measurement date.  Because these Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.  We measured the fair value of our equity investment in AIC, which is an Indiana insurance company that we currently own in equal proportion as each of the other seven shareholders of that company (see Note 9), and categorized that investment in Level 2 of the fair value hierarchy in its entirety, by considering, among other things, the individual assets and liabilities held by AIC, AIC’s overall financial condition and earning trends, and the financial condition and prospects for the insurance industry generally.

Note 7.  Indebtedness

As of September 30, 2013, we had a $35,000 revolving secured line of credit, or our Credit Agreement, available for general business purposes, including acquisitions.  On December 31, 2013, in connection with the transfer of our rehabilitation hospitals’ operations, we reduced the borrowings available under our Credit Agreement to $25,000 because the accounts receivable generated at the two rehabilitation hospitals were no longer available as collateral.  The maturity date of our Credit Agreement is March 18, 2016.  Borrowings under our Credit Agreement typically bear interest at LIBOR plus a premium of 250 basis points, or 2.68% as of September 30, 2013.  We may draw, repay and redraw funds under our Credit Agreement until maturity, and no principal repayment is due until maturity.  We made no borrowings under our Credit Agreement during the three and nine months ended September 30, 2013 and 2012.  As of April 14, 2014 and September 30, 2013, we had $0 outstanding under our Credit Agreement.  We incurred facility costs related to our Credit Agreement of $35 and $154 for the three months ended September 30, 2013 and 2012, respectively, and $277 and $509 for the nine months ended September 30, 2013 and 2012, respectively.

We are the borrower under our Credit Agreement and certain of our subsidiaries guarantee our obligations under our Credit Agreement, which is secured by our and our guarantor subsidiaries’ accounts receivable and related collateral. Our Credit Agreement provides for acceleration of payment of all amounts outstanding thereunder upon the occurrence and continuation of certain events of default, such as a change of control of us, which includes termination of our business management and shared services agreement, or our business management agreement, with Reit Management & Research LLC, or RMR.

We also have a $150,000 secured revolving credit facility, or our Credit Facility, that is available for general business purposes, including acquisitions.  The maturity date of our Credit Facility is April 13, 2015, and, subject to the payment of extension fees and meeting certain other conditions, our Credit Facility includes options for us to extend its stated maturity date for two one-year periods.  Borrowings under our Credit Facility typically bear interest at LIBOR plus a premium of 250 basis points, or 2.68% as of September 30, 2013.  We may draw, repay and redraw funds under our Credit Facility until maturity, and no principal repayment is due until maturity.  The weighted average interest rate for borrowings under our Credit Facility was 3.15% and 2.92% for the nine months ended September 30, 2013 and September 30, 2012, respectively.  As of April 14, 2014 and September 30, 2013, we had $15,000 and $10,000, respectively, outstanding under our Credit Facility.  We incurred interest expense and other associated costs related to our Credit Facility of $542 and $762 for the three months ended September 30, 2013 and 2012, respectively, and $1,442 and $1,287 for the nine months ended September 30, 2013 and 2012, respectively.

We are the borrower under our Credit Facility, and certain of our subsidiaries guarantee our obligations under our Credit Facility, which is secured by real estate mortgages on 15 senior living communities with 1,549 living units owned by our guarantor subsidiaries and our guarantor subsidiaries’ accounts receivable and related collateral.  Our Credit Facility 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.

Our Credit Agreement and our Credit Facility contain a number of financial and other covenants, including covenants that restrict our ability to incur indebtedness or to pay dividends or make other distributions under certain circumstances and require us to maintain financial ratios and a minimum net worth.  Our Credit Agreement and Credit Facility require that we deliver quarterly and annual financial statements within the time periods specified within those agreements.  The lenders under each of our Credit Agreement and Credit Facility have waived, until April 15, 2014, any default resulting from our not timely delivering our financial statements for the quarter ended September 30, 2013, and until May 15, 2014, any default arising from our not timely delivering our financial statements for the year ended December 31, 2013, as required under those credit facilities.  Our financial statements for the quarter ended September 30, 2013 were delivered to our lenders contemporaneously with the filing of this Quarterly Report.

10

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

In October 2006, we issued $126,500 principal amount of the Notes.  Our net proceeds from this issuance were approximately $122,600.  The Notes bore interest at a rate of 3.75% per annum and were convertible into our common shares at any time.  The conversion rate, which was subject to adjustment, was 76.9231 common shares per $1 principal amount of the Notes, which represented a conversion price of $13.00 per share.  The Notes were guaranteed by certain of our wholly owned subsidiaries.  The Notes were scheduled to mature on October 15, 2026.  We could prepay the Notes at any time and the holders had rights to require us to purchase all or a portion of these Notes on each of October 15, 2013, 2016 and 2021 at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest.  We had periodically repurchased Notes in open market transactions or in privately negotiated transactions, and, on July 8, 2013, we redeemed all of the $24,872 principal amount of the Notes then outstanding at a redemption price equal to the principal amount, plus accrued and unpaid interest.  We recorded a loss on early extinguishment of debt, net of unamortized issuance costs, of $599 in the third quarter of 2013.   As of September 30, 2013 and December 31, 2012, we had $0 and $24,872, respectively, principal amount of the Notes outstanding, which were classified as current liabilities in our condensed consolidated balance sheet as of December 31, 2012.  We incurred interest expense and other associated costs related to the Notes of $21 and $245 for the three months ended September 30, 2013 and 2012, respectively, and $511 and $876 for the nine months ended September 30, 2013 and 2012, respectively.

At September 30, 2013, four of our senior living communities were encumbered by mortgage notes with an aggregate outstanding principal balance of $37,900: (1) one of our communities was encumbered by a Federal National Mortgage Association, or FNMA, mortgage note and (2) three of our communities were encumbered by Federal Home Loan Mortgage Corporation, or FMCC, mortgage notes.  These mortgages contain FNMA and FMCC, respectively, standard mortgage covenants.  We recorded a mortgage premium in connection with our assumption of the FNMA and FMCC mortgage notes as part of our acquisitions of the encumbered communities in order to record the assumed mortgage notes at their estimated fair value.  We are amortizing the mortgage premiums as a reduction of interest expense until the maturity of the respective mortgage notes.  The weighted average interest rate on these four notes was 6.91% as of September 30, 2013.  Payments of principal and interest are due monthly until maturities at varying dates ranging from June 2023 to September 2032.  We incurred mortgage interest expense, net of premium amortization, of $581 and $709 for the three months ended September 30, 2013 and 2012, respectively, and $2,425 and $2,134 for the nine months ended September 30, 2013 and 2012, respectively, including some interest expense recorded in discontinued operations.  Our mortgages require monthly payments into escrows for taxes, insurance and property replacement funds; withdrawals from these escrows require applicable FNMA and FMCC approval.  As of September 30, 2013, we believe we were in compliance with all applicable covenants under these mortgages.

In May 2011, we entered into a bridge loan, or the Bridge Loan, agreement with SNH under which SNH agreed to lend us up to $80,000 to fund a part of the purchase price for our acquisitions of certain assets of six senior living communities located in Indiana, or the Indiana Communities. During 2011, we completed our acquisitions of the assets of the Indiana Communities and, in connection with the acquisitions, borrowed $80,000 under the Bridge Loan. During 2011, we repaid $42,000 of this advance with proceeds from a public offering of our common shares and cash generated by operations. In April 2012, we repaid in full the principal amount then outstanding under the Bridge Loan, resulting in termination of the Bridge Loan. We funded the April 2012 repayment of the Bridge Loan with borrowings under our Credit Facility and cash on hand. We incurred interest expense and other associated costs related to the Bridge Loan of $314 for the nine months ended September 30, 2012.

Note 8. Off Balance Sheet Arrangements

We have pledged our accounts receivable and certain other assets, with a carrying value, as of September 30, 2013, of $12,706 arising from our operation of 26 properties owned by SNH and leased to us to secure SNH’s borrowings from its lender, FNMA.  As of September 30, 2013, we had no other 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 or expenses, results of operations, liquidity, capital expenditures or capital resources.

11

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 9. Related Person Transactions

We were formerly a 100% owned subsidiary of SNH, SNH is our largest landlord and our largest stockholder and we manage senior living communities for SNH.  In 2001, SNH distributed substantially all of our then outstanding common shares to its shareholders.  As of September 30, 2013, SNH owned 4,235 of our common shares, or approximately 8.8% of our outstanding common shares.  One of our Managing Directors, Barry Portnoy, is a managing trustee of SNH.  Barry Portnoy’s son, Adam Portnoy, also serves as a managing trustee of SNH.

As of September 30, 2013, we leased 187 senior living communities (including 10 that we have classified as discontinued operations) and two rehabilitation hospitals (which we have also classified as discontinued operations) from SNH.  Under our leases with SNH, we pay SNH minimum rent plus percentage rent based on increases in gross revenues at certain properties.  Our total minimum annual rent payable to SNH as of September 30, 2013 was $199,257, excluding percentage rent.  Our total rent expense (which includes rent for all properties we lease from SNH, including properties that we have classified as discontinued operations) under all of our leases with SNH, net of lease inducement amortization, was $50,622 and $50,119 for the three months ended September 30, 2013 and 2012, respectively, and $152,089 and $149,842 for the nine months ended September 30, 2013 and 2012, respectively.  As of September 30, 2013 and 2012, we had outstanding rent due and payable to SNH of $17,863 and $17,614, respectively.  During the nine months ended September 30, 2013, pursuant to the terms of our leases with SNH, we sold $22,501 of improvements made to properties leased from SNH, and, as a result, our annual rent payable to SNH increased by approximately $1,800.  As of September 30, 2013, our property and equipment included $4,870 for similar improvements we have made to properties we lease from SNH that we expected to request that SNH purchase from us for an increase in future rent; however, we are not obligated to make these sales and SNH is not obligated to purchase those assets.

In August 2013, we and SNH entered into an asset purchase agreement, or the Purchase Agreement, with certain unrelated third parties, pursuant to which SNH agreed to sell the real estate associated with two rehabilitation hospitals and certain related assets, and in connection with such sale, we agreed to transfer the operations of those hospitals and several leased in-patient and out-patient clinics that are affiliated with those hospitals to those third parties.  As a result of the transfer, we retained our net working capital investment in those hospitals of approximately $10,468.  Each hospital was leased to us by SNH under one of our combination leases with SNH, Lease No. 2, and the in-patient and out-patient clinics were leased to us by third parties.  In September 2013, we entered into an amendment to Lease No. 2 in connection with SNH’s agreement to sell the real estate associated with these rehabilitation hospitals and our agreement to transfer our related hospital operations.  The lease amendment provided, among other things, that effective upon the sale of the rehabilitation hospitals pursuant to the Purchase Agreement, Lease No. 2 would terminate with respect to the rehabilitation hospitals and the annual rent we pay to SNH under Lease No. 2 would be reduced by $9,500.  The lease amendment also provided for an allocation of indemnification obligations under the Purchase Agreement between SNH and us.  The transfer of the operations of the rehabilitation hospitals was completed on December 31, 2013.

We and SNH have agreed to offer for sale 10 senior living communities we lease from SNH, which we have classified as discontinued operations.  Our rent payable to SNH will be reduced if and as these sales occur pursuant to terms set in our leases with SNH.  In August 2013, SNH 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, our annual minimum rent payable to SNH decreased by $255, or 10% of the net proceeds of the sale to SNH, in accordance with the terms of the applicable lease with SNH.  In January 2014, SNH sold another one of these communities, an assisted living community with 48 living units, for a sales price of $2,400, and as a result of this sale, our annual minimum rent payable to SNH decreased by $210, or 8.75% of the net proceeds of the sale to SNH, in accordance with the terms of the applicable lease with SNH.  We can provide no assurance that the remaining eight senior living communities that we and SNH have agreed to offer for sale will be sold or what the terms of any sales may provide.

As of September 30, 2013, we managed 40 senior living communities for the account of SNH.  We manage these SNH communities pursuant to long term management agreements on substantially similar terms.  In connection with the management agreements, we and SNH have entered into four combination agreements, or pooling agreements, three pooling agreements that combine our management agreements with SNH for communities consisting only of assisted living units, or the AL Pooling Agreements, and a fourth pooling agreement, which combines our management agreements with SNH for communities that include only independent living units, or the IL Pooling Agreement.  Each of our first and second AL Pooling Agreements includes 20 identified communities (including three assisted living

12

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

communities that we began managing in October 2013, the management agreements for which are included under the second AL Pooling Agreement).  We and SNH entered into the third AL Pooling Agreement in November 2013 and that pooling agreement currently includes the management agreement for the community we began managing in November 2013, as further described below.  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 the applicable pooling agreement, including determinations of our incentive fees.  The senior living community in New York described below that we manage is not included in any of our Pooling Agreements.  We earned management fees from SNH of $2,290 and $1,284 for the three months ended September 30, 2013 and 2012, respectively, and $6,866 and $3,431 for the nine months ended September 30, 2013 and 2012, respectively.

In August 2013, we began managing for SNH a senior living community in Georgia with 93 assisted living units.  In October 2013, we began managing for SNH three senior living communities with an aggregate of 213 assisted living units; one of those communities is located in Tennessee, and the other two are located in Georgia.  In November 2013, we began managing for SNH a senior living community in Wisconsin with 68 assisted living units.  We entered into separate long term management agreements with SNH for each of those senior living communities on terms similar to those management agreements that we currently have with SNH for senior living communities that include assisted living units.  The management agreements for the senior living communities we began managing in August and October 2013 were added to the second AL Pooling Agreement and the management agreement for the senior living community we began managing in November 2013 was added to the third AL Pooling Agreement.  We expect that we may enter additional management arrangements with SNH for senior living communities that SNH may acquire in the future on terms similar to those management arrangements we currently have with SNH.

We manage a portion of a senior living community in New York that is not subject to the requirements of New York healthcare licensing laws, consisting of 198 living units, pursuant to a long term management agreement with SNH.  The terms of this management agreement are substantially consistent with the terms of our other management agreements with SNH for communities that include assisted living units, except that the management fee payable to us is equal to 5% of the gross revenues realized at that portion of the community, and there is no incentive fee payable to us under this management agreement.  In order to accommodate certain requirements of New York healthcare licensing laws, SNH subleases a portion of this senior living community that is subject to those requirements, consisting of 111 living units, to an entity, D&R Yonkers LLC, which is owned by SNH’s President and Chief Operating Officer and its Treasurer and Chief Financial Officer.  We manage this portion of the community pursuant to a long term management agreement with D&R Yonkers LLC.  Pursuant to that management agreement, D&R Yonkers LLC pays us a management fee equal to 3% of the gross revenues realized at that portion of the community and we are not entitled to any incentive fee under that agreement.

As discussed above in Note 7, in May 2011, we and SNH entered into the Bridge Loan, under which SNH lent to us $80,000.  In April 2012, we repaid in full the then outstanding principal amount under the Bridge Loan, resulting in the termination of the Bridge Loan.  We incurred interest expense and other associated costs on the Bridge Loan of $314 for the nine months ended September 30, 2012.

RMR provides business management and shared services to us pursuant to our business management agreement.  RMR also provides management services to SNH.  One of our Managing Directors, Barry Portnoy, is Chairman, majority owner and an employee of RMR.  Barry Portnoy’s son, Adam Portnoy, is an owner of RMR and serves as President, Chief Executive Officer and a director of RMR.  Our other Managing Director, Gerard Martin, is a director of RMR.  Bruce Mackey, our President and Chief Executive Officer, is an Executive Vice President of RMR and Paul Hoagland, our Treasurer and Chief Financial Officer, is a Senior Vice President of RMR.  SNH’s executive officers are officers of RMR and SNH’s President and Chief Operating Officer is a director of RMR.  Our Independent Directors also serve as independent directors or independent trustees of other public companies to which RMR provides management services.  Barry Portnoy serves as a managing director or managing trustee of those companies, including SNH, and Adam Portnoy serves as a managing trustee of a majority of those companies, including SNH.  In addition, officers of RMR serve as officers of those companies.

13

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Pursuant to our business management agreement with RMR, we recognized aggregate business management, administrative and information system service fees of $3,014 and $3,218 for the three months ended September 30, 2013 and 2012, respectively, and $10,175 and $9,696 for the nine months ended September 30, 2013 and 2012, respectively.  These amounts are included in general and administrative expenses in our condensed consolidated statements of income.  We also lease our headquarters from an affiliate of RMR for annual rent of approximately $767, which amount is subject to fixed increases.  Our rent expense for our headquarters, which included our utilities and real estate taxes that we are required to pay as additional rent, under this lease, was $355 and $359 for the three months ended September 30, 2013 and 2012, respectively, and $1,049 and $1,067 for the nine months ended September 30, 2013 and 2012, respectively.

We, RMR, SNH and five other companies to which RMR provides management services each currently own 12.5% of AIC, an Indiana insurance company.  All of our Directors, all of the trustees and directors of the other publicly held AIC shareholders and nearly all of the directors of RMR 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.

As of September 30, 2013, we have invested $5,209 in AIC since its formation in 2008.  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 Directors are also directors of AIC.  Our investment in AIC had a carrying value of $5,781 and $5,629 as of September 30, 2013 and December 31, 2012, respectively.  We recognized income of $64 and $115 for the three months ended September 30, 2013 and 2012, respectively, and $219 and $236 for the nine months ended September 30, 2013 and 2012, respectively, arising from our investment in AIC. We and the other shareholders of AIC have purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts.  This program was modified and extended in June 2013 for a one year term, and we paid a premium, including taxes and fees, of $5,428 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 this program.  We periodically consider the possibilities for expanding our insurance relationships with AIC to include other types of insurance and may in the future participate in additional insurance offerings AIC may provide or arrange.  We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so.  By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro rata share of any profits of this insurance business.

In July 2013, we, RMR, SNH and four other companies to which RMR provides management services purchased from an unrelated third party insurer a combined directors’ and officers’ liability insurance policy providing $10,000 of aggregate primary layer coverage and $5,000 of aggregate excess layer coverage.  We paid a premium of approximately $133 in connection with this policy.

Note 10.  Discontinued Operations

In 2011, we decided to offer for sale two SNFs we owned located in Michigan with a total of 271 living units.  On April 30, 2013, we sold these two SNFs for an aggregate sales price of $8,000, which included as part of the sales price the prepayment by the buyer of the then outstanding $7,510 of United States Department of Housing and Urban Development mortgage debt that encumbered these SNFs.

In August 2011, we agreed with SNH that SNH should sell one assisted living community we lease from SNH located in Pennsylvania with 103 living units.  We and SNH are in the process of offering this assisted living community for sale and, if sold, our annual minimum rent payable to SNH will decrease by 9.0% of the net proceeds of the sale to SNH, in accordance with the terms of our applicable lease with SNH.

In September 2012, we sold our pharmacy business to Omnicare. We received $34,298 in sale proceeds from Omnicare, including $3,789 in working capital and excluding transaction costs and taxes.  We recorded a pre-tax capital gain on the sale of the pharmacy business of $23,347.  In connection with the sale, Omnicare did not acquire the real estate we

14

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

owned associated with one pharmacy located in South Carolina.  We intend to sell this real estate and we recorded a $350 asset impairment charge during the third quarter of 2012 to reduce the carrying value of this property to its estimated fair value less costs to sell.  The fair value of assets held for sale is determined based upon the use of appraisals, input from market participants and/or our experience selling similar assets.

In June 2013, we agreed with SNH that SNH will offer for sale 10 senior living communities we lease from SNH with 721 living units.  Seven of these 10 communities with 578 living units are SNFs and three of these 10 communities with 143 living units are assisted living communities.  In August 2013, SNH 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, our annual minimum rent payable to SNH decreased by $255, or 10% of the net proceeds of the sale to SNH, in accordance with the terms of our applicable lease with SNH.  In January 2014, SNH sold another one of these communities, an assisted living community with 48 living units, for a sales price of $2,400, and as a result of this sale, our annual minimum rent payable to SNH decreased by $210, or 8.75% of the net proceeds of the sale to SNH, in accordance with the terms of the applicable lease with SNH.  We and SNH are in the process of offering the other eight communities for sale, and if sold, our annual minimum rent payable to SNH will decrease by 10% of the net proceeds of the sales to SNH, in accordance with the terms of our applicable leases with SNH.  We can provide no assurance that these eight communities will be sold or what the terms or timing for any sale of the communities may be.  We recorded a $1,231 asset impairment charge during the second quarter of 2013 to reduce the assets we own relating to these 10 communities to their estimated fair market values, less costs to sell.

Also in June 2013, we decided to offer for sale one assisted living community we own with 32 living units.  We are in the process of offering this community for sale but we can provide no assurance that this community will be sold or what the terms or timing for any sale of this community may be.

In August 2013, we and SNH entered into the Purchase Agreement with certain unrelated parties, pursuant to which SNH agreed to sell the real estate associated with two rehabilitation hospitals and certain related assets, and in connection with such sale, we agreed to transfer the operations of those hospitals and several leased in-patient and out-patient clinics that are affiliated with those hospitals to those third parties.  As of December 31, 2013, we completed the transfer of our rehabilitation hospital business, and, as a result of the transfer, we retained our net working capital investment in those hospitals of approximately $10,468 and our annual rent payable to SNH and others decreased by approximately $11,500.  We recorded a $1,029 asset impairment charge during the third quarter of 2013 to reduce the fixed assets we own relating to the rehabilitation hospitals to their estimated fair market values.

We have reclassified the condensed consolidated balance sheets, the condensed consolidated statements of income and the consolidated statement of cash flows for all periods presented to show the financial position, results of operations and cash flows of our rehabilitation hospitals, pharmacies and the communities that have been sold or are expected to be sold as discontinued.  Below is a summary of the operating results of these discontinued operations included in the condensed consolidated financial statements for the three and nine months ended September 30, 2013 and 2012:

	Three months ended September 30,						Nine months ended September 30,
				2012						2012
	2013			(Restated)			2013			(Restated)
Revenues	$	35,198		$	52,526		$	115,332		$	170,653
Expenses	(35,552		)	(55,091		)	(118,356		)	(175,630		)
Gain on sale	—			23,347			—			23,347
Impairment of long-lived assets	(1,127		)	(644		)	(2,358		)	(644		)
Benefit (provision) for income taxes	556			(7,013		)	2,157			(5,962		)
Net (loss) income	$	(925	)	$	13,125		$	(3,225	)	$	11,764

Note 11.   Litigation Settlement

On May 29, 2012, we entered into a settlement agreement, or the Settlement Agreement, with subsidiaries of Sunrise Senior Living, Inc., or Sunrise, pursuant to which we agreed to settle our long running litigation with Sunrise, involving

15

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

amounts charged by Sunrise to us for certain insurance programs for senior living communities previously managed by Sunrise for us.  Pursuant to the Settlement Agreement, Sunrise paid us $4,000 in cash and we recorded a gain of $3,365, net of legal fees, in our condensed consolidated statements of income.

16

Note 12. Restatement of Previously Issued Financial Statements

Subsequent to the issuance of our Annual Report, we identified certain errors primarily related to the accounting for income taxes. The Audit Committee of our Board of Directors, or our Audit Committee, after consideration of relevant facts and circumstances and after consultation with our management, concluded that our consolidated financial statements for the years ended December 31, 2012 and 2011 contained within our Annual Report, and our condensed consolidated financial statements for the quarters ended March 31, 2013 and June 30, 2013 contained within our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, respectively, should be restated, and that those financial statements previously filed with the SEC should no longer be relied upon.

Our condensed consolidated financial statements for the three and nine months ended September 30, 2012 are restated to correct certain errors related to the accounting for income taxes and other errors. We have corrected our condensed consolidated  balance sheet as of December 31, 2012 to reflect the effects of the restatement of our 2012 and 2011 annual financial statements. The accounting for income tax errors relate to, among other things, the measurement of deferred tax assets for net operating losses and tax credits and the measurement of deferred tax assets and liabilities for temporary differences related to fixed assets, intangible assets and investments.

Prior to 2011, we recognized a valuation allowance for most of our net deferred tax assets; therefore, errors in the measurement of our deferred tax assets and liabilities for years prior to 2011 were substantially offset by corresponding errors in the valuation allowance, with minimal net impact to our consolidated financial statements. We have corrected the errors relating to the quarter ended September 30, 2012 by increasing the income tax provision by $260 and $312 for the three and nine months ended September 30, 2012, respectively.

In addition, as part of the restatement, our condensed consolidated financial statements for the three and nine months ended September 30, 2012 also have been adjusted to correct certain other errors in those periods, including:

·      In 2013, we discovered certain errors relating to our security deposit liability.  We have corrected the errors relating to the three and nine months ended September 30, 2012 by increasing senior living revenues by $61 and $184, respectively.

·      In the fourth quarter of 2013, we determined that certain assets acquired and placed into service as of December 31, 2012 were not recorded in the proper time period. We have corrected the balance sheet error by recording $5,622 of fixed asset additions and related accrued liabilities as of December 31, 2012.

·      We also corrected classification errors pertaining to our related party balance sheet accounts by increasing due from related persons by $6,881 and increasing due to related persons by $7,769 at December 31, 2012.

·      We also made certain other immaterial corrections that impacted our condensed consolidated statements of income, including adjustments to general and administrative and depreciation expense, and made other balance sheet classification changes that are not material, individually or in aggregate, in the restated condensed consolidated financial statements included herein.

The net impact of correcting the errors resulted in an increase to our shareholders’ equity of $6,749 at December 31, 2012 and an increase of $272 and $375 to net income for the three and nine months ended September 30, 2012, respectively.

We corrected the presentation and disclosure of our consolidated statements of cash flows to separately identify the net cash flows from discontinued operations, by category and in total.  The restated financial statements include the proceeds from the sale of our pharmacy business of $34,298 for the nine months ended September 30, 2012 as cash provided by investing activities of discontinued operations and reflect the correction of other errors in the separate disclosure of cash flows for continuing operations and discontinued operations.

We have also corrected the footnote presentation in Note 6 of the classification of $11,550 as of December 31, 2012 of our available for sale debt securities from Level 1 assets to Level 2 assets as defined in the fair value hierarchy and corrected the disclosure of the fair value of our mortgage notes payable which increased $9,947 as of December 31, 2012.

In the third quarter of 2013, in connection with entering into a purchase agreement with SNH and certain unrelated parties, we reclassified our rehabilitation hospital business as discontinued operations and our rehabilitation hospital business is retrospectively presented as discontinued operations throughout the financial statements. These reclassifications decreased our income from continuing operations by $319 and $547, and decreased our loss from discontinued operations by those same amounts for the three and nine months ended September 30, 2012, respectively.

The financial information included in the accompanying financial statements and the Notes thereto reflect the effects of the corrections and retrospective adjustments described above.

The following tables summarize the effect of the retrospective adjustments to reflect discontinued operations and the correction of errors by financial statement line item for the three and nine months ended September 30, 2012 and as of December 31, 2012:

	For the Three Months Ended September 30, 2012
				Error Corrections															Retrospective Adjustments for
	As Reported			Income Taxes			Insurance Claims			Other Errors			Total Error Corrections			As Corrected			Discontinued Operations			As Restated
Consolidated Statement of Income data:
Senior living revenue	$	277,568		$	—		$	—		$	(310	)		(310	)		277,258			(8,613	)	$	268,645
Rehabilitation hospital revenue	26,328			—			—			—			—			26,328			(26,328		)	—
Total revenues	332,420			—			—			(310		)	(310		)	332,110			(34,941		)	297,169
Senior living wages and benefits	137,816			—			—			22			22			137,838			(6,454		)	131,384
Other senior living operating expenses	66,858			—			390			(371		)	19			66,877			(2,298		)	64,579
Rehabilitation hospital expense	23,734			—			—			—			—			23,734			(23,734		)	—
Rent expense	50,523			—			—			—			—			50,523			(2,864		)	47,659
General and administrative	14,602			—			—			45			45			14,647			—			14,647
Depreciation and amortization	6,324			—			—			(20		)	(20		)	6,304			(129		)	6,175
Total operating expenses	327,104			—			390			(324		)	66			327,170			(35,479		)	291,691
Operating income	5,316			—			(390		)	14			(376		)	4,940			538			5,478
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company	3,716			—			(390		)	14			(376		)	3,340			538			3,878
Provision for income taxes	(426		)	(260		)	—			—			(260		)	(686		)	(219		)	(905		)
Income from continuing operations	3,405			(260		)	(390		)	14			(636		)	2,769			319			3,088
Income from discontinued operations	13,034			408			—			2			410			13,444			(319		)	13,125
Net income	16,439			148			(390		)	16			(226		)	16,213			—			16,213
Per Share data:
Basic income per share from:
Continuing operations	$	0.07														$	0.06					$	0.06
Discontinued operations	0.27															0.28						0.28
Net income per share - basic	$	0.34														$	0.34					$	0.34
Diluted income per share from:
Continuing operations	$	0.07														$	0.06					$	0.06
Discontinued operations	0.26															0.27						0.27
Net income per share - diluted	$	0.33														$	0.33					$	0.33

	For the Three Months Ended September 30, 2012
	As Reported		Error Corrections		As Restated
Consolidated Statement of Comprehensive Income:
Net income	16,439		(226	)	16,213
Other comprehensive income (loss):
Unrealized gain on investments in available for sale securities, net of tax	188		(76	)	112
Realized loss (gain) on investments in available for sale securities reclassified and included in net income, net of tax	(63	)	25		(38	)
Unrealized gains on equity investment in Affiliates Insurance Company	35		—		35
Other comprehensive income (loss)	160		(51	)	109
Comprehensive income	16,599		(277	)	16,322

17

	For the Nine Months Ended September 30, 2012
				Error Corrections															Retrospective Adjustments for
	As Reported			Income Taxes			Insurance Claims			Other Errors			Total Error Corrections			As Corrected			Discontinued Operations			As Restated
Consolidated Statement of Income data:
Senior living revenue	$	831,864		$	—		$	—		$	(677	)	$	(677	)	$	831,187		$	(26,644	)	$	804,543
Rehabilitation hospital revenue	79,501			—			—			—			—			79,501			(79,501		)	—
Total revenues	991,781			—			—			(677		)	(677		)	991,104			(106,144		)	884,960
Senior living wages and benefits	412,808			—			—			58			58			412,866			(19,420		)	393,446
Other senior living operating expenses	200,062			—			390			(861		)	(471		)	199,591			(6,955		)	192,636
Rehabilitation hospital expense	71,725			—			—			—			—			71,725			(71,725		)	—
Rent expense	151,043			—			—			—			—			151,043			(8,592		)	142,451
General and administrative	45,445			—			—			134			134			45,579			1			45,580
Depreciation and amortization	18,631			—			—			(59		)	(59		)	18,572			(376		)	18,196
Total operating expenses	973,099			—			390			(728		)	(338		)	972,761			(107,067		)	865,694
Operating income	18,682			—			(390		)	51			(339		)	18,343			923			19,266
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company	14,534			—			(390		)	51			(339		)	14,195			923			15,118
Provision for income taxes	(4,835		)	(312		)	—			—			(312		)	(5,147		)	(376		)	(5,523		)
Income from continuing operations	9,935			(312		)	(390		)	51			(651		)	9,284			547			9,831
Income from discontinued operations	11,511			796			—			4			800			12,311			(547		)	11,764
Net income	21,446			484			(390		)	55			149			21,595			—			21,595
Per Share data:
Basic income per share from:
Continuing operations	$	0.21														$	0.19					$	0.21
Discontinued operations	0.24															0.26						0.24
Net income per share - basic	$	0.45														$	0.45					$	0.45
Diluted income per share from:
Continuing operations	$	0.21														$	0.19					$	0.21
Discontinued operations	0.24															0.25						0.23
Net income per share - diluted	$	0.45														$	0.44					$	0.44

	For the Nine Months Ended September 30, 2012
	As Reported		Error Corrections		As Restated
Consolidated Statement of Comprehensive Income:
Net income	21,446		149		21,595
Other comprehensive income (loss):
Unrealized gain on investments in available for sale securities, net of tax	469		(189	)	280
Realized loss (gain) on investments in available for sale securities reclassified and included in net income, net of tax	(62	)	25		(37	)
Unrealized gains on equity investment in Affiliates Insurance Company	31		—		31
Other comprehensive income (loss)	438		(164	)	274
Comprehensive income	21,884		(15	)	21,869

18

	For the Nine Months Ended September 30, 2012
				Error Corrections												Retrospective
	As Reported			Income Taxes		Insurance Claims		Other Errors		Presentation and Classification		Total Error Corrections		As Corrected		Adjustments for Discontinued Operations		As Restated
Consolidated Statement of Cash Flows data:
Net income	$	21,446		484		(390	)	55		—		149		21,595		—		21,595
Depreciation and amortization	18,631			—		—		(59	)	—		(59	)	18,572		(376	)	18,196
Loss from discontinued operations	(11,511		)	—		—		(4	)	(7,134	)	(7,138	)	(18,649	)	923		(17,726	)
Stock-based compensation	649			—		—		134		—		134		783		—		783
Provision for losses on receivables	3,949			—		—		—		—		—		3,949		(991	)	2,958
Changes in assets and liabilities:
Accounts receivable	(2,320		)	—		—		58		286		344		(1,976	)	(1,151	)	(3,127	)
Prepaid expenses and other assets	2,408			(429	)	390		—		(105	)	(144	)	2,264		32		2,296
Accounts payable and accrued expenses	906			(55	)	—		—		(181	)	(236	)	670		529		1,199
Accrued compensation and benefits	9,143			—		—		—		—		—		9,143		(1,874	)	7,269
Due to related persons, net	(5,868		)	—		—		—		201		201		(5,667	)	—		(5,667	)
Other current and long term liabilities	6,145			—		—		(184	)	(201	)	(385	)	5,760		(1,003	)	4,757
Cash provided by operating activities	43,235			—		—		—		(7,134	)	(7,134	)	36,101		(3,911	)	32,190
Acquisition of property and equipment	(40,251		)	—		—		—		—		—		(40,251	)	3,731		(36,520	)
Proceeds from sale of pharmacy business	34,298			—		—		—		(34,298	)	(34,298	)	—		—		0
Proceeds from disposition of property and equipment held for sale	18,249			—		—		—		—		—		18,249		(3,361	)	14,888
Cash provided by investing activities	1,912			—		—		—		(34,298	)	(34,298	)	(32,386	)	370		(32,016	)
Repayments of mortgage notes payable	(871		)	—		—		—		106		106		(765	)	—		(765	)
Cash used in financing activities	(50,909		)	—		—		—		106		106		(50,803	)	—		(50,803	)
Net cash used in operating activities of discontinued operations	(8,317		)	—		—		—		5,869		5,869		(2,448	)	3,911		1,463
Net cash provided by investing activities of discontinued operations	—			—		—		—		35,563		35,563		35,563		(370	)	35,193
Net cash used in financing activities of discontinued operations	—			—		—		—		(106	)	(106	)	(106	)	—		(106	)
Net cash provided by discontinued operations	(8,317		)	—		—		—		41,326		41,326		(33,009	)	3,541		36,550

	As of December 31, 2012
				Error Corrections																				Retrospective Adjustments
	As Reported			Income Taxes			Insurance Claims			Other Errors			Asset Additions and Related Accruals		Presentation and Classification			Total Error Corrections			As Corrected			for Discontinued Operations			As Restated
Consolidated Balance Sheet data:
Accounts receivable	$	53,134		$	—		$	—		$	(331	)	$	—	$	1,391		$	1,060		$	54,194		$	(14,989	)	$	39,205
Due from related persons	—			—			—			—			—		6,881			6,881			6,881			—			6,881
Prepaid and other current assets	29,644			9,507			(1,763		)	—			—		1,681			9,425			39,069			(751		)	38,318
Assets of discontinued operations	10,430			—			—			—			693		—			693			11,123			18,977			30,100
Total current assets	137,314			9,507			(1,763		)	(331		)	693		9,953			18,059			155,373			3,237			158,610
Property and equipment, net	335,612			—			—			110			4,929		—			5,039			340,651			(3,157		)	337,494
Goodwill and other intangible assets	27,788			—			—			—			—		—			—			27,788			(80		)	27,708
Other long term assets	42,267			(1,885		)	—			—			—		—			(1,885		)	40,382			—			40,382
Total assets	571,356			7,622			(1,763		)	(221		)	5,622		9,953			21,213			592,569			—			592,569
Accounts payable	36,920			—			—			—			—		2,768			2,768			39,688			(1,653		)	38,035
Accrued expenses	22,996			(544		)	—			—			4,929		827			5,212			28,208			(198		)	28,010
Accrued compensation and benefits	40,986			—			—			—			—		—			—			40,986			(5,684		)	35,302
Due to related persons	11,715			—			—			—			—		7,769			7,769			19,484			—			19,484
Accrued real estate taxes	11,905			—			—			—			—		(888		)	(888		)	11,017			(294		)	10,723
Security deposit liability	9,727			—			—			(647		)	—		—			(647		)	9,080			(23		)	9,057
Other current liabilities	15,299			—			—			—			—		(523		)	(523		)	14,776			(1		)	14,775
Liabilities of discontinued operations	8,448			—			—			(21		)	693		—			672			9,120			7,857			16,977
Total current liabilities	183,960			(544		)	—			(668		)	5,622		9,953			14,363			198,323			4			198,327
Other long term liabilities	6,615			101			—			—			—		—			101			6,716			(4		)	6,712
Total long term liabilities	80,591			101			—			—			—		—			101			80,692			(4		)	80,688
Additional paid in capital	354,083			—			—			81			—		—			81			354,164			—			354,164
Accumulated deficit	(49,637		)	6,579			(1,763		)	366			—		—			5,182			(44,455		)	—			(44,455		)
Cumulative other comprehensive income	1,877			1,486			—			—			—		—			1,486			3,363			—			3,363
Total shareholders’ equity	306,805			8,065			(1,763		)	447			—		—			6,749			313,554			—			313,554
Total liabilities and shareholders’ equity	$	571,356		$	7,622		$	(1,763	)	$	(221	)	$	5,622	$	9,953		$	21,213		$	592,569		$	—		$	592,569

19

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

RESULTS OF OPERATIONS

We have three operating segments: senior living communities, rehabilitation and wellness and rehabilitation hospitals. In the senior living community segment, we operate for our own account or manage for the account of SNH independent living communities, assisted living communities and SNFs that are subject to centralized oversight and provide housing and services to elderly residents. Our rehabilitation and wellness operating segment does not meet any of the quantitative thresholds of a reportable segment as prescribed under FASB ASC Topic 280, and as discussed further in Note 10 to the Notes to our condensed consolidated financial statements included in Item 1 of this Quarterly Report, our rehabilitation hospital operating segment has been reclassified as discontinued operations. After the reclassification of our rehabilitation hospital business as discontinued operations, our business is comprised of one reportable segment, senior living.  All of our operations and assets are located in the United States, except for the operations of our captive insurance company subsidiary, which participates in our workers’ compensation, professional liability and automobile insurance programs and which is organized in the Cayman Islands.

Key Statistical Data For the Three Months Ended September 30, 2013 and 2012:

The following tables present a summary of our operations for the three months ended September 30, 2013 and 2012:

	Three months ended September 30,
(dollars in thousands, except average monthly rate)	2013			2012 (Restated)			$ Change			% / bps Change
Senior living revenue	$	269,839		$	268,645		$	1,194		0.4	%
Management fee revenue	2,290			1,277			1,013			79.3	%
Reimbursed costs incurred on behalf of managed communities	51,983			27,247			24,736			90.8	%
Total revenue	324,112			297,169			26,943			9.1	%
Senior living wages and benefits	(130,824		)	(131,384		)	560			0.4	%
Other senior living operating expenses	(68,227		)	(64,579		)	(3,648		)	(5.6	)%
Costs incurred on behalf of managed communities	(51,983		)	(27,247		)	(24,736		)	(90.8	)%
Rent expense	(48,743		)	(47,659		)	(1,084		)	(2.3	)%
General and administrative expense	(15,081		)	(14,647		)	(434		)	(3.0	)%
Depreciation and amortization expense	(6,736		)	(6,175		)	(561		)	(9.1	)%
Interest, dividend and other income	191			199			(8		)	(4.0	)%
Interest and other expense	(1,179		)	(1,762		)	583			33.1	%
Acquisition related costs	(78		)	(100		)	22			22.0	%
Loss on early extinguishment of debt	(599		)	—			(599		)	(100.0	)%
Gain on sale of available for sale securities	36			63			(27		)	(42.9	)%
Provision for income taxes	(226		)	(905		)	679			75.0	%
Equity in earnings of Affiliates Insurance Company	64			115			(51		)	(44.3	)%
Income from continuing operations	$	727		$	3,088		$	(2,361	)	(76.5	)%
Total number of communities (end of period):
Owned and leased communities	211			211			—			—
Managed communities	40			30			10			33.3	%
Number of total communities (1)	251			241			10			4.1	%
Total number of living units (end of period):
Owned and leased living units	22,972			22,972			—			—
Managed living units	6,771			4,488			2,283			50.9	%
Number of total living units (2)	29,743			27,460			2,283			8.3	%
Owned and leased communities:
Occupancy %	85.9		%	86.2		%	n/a			(30	)bps
Average monthly rate(3)	$	4,407		$	4,346		$	61		1.4	%
Percent of senior living revenue from Medicaid	10.9		%	10.9		%	n/a			—
Percent of senior living revenue from Medicare	12.0		%	12.5		%	n/a			(50	)bps
Percent of senior living revenue from private and other sources	77.1		%	76.6		%	n/a			50	bps

(1)Excludes those senior living communities we have classified as discontinued operations.

(2)Excludes 48 living units of one senior living community that has been temporarily closed for renovations.

(3)Average monthly rate is calculated as total operating revenues divided by occupied units during the period, multiplied by 30 days.

20

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

Comparable senior living communities (senior living communities that we have owned, leased or managed and operated continuously since July 1, 2012):

	Three months ended September 30,
(dollars in thousands, except average monthly rate)	2013			2012 (Restated)			$ Change			% / bps Change
Senior living revenue	$	269,839		$	268,645		$	1,194		0.4	%
Management fee revenue	1,246			1,171			75			6.4	%
Senior living wages and benefits	(130,824		)	(131,384		)	560			0.4	%
Other senior living operating expenses	(68,227		)	(64,579		)	(3,648		)	(5.6	)%
Total number of communities (end of period):
Owned and leased communities	211			211			—			—
Managed communities	25			25			—			—
Number of total communities (1)	236			236			—			—
Total number of living units (end of period):
Owned and leased living units	22,972			22,972			—			—
Managed living units	3,735			3,735			—			—
Number of total living units (2)	26,707			26,707			—			—
Owned and leased communities:
Occupancy %	85.9		%	86.2		%	n/a			(30	)bps
Average monthly rate(3)	$	4,407		$	4,346		$	61		1.4	%
Percent of senior living revenue from Medicaid	10.9		%	10.9		%	n/a			—
Percent of senior living revenue from Medicare	12.0		%	12.5		%	n/a			(50	)bps
Percent of senior living revenue from private and other sources	77.1		%	76.6		%	n/a			50	bps

(1)Excludes those senior living communities we have classified as discontinued operations.

(2)Excludes 48 living units of one senior living community that has been temporarily closed for renovations.

(3)Average monthly rate is calculated as total operating revenues divided by occupied units during the period, multiplied by 30 days.

21

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

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Our senior living revenue increased 0.4% for the three months ended September 30, 2013 compared to the same period in 2012, with increased per diem charges to private pay residents, partially offset by government sequestration rate cuts (see “Our Revenues” appearing later in this Quarterly Report) which negatively impacted our Medicare rates and a decrease in occupancy during the third quarter 2013 compared to the same period in 2012.

Our management fee revenue and reimbursed costs at our managed communities increased significantly during the three months ended September 30, 2013 compared to the same period in 2012 due to an increase in the number of communities we managed as of the end of each respective period from 30 to 40.

Our senior living wages and benefits decreased 0.4% for the three months ended September 30, 2013 compared to the same period in 2012 primarily due to certain lower wage costs, partially offset by increased employee health insurance costs.  Our other senior living operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, increased 5.6% due to increased charges from various service providers, increased costs relating to our professional liability insurance program and general maintenance expenses.  Our rent expense increased 2.3% compared to the same period in 2012 primarily due to additional rent resulting from senior living community capital improvements we sold to SNH since July 1, 2012, pursuant to our leases with SNH.

General and administrative expenses increased 3.0% for the three months ended September 30, 2013 compared to the same period in 2012 primarily due to the increased size of our business, partially offset by lower costs associated with certain third party services.

Our depreciation and amortization expense increased 9.1% for the three months ended September 30, 2013 compared to the same period in 2012 primarily due to capital expenditures (net of our sales of capital improvements to SNH), including depreciation costs arising from our purchase of furniture and fixtures for our owned communities.

Our interest, dividend and other income decreased 4.0% for the three months ended September 30, 2013 compared to the same period in 2012 due to lower investable cash balances and lower yields realized on our investments.

Our interest and other expense decreased significantly for the three months ended September 30, 2013 compared to the same period in 2012 primarily due to our redemption of $24.9 million principal amount of the Notes outstanding in July 2013, and also due to fewer costs incurred under our Credit Agreement and our Credit Facility for the third quarter 2013 compared to the same period in 2012.

For the three months ended September 30, 2013, we recognized tax expense from continuing operations of $226,000.  During this period, we also recognized a tax benefit from discontinued operations of $556,000.  As of December 31, 2012, our federal net operating loss carry forward, which begins to expire in 2026 if unused, was approximately $70.8 million, and our tax credit carry forward, which begins to expire in 2022 if unused, was approximately $11.7 million.  For more information about our taxes, see Note 4 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

Discontinued operations:

We recorded a loss from discontinued operations for the three months ended September 30, 2013 of $925,000, compared to income from discontinued operations of $13.1 million for the three months ended September 30, 2012.  The loss is primarily due to losses incurred at assisted living communities, SNFs and our rehabilitation hospitals that we have sold or transferred or expect to sell or transfer, which includes an impairment charge for long-lived assets of $1.1 million.  Income from discontinued operations for the three months ended September 30, 2012 includes the $23.3 million gain on sale that we recorded relating to the sale of our pharmacy business, partially offset by income tax expense of $7.0 million and losses incurred at assisted living communities, SNFs and our rehabilitation hospitals that we have sold or transferred or expect to sell or transfer, and the recognition of an impairment charge for long-lived assets of $644,000.  The loss for the three months ended September 30, 2013 is after giving effect to an income tax benefit of $556,000 that we recognized in that period relating to our discontinued operations.

22

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

Key Statistical Data For the Nine Months Ended September 30, 2013 and 2012:

The following tables present a summary of our operations for the nine months ended September 30, 2013 and 2012:

	Nine months ended September 30,
(dollars in thousands, except average monthly rate)	2013			2012 (Restated)			$ Change			% / bps Change
Senior living revenue	$	807,906		$	804,543		$	3,363		0.4	%
Management fee revenue	6,873			3,667			3,206			87.4	%
Reimbursed costs incurred on behalf of managed communities	156,194			76,750			79,444			103.5	%
Total revenue	970,973			884,960			86,013			9.7	%
Senior living wages and benefits	(393,641		)	(393,446		)	(195		)	(0.0	)%
Other senior living operating expenses	(200,317		)	(192,636		)	(7,681		)	(4.0	)%
Costs incurred on behalf of managed communities	(156,194		)	(76,750		)	(79,444		)	(103.5	)%
Rent expense	(145,035		)	(142,451		)	(2,584		)	(1.8	)%
General and administrative expense	(45,664		)	(45,580		)	(84		)	(0.2	)%
Depreciation and amortization expense	(19,691		)	(18,196		)	(1,495		)	(8.2	)%
Gain on settlement	—			3,365			(3,365		)	(100.0	)%
Interest, dividend and other income	599			638			(39		)	(6.1	)%
Interest and other expense	(3,990		)	(4,793		)	803			16.8	%
Acquisition related costs	(119		)	(100		)	(19		)	(19.0	)%
(Loss) gain on early extinguishment of debt	(599		)	45			(644		)	(1,431.1	)%
Gain on sale of available for sale securities	6			62			(56		)	(90.3	)%
Provision for income taxes	(582		)	(5,523		)	4,941			89.5	%
Equity in earnings of Affiliates Insurance Company	219			236			(17		)	(7.2	)%
Income from continuing operations	$	5,965		$	9,831		$	(3,866	)	(39.3	)%
Total number of communities (end of period):
Owned and leased communities	211			211			—			—
Managed communities	40			30			10			33.3	%
Number of total communities (1)	251			241			10			4.1	%
Number of living units:
Owned and leased living units	22,972			22,972			—			—
Managed living units	6,771			4,488			2,283			50.9	%
Number of total living units (2)	29,743			27,460			2,283			8.3	%
Owned and leased communities:
Occupancy %	85.8		%	86.2		%	n/a			(40	)bps
Average monthly rate(3)	$	4,444		$	4,378		$	66		1.5	%
Percent of senior living revenue from Medicaid	10.9		%	11.1		%	n/a			(20	)bps
Percent of senior living revenue from Medicare	12.6		%	12.8		%	n/a			(20	)bps
Percent of senior living revenue from private and other sources	76.5		%	76.1		%	n/a			40	bps

(1)Excludes those senior living communities we have classified as discontinued operations.

(2)Excludes 48 living units of one senior living community that has been temporarily closed for renovations.

(3)Average monthly rate is calculated as total operating revenue divided by occupied units during the period, multiplied by 30 days.

23

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

Comparable senior living communities (senior living communities that we have owned, leased or managed and operated continuously since January 1, 2012):

	Nine months ended September 30,
(dollars in thousands, except average monthly rate)	2013			2012 (Restated)			$ Change			% / bps Change
Senior living revenue	$	807,906		$	804,543		$	3,363		0.4	%
Management fee revenue	3,344			3,218			126			3.9	%
Senior living wages and benefits	(393,641		)	(393,446		)	(195		)	(0.0	)%
Other senior living operating expenses	(200,317		)	(192,636		)	(7,681		)	(4.0	)%
Total number of communities (end of period):
Owned and leased communities	211			211			—			—
Managed communities	23			23			—			—
Number of total communities (1)	234			234			—			—
Number of living units:
Owned and leased living units	22,972			22,972			—			—
Managed living units	3,390			3,390			—			—
Number of total living units (2)	26,362			26,362			—			—
Owned and leased communities:
Occupancy %	85.8		%	86.2		%	n/a			(40	)bps
Average monthly rate(3)	$	4,444		$	4,378		$	66		1.5	%
Percent of senior living revenue from Medicaid	10.9		%	11.1		%	n/a			(20	)bps
Percent of senior living revenue from Medicare	12.6		%	12.8		%	n/a			(20	)bps
Percent of senior living revenue from private and other sources	76.5		%	76.1		%	n/a			40	bps

(1)Excludes those senior living communities we have classified as discontinued operations.

(2)Excludes 48 living units of one senior living community that has been temporarily closed for renovations.

(3)Average monthly rate is calculated as total operating revenue divided by occupied units during the period, multiplied by 30 days.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Our senior living revenue increased 0.4% for the nine months ended September 30, 2013 compared to the same period in 2012 primarily due to increased per diem charges to private pay residents, partially offset by government sequestration rate cuts which negatively impacted our Medicare rates and a decrease in occupancy.

Our management fee revenue and reimbursed costs at our managed communities increased significantly during the nine months ended September 30, 2013 compared to the same period in 2012 due to an increase in the number of communities we managed as of the end of each respective period from 30 to 40, the senior living communities we began managing during the nine months ended September 30, 2012 being reflected for the full period for the nine months ended September 30, 2013, and increases in our management fee revenues and reimbursed costs at those communities we managed continuously since January 1, 2012, which was primarily due to increases in occupancy.

24

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

Our senior living wages and benefits were flat for the nine months ended September 30, 2013 compared to the same period in 2012 primarily due to increased employee health insurance costs, offset by certain lower wage costs.  Our other senior living operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, increased 4.0% due to increased charges from various service providers, increased costs relating to our professional liability insurance program and general maintenance expenses.  Our rent expense increased 1.8% compared to the same period in 2012 primarily due to additional rent resulting from senior living community capital improvements we sold to SNH since January 1, 2012, pursuant to our leases with SNH.

General and administrative expenses increased 0.2% for the nine months ended September 30, 2013 compared to the same period in 2012 primarily due to the increased size of our business, partially offset by lower costs associated with certain third party services.

Our depreciation and amortization expense increased 8.2% for the nine months ended September 30, 2013 compared to the same period in 2012 primarily due to capital expenditures (net of our sales of capital improvements to SNH), including depreciation costs arising from our purchase of furniture and fixtures for our owned communities.

Our interest, dividend and other income decreased 6.1% for the nine months ended September 30, 2013 compared to the same period in 2012 due to lower investable cash balances and lower yields realized on our investments.

Our interest and other expense decreased 16.8% for the nine months ended September 30, 2013 compared to the same period in 2012 primarily due to our repurchase of $12.4 million par value of the outstanding Notes between January 2012 and April 2012, and our redemption of the remaining $24.9 million principal amount of the Notes outstanding in July 2013 and our repayment and subsequent termination of the Bridge Loan in April 2012.

For the nine months ended September 30, 2013, we recognized tax expense from continuing operations of $582,000, which includes a tax benefit of $1.5 million relating to a work opportunity tax credit program that expired in 2012 and which was retroactively reinstated on January 3, 2013 and extended by the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013.  As prescribed by FASB ASC Topic 740, Accounting for Income Taxes, the effects of tax law changes are recognized in the period in which new legislation is enacted; and the total effect of the reinstatement of the work opportunity tax credit program relating to 2012 employee wages is recorded as a component of income tax expense in continuing operations during the first quarter of 2013.  We also recognized in the nine months ended September 30, 2013 a tax benefit from discontinued operations of $2.2 million.  As of December 31, 2012, our federal net operating loss carry forward, which begins to expire in 2026 if unused, was approximately $70.8 million, and our tax credit carry forward, which begins to expire in 2022 if unused, was approximately $11.7 million.  For more information relating to our taxes, see Note 4 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

Discontinued operations:

We recorded a loss from discontinued operations for the nine months ended September 30, 2013 of $3.2 million, compared to income from discontinued operations of $11.8 million for the nine months ended September 30, 2012.  The loss in the current period is primarily due to losses incurred at assisted living communities, SNFs and our rehabilitation hospital business that we have sold or transferred or expect to sell or transfer, which includes an impairment charge for long-lived assets of $2.4 million.  Income from discontinued operations for the nine months ended September 30, 2012 includes the $23.3 million gain on sale that we recorded relating to the sale of our pharmacy business, partially offset by income tax expense of $6.0 million and losses incurred at assisted living communities, SNFs and our rehabilitation hospital business that we have sold or transferred or expect to sell or transfer, and the recognition of an impairment charge for long-lived assets of $644,000.  The loss for the nine months ended September 30, 2013 is after giving effect to a tax benefit of $2.2 million that we recognized in that period relating to our discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2013, we had $19.6 million of unrestricted cash and cash equivalents and $35.0 million and $139.4 million available to borrow under our Credit Agreement and our Credit Facility, respectively.  On December 31, 2013, in connection with the transfer of the operations of our rehabilitation hospital business, we reduced the borrowings available under our Credit Agreement to $25.0 million because the accounts receivable generated at the two rehabilitation hospitals were no

25

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

longer available as collateral.  We expect to use the cash flow from our operations, our cash balances, borrowings under our Credit Agreement and our Credit Facility and proceeds from our sales to SNH of qualified capital improvements we may make to our properties that we lease from SNH for increased rent pursuant to our leases with SNH to fund our operations, debt repayments, investments in and maintenance of our properties, future property acquisitions and other general business purposes.  We believe such amounts will be sufficient to fund these activities for the next 12 months and for the foreseeable future thereafter.  If, however, our occupancies decline from historic levels, the non-government rates we receive for our services decline or government rates are reduced or government payments are delayed or not paid and we are unable to generate positive cash flow for an extended period, we expect that we would explore alternatives to fund our operations.  Such alternatives may include reducing our costs, incurring debt under, and perhaps in addition to, our Credit Agreement and our Credit Facility, engaging in sale leaseback transactions of our owned communities, mortgage financing our communities that we own and that are not subject to existing mortgages and issuing new equity or debt securities.

Assets and Liabilities

Our total current assets at September 30, 2013 were $148.7 million, compared to $158.6 million at December 31, 2012.  At September 30, 2013, we had cash and cash equivalents of $19.6 million compared to $24.6 million at December 31, 2012.  The decrease in our cash and cash equivalents primarily results from using excess cash balances in our captive insurance program to invest in available for sale securities.  Our current liabilities were $176.7 million at September 30, 2013 compared to $198.3 million at December 31, 2012.

We had net cash flows from continuing operations of $38.4 million for the nine months ended September 30, 2013 compared to $32.2 million for the same period in 2012.  Acquisitions of property, plant and equipment in our continuing operations on a net basis after considering the proceeds from sales of fixed assets to SNH, were $17.3 million and $21.6 million for the nine months ended September 30, 2013 and 2012, respectively.

Our Leases and Management Agreements with SNH

As of September 30, 2013, we leased 177 senior living communities which are included in our continuing operations, and two rehabilitation hospitals and 10 senior living communities which have been classified as discontinued operations, from SNH under four leases.  Our total annual rent payable to SNH as of September 30, 2013 was $199.3 million, excluding percentage rent based on increases in gross revenues at certain properties.  Our total rent expense under all of our leases with SNH was $50.6 million and $50.1 million for the three months ended September 30, 2013 and 2012, respectively, and $152.1 million and $149.8 million for the nine months ended September 30, 2013 and 2012, respectively, which included approximately $1.1 million and $1.2 million in percentage rent paid to SNH for the three months ended September 30, 2013 and 2012, respectively, and $4.0 million and $3.6 million for the nine months ended September 30, 2013 and 2012, respectively.

Upon our request, SNH may purchase capital improvements made at the properties we lease from SNH and increase our rent pursuant to contractual formulas under our applicable leases with SNH; however, SNH is not obligated to purchase these improvements from us and we are not obligated to sell them to SNH.  During the nine months ended September 30, 2013, SNH purchased from us $22.5 million for capital expenditures made at the properties leased from SNH, including properties classified as discontinued operations, and these purchases resulted in our annual rent being increased by approximately $1.8 million.

During 2012 and 2013, we entered into several management agreements, pooling agreements and lease amendments with SNH and its affiliates.  For more information regarding these activities and our leases and management agreements with SNH, see Note 9 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, Notes 9 and 10 to our condensed consolidated financial statements included in Part I, Item 1 of our Amendment No. 1 to our Quarterly Reports on Form 10-Q/A for the quarters ended March 31 and June 30, 2013, respectively, and Note 15 to our consolidated financial statements included in Item 15 of our Annual Report.

Disposition Activity

In August 2013, SNH sold a SNF with 112 living units for net proceeds of approximately $2.6 million, and, as a result of this sale, our annual minimum rent payable to SNH decreased by $255,000 per year, or 10% of the net proceeds of the sale to SNH, in accordance with the terms of our applicable lease with SNH.

26

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

In August 2013, we and SNH entered into the Purchase Agreement with certain third parties, pursuant to which SNH agreed to sell the real estate associated with two rehabilitation hospitals and certain related assets, and, in connection with such sale, we agreed to transfer the operations of those hospitals and several leased in-patient and out-patient clinics that are affiliated with those hospitals to those third parties.  We completed the transfer of the operations of our rehabilitation hospital business on December 31, 2013, and, as a result of this transfer, we retained our net working capital investment in those hospitals of approximately $10.5 million and our annual rent payable to SNH and others decreased by approximately $11.5 million.

In January 2014, SNH sold an assisted living community with 48 living units for a sales price of $2.4 million, and, as a result of this sale, our annual minimum rent payable to SNH decreased by $210,000, or 8.75% of the net proceeds of the sale to SNH, in accordance with the terms of the applicable lease with SNH.

Litigation Settlement

On May 29, 2012, we entered into the Settlement Agreement with Sunrise pursuant to which we agreed to settle our long running litigation with Sunrise involving amounts charged by Sunrise to us for certain insurance programs for senior living communities previously managed by Sunrise for us.  Pursuant to the Settlement Agreement, Sunrise paid us $4.0 million in cash and we recorded a gain of $3.4 million, net of legal fees, in our condensed consolidated statements of income.

Our Revenues

Our revenues from services to residents at our senior living communities are our primary source of cash to fund our operating expenses, including rent, capital expenditures (net of capital improvements we sell to SNH for increased rent, pursuant to our leases with SNH) and principal and interest payments on our debt.

During the past several years, weak economic conditions throughout the country have negatively affected many entities both in and outside of our industry. These conditions have resulted in, among other things, a decrease in our communities’ occupancy, and it is unclear when these conditions may materially improve. Although many of the services that we provide are needs-driven, some of our prospective residents may be deferring their decisions to relocate to senior living communities in light of current economic circumstances.  Recently, economic indicators reflect an improving housing market; however, it is unclear how sustainable the improvements will be and whether any such improvements will result in any increased demand for our services.

At some of our senior living communities (principally our SNFs), Medicare and Medicaid programs provide operating revenues for skilled nursing and rehabilitation services.  These programs are discussed in Part I, Item 1 of our Annual Report under the caption “Government Regulation and Reimbursement”.  We derived approximately 23.5% and 23.9% of our senior living community revenues from these programs during the nine months ended September 30, 2013 and 2012, respectively.

Our net Medicare revenues from services to senior living community residents totaled $100.6 million and $100.9 million during the nine months ended September 30, 2013 and 2012, respectively.  Our net Medicaid revenues from services to senior living community residents totaled $86.6 million and $88.1 million during the nine months ended September 30, 2013 and 2012, respectively.  Our Medicare net revenue is impacted by periodic adjustments to the Prospective Payment System, or PPS, by the Centers for Medicare & Medicaid Services, or CMS. PPS is a method of rate setting which CMS uses to make Medicare payments for services based on a predetermined, fixed payment amount based on the classification system of service deemed to be appropriate for patients, in contrast to a traditional fee-for-service model.  CMS updates PPS rates by facility type annually.  In federal fiscal year 2012, CMS reduced aggregate Medicare PPS rates for SNFs by approximately 11.1%.  CMS has increased these rates by 1.8% in federal fiscal year 2013 and by 1.3% for federal fiscal year 2014, effective October 1, 2013.

The Budget Control Act of 2011 and the Bipartisan Budget Act of 2013 allow for automatic reductions in federal spending by means of a process called sequestration, which reduced Medicare payments by 2% starting in March 2013.  Sequestration remains in effect and could result in reductions to our revenues from Medicare and certain other federal health programs over the next decade.  Any future reductions in Medicare payment rates could be adverse and material to our operations and to our future financial results of operations.  Furthermore, the Middle Class Tax Relief and Job

27

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

Creation Act of 2012, which was enacted in February 2012, gradually reduces the rate for Medicare bad debt reimbursement for SNFs from 100% to 65% for beneficiaries dually-eligible for Medicare and Medicaid. This reduction is currently taking place in phases over a three-year period from federal fiscal year 2013 to federal fiscal year 2015. Because nearly 90% of SNF bad debt has historically been related to dual-eligible beneficiaries, this reimbursement reduction is having, and will continue to have, a substantial adverse effect on SNFs, including some of those we operate. The same law also reduced the Medicare bad debt reimbursement rate for Medicare beneficiaries not eligible for Medicaid from 70% to 65% as of federal fiscal year 2013.

Although Medicaid is exempt from the sequestration process described above, some of the states in which we operate either have not raised Medicaid rates by amounts sufficient to offset increasing costs or have frozen or reduced, or are expected to freeze or reduce, Medicaid rates. In addition, certain temporary increases in federal payments to states for Medicaid programs that had been in effect since October 1, 2008 ended as of June 30, 2011. Despite these freezes and reduced payments to states, according to the 2012 Actuarial Report on the Financial Outlook for Medicaid, Medicaid enrollment is projected to increase at an average annual rate of 3.4% through 2021, due in part to the expansion in Medicaid eligibility under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, beginning in 2014. Under the ACA, the federal government would pay for 100% of a state’s expansion in the Medicaid program to groups not currently covered by Medicaid for the first three years and gradually reduce its subsidy to 90% by 2020.  As of September 30, 2013, however, more than 20 states elected not to broaden Medicaid eligibility and, instead, to forgo the federal funds that would otherwise be available for Medicaid expansion.  We expect the ending of temporary federal payments, as well as other costs and budgetary constraints for state governments, to result in continued challenging state fiscal conditions. Some state budget deficits may increase, and certain states may reduce Medicaid payments to healthcare services providers like us as part of an effort to balance their budgets.

For federal fiscal year 2013, CMS adopted a final rule that updated Medicare PPS rates for in-patient rehabilitation facilities, or IRFs, which included our rehabilitation hospitals.  The updates included an aggregate net increase of 2.1% in IRF PPS rates.  In addition, our two rehabilitation hospitals and three in-patient satellite locations were required to satisfy the so-called “60% Rule” in order to be classified as an IRF by the Medicare program. Pursuant to the 60% Rule, at least 60% of a facility’s in-patient population during each 12-month cost-reporting period must require intensive rehabilitation services for one of CMS’s 13 designated medical conditions. An IRF that fails to meet the requirements of the 60% Rule is subject to reclassification as a different type of healthcare provider, the effect of which would be to lower that IRF’s Medicare payment rates. Although we believe that our former IRFs operated in compliance with the 60% Rule during the time we operated them, the actual percentage of patients at our former IRFs who received services for a designated condition may not be as high as we believed.  Our failure to have complied, or a CMS finding of noncompliance, could result in our retroactively receiving lower Medicare rates and require us to refund prior amounts we may have received in excess of the assessed payment rate for services we previously provided at our former IRFs.

We cannot currently predict the type and magnitude of the potential Medicare and Medicaid policy changes, rate reductions or other changes and the impact on us of the possible failure of these programs to increase rates to match our increasing expenses, but they may be adverse and material to our operations and to our future financial results of operations.  Similarly, we are unable to predict the impact on us of the insurance changes, payment changes, and healthcare delivery systems changes contained in and to be developed pursuant to the ACA or the impact the various remaining challenges and potential changes to the ACA may have on its implementation.  If the changes to be implemented under the ACA result in reduced payments for our services, or the failure of Medicare, Medicaid or insurance payment rates to cover our costs of providing required services to patients and residents, our future financial results could be materially and adversely affected.

Debt Financings and Covenants

As of September 30, 2013, we had no outstanding borrowings under our Credit Agreement and we had $10.0 million outstanding under our Credit Facility.  On December 31, 2013, in connection with the transfer of the operations of our rehabilitation hospital business, we reduced the borrowings available under our Credit Agreement to $25.0 million because the accounts receivable generated at the two rehabilitation hospitals were no longer available as collateral.  As of September 30, 2013, we had $37.9 million aggregate principal amount of mortgage notes outstanding.  As of September 30, 2013, we believe we were in compliance with all applicable covenants under our debt agreements.  Our Credit Agreement and Credit Facility require that we deliver quarterly and annual financial statements within the time periods specified within those agreements.  The lenders under each of our Credit Agreement and Credit Facility have waived, until April 15, 2014, any default resulting from our not timely delivering our financial statements for the quarter ended September 30, 2013, and until May 15, 2014, any default arising from our not timely delivering our financial statements for the year ended December 31, 2013, as required under those credit facilities.  Our financial statements for the quarter ended September 30, 2013 were delivered to our lenders contemporaneously with the filing of this Quarterly Report.  For more information regarding our debt financings and covenants, including terms governing those debt financings and their maturities, and regarding the

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

redemption of the Notes in July 2013, please see Note 7 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference.

Off Balance Sheet Arrangements

We have pledged our accounts receivable and certain other assets, with a carrying value, as of September 30, 2013, of $12.7 million, arising from our operation of 26 properties owned by SNH and leased to us to secure SNH’s borrowings from its lender, FNMA.  As of September 30, 2013, we had no other 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 or expenses, results of operations, liquidity, capital expenditures or capital resources.

Related Person Transactions

We have relationships and historical and continuing transactions with our Directors, our executive officers, SNH, RMR, AIC and other companies to which RMR provides management services and others affiliated with them.  For example:  SNH is our former parent, our largest landlord and our largest stockholder and RMR provides management services to both us and SNH; we provide management services to SNH and to D&R Yonkers LLC which is owned by SNH’s executive officers and we manage a portion of a senior living community which D&R Yonkers LLC subleases from SNH in order to accommodate certain requirements of New York healthcare licensing laws; we, RMR, SNH and five other companies to which RMR provides management services each currently own 12.5% of AIC, an Indiana insurance company, 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; and RMR, a company that employs our President and Chief Executive Officer, our Treasurer and Chief Financial Officer, and one of our Managing Directors and which is majority owned by one of our Managing Directors, assists us with various aspects of our business pursuant to a business management and shared services agreement.  For further information about these and other such relationships and related person transactions, please see Note 9 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference.  In addition, for more information about these transactions and relationships, please see elsewhere in this Quarterly Report, including “Warning Concerning Forward Looking Statements” in Part I, and our Annual Report, our definitive Proxy Statement for the Annual Meeting of Stockholders held on May 16, 2013, or our Proxy Statement, our Current Report on Form 8-K dated September 19, 2013, and our other filings with the SEC, including Note 15 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 Company Review of Such Transactions” and the information regarding our Directors 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 leases, forms of management agreements and related pooling agreements and former Bridge Loan agreement with SNH, our management agreement with D&R Yonkers LLC, our business management agreement with RMR, our headquarters lease with an affiliate of RMR and our shareholders agreement with AIC and its shareholders, are also publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website, www.sec.gov.

We believe that our agreements with SNH, RMR, D&R Yonkers LLC and AIC are on commercially reasonable terms.  We also believe that our relationships with SNH, RMR, D&R Yonkers LLC 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.

Seasonality

Our senior living business is subject to modest effects of seasonality. During the calendar fourth quarter holiday periods, nursing home and assisted living residents are sometimes discharged to join family celebrations and relocations and admission decisions are often deferred. The first quarter of each calendar year usually coincides with increased illness among nursing home and assisted living residents which can result in our experiencing increased costs or discharges to hospitals. As a result of these factors, nursing home and assisted living operations sometimes produce greater earnings in

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

the second and third quarters of a calendar year and lesser earnings in the first and fourth quarters. We do not believe that this seasonality will cause fluctuations in our revenues or operating cash flow to such an extent that we will have difficulty paying our expenses, including rent, which do not fluctuate seasonally.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting us, see Item 7A. — “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report.  Our exposure to market risks has not changed materially from that set forth in our Annual Report.

Item 4.  Controls and Procedures

Our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Treasurer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 as of September 30, 2013.  During this review and evaluation and subsequent thereto, our management, including our President and Chief Executive Officer and our Treasurer and Chief Financial Officer, identified material weaknesses, described below, in our internal control over financial reporting as of December 31, 2012.  As a result, our management concluded that our disclosure controls and procedures were not effective as of September 30, 2013 because of the material weaknesses described below.

We determined that we had material weaknesses in our internal controls over accounting for income taxes, lacked sufficient personnel with requisite technical accounting competencies and had an insufficient level of oversight in the financial statement close process.  A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.

Remediation of Material Weaknesses in Internal Control Over Financial Reporting

We are developing our remediation plan for the material weaknesses described above, which, at a minimum, will include:

·      Enhancing internal control around the accounting for income taxes to include additional layers of review by qualified persons, whether sourced internally or externally; and

·      Recruiting additional experienced personnel for certain accounting roles.

We have begun to implement the remediation plan while we continue to develop it.  Successful remediation of the material weaknesses described above will require review and evidence of the effectiveness of the related internal control processes as part of our periodic assessments of our internal controls over financial reporting.  As we continue to evaluate and work to enhance our internal control over financial reporting, we may determine that additional measures should be taken to address the material weaknesses described above or other control deficiencies, or that we should modify the remediation plan.  We expect that the remediation of the material weaknesses described above will be completed before December 31, 2014.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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WARNING CONCERNING FORWARD LOOKING STATEMENTS

THIS QUARTERLY REPORT 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 ABILITY TO OPERATE OUR SENIOR LIVING COMMUNITIES PROFITABLY,

·OUR ABILITY TO COMPLY AND TO REMAIN IN COMPLIANCE WITH APPLICABLE MEDICARE, MEDICAID AND OTHER FEDERAL AND STATE REGULATORY, RULE MAKING AND RATE SETTING REQUIREMENTS,

·OUR ABILITY TO MEET OUR RENT AND DEBT OBLIGATIONS,

·OUR ABILITY TO RAISE EQUITY OR DEBT CAPITAL,

·OUR ABILITY TO COMPETE FOR ACQUISITIONS EFFECTIVELY AND TO SELL PROPERTIES WE OFFER FOR SALE,

·THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR CREDIT FACILITIES,

·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, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:

·CHANGES IN MEDICARE AND MEDICAID POLICIES WHICH COULD RESULT IN REDUCED RATES OF PAYMENT TO US,

·THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR RESIDENTS AND OTHER CUSTOMERS,

·COMPETITION WITHIN THE SENIOR LIVING SERVICES BUSINESS,

·INCREASES IN INSURANCE AND TORT LIABILITY COSTS,

·INCREASES IN OUR LABOR COSTS OR IN COSTS WE PAY FOR GOODS AND SERVICES,

·ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR MANAGING DIRECTORS, SNH, RMR, AIC AND THEIR RELATED PERSONS AND ENTITIES,

·DELAYS OR NONPAYMENTS OF GOVERNMENT PAYMENTS TO US THAT COULD RESULT FROM GOVERNMENT SHUTDOWNS, PAYMENT DEFAULTS OR PAYMENT PRIORITIZATION,

·COMPLIANCE WITH, AND CHANGES TO FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS THAT COULD AFFECT OUR SERVICES OR IMPOSE REQUIREMENTS, COSTS AND

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ADMINISTRATIVE BURDENS THAT MAY REDUCE OUR ABILITY TO PROFITABLY OPERATE OUR BUSINESS, AND

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

FOR EXAMPLE:

·THE VARIOUS GOVERNMENTS WHICH PAY US FOR THE SERVICES WE PROVIDE TO OUR RESIDENTS ARE CURRENTLY EXPERIENCING, AND ARE EXPECTED TO CONTINUE TO EXPERIENCE, BUDGETARY PRESSURES AND CONSTRAINTS AND MAY LOWER THE MEDICARE, MEDICAID AND OTHER RATES THEY PAY US.  BECAUSE WE OFTEN CANNOT ETHICALLY LOWER THE QUALITY OF THE SERVICES WE PROVIDE TO MATCH THE AVAILABLE MEDICARE, MEDICAID AND OTHER RATES WE ARE PAID, WE MAY EXPERIENCE LOSSES AND SUCH LOSSES MAY BE MATERIAL;

·THIS QUARTERLY REPORT STATES OR IMPLIES THAT WE EXPECT THAT WE MAY ENTER INTO ADDITIONAL MANAGEMENT ARRANGEMENTS OR POOLING AGREEMENTS WITH SNH SIMILAR TO THOSE CURRENTLY IN EFFECT FOR US TO MANAGE ADDITIONAL SENIOR LIVING COMMUNITIES SNH MAY ACQUIRE IN THE FUTURE. HOWEVER, THERE CAN BE NO ASSURANCE THAT SNH WILL ACQUIRE OTHER COMMUNITIES OR THAT WE AND SNH WILL ENTER INTO ANY ADDITIONAL MANAGEMENT ARRANGEMENTS OR POOLING AGREEMENTS;

·OUR ABILITY TO OPERATE AND MANAGE NEW SENIOR LIVING COMMUNITIES PROFITABLY DEPENDS UPON MANY FACTORS, INCLUDING OUR ABILITY TO INTEGRATE NEW COMMUNITIES INTO OUR EXISTING OPERATIONS AND SOME FACTORS WHICH ARE BEYOND OUR CONTROL SUCH AS THE DEMAND FOR OUR SERVICES ARISING FROM ECONOMIC CONDITIONS GENERALLY.  WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE NEW COMMUNITIES OR OPERATE AND MANAGE NEW COMMUNITIES PROFITABLY;

·THIS QUARTERLY REPORT STATES THAT AT SEPTEMBER 30, 2013, WE HAD $19.6 MILLION OF UNRESTRICTED CASH AND CASH EQUIVALENTS AND WE HAD $10 MILLION OF BORROWINGS OUTSTANDING UNDER OUR CREDIT FACILITIES, LEAVING $174.4 MILLION OF AVAILABILITY, AND THAT WE HAVE IN THE PAST SOLD IMPROVEMENTS TO SNH AND EXPECT TO REQUEST TO SELL ADDITIONAL IMPROVEMENTS TO SNH FOR INCREASED RENT PURSUANT TO OUR LEASES WITH SNH; ALL OF WHICH MAY IMPLY THAT WE HAVE ABUNDANT CASH LIQUIDITY.  HOWEVER, OUR OPERATIONS AND BUSINESS REQUIRE SIGNIFICANT AMOUNTS OF WORKING CASH AND REQUIRE US TO MAKE SIGNIFICANT CAPITAL EXPENDITURES TO MAINTAIN OUR COMPETITIVENESS.  ACCORDINGLY, WE MAY NOT HAVE SUFFICIENT CASH LIQUIDITY;

·THIS QUARTERLY REPORT STATES THAT DURING THE PAST SEVERAL YEARS, WEAK ECONOMIC CONDITIONS THROUGHOUT THE COUNTRY HAVE NEGATIVELY AFFECTED ENTITIES BOTH IN AND OUTSIDE OF OUR INDUSTRY, THAT THESE CONDITIONS HAVE RESULTED IN, AMONG OTHER THINGS, A DECREASE IN OUR COMMUNITIES’ OCCUPANCIES AND THAT IT IS UNCLEAR WHEN THESE CONDITIONS MAY MATERIALLY IMPROVE.  THESE STATEMENTS MAY IMPLY THAT OUR BUSINESS AND RESULTS OF OPERATIONS WILL IMPROVE AS THESE CONDITIONS IMPROVE BUT THERE CAN BE NO ASSURANCE THAT OUR BUSINESS AND RESULTS OF OPERATIONS WILL IMPROVE IF AND AS THESE CONDITIONS IMPROVE;

·OUR RESIDENTS WHO PAY FOR OUR SERVICES WITH THEIR PRIVATE RESOURCES MAY BECOME UNABLE TO AFFORD OUR SERVICES WHICH COULD RESULT IN DECREASED OCCUPANCY AND DECREASED REVENUES AT OUR SENIOR LIVING COMMUNITIES AND INCREASED RELIANCE ON LOWER RATES FROM GOVERNMENT AND OTHER PAYERS;

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

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·THE AMOUNT OF AVAILABLE BORROWINGS UNDER OUR CREDIT FACILITIES IS SUBJECT TO OUR HAVING QUALIFIED COLLATERAL, WHICH IS PRIMARILY BASED ON THE VALUE OF OUR ACCOUNTS RECEIVABLE SECURING OUR $25.0 MILLION CREDIT AGREEMENT AND THE VALUE OF THE PROPERTIES SECURING OUR $150.0 MILLION CREDIT FACILITY.  ACCORDINGLY, THE AVAILABILITY OF BORROWINGS UNDER OUR CREDIT FACILITIES AT ANY TIME MAY BE LESS THAN $25.0 MILLION AND $150.0 MILLION, RESPECTIVELY.  ADDITIONALLY, THE AVAILABILITY OF BORROWINGS UNDER OUR CREDIT FACILITIES IS SUBJECT TO OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND MEETING OTHER CUSTOMARY CONDITIONS;

·ACTUAL COSTS UNDER OUR CREDIT FACILITIES WILL BE HIGHER THAN LIBOR PLUS A PREMIUM BECAUSE OF OTHER FEES AND EXPENSES ASSOCIATED WITH OUR CREDIT FACILITIES;

·THIS QUARTERLY REPORT STATES THAT OUR CASH RECEIPTS RESULTING FROM THE SALE OF OUR PHARMACY BUSINESS ARE $34.3 MILLION, BEFORE TAXES AND TRANSACTION COSTS.  HOWEVER, THE PURCHASE AGREEMENT INCLUDED CUSTOMARY INDEMNIFICATION OBLIGATIONS AND REQUIRED US TO ESCROW A PORTION OF THE PURCHASE PRICE AT CLOSING IN CONNECTION WITH THE INDEMNIFICATION OBLIGATIONS.  IF WE ARE REQUIRED TO PAY AMOUNTS (INCLUDING WITH ESCROWED PROCEEDS) TO SATISFY INDEMNIFICATION OBLIGATIONS IN THE FUTURE, THE ACTUAL CASH RECEIPTS WE MAY REALIZE FROM THIS SALE, AND ANY CORRESPONDING CAPITAL GAIN, MAY BE REDUCED;

·THIS QUARTERLY REPORT STATES THAT WE AND SNH HAVE DECIDED TO OFFER FOR SALE CERTAIN SENIOR LIVING COMMUNITIES THAT WE LEASE FROM SNH, WHICH HAVE NOT YET BEEN SOLD, AND THAT WE HAVE DECIDED TO OFFER FOR SALE ONE COMMUNITY WHICH WE OWN.  WE AND SNH MAY BE UNABLE TO SELL ANY OF THOSE COMMUNITIES WE LEASE FROM SNH, AND WE MAY BE UNABLE TO SELL THE ONE COMMUNITY WE OWN, ON ACCEPTABLE TERMS.  ACCORDINGLY, WE CAN PROVIDE NO ASSURANCE THAT THESE COMMUNITIES WILL BE SOLD OR WHAT THE TERMS OR TIMING OF ANY SALE WOULD BE; AND

·THIS QUARTERLY REPORT STATES OUR BELIEF THAT OUR CONTINUING RELATIONSHIPS WITH SNH, RMR AND AIC AND 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 NATURAL DISASTERS, CHANGED MEDICARE AND MEDICAID RATES, NEW LEGISLATION, REGULATIONS OR RULE MAKING AFFECTING OUR BUSINESS, CHANGES IN OUR REVENUES OR COSTS, OR CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY.

THE INFORMATION CONTAINED ELSEWHERE IN THIS QUARTERLY REPORT 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.

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Part II.  Other Information

Item 1A. Risk Factors

Our business faces many risks, a number of which are described under “Risk Factors” in Part I of our Annual Report, and below.  The risks so described may not be the only risks we face. Additional risks of which we are not yet aware, or that we currently believe are immaterial, may also materially and adversely impact our business operations or financial results. If any of the events or circumstances described in the risk factors contained in our Annual Report or described below occurs, our business, financial condition or results of operations could decline and the trading price of our equity securities could decline.  Investors and prospective investors should consider the risks described in our Annual Report and below and the information contained under the heading “Warning Concerning Forward Looking Statements” and elsewhere in this Quarterly Report before deciding whether to invest in our securities.

We and our independent registered public accounting firm have determined that we have material weaknesses in our internal control over financial reporting because we did not maintain adequate and effective internal control over our accounting for income taxes, we lacked sufficient personnel with requisite technical accounting competencies and we had an insufficient level of oversight in the financial statement close process.  Failure to establish and maintain effective internal control over financial reporting could have a material adverse effect on our business, results of operations and the value of our common shares.

As a result of certain errors identified in our consolidated financial statements for the years ended December 31, 2011 and 2012 contained within our Annual Report 2013, we and our independent registered public accounting firm reassessed the effectiveness of our internal control over financial reporting and determined that we had material weaknesses because we did not maintain adequate and effective internal control over accounting for income taxes, we lacked sufficient personnel with requisite technical accounting competencies and we had an insufficient level of oversight in the financial statement close process.  As a result, we concluded that our internal control over financial reporting was ineffective as of December 31, 2012.  A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.  We are developing our remediation plan for the material weaknesses described above, which, at a minimum, will include enhancing internal control around the accounting for income taxes to include additional layers of review by qualified persons, whether sourced internally or externally, and recruiting additional experienced personnel for certain accounting roles.  We have begun to implement the remediation plan while we continue to develop it. Successful remediation of the material weaknesses described above will require review and evidence of the effectiveness of the related internal control processes as part of our periodic assessments of our internal controls over financial reporting.  As we continue to evaluate and work to enhance our internal control over financial reporting, we may determine that additional measures should be taken to address the material weaknesses described above or other control deficiencies, or that we should modify the remediation plan.  We expect that the remediation of the material weaknesses described above will be completed before December 31, 2014

If we fail to remediate these material weaknesses or to design, implement and maintain new or improved controls and procedures designed to prevent additional material weaknesses, or if our management or our independent registered public accounting firm were to conclude in their future reports that our internal control over financial reporting was not effective, our ability to meet our periodic reporting obligations may be adversely affected, and may result in additional errors and material misstatements not detected by management in our financial statements.  Any such failure could adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting.  Any such failure could also cause investors to lose confidence in our reported financial information and could therefore adversely affect our business, results of operations and the value of our common shares.

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Item 6.  Exhibits

Exhibit  Number	Description
3.1	Composite Copy of Articles of Amendment and Restatement, dated December 5, 2001, as amended to date. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.)
3.2	Articles Supplementary, as corrected by Certificate of Correction, dated March 19, 2004. (Incorporated by reference to the Company’s registration statement on Form 8-A dated March 19, 2004 and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, respectively.)
3.3	Amended and Restated Bylaws of the Company, adopted February 14, 2012. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.)
4.1	Form of Common Share Certificate. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.)
4.2	Rights Agreement, dated March 10, 2004, between the Company and EquiServe Trust Company, N.A. (Incorporated by reference to the Company’s Current Report on Form 8-K dated March 10, 2004.)
4.3	Appointment of Successor Rights Agent, dated December 13, 2004, between the Company and Wells Fargo Bank, National Association. (Incorporated by reference to the Company’s Current Report on Form 8-K dated December 13, 2004.)
4.4	Indenture related to 3.75% Convertible Senior Notes due 2026, dated as of October 18, 2006, among the Company, each of the guarantors named therein and U.S. Bank National Association, as Trustee. (Incorporated by reference to the Company’s Current Report on Form 8-K dated October 24, 2006.)
10.1	Partial Termination of and Ninth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 1, 2013, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and certain subsidiaries of the Company, as Tenant. (Filed herewith.)
10.2	Partial Termination of and Tenth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of January 22, 2014, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and certain subsidiaries of the Company, as Tenant. (Filed herewith.)
10.3	Partial Termination of and Sixth Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of September 19, 2013, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and certain subsidiaries of the Company, as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated September 19, 2013.)
10.4	Representative form of Accession Agreement, dated as of November 1, 2012, by SNH SE Tenant TRS, Inc. in favor of FVE Managers, Inc., relating to Pooling Agreement No. 2, dated as of October 30, 2012, between FVE Managers, Inc. and certain subsidiaries of Senior Housing Properties Trust. (Filed herewith.)
10.5	Form of Restricted Share Agreement. (Filed herewith).
31.1	Rule 13a-14(a) Certification of Chief Executive Officer. (Filed herewith.)
31.2	Rule 13a-14(a) Certification of Chief Financial Officer. (Filed herewith.)
32.1	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. (Furnished herewith.)
101.1	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, and (vi) related notes to these financial statements, tagged as blocks of text and in detail. (Filed herewith.)

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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.

FIVE STAR QUALITY CARE, INC.

/s/ Bruce J. Mackey Jr.

Bruce J. Mackey Jr.

President and Chief Executive Officer

Dated: April 15, 2014

/s/ Paul V. Hoagland

Paul V. Hoagland

Treasurer and Chief Financial Officer

(Principal Financial and Accounting Officer)

Dated: April 15, 2014

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EX-10.1

Exhibit 10.1

PARTIAL TERMINATION OF AND NINTH AMENDMENT TO
AMENDED AND RESTATED MASTER LEASE AGREEMENT
(LEASE NO. 1)

THIS PARTIAL TERMINATION OF AND NINTH AMENDMENT TO AMENDED AND RESTATED MASTER LEASE AGREEMENT (LEASE NO. 1) (this “Amendment”) is made and entered into as of August 1, 2013 by and among each of the parties identified on the signature pages hereof as a landlord (collectively, “Landlord”) and FIVE STAR QUALITY CARE TRUST, a Maryland business trust (“Tenant”).

W I T N E S S E T H:

WHEREAS, pursuant to the terms of that certain Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 4, 2009, as amended by that certain Partial Termination of and First Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of October 1, 2009, that certain Second Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of November 17, 2009, that certain Third Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of December 10, 2009, that certain Partial Termination of and Fourth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 1, 2010, that certain Fifth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of May 1, 2011, that certain Partial Termination of and Sixth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of June 1, 2011, that certain Seventh Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of June 20, 2011, and that certain Eighth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 31, 2012 (as so amended, “Amended Lease No. 1”), Landlord leases to Tenant, and Tenant leases from Landlord, the Leased Property (this and other capitalized terms used but not otherwise defined herein having the meanings given such terms in Amended Lease No. 1), all as more particularly described in Amended Lease No. 1; and

WHEREAS, simultaneously herewith, SPTIHS Properties Trust is selling a portion of the Leased Property consisting of the real property and related improvements known as the Arbor View Healthcare and Rehabilitation Center and located at 1317 North 36th Street, Saint Joseph, Missouri, as more particularly described on Exhibit A-29 to Amended Lease No. 1 (the “Arbor View Property”); and

WHEREAS, in connection with the sales of the Arbor View Property, SPTIHS Properties Trust, the other entities comprising Landlord and Tenant wish to amend Amended Lease No. 1 to terminate Amended Lease No. 1 with respect to the Arbor View Property;

NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree that, effective as of the date hereof, Amended Lease No. 1 is hereby amended as follows:

1.             Partial Termination of Amended Lease No. 1.  Amended Lease No. 1 is terminated with respect to the Arbor View Property and neither Landlord nor Tenant shall have any further rights or liabilities thereunder with respect to the Arbor View Property from and after

the date hereof, except for those rights and liabilities which by their terms survive the termination of Amended Lease No. 1.

2.             Definition of Minimum Rent.  The defined term “Minimum Rent” set forth in Section 1.68 of Amended Lease No. 1 is deleted in its entirety and replaced with the following:

“Minimum Rent”  shall mean the sum of Fifty-Eight Million Six Hundred Thirty Nine Thousand One Hundred Eighty-Five and 95/100 Dollars ($58,639,185.95) per annum.

3.             Schedule 1.  Schedule 1 to Amended Lease No. 1 is deleted in its entirety and replaced with Schedule 1 attached hereto.

4.             Exhibit A.  Exhibit A to Amended Lease No. 1 is amended by deleting the text of Exhibit A-29 attached thereto in its entirety and replacing it with “Intentionally Deleted.”

5.             Ratification.  As amended hereby, Amended Lease No. 1 is hereby ratified and confirmed.

[Remainder of page intentionally left blank; signature pages follow]

IN WITNESS WHEREOF, the parties have executed this Amendment as a sealed instrument as of the date above first written.

LANDLORD:
SNH SOMERFORD PROPERTIES TRUST
By:	/s/ David J. Hegarty
	David J. Hegarty
	President
SPTMNR PROPERTIES TRUST
By:	/s/ David J. Hegarty
	David J. Hegarty
	President
SNH/LTA PROPERTIES TRUST
By:	/s/ David J. Hegarty
	David J. Hegarty
	President
SPTIHS PROPERTIES TRUST
By:	/s/ David J. Hegarty
	David J. Hegarty
	President
SNH CHS PROPERTIES TRUST
By:	/s/ David J. Hegarty
	David J. Hegarty
	President
SNH/LTA PROPERTIES GA LLC
By:	/s/ David J. Hegarty
	David J. Hegarty
	President

[Signature Page: Partial Termination of and Ninth Amendment to Amended and Restated
Master Lease Agreement (Lease No. 1)]

TENANT:
FIVE STAR QUALITY CARE TRUST
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	President

[Signature Page: Partial Termination of and Ninth Amendment to Amended and Restated Master
Lease Agreement (Lease No. 1)]

SCHEDULE 1

PROPERTY-SPECIFIC INFORMATION

Exhibit	Property Address	Base Gross Revenues (Calendar Year)	Base Gross Revenues (Dollar Amount)		Commencement Date	Interest Rate
A-1	La Mesa Healthcare Center 2470 South Arizona Avenue Yuma, AZ 85364	2005	$	6,333,157	12/31/2001	10%
A-2	SunQuest Village of Yuma 265 East 24th Street Yuma, AZ  85364	2005	$	543,595	12/31/2001	10%
A-3	Somerford Place - Encinitas 1350 South El Camino Real Encinitas, CA  92024	2009	N/A		03/31/2008	8%
A-4	Somerford Place - Fresno 6075 North Marks Avenue Fresno, CA  93711	2009	N/A		03/31/2008	8%
A-5	Lancaster Healthcare Center 1642 West Avenue J Lancaster, CA  93534	2005	$	6,698,648	12/31/2001	10%
A-6	Somerford Place – Redlands 1319 Brookside Avenue Redlands, CA  92373	2009	N/A		03/31/2008	8%
A-7	Somerford Place - Roseville 110 Sterling Court Roseville, CA  95661	2009	N/A		03/31/2008	8%
A-8	Leisure Pointe 1371 Parkside Drive San Bernardino, CA  92404	2007	$	1,936,220	09/01/2006	8.25%
A-9	Van Nuys Health Care Center 6835 Hazeltine Street Van Nuys, CA  91405	2005	$	3,626,353	12/31/2001	10%
A-10	Mantey Heights Rehabilitation & Care Center 2825 Patterson Road Grand Junction, CO  81506	2005	$	5,564,949	12/31/2001	10%
A-11	Cherrelyn Healthcare Center 5555 South Elati Street Littleton, CO  80120	2005	$	12,574,200	12/31/2001	10%
A-12	Somerford House and Somerford Place – Newark I & II 501 South Harmony Road and 4175 Ogletown Road Newark, DE  19713	2009	N/A		03/31/2008	8%
A-13	Tuscany Villa Of Naples (aka Buena Vida) 8901 Tamiami Trail East Naples, FL  34113	2008	$	2,157,675	09/01/2006	8.25%
A-14	Intentionally Deleted.	N/A	N/A		N/A	N/A
A-15	Morningside of Columbus 7100 South Stadium Drive Columbus, GA  31909	2006	$	1,381,462	11/19/2004	9%
A-16	Morningside of Dalton 2470 Dug Gap Road Dalton, GA  30720	2006	$	1,196,357	11/19/2004	9%
A-17	Morningside of Evans 353 North Belair Road	2006	$	1,433,421	11/19/2004	9%

Exhibit	Property Address	Base Gross Revenues (Calendar Year)	Base Gross Revenues (Dollar Amount)		Commencement Date	Interest Rate
	Evans, GA  30809
A-18	Vacant Land Adjacent to Morningside of Macon 6191 Peake Road Macon, GA  31220	2006	N/A		11/19/2004	9%
A-19	Intentionally Deleted.	N/A	N/A		N/A	N/A
A-20	Union Park Health Services 2401 East 8th Street Des Moines, IA  50316	2005	$	4,404,678	12/31/2001	10%
A-21	Park Place 114 East Green Street Glenwood, IA  51534	2005	$	8,109,512	12/31/2001	10%
A-22	Prairie Ridge Care & Rehabilitation 608 Prairie Street Mediapolis, IA  52637	2005	$	3,234,505	12/31/2001	10%
A-23	Ashwood Place 102 Leonardwood Frankfort, KY  40601	2007	$	1,769,726	09/01/2006	8.25%
A-24	Somerford Place - Annapolis 2717 Riva Road Annapolis, MD  21401	2009	N/A		03/31/2008	8%
A-25	Somerford Place - Columbia 8220 Snowden River Parkway Columbia, MD  21045	2009	N/A		03/31/2008	8%
A-26	Somerford Place - Frederick 2100 Whittier Drive Frederick, MD  21702	2009	N/A		03/31/2008	8%
A-27	Somerford Place - Hagerstown 10114 & 10116 Sharpsburg Pike Hagerstown, MD  21740	2009	N/A		03/31/2008	8%
A-28	The Wellstead of Rogers 20500 and 20600         South Diamond Lake Road Rogers, MN  55374	2009	N/A		03/01/2008	8%
A-29	Intentionally Deleted.	N/A	N/A		N/A	N/A
A-30	Hermitage Gardens of Oxford 1488 Belk Boulevard Oxford, MS  38655	2007	$	1,816,315	10/01/2006	8.25%
A-31	Hermitage Gardens of Southaven 108 Clarington Drive Southaven, MS  38671	2007	$	1,527,068	10/01/2006	8.25%
A-32	Ashland Care Center 1700 Furnace Street Ashland, NE  68003	2005	$	4,513,891	12/31/2001	10%
A-33	Blue Hill Care Center 414 North Wilson Street Blue Hill, NE  68930	2005	$	2,284,065	12/31/2001	10%
A-34	Central City Care Center 2720 South 17th Avenue Central City, NE  68462	2005	$	2,005,732	12/31/2001	10%
A-35	Intentionally deleted.	N/A	N/A		N/A	N/A
A-36	Gretna Community Living Center 700 South Highway 6 Gretna, NE  68028	2005	$	3,380,356	12/31/2001	10%

Exhibit	Property Address	Base Gross Revenues (Calendar Year)	Base Gross Revenues (Dollar Amount)		Commencement Date	Interest Rate
A-37	Sutherland Care Center 333 Maple Street Sutherland, NE  69165	2005	$	2,537,340	12/31/2001	10%
A-38	Waverly Care Center 11041 North 137th Street Waverly, NE  68462	2005	$	3,066,135	12/31/2001	10%
A-39	Intentionally deleted.	N/A	N/A		N/A	N/A
A-40	Ridgepointe 5301 Brownsville Road Pittsburgh, PA  15236	2006	$	1,944,499	10/31/2005	9%
A-41	Mount Vernon of South Park 1400 Riggs Road South Park, PA  15129	2006	$	2,718,057	10/31/2005	9%
A-42	Morningside of Gallatin 1085 Hartsville Pike Gallatin, TN  37066	2006	$	1,343,801	11/19/2004	9%
A-43	Walking Horse Meadows 207 Uffelman Drive Clarksville, TN  37043	2007	$	1,471,410	01/01/2007	8.25%
A-44	Morningside of Belmont 1710 Magnolia Boulevard Nashville, TN  37212	2006	$	3,131,648	06/03/2005	9%
A-45	Dominion Village at Chesapeake 2856 Forehand Drive Chesapeake, VA  23323	2005	$	1,416,951	05/30/2003	10%
A-46	Dominion Village at Williamsburg 4132 Longhill Road Williamsburg, VA  23188	2005	$	1,692,753	05/30/2003	10%
A-47	Heartfields at Richmond 500 North Allen Avenue Richmond, VA  23220	2005	$	1,917,765	10/25/2002	10%
A-48	Brookfield Rehabilitation and Specialty Care (aka Woodland Healthcare Center) 18741 West Bluemound Road Brookfield, WI  53045	2005	$	13,028,846	12/31/2001	10%
A-49	Meadowmere - Southport Assisted Living 8350 and 8351 Sheridan Road Kenosha, WI  53143	2009	N/A		01/04/2008	8%
A-50	Meadowmere - Madison Assisted Living 5601 Burke Road Madison, WI  53718	2009	N/A		01/04/2008	8%
A-51	Sunny Hill Health Care Center 4325 Nakoma Road Madison, WI  53711	2005	$	3,237,633	12/31/2001	10%
A-52	Mitchell Manor Senior Living 5301 West Lincoln Avenue West Allis, WI  53219	2009	N/A		01/04/2008	8%
A-53	Laramie Care Center 503 South 18th Street Laramie, WY  82070	2005	$	4,473,949	12/31/2001	10%

Exhibit	Property Address	Base Gross Revenues (Calendar Year)	Base Gross Revenues (Dollar Amount)		Commencement Date	Interest Rate
A-54	Haven in Highland Creek 5920 McChesney Drive Charlotte, NC  28269 Laurels in Highland Creek  6101 Clark Creek Parkway Charlotte, NC  28269	2010	N/A		11/17/2009	8.75%
A-55	Haven in the Village at Carolina Place 13150 Dorman Road Pineville, NC  28134 Laurels in the Village at Carolina Place 13180 Dorman Road Pineville, NC  28134	2010	N/A		11/17/2009	8.75%
A-56	Haven in the Summit 3 Summit Terrace Columbia, SC  29229	2010	N/A		11/17/2009	8.75%
A-57	Haven in the Village at Chanticleer 355 Berkmans Lane Greenville, SC  29605	2010	N/A		11/17/2009	8.75%
A-58	Haven in the Texas Hill Country 747 Alpine Drive Kerrville, TX  78028	2010	N/A		11/17/2009	8.75%
A-59	Haven in Stone Oak 511 Knights Cross Drive San Antonio, TX  78258 Laurels in Stone Oak 575 Knights Cross Drive San Antonio, TX  78258	2010	N/A		11/17/2009	8.75%
A-60	Eastside Gardens 2078 Scenic Highway North Snellville, GA 30078	2010	N/A		12/10/2009	8.75%
A-61	Crimson Pointe 7130 Crimson Ridge Drive Rockford, IL  61107	2012	N/A		05/01/2011	8%
A-62	Talbot Park 6311 Granby Street Norfolk, VA 23305	2012	N/A		06/20/2011	7.5%
A-63	The Landing at Parkwood Village 1720 Parkwood Boulevard Wilson, NC  27893	2012	N/A		06/20/2011	7.5%
A-64	Aspenwood 14400 Homecrest Road Silver Spring, MD 20906	2005	$	4,470,354	10/25/2002	10%
A-65	HeartFields at Easton 700 Port Street Easton, MD 21601	2005	$	2,545,887	10/25/2002	10%

EX-10.2

Exhibit 10.2

PARTIAL TERMINATION OF AND TENTH AMENDMENT TO

AMENDED AND RESTATED MASTER LEASE AGREEMENT

(LEASE NO. 1)

THIS PARTIAL TERMINATION OF AND TENTH AMENDMENT TO AMENDED AND RESTATED MASTER LEASE AGREEMENT (LEASE NO. 1) (this “Amendment”) is made and entered into as of January 22, 2014 by and among each of the parties identified on the signature pages hereof as a landlord (collectively, “Landlord”) and each of the parties identified on the signature pages hereof as a tenant (jointly and severally, “Tenant”).

W I T N E S S E T H:

WHEREAS, pursuant to the terms of that certain Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 4, 2009, as amended by that certain Partial Termination of and First Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of October 1, 2009, that certain Second Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of November 17, 2009, that certain Third Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of December 10, 2009, that certain Partial Termination of and Fourth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 1, 2010, that certain Fifth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of May 1, 2011, that certain Partial Termination of and Sixth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of June 1, 2011, that certain Seventh Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of June 20, 2011, that certain Eighth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 31, 2012, and that certain Partial Termination of and Ninth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 1, 2013 (as so amended, “Amended Lease No. 1”), Landlord leases to Tenant, and Tenant leases from Landlord, the Leased Property (this and other capitalized terms used but not otherwise defined herein having the meanings given such terms in Amended Lease No. 1), all as more particularly described in Amended Lease No. 1; and

WHEREAS, prior to the date hereof, the financings secured by the LTA GMAC Properties were paid off and, pursuant to Section 23.17 of Amended Lease No. 1, the LTA GMAC Properties were automatically added to and demised under Amended Lease No. 1, and, pursuant to Section 21.12(c) of the LTA GMAC Leases, the LTA GMAC Leases were automatically terminated; and

WHEREAS, simultaneously herewith, SNH/LTA Properties Trust is selling a portion of the Leased Property consisting of the real property and related improvements known as The Haven in Texas Hill Country and located at 747 Alpine Drive, Kerrville, Texas, as more particularly described on Exhibit A-58 to Amended Lease No. 1 (the “Kerrville Property”); and

WHEREAS, in connection with the foregoing, SNH/LTA Properties Trust and the other entities comprising Landlord and Five Star Quality Care Trust and the other entities comprising Tenant wish to amend Amended Lease No. 1 to (a) document the addition of the LTA GMAC

Properties to Amended Lease No. 1, and (b) terminate Amended Lease No. 1 with respect to the Kerrville Property;

NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree that, effective as of the date hereof, Amended Lease No. 1 is hereby amended as follows:

1.LTA GMAC Leases.  As of April 30, 2012, the financing securing the LTA GMAC Properties described on Exhibit A-66 through and including Exhibit A-81 attached hereto was paid off and those LTA GMAC Properties were added to and demised under Lease No. 1, such that the applicable landlords and tenants under the corresponding LTA GMAC Lease became Landlords and Tenants under Amended Lease No. 1.  As of June 28, 2013, the financing securing the LTA GMAC Properties described on Exhibit A-82 through and including Exhibit A-85 attached hereto was paid off and those LTA GMAC Properties were added to and demised under Lease No. 1, such that the applicable landlords and tenants under the corresponding LTA GMAC Lease became Landlords and Tenants under Amended Lease No. 1.

2.Partial Termination of Amended Lease No. 1.  Amended Lease No. 1 is terminated with respect to the Kerrville Property and neither Landlord nor Tenant shall have any further rights or liabilities thereunder with respect to the Kerrville Property from and after the date hereof, except for those rights and liabilities which by their terms survive the termination of Amended Lease No. 1.

3.Leased Property.  Section 2.1 of Amended Lease No. 1 is hereby amended by deleting subsection (a) therefrom in its entirety and replacing it with the following:

(a)those certain tracts, pieces and parcels of land as more particularly described on Exhibits A-1 through A-85 attached hereto and made a part hereof (the “Land”);

4.Definition of Minimum Rent.  The defined term “Minimum Rent” set forth in Section 1.68 of Amended Lease No. 1 is deleted in its entirety and replaced with the following:

“Minimum Rent”  shall mean the sum of Fifty-Eight Million Five Hundred Fifteen Thousand Eight Hundred Ninety and 56/100 Dollars ($58,515,890.56) per annum.

5.Schedule 1.  Schedule 1 to Amended Lease No. 1 is deleted in its entirety and replaced with Schedule 1 attached hereto.

6.Exhibit A.  Exhibit A to Amended Lease No. 1 is amended by (a) deleting the text of Exhibit A-58 attached thereto in its entirety and replacing it with “Intentionally Deleted” and (b) inserting Exhibits A-66 through A-85 attached hereto immediately following Exhibit A-65 to Amended Lease No. 1.

7.Ratification.  As amended hereby, Amended Lease No. 1 is hereby ratified and confirmed.

IN WITNESS WHEREOF, the parties have executed this Amendment as a sealed instrument as of the date above first written.

LANDLORD:
SNH SOMERFORD PROPERTIES TRUST
SPTMNR PROPERTIES TRUST
SNH/LTA PROPERTIES TRUST
SPTIHS PROPERTIES TRUST
SNH CHS PROPERTIES TRUST
SNH/LTA PROPERTIES GA LLC
By:	/s/ David J. Hegarty
	David J. Hegarty
	President of each of the foregoing entities
MSD — MACON, LLC
MSD — BEAUFORT, LLC
MSD — CAMDEN, LLC
MSD — HARTSVILLE, LLC
MSD — LEXINGTON, LLC
MSD — ORANGEBURG, LLC
MSD — SENECA, LLC
MSD — CULLMAN, LLC
MSD — MADISON, LLC
MSD — SHEFFIELD, LLC
MSD — BOWLING GREEN, LLC
MSD — PADUCAH, LLC
MSD — CONYERS, LLC
MSD — GAINESVILLE, LLC
MSD — CLEVELAND, LLC
MSD — COOKEVILLE, LLC
MSD — JACKSON, LLC
MSD — KNOXVILLE, LLC
MSD — FRANKLIN, LLC
MSD — HOPKINSVILLE, LLC
By:	/s/ David J. Hegarty
	David J. Hegarty
	President of each of the foregoing entities

[Signature Page: Partial Termination of and Tenth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1)]

TENANT:
FIVE STAR QUALITY CARE TRUST
MORNINGSIDE OF KNOXVILLE, LLC
MORNINGSIDE OF FRANKLIN, LLC
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	President of each of the foregoing entities
MORNINGSIDE OF MACON, LLC
MORNINGSIDE OF SENECA, L.P.
MORNINGSIDE OF HOPKINSVILLE, LIMITED PARTNERSHIP
By: LIFETRUST AMERICA, INC.,
a Tennessee corporation, its General Partner/Member (as applicable)
	By:	/s/ Bruce J. Mackey Jr.
		Bruce J. Mackey Jr.
		President and Chief Executive Officer
MORNINGSIDE OF BEAUFORT, LLC
MORNINGSIDE OF CAMDEN, LLC
MORNINGSIDE OF HARTSVILLE, LLC
MORNINGSIDE OF LEXINGTON, LLC
MORNINGSIDE OF ORANGEBURG, LLC
By: MORNINGSIDE OF SOUTH CAROLINA, L.P., a Delaware limited partnership, its Sole Member
		By: LIFETRUST AMERICA, INC.,
		a Tennessee corporation, its General Partner
		By:	/s/ Bruce J. Mackey Jr.
			Bruce J. Mackey Jr.
			President and Chief Executive
			Officer

[Signature Page: Partial Termination of and Tenth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1)]

MORNINGSIDE OF CULLMAN, LLC
MORNINGSIDE OF MADISON, LLC
MORNINGSIDE OF SHEFFIELD, LLC
By: MORNINGSIDE OF ALABAMA, L.P., a Delaware limited partnership, its Sole Member
			By: LIFETRUST AMERICA, INC.,
			a Tennessee corporation, its General Partner
					By:	/s/ Bruce J. Mackey Jr.
						Bruce J. Mackey Jr.
						President and Chief Executive
						Officer
MORNINGSIDE OF BOWLING GREEN, LLC
MORNINGSIDE OF PADUCAH, LLC
By: MORNINGSIDE OF KENTUCKY, LIMITED PARTNERSHIP, a Delaware limited partnership, its Sole Member
	By: LIFETRUST AMERICA, INC.,
	a Tennessee corporation, its General Partner
			By:	/s/ Bruce J. Mackey Jr.
				Bruce J. Mackey Jr.
				President and Chief Executive Officer
MORNINGSIDE OF CONYERS, LLC
MORNINGSIDE OF GAINESVILLE, LLC
By: MORNINGSIDE OF GEORGIA, L.P., a Delaware limited partnership, its Sole Member
	By: LIFETRUST AMERICA, INC.,
	a Tennessee corporation, its General Partner
		By:		/s/ Bruce J. Mackey Jr.
				Bruce J. Mackey Jr.
				President and Chief Executive Officer

[Signature Page: Partial Termination of and Tenth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1)]

MORNINGSIDE OF CLEVELAND, LLC
MORNINGSIDE OF COOKEVILLE, LLC
MORNINGSIDE OF JACKSON, LLC
By: MORNINGSIDE OF TENNESSEE, LLC, a Delaware limited liability company, its Sole Member
	By:	/s/ Bruce J. Mackey Jr.
		Bruce J. Mackey Jr.
		President and Chief Executive Officer

[Signature Page: Partial Termination of and Tenth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1)]

SCHEDULE 1

PROPERTY-SPECIFIC INFORMATION

Exhibit	Property Address	Base Gross Revenues (Calendar Year)	Base Gross Revenues (Dollar Amount)		Commencement Date	Interest Rate
A-1	La Mesa Healthcare Center 2470 South Arizona Avenue Yuma, AZ 85364	2005	$	6,333,157	12/31/2001	10	%
A-2	SunQuest Village of Yuma 265 East 24th Street Yuma, AZ 85364	2005	$	543,595	12/31/2001	10	%
A-3	Somerford Place - Encinitas 1350 South El Camino Real Encinitas, CA 92024	2009	$	3,092,467	03/31/2008	8	%
A-4	Somerford Place - Fresno 6075 North Marks Avenue Fresno, CA 93711	2009	$	3,424,896	03/31/2008	8	%
A-5	Lancaster Healthcare Center 1642 West Avenue J Lancaster, CA 93534	2005	$	6,698,648	12/31/2001	10	%
A-6	Somerford Place — Redlands 1319 Brookside Avenue Redlands, CA 92373	2009	$	3,065,084	03/31/2008	8	%
A-7	Somerford Place - Roseville 110 Sterling Court Roseville, CA 95661	2009	$	2,802,082	03/31/2008	8	%
A-8	Leisure Pointe 1371 Parkside Drive San Bernardino, CA 92404	2007	$	1,936,220	09/01/2006	8.25	%
A-9	Van Nuys Health Care Center 6835 Hazeltine Street Van Nuys, CA 91405	2005	$	3,626,353	12/31/2001	10	%
A-10	Mantey Heights Rehabilitation & Care Center 2825 Patterson Road Grand Junction, CO 81506	2005	$	5,564,949	12/31/2001	10	%
A-11	Cherrelyn Healthcare Center 5555 South Elati Street Littleton, CO 80120	2005	$	12,574,200	12/31/2001	10	%
A-12	Somerford House and Somerford Place — Newark I & II 501 South Harmony Road and 4175 Ogletown Road Newark, DE 19713	2009	$	6,341,636	03/31/2008	8	%
A-13	Tuscany Villa Of Naples (aka Buena Vida) 8901 Tamiami Trail East Naples, FL 34113	2008	$	2,157,675	09/01/2006	8.25	%
A-14	Intentionally Deleted.	N/A	N/A		N/A	N/A
A-15	Morningside of Columbus 7100 South Stadium Drive Columbus, GA 31909	2006	$	1,381,462	11/19/2004	9	%
A-16	Morningside of Dalton 2470 Dug Gap Road Dalton, GA 30720	2006	$	1,196,357	11/19/2004	9	%
A-17	Morningside of Evans 353 North Belair Road	2006	$	1,433,421	11/19/2004	9	%

Exhibit	Property Address	Base Gross Revenues (Calendar Year)	Base Gross Revenues (Dollar Amount)		Commencement Date	Interest Rate
	Evans, GA 30809
A-18	Vacant Land Adjacent to Morningside of Macon 6191 Peake Road Macon, GA 31220	2006	N/A		11/19/2004	9	%
A-19	Intentionally Deleted.	N/A	N/A		N/A	N/A
A-20	Union Park Health Services 2401 East 8th Street Des Moines, IA 50316	2005	$	4,404,678	12/31/2001	10	%
A-21	Park Place 114 East Green Street Glenwood, IA 51534	2005	$	8,109,512	12/31/2001	10	%
A-22	Prairie Ridge Care & Rehabilitation 608 Prairie Street Mediapolis, IA 52637	2005	$	3,234,505	12/31/2001	10	%
A-23	Ashwood Place 102 Leonardwood Frankfort, KY 40601	2007	$	1,769,726	09/01/2006	8.25	%
A-24	Somerford Place - Annapolis 2717 Riva Road Annapolis, MD 21401	2009	$	3,917,902	03/31/2008	8	%
A-25	Somerford Place - Columbia 8220 Snowden River Parkway Columbia, MD 21045	2009	$	3,221,426	03/31/2008	8	%
A-26	Somerford Place - Frederick 2100 Whittier Drive Frederick, MD 21702	2009	$	5,088,592	03/31/2008	8	%
A-27	Somerford Place - Hagerstown 10114 & 10116 Sharpsburg Pike Hagerstown, MD 21740	2009	$	4,066,761	03/31/2008	8	%
A-28	The Wellstead of Rogers 20500 and 20600 South Diamond Lake Road Rogers, MN 55374	2009	$	12,646,616	03/01/2008	8	%
A-29	Intentionally Deleted.	N/A	N/A		N/A	N/A
A-30	Hermitage Gardens of Oxford 1488 Belk Boulevard Oxford, MS 38655	2007	$	1,816,315	10/01/2006	8.25	%
A-31	Hermitage Gardens of Southaven 108 Clarington Drive Southaven, MS 38671	2007	$	1,527,068	10/01/2006	8.25	%
A-32	Ashland Care Center 1700 Furnace Street Ashland, NE 68003	2005	$	4,513,891	12/31/2001	10	%
A-33	Blue Hill Care Center 414 North Wilson Street Blue Hill, NE 68930	2005	$	2,284,065	12/31/2001	10	%
A-34	Central City Care Center 2720 South 17th Avenue Central City, NE 68462	2005	$	2,005,732	12/31/2001	10	%
A-35	Intentionally deleted.	N/A	N/A		N/A	N/A
A-36	Gretna Community Living Center 700 South Highway 6 Gretna, NE 68028	2005	$	3,380,356	12/31/2001	10	%

Exhibit	Property Address	Base Gross Revenues (Calendar Year)	Base Gross Revenues (Dollar Amount)		Commencement Date	Interest Rate
A-37	Sutherland Care Center 333 Maple Street Sutherland, NE 69165	2005	$	2,537,340	12/31/2001	10	%
A-38	Waverly Care Center 11041 North 137th Street Waverly, NE 68462	2005	$	3,066,135	12/31/2001	10	%
A-39	Intentionally deleted.	N/A	N/A		N/A	N/A
A-40	Ridgepointe 5301 Brownsville Road Pittsburgh, PA 15236	2006	$	1,944,499	10/31/2005	9	%
A-41	Mount Vernon of South Park 1400 Riggs Road South Park, PA 15129	2006	$	2,718,057	10/31/2005	9	%
A-42	Morningside of Gallatin 1085 Hartsville Pike Gallatin, TN 37066	2006	$	1,343,801	11/19/2004	9	%
A-43	Walking Horse Meadows 207 Uffelman Drive Clarksville, TN 37043	2007	$	1,471,410	01/01/2007	8.25	%
A-44	Morningside of Belmont 1710 Magnolia Boulevard Nashville, TN 37212	2006	$	3,131,648	06/03/2005	9	%
A-45	Dominion Village at Chesapeake 2856 Forehand Drive Chesapeake, VA 23323	2005	$	1,416,951	05/30/2003	10	%
A-46	Dominion Village at Williamsburg 4132 Longhill Road Williamsburg, VA 23188	2005	$	1,692,753	05/30/2003	10	%
A-47	Heartfields at Richmond 500 North Allen Avenue Richmond, VA 23220	2005	$	1,917,765	10/25/2002	10	%
A-48	Brookfield Rehabilitation and Specialty Care (aka Woodland Healthcare Center) 18741 West Bluemound Road Brookfield, WI 53045	2005	$	13,028,846	12/31/2001	10	%
A-49	Meadowmere - Southport Assisted Living 8350 and 8351 Sheridan Road Kenosha, WI 53143	2009	$	2,170,645	01/04/2008	8	%
A-50	Meadowmere - Madison Assisted Living 5601 Burke Road Madison, WI 53718	2009	$	2,136,654	01/04/2008	8	%
A-51	Sunny Hill Health Care Center 4325 Nakoma Road Madison, WI 53711	2005	$	3,237,633	12/31/2001	10	%
A-52	Mitchell Manor Senior Living 5301 West Lincoln Avenue West Allis, WI 53219	2009	$	12,348,104	01/04/2008	8	%
A-53	Laramie Care Center 503 South 18th Street Laramie, WY 82070	2005	$	4,473,949	12/31/2001	10	%

Exhibit	Property Address	Base Gross Revenues (Calendar Year)	Base Gross Revenues (Dollar Amount)		Commencement Date	Interest Rate
A-54	Haven in Highland Creek 5920 McChesney Drive Charlotte, NC 28269 Laurels in Highland Creek 6101 Clark Creek Parkway Charlotte, NC 28269	2010	$	6,454,157	11/17/2009	8.75	%
A-55	Haven in the Village at Carolina Place 13150 Dorman Road Pineville, NC 28134 Laurels in the Village at Carolina Place 13180 Dorman Road Pineville, NC 28134	2010	$	7,052,425	11/17/2009	8.75	%
A-56	Haven in the Summit 3 Summit Terrace Columbia, SC 29229	2010	$	2,308,737	11/17/2009	8.75	%
A-57	Haven in the Village at Chanticleer 355 Berkmans Lane Greenville, SC 29605	2010	$	2,197,919	11/17/2009	8.75	%
A-58	Intentionally Deleted	N/A	N/A		N/A	N/A
A-59	Haven in Stone Oak 511 Knights Cross Drive San Antonio, TX 78258 Laurels in Stone Oak 575 Knights Cross Drive San Antonio, TX 78258	2010	$	6,584,027	11/17/2009	8.75	%
A-60	Eastside Gardens 2078 Scenic Highway North Snellville, GA 30078	2010	$	1,766,628	12/10/2009	8.75	%
A-61	Crimson Pointe 7130 Crimson Ridge Drive Rockford, IL 61107	2012	$	2,568,827	05/01/2011	8	%
A-62	Talbot Park 6311 Granby Street Norfolk, VA 23305	2012	$	3,866,871	06/20/2011	7.5	%
A-63	The Landing at Parkwood Village 1720 Parkwood Boulevard Wilson, NC 27893	2012	$	4,318,990	06/20/2011	7.5	%
A-64	Aspenwood 14400 Homecrest Road Silver Spring, MD 20906	2005	$	4,470,354	10/25/2002	10	%
A-65	HeartFields at Easton 700 Port Street Easton, MD 21601	2005	$	2,545,887	10/25/2002	10	%
A-66	Morningside of Macon 6191 Peake Road Macon, GA 31220	2006	$	1,298,541	11/19/2004	9	%
A-67	Morningside of Beaufort 109 Old Salem Road Beaufort, SC 29902	2006	$	1,337,453	11/19/2004	9	%
A-68	Morningside of Camden 719 Kershaw Highway Camden, SC 29020	2006	$	1,595,035	11/19/2004	9	%
A-69	Morningside of Hartsville	2006	$	1,507,131	11/19/2004	9	%

Exhibit	Property Address	Base Gross Revenues (Calendar Year)	Base Gross Revenues (Dollar Amount)		Commencement Date	Interest Rate
	1901 West Carolina Avenue Hartsville, SC 29550
A-70	Morningside of Lexington 218 Old Chapin Road Lexington, SC 29072	2006	$	1,638,422	11/19/2004	9	%
A-71	Morningside of Orangeburg 2306 Riverbank Drive Orangeburg, SC 29118	2006	$	1,129,764	11/19/2004	9	%
A-72	Morningside of Seneca 15855 Wells Highway Seneca, SC 29678	2006	$	1,684,477	11/19/2004	9	%
A-73	Morningside of Cullman 2021 Dahlke Dr. NE Cullman, AL 32058	2006	$	1,413,633	11/19/2004	9	%
A-74	Morningside of Madison 49 Hughes Road Madison, AL 35758	2006	$	1,531,206	11/19/2004	9	%
A-75	Morningside of Sheffield 413 D. D. Cox Boulevard Sheffield, AL 35660	2006	$	1,495,038	11/19/2004	9	%
A-76	Morningside of Bowling Green 981 Campbell Lane Bowling Green, KY 42104	2006	$	1,458,781	11/19/2004	9	%
A-77	Morningside of Paducah 1700 Elmdale Road Paducah, KY 42003	2006	$	2,012,245	11/19/2004	9	%
A-78	Morningside of Conyers 1352 Wellbrook Circle Conyers, GA 30012	2006	$	1,646,910	11/19/2004	9	%
A-79	Morningside of Gainesville 2435 Limestone Parkway Gainesville, GA 30501	2006	$	1,453,250	11/19/2004	9	%
A-80	Morningside of Cleveland 2900 Westside Drive, N.W. Cleveland, TN 37312	2006	$	1,212,846	11/19/2004	9	%
A-81	Morningside of Cookeville 1010 East Spring Street Cookeville, TN 38501	2006	$	1,513,932	11/19/2004	9	%
A-82	Morningside of Jackson 1200 North Parkway Jackson, TN 38305	2006	$	1,787,155	11/19/2004	9	%
A-83	Williamsburg Villas A Morningside Community 3020 Heatherton Way Knoxville, TN 37920	2006	$	2,728,841	11/19/2004	9	%
A-84	Morningside of Franklin 105 Sunrise Circle Franklin, TN 37067	2006	$	1,582,509	11/19/2004	9	%
A-85	Morningside of Hopkinsville 4190 Lafayette Road Hopkinsville, KY 42240	2006	$	1,444,246	11/19/2004	9	%

EXHIBIT A-66

Morningside of Macon

6191 Peake Road

Macon, GA 31220

(See attached copy.)

Morningside of Macon

6191 Peake Road

Macon, Georgia 31220

Exhibit A-1

Legal Description

Tract 1

BEING A TRACT or parcel of land lying in Land Lot [ILLEGIBLE] of the 13th Land District of Bibb County, Georgia also being Lot 1 on the Plat of The Subdivision for Morningside of Macon, L.P. as of record in Plat Book [ILLEGIBLE], Page 13, Clerk’s Office, Superior Court of Bibb County, Georgia, and being more particularly described as follows:

Beginning at an existing concrete monument at the Intersection of the southerly right-of-way line of Peake Road, 100 feet in width and the westerly right-of-way line of Interstate 475 (Macon By Parcel), width varies:

Thence leaving the southerly right-of-way line on Peake Road with the westerly right-of-way line of Interstate 475 South 42 degrees [ILLEGIBLE] minutes 05 seconds East, [ILLEGIBLE] feet to an existing concrete monument;

Thence South 38 degrees 50 minutes [ILLEGIBLE] seconds East, 33.28 feet to an existing iron pin at a corner common with the property of Morningside of Georgia, L.P., as of Record in Deed Book [ILLEGIBLE], Page 167-170, in the Clerk’s Office, Superior Court of Bibb County, Georgia;

Thence leaving the westerly right of way of Interstate 475 with the northerly property line of Morningside of Georgia, L.P., South 47 degrees 19 minutes 10 seconds West, [ILLEGIBLE] feet to an existing iron pin in the easterly right-of-way line of Peake Road;

Thence with the easterly right-of-way line of Peake Road North 42 degrees 45 minutes 54 seconds West, 428.68 feet to an existing iron pin at the Intersection of the easterly right-of-way line of Peake Road and the southerly right-of-way of Peake Road;

Thence leaving the easterly right-of-way line of Peake Road with the southerly right-of-way line of Peake Road North 47 degrees 19 minutes 10 seconds East, 399.92 feet to the POINT OF BEGINNING containing 170,669 square feet [ILLEGIBLE] acres more or less.

EXHIBIT A-67

Morningside of Beaufort

109 Old Salem Road

Beaufort, SC 29902

(See attached copy.)

Morningside of Beaufort

109 Old Salem Road

Beaufort, South Carolina 29902

Exhibit A-2

Legal Description

ALL that certain piece, parcel or tract of land, situate, lying and being on Port Royal Island, Beaufort County, South Carolina, containing 5.607 acres, more or less, shown and described on a plat, dated May 27, 1997, entitled “Boundary Survey prepared for Five Thirty Club Beaufort Tax Map 29A, Parcel 106 Salem Point Area Button,” by Beaufort Surveying, Inc., David. S. Youmans, SCRLS No. 9765.  For a more complete description as to metes, bounds and distances, reference may be had to said plat which is duly indexed and recorded in the Office of the Register of Deeds for Beaufort County, South Carolina, in Plat Book 62 at Page 5.

This being the same property shown on Plat Book 64, Page 10 and being the same property conveyed to Morningside of Beaufort, LLC by deed from Morningside of South Carolina, L.P., as recorded in Record Book 1597 at Page 1646.

Tax Map Number:                                        

EXHIBIT A-68

Morningside of Camden

719 Kershaw Highway

Camden, SC 29020

(See attached copy.)

Morningside of Camden

719 Kershaw Highway

Camden, South Carolina 29020

Exhibit A-3

Legal Description

All that certain piece, parcel or tract of land, situate, lying and being just North of the City of Camden, County of Kershaw, State of South Carolina, containing Four and 07/100 (4.07) acres more or less, and being more particularly shown on that plat prepared by J.H. Walker & Associates, dated July 7, 1997, found recorded in the Office of the Clerk of Court for Kershaw County in Book A-88, at page 7.  Said property having the following metes and bounds, as shown on said plat:  the Point of Beginning being a 1 rod found in the Western margin of Hwy #521-601, located 352.97 feet North of the intersection of S-28-130 and Hwy #521-601, thence S 712113 West for a distance of 250.13 feet to a 1 square bar found; thence S 713128 West for a distance of 249.07 feet to a 1 flat bar found; thence S 790309 West for a distance of 5.00 feet to a #5 rebar set; thence N 115540 West for a distance of 375.12 feet to a #5 rebar set; thence N 802640 East for a distance of 559.00 feet to a #5 rebar set; thence S 005039 East for a distance of 300.00 feet to the Point of Beginning.  Reference being made to said plat for a more accurate description; all measurements being a little more or less.

This being the some property conveyed to Morningside of Camden, LLC by Deed of Morningside of South Carolina, L.P. dated June 21, 2002 and recorded in Record Book 1179 at Page 54.

Tax Map Number:                                          

EXHIBIT A-69

Morningside of Hartsville

1901 West Carolina Avenue

Hartsville, SC 29550

(See attached copy.)

Morningside of Hartsville

1901 West Carolina Avenue

Hartsville, South Carolina 29550

Exhibit A-4

Legal Description

All that certain piece, parcel of land situate, lying and being in the County of Darlington, State of South Carolina, containing 3.74 acres according to a plat prepared for Morningside of South Carolina, L.P. by J.H. Walker & Associates, dated October 15, 1997 and recorded in the office of the Clerk of Court for Darlington County in Plat Book 172, Page 117; and being more particularly described as follows:

NORTH:	By SC Highway 151, for a distance of 348.06 feet;
EAST:	By Sunset Drive, for a distance of 400.02 feet;
SOUTH:	By other lands now or formerly of Robert Gilbert, et al, for a distance of 490.02 feet; and
WEST:	By other lands now or formerly of Robert Gilbert, et al, for a distance of 399.97 feet.

This being the same property conveyed to Morningside of Hartsville, LLC by deed of Morningside of South Carolina, L.P. dated June 21, 2002 and recorded in Book D-359, Page 62 in the office of the Clerk of Court for Darlington County, S.C.

Tax Map No.:  035-00-01-016

EXHIBIT A-70

Morningside of Lexington

218 Old Chapin Road

Lexington, SC 29072

(See attached copy.)

Morningside of Lexington

218 Old Chapin Road

Lexington, South Carolina 29072

Exhibit A-5

Legal Description

All that certain piece, parcel or tract of land, situate, lying and being in the City of Lexington, County of Lexington, State of South Carolina, the same being a portion of 28.59 acre tract as shown on a plat prepared for Miriam Swann Roberts Reenstjerna by Baughman Land Surveyors, Inc., dated March 27, 1973, and recorded in the Office of The ROD for Lexington County in Plat Book 129-G at Page 14; and being more particularly shown and delineated on a plat prepared for LifeTrust America, Inc., by Ralph O. Vanodore, PLS, dated May 19, 1997, revised October 9, 1997, recorded in Plat Book [ILLEGIBLE], page 31, in the Office of the ROD for Lexington County; State of South Carolina, and being shown and delineated as 5.27 acres thereon which plat is incorporated herein by reference.

Together with Sewer Easement recorded in Record Book 4404 at Page 257.

This being the same property conveyed to Morningside of Lexington, LLC by deed of Morningside of South Carolina, L.P., dated June 21, 2002 and recorded in Record Book 7300 at Page 271.

Tax Map Number:  4300 04102

EXHIBIT A-71

Morningside of Orangeburg

2306 Riverbank Drive

Orangeburg, SC 29118

(See attached copy.)

Morningside of Orangeburg

2306 Riverbank Drive

Orangeburg, South Carolina 29118

Exhibit A-6

Legal Description

All that certain piece, parcel or tract of land, with any improvements thereon situate, lying and being near the city of Orangeburg, Orangeburg County, South Carolina, containing 3.82 acres, more or less, as shown on that plat of survey prepared for Morningside of South Carolina, L.P. by J. Henry Walker, III, PLS, dated August 27, 1997 and recorded in the office of the RMC for Orangeburg County in Plat Book C48 at Page 8 and being more particularly described as follows:  The point of beginning being an iron pin set on the Northeastern margin of the Right-of-way of Riverside Drive (S-38-1032), and being 27.23 feet Southeast of the Centerline of Hoffman Street; thence N 36°08’39” W along the Northeast margin of Riverside Drive for a distance of 474.29 feet to an iron pin set; thence N 53°57’56” E along property now or formerly of Caw Caw Associates for a distance of 350.75 feet to an iron pin set; thence S 36°08’39” E along property now or formerly of Caw Caw Associates for a distance of 474.29 feet to an iron pin set; thence S 53°57’56” W along property now or formerly of Bishop of Charleston, a corporation sole and his successors in office for a distance of 275.40 feet to an iron pin found; thence S 53°57’56” W along property now or formerly of Caw Caw Associates for a distance of [ILLEGIBLE] feet to the point and place of beginning.

This being the same property conveyed to Morningside of Orangeburg, LLC by Deed of Morningside of South Carolina., L.P. dated June 21, 2002 and recorded in Record Book 0934 at Page 289.

Tax Map Number:  0151-1706-002

EXHIBIT A-72

Morningside of Seneca

15855 Wells Highway

Seneca, SC 29678

(See attached copy.)

Morningside of Seneca

15855 Wells Highway

Seneca, South Carolina 29678

Exhibit A-7

Legal Description

All that certain piece, parcel or tract of land situate, lying and being in the County of Oconee, State of South Carolina, lying on the southwest side of Wells Highway (S37-488) distances, metes and bounds as follows:

TRACT 1

Beginning at a point, said point being an old PK nail in the centerline of Wells Highway, a one hundred (100.00) foot road; thence leaving said road and by a line adjoining lands Northwoods of South Carolina, L.P. as recorded in Deed Book 883, page 224.  A bearing of S 68°20’16” W a distance of [ILLEGIBLE] feet to an old 1/2 inch rod; thence S [ILLEGIBLE]°30’13” W a distance of 354.71 feet to a new 5/8 rebar; thence by line adjoining tract two as described below, N 21°63’49” W a distance of 437.84 feet to a new 5/8 inch rebar, thence by line adjoining lands of Subrata Saha as recorded in Deed Book 1110, Page 35, N 71°12’26” E a distance of 432.26 feet to an old 1/2 inch rod found within the limits of aforesaid Wells Highway; thence S 27°51’51” E a distance of [ILLEGIBLE] feet to an old nail and cap found in the centerline of said Wells Highway; thence S 14°60’45” E 310.22 feet to the Point of Beginning, containing 4.198 acres.

TRACT 2

Beginning at a point, a said point being distant S 68°30’13” W a distance of 354.71 feet from an old 1/2 inch rebar on the western right of way of Wells Highway, said point being a new 5/8 inch rebar; thence by lands of Northwoods of South Carolina, L.P. as recorded in Deed Book 883, page 224, S 68°30’13” W 272.17 feet to an old 1/2 inch rod; thence by lands of Samuel Thrift as recorded in Deed Book 14Y, page 86, N 20°43’13” W a distance of [ILLEGIBLE] feet to an old 3/4 inch pipe; thence by same adjoiner N 20°37’46” W 347.70 feet to an old 1/2 rod; thence by lands of Subrata Saha N 71°12’26” E a distance of 262.75 feet to a new 5/8 inch rebar; thence by aforesaid Tract 1 S 21°53’49” E a distance of 437.84 feet to the Point of Beginning, containing 2.726 acres.

Being the same property shown on a survey for Hart Freeland and Roberts prepared by Goldie & Associates dated 2/27/98 and recorded in the office of the Clerk of Court for Oconee County in Plat Book A609 at Page 5.

Tax Map #520-59-01-004

Intending to convey the same property conveyed to Morningside of Seneca, L.P., by deed of Morningside of South Carolina, L.P., recorded in the Office of the Clerk of Court for Oconee County in Deed Book 1225, Page 224.

EXHIBIT A-73

Morningside of Cullman

2021 Dahlke Dr. NE

Cullman, AL 32058

(See attached copy.)

Morningside of Cullman

2021 Dahlke Dr. NE

Cullman, Alabama 32058

Exhibit A-8

Legal Description

Being a part of a tract of land situated in the NW ¼ of the NW ¼ of Section 1, Township 10 South, Range 3 West, Cullman County, Alabama, and being more particularly described as follows:  Commencing at the NE Corner of the NW ¼ of the NW ¼ of Section 1, Township 10 South, Range 3 West, Cullman County, Alabama; thence with the North line of Section 1 North 89 degrees 32 minutes 10 seconds West 76.45 feet to an existing iron rod in the Westerly right-of-way line of Vogel Road, a paved public road, being the point of beginning; thence with the with Westerly right-of-way line of Vogel Road South 00 degrees 39 minutes 08 seconds East 407.86 feet to an existing iron rod; thence North 89 degrees 31 minutes 00 seconds West, 319.66 feet to an existing iron rod; thence North 00 degrees 39 minutes 22 seconds West, 407.75 feet to an existing rod in the North line of Section 1; thence with the North line of Section 1 South 89 degrees 32 minutes 10 seconds East, 319.69 feet to the point of beginning.

EXHIBIT A-74

Morningside of Madison

49 Hughes Road

Madison, AL 35758

(See attached copy.)

Morningside of Madison

49 Hughes Road

Madison, Alabama 35758

Exhibit A-9

Legal Description

Lot 1A and 1B, according to the certified plat of a Resubdivision of Lot One of a Resubdivision of Lot One Lanier Park Phase One, Section 15 and 16, T4S, R2W, Madison, Alabama, as recorded in Pat Book 35, Page 74, Probate Records of Madison County, Alabama.

EXHIBIT A-75

Morningside of Sheffield

413 D. D. Cox Boulevard

Sheffield, AL 35660

(See attached copy.)

Morningside of Sheffield

413 D. D. Cox Boulevard

Sheffield, Alabama 35660

Exhibit A-10

Legal Description

Tract One:  Part of Lots 4 and 5, D. D. COX PLAZA ADDITION NO. 1, according to the plat recorded in the office of the Judge of Probate in said County in Plat Cabinet C, Slide 48, more particularly described as follows:  Commence at the Southwest corner of said Lot 4, said point being on the East right of way of Cox Boulevard; thence along said right of way North 02 degrees 37 minutes 00 seconds West, for 16.24 feet to the point of beginning; thence continue North 02 degrees 37 minutes 00 seconds West along said right of way for 215.12 feet to the PC of a curve to the left having a radius of 612.70 feet; thence along said curve 9.88 feet (chord bearing N 02 degrees 37 minutes 00 second West — chord distance of 9.88 feet); thence leaving said right of way North 87 degrees 23 minutes 00 seconds East for 360.08 feet; thence South 02 degrees 37 minutes 00 seconds East for 225.00 feet; thence South 87 degrees 23 minutes 00 seconds West for 360.00 feet to the point of beginning.

Tract Two:  A tract of land lying in Sheffield, Colbert County, Alabama, and being the Northerly 103.76 feet of Lot 2, all of Lot 3 and the Southerly 16.24 feet of Lot 4 of the D. D. COX PLAZA ADDITION NO. 1, according to the plat thereof recorded in the office of the Judge of Probate of Colbert County, Alabama, in Map Cabinet C, Slide 48, and being more particularly described as follows:  Commencing at the SW corner, SE 1/4, Section 34, Township 3 South, Range [ILLEGIBLE] West; thence N 02 degrees 37 minutes 00 seconds W 1864.28 feet to an iron rod set, said iron rod being N 2 degrees 37 minutes 00 seconds W 96.24 feet from the SE corner of Lot 2 of said D. D. COX PLAZA ADDITION NO. 1 and the point of beginning of the herein described tract; thence S 87 degrees 23 minutes 00 second W 360.00 feet to an iron rod set in the East right of way line of D. D. Cox Boulevard, 80 feet in width; thence with said E right of way line N 02 degrees 37 minutes 00 seconds W 320.00 feet to an iron rod set, said point being N 02 degrees 37 minutes 00 seconds W 16.24 feet from the SW corner of Lot 4 of said D. D. COX PLAZA ADDITION NO. 1; thence leaving said E right of way line N 87 degrees 23 minutes 00 seconds E 360.00 feet to an iron rod set; thence S 02 degrees 37 minutes 00 seconds E 320.00 feet to the point of beginning.

EXHIBIT A-76

Morningside of Bowling Green

981 Campbell Lane

Bowling Green, KY 42104

(See attached copy.)

Morningside of Bowling Green

981 Campbell Lane

Bowling Green, Kentucky 42104

Exhibit A-11

Legal Description

Being Lot 163 of the Calvin Alford Property, consisting of 3.19 acres, as shown in Major Subdivision Plat Book 30, Page 31, in the Warren County Clerk’s Office, as per survey dated August 21,1997, by Can Meter Engineering, Inc.; together with a 10 foot Sanitary Sewer Easement as granted by said Plat.

EXHIBIT A-77

Morningside of Paducah

1700 Elmdale Road

Paducah, KY 42003

(See attached copy.)

Morningside of Paducah

1700 Elmdale Road

Paducah, Kentucky 42003

Exhibit A -12

Legal Description

Being Tract No. 1 located on the southeast corner of Bleich Road and Elmdale Road in McCracken County, Kentucky, as shown on Final Plat of Subdivision for “Lake Forest Plaza”, of record in Plat Section “K”, Page 1941, McCracken County Clerk’s Office.

EXHIBIT A-78

Morningside of Conyers

1352 Wellbrook Circle

Conyers, GA 30012

(See attached copy.)

Morningside of Conyers

1352 Wellbrook Circle

Conyers, Georgia 30012

Exhibit A-13

Legal Description

ALL THAT TRACT or parcel of land lying and being in Land Lots 301 and 302 of the 16th District of Rockdale County, Georgia, in the City of Conyers, and being known as Tract 4, containing 2.00 acres, of Wellbrook Park Subdivision (formerly known as Wellbrook Place Subdivision, as per plat recorded in Plat Book W, Page 146, Records of the Clerk of Superior Court for Rockdale County, Georgia), according to plat recorded in Plat Book X, Page 34, Rockdale County Records, which plat is hereby referred to and incorporated herein by reference for a more complete legal description of subject property.

EXHIBIT A-79

Morningside of Gainesville

2435 Limestone Parkway

Gainesville, GA 30501

(See attached copy.)

Morningside of Gainesville

2435 Limestone Parkway

Gainesville, Georgia 30501

Exhibit A-14

Legal Description

ALL THAT TRACT or parcel of land located in the city of Gainesville, Land Lot 125, 9th District, Hall County, Georgia and being more particularly described as follows:

Beginning at a point on the westerly right-of-way of Limestone Parkway, 75 feet from centerline, and is located North 53 degrees 10 minutes 36 seconds West, [ILLEGIBLE] feet from the centerline Intersection of Limestone Parkway and Lighthouse Manor Drive, said point also being the POINT OF BEGINNING:

Thence leaving the right-of-way of said Limestone Parkway South 60 degrees 01 minutes 19 seconds West a distance of 295.29 feet to a point; thence South 29 degrees 45 minutes 06 seconds East a distance of 55.46 feet to a point; thence South 59 degrees 58 minutes 08 seconds West a distance of 34.78 feet to a point; thence North 29 degrees 58 minutes 41 seconds West a distance of 355.50 feet to a point on the easterly right-of-way, 26 feet from centerline of Flintridge Road; thence North 60 degrees 01 minutes 19 seconds East a distance of 310.29 feet along said right-of-way to a point; thence South 74 degrees 58 minutes 41 seconds East a distance of 28.28 feet to a point on the said westerly right-of-way of Limestone Parkway, 75 feet from centerline; thence South 29 degrees 58 minutes 41 seconds East a distance of 280.00 feet along said right-of-way to the POINT OF BEGINNING.

Containing 2.315 acres.

The above property is more particularly shown on a plat entitled “Mt. View Enterprises, Inc.” recorded at Slide 607, Plat 152A.

Together with Ingress and egress easement recorded in Book 2865, Page 184.

Being more particularly shown on this plat for Lifetrust America, Inc. by Farley-Collins-Whidden Georgia Registered Land Surveyors No. 1435 and 2632, dated April 26, 2002.

EXHIBIT A-80

Morningside of Cleveland

2900 Westside Drive, N.W.

Cleveland, TN 37312

(See attached copy.)

Morningside of Cleveland

2900 Westside Drive, N.W.

Cleveland, Tennessee 37312

Exhibit A-15

Legal Description

A certain tract or parcel of land in Bradley County, Tennessee, described as follows, to wit:

Being a tract of land lying in Cleveland, Bradley County, Tennessee, and being part of the property of Deborah Evans, as of record in Deed Book 366, pages 590 and 594, in the Register’s Office for Bradley County, Tennessee, and being bounded on the West by the East right-of-way line of Westside Drive, on the North by the remainder of the property of Deborah Evans, as of record in Deed Book 366, pages 590 and 594, in the Register’s Office for Bradley County, Tennessee, on the East by Mary W. Moore, as of record in Deed Book 346, page 167, in the Register’s Office for Bradley County, Tennessee, and on the South by National Healthcare of Cleveland, as of record in Deed Book 298, page 857, and B&C Enterprises, as of record in Deed Book 311, page 818, both in the Register’s Office for Bradley County, Tennessee, and being more particularly described as follows:

Beginning at an axle in the East right of way line of Westside Drive, at a corner common with B&C Enterprises;

Thence, with the East right of way line of Westside Drive, with a curve to the right, said curve having a central angle of 11°03’19” a radius of 400.73 feet, a chord of North 51°30’33” East, 77.20 feet, for an arc length of 77.32 feet to an iron rod;

Thence, North 48°27’00” East, 32.10 feet to an iron rod;

Thence, North [ILLEGIBLE]°27’00” East, 274.21 feet to an iron rod;

Thence with a severance line, South 66°13’06” East, 224.53 feet to an iron rod in the West line of Mary W. Moore;

Thence, with a West line of Mary W. Moore, South 23°47’00” West, 321.02 feet to an iron rod in the north line of National Healthcare of Cleveland;

Thence, with the North line of National Healthcare of Cleveland, North 65°45’00” West, 437.60 feet to the point of beginning, containing 108,466 square feet or 2.490 acres, more or less, according to a survey prepared by R. Scot Cherry, Tennessee Registered Land Surveyor No. 1512, of Cherry Land Surveying, 622 West Iris, Nashville, Tennessee 37204.

EXHIBIT A-81

Morningside of Cookeville

1010 East Spring Street

Cookeville, TN  38501

(See attached copy.)

Morningside of Cookeville

1010 East Spring Street

Cookeville, Tennessee 38501

Exhibit A-16

Legal Description

Beginning at an iron pin in the East Margin of a 50’ permanent access easement, being the Northwest corner of Tract 1 Morningside of Cookeville as recorded in Plat Cabinet: C, slide: 131 in the R.O.P.C.T.; Thence leaving Tract 1 with the East Margin of said easement N 7 degrees 11” W 99.11’; Thence around a curve and arc distance of 25.48 (Delta 11 degrees 40’ 49 seconds, radius 125.00’, Tangent-12.97’); Thence N 4 degrees 40’ 38” E 180.28’; Thence around a curve an arc distance of 76.98 (Delta-35 degrees 17’ 01”, Radius — 125.00’, Tangent-39.75’);

Thence N 39 degrees 57’ 39” E 3.45 to an iron pin in the south line of Tract 4 Morningside of Cookeville as recorded in Plat Cab: C, slide 131: thence leaving said easement with the south line of tract 4 s 86 degrees 00’ 57” E 293.79 to an iron pin in the west line of Putnam County; Thence leaving Tract 4 with the west the of Putnam County S 03 degrees 59’ 03” W 375.54 to an iron pin, being a corner of Tract 3 morningside of Cookeville as recorded in Plat Cab: C, slide 131; thence leaving Putnam County with the line of Tract 1 N 86 degrees 00’57” W 50.00 to an iron pin, being a corner of Tract 1; thence S 03 degrees 59’ 03” W 180.05 to an iron pin; thence N 50 degrees 39’ 10” W 307.53’ to the point of Beginning.  Being tract No 3 of Morningside of Cookeville recorded in Plat Cabinet: C Slide: 131 in the R.O.P.C.T. Containing 3.2517 acres more or less, as surveyed by Alfred M. Bartlett, R.L.S. #762 on May 8th, 2002.

Together with a Non-Exclusive Permanent Access Easement as created by Plat Cabinet: C Slide 131.

EXHIBIT A-82

Morningside of Jackson

1200 North Parkway

Jackson, TN  38305

(See attached copy.)

Morningside of Jackson

1200 North Parkway

Jackson, Tennessee 38305

Exhibit A-1

Legal Description

A parcel of land lying a being in the Sixth Ward of the City of Jackson in Madison Co., Tn, and more particularly described as follows:

Beginning at an iron pin at the intersection of the south margin of North Parkway (50 feet at right angles from centerline) and the east margin of Sweetbay Drive (25 feet at right angles from centerline); thence with the south margin of North Parkway North 72 degrees 38 minutes East a distance of 73.52 feet to a point at the beginning of a curve; thence with said curve (Radius of 754.25 feet) to the left a distance of 201.14 feet to a point; thence North 57 degrees 18 minutes 44 seconds East a distance of 108.49 feet to an Iron pin, said being 240.17 feet southwest from the northwest corner of a tract owned by Ken Brasfield (Deed Book 393, page 83) and being the nortwest corner of a tract belonging to Jackson Housing Authority (Deed Book 635, page 568); thence with the west line of the Jackson Housing Authority tract, South 28 degrees 25 minutes 08 seconds East a distance of 176.98 feet to an Iron pin; thence South 13 degrees 09 minutes 27 seconds East a distance of 216.30 feet to an iron pin at an interior corner of the Jackson Housing Authority tract; thence with the north line of the Jackson Housing Authority tract and the north line of a tract owned by Marty Botton (Deed Book 623, page 626) South 59 degrees 18 minutes 45 seconds West a distance of 412.19 feet to an iron pin on the east margin of Sweetbay Drive; thence with the east margin of Sweetbay Drive North 41 degrees 46 minutes 32 seconds West a distance of 126.64 feet to a point at the beginning of a curve; thence with said curve (Radius of 197.77) to the right a distance of 164.12 feet to a point; thence North 5 degrees 46 minutes 17 seconds East a distance of 168.81 feet to the point of beginning, containing 4.10 acres, more or less, described according to a Plat of Property, dated October 22, 2003, prepared by David A. Hall Tennessee No. 943, David Hall land Surveying Company, 26-G Brentshire Square, Jackson Tennessee 38305.  Being the Morningside Property a recorded in Plat Book 7, page 195 in the Register’s Office of Madison Co., TN.

EXHIBIT A-83

Williamsburg Villas

A Morningside Community

3020 Heatherton Way

Knoxville, TN  37920

(See attached copy.)

Williamsburg Villas

A Morningside Community

3020 Heatherton Way

Knoxville, Tennessee 37920

Exhibit A-2

Legal Description

SITUATED in the Ninth Civil District of Knox County, Tennessee, within the 25th Ward of the City of Knoxville, Tennessee, and being all of Lots 1R-2A and 1R-2B, as recorded in Plat Cabinet M, Slide [ILLEGIBLE], in the Register’s Office for Knox County, Tennessee, and being more particularly described as follows:

BEGINNING on an Iron pin in the eastern right of way line of Heatherton Way (a public road maintained by Knox County), said iron pin also being common corner with subject property on the northwest corner of Lot 1R of Blair Hill property as recorded in Plat Cabinet L, Slide 191B in the Register’s Office for Knox County, Tennessee, said iron pin also being located North 22 deg. 59 min. West, 347.4 feet from a mall marking the point of intersection of the centerline of Heatherton Way and the centerline of Governor John Sevier Highway (State Route 168, a public road maintained by the State of Tennessee); thence leaving the point of beginning and with the eastern right of way of Heatherton Way, North 46 deg. [ILLEGIBLE] min. 00 sec. West, 15.00 feet to an Iron pin; thence with a curve to the right having a radius of 125.00 feet, and a chord of North 35 deg. 37 min. 00 sec. West, 48.77 feet to an Iron pin; thence North 24 deg. 22 min. 00 sec. West, 171.05 feet to an Iron pin, corner to Lot 1R-2A; thence continuing with the right of way of Heatherton Way and with a curve to the left having a radius of 50 feet and a chord of North 72 deg. 14 min. [ILLEGIBLE] sec. West, 73.92 feet to an Iron pin, corner to property of Williamsburg Development; thence leaving the right of way of Heatherton Way, and with the line between Williamsburg Villas, Inc. and Williamsburg Development, North [ILLEGIBLE] deg. 52 min. 00 sec. West, 300.00 feet to an Iron pin; thence North 75 deg. 39 min. 35 sec. East, [ILLEGIBLE] feet to an Iron pin; thence North 62 deg. 10 min. 20 sec. East, 300.00 feet to an Iron pin; thence North 49 deg. 13 min. 26 sec. East, 263.70 feet to an Iron pin corner to Lot 15 of Topside View Addition, thence with said line, South 25 deg. [ILLEGIBLE] min. [ILLEGIBLE] sec. East, 216.10 feet to an Iron pin in the north right of way of Walmar Drive (a public road maintained by Knox County); thence with the terminus of said right of way, South [ILLEGIBLE] deg. 41 min. [ILLEGIBLE] sec. East, 54.77 feet to an Iron pin in the southern right of way of Walmar Drive, said pin also being the northwest corner of Lot 3 of the aforementioned Topside View Addition; thence with the line of Lot 3, South 26 deg. 05 min. 15 sec. East, 134.27 feet to an Iron pin; thence continuing with the line of Lot 3, South 26 deg. 05 min. 16 sec. East, 69.51 feet to an Iron pin corner to property of Church of God of Prophecy; thence with their line, South 24 deg. 23 min. 38 sec. East, 107.87 feet to an Iron pin corner to Lot 1R-1R, of Blair and Hill property; thence with said line, South [ILLEGIBLE] deg. 09 min. 15 sec. West, [ILLEGIBLE] feet to an Iron pin, corner to Lot 1R-1R, of Blair & Hill property;  thence with said line, South 71 deg. 07 min. 05 sec. West, 628.38 feet to the point of BEGINNING containing 10.810 acres, as shown on survey by Sizemore-Lynch Surveyors, dated September 17, 1997, Project No. 2570.

EXHIBIT A-84

Morningside of Franklin

105 Sunrise Circle

Franklin, TN  37067

(See attached copy.)

Morningside of Franklin

105 Sunrise Circle

Franklin, Tennessee 37067

Exhibit A-3

Legal Description

BEING A TRACT OF LAND LYING IN FRANKLIN, WILLIAMSON COUNTY, TENNESSEE, AND BEING LOT 3 OF THE MORNINGSIDE P.U.D. SUBDIVISION, SECTION ONE, AS OF RECORD IN PLAT BOOK [ILLEGIBLE], PAGE 50, IN THE OFFICE OF THE REGISTER OF DEEDS FOR WILLIAMSON COUNTY, TENNESSEE, AND BEING BOUNDED ON THE NORTH BY THE FUTURE DEVELOPMENT OF MORNINGSIDE P.U.D., SUBDIVISION, AND BEING PART OF THE PROPERTY OF HAURY & SMITH CONTRACTORS, INC., AS OF RECORD IN DEED BOOK [ILLEGIBLE], PAGE 19, AND DEED BOOK [ILLEGIBLE], PAGE 15, AND RERECORDED IN DEED BOOK [ILLEGIBLE], PAGE 1006, IN THE OFFICE OF THE REGISTER OF DEEDS FOR WILLIAMSON COUNTY, TENNESSEE, ON THE EAST BY THE WEST RIGHT-OF-WAY [ILLEGIBLE] OF [ILLEGIBLE] SUNRISE CIRCLE, ON THE SOUTH BY LOT 2 OF THE MORNINGSIDE P.U.D. SUBDIVISION, AND BEING THE PROPERTY OF HAURY & SMITH CONTRACTORS, INC. AND BY THE NORTH RIGHT-OF-WAY LINE OF THE TURNAROUND ON SUNRISE CIRCLE, AND ON THE WEST BY SARA M. PEARSON ESTATE C/O JOHN M. MORGAN, JR., AS OF RECORD IN DEED BOOK 66, PAGE 419, IN THE OFFICE OF THE REGISTER OF DEEDS FOR WILLIAMSON COUNTY, TENNESSEE, AND BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:

BEGINNING AT AN IRON ROD IN THE NORTH RIGHT-OF-WAY LINE OF THE TURNAROUND OF SUNRISE CIRCLE AT A CORNER COMMON WITH SAID LOT 2;

THENCE WITH SAID LOT 2 FOR THE FOLLOWING TWO CALLS;

NORTH [ILLEGIBLE] DEG 40 MIN 30 SEC WEST, 88.74 [ILLEGIBLE] TO AN IRON ROD;

NORTH 80 DEG 23 MIN 41 SEC WEST, [ILLEGIBLE] TO AN IRON ROD IN THE WEST PROPERTY LINE OF SARA M. PEARSON, c/o JOHN M. MORGAN, JR.;

THENCE WITH SARA M. PEARSON ESTATE c/o JOHN M. MORGAN, JR., NORTH [ILLEGIBLE] DEG 36 MIN 19 SEC EAST, [ILLEGIBLE] FEET TO AN IRON ROD AT THE CORNER COMMON WITH SAID FUTURE DEVELOPMENT.

THENCE WITH SAID FUTURE DEVELOPMENT, SOUTH 80 DEG 23 MIN 41 SEC EAST, 285.00 FEET TO AN IRON ROD IN THE WEST RIGHT-OF-WAY, LINE OF NORTH SUNRISE CIRCLE;

THENCE WITH THE WEST RIGHT-OF-WAY LINE OF NORTH SUNRISE CIRCLE FOR THE FOLLOWING TWO CALLS;

SOUTH [ILLEGIBLE] DEG 36 MIN [ILLEGIBLE] SEC WEST, 277.84 FEET IN A CONCRETE MONUMENT;

ALONG A CURVE TO THE RIGHT, THE CENTRAL ANGLE OF 30 DEG 20 MIN 42 SEC, THE RADIUS OF WHICH IS [ILLEGIBLE] FEET, THE CHORD OF WHICH IS SOUTH 24 DEG [ILLEGIBLE] MIN [ILLEGIBLE] SEC WEST, 151.28 FEET, ALONG AN ARC LENGTH OF 153.07 FEET TO A CONCRETE MONUMENT IN THE NORTH RIGHT-OF-WAY LINE OF THE TURNAROUND OF SUNRISE CIRCLE.

THENCE WITH THE NORTH RIGHT-OF-WAY LINE OF THE TURNAROUND OF SUNRISE CIRCLE ALONG A CURVE TO THE LEFT, THE CENTRAL ANGLE OF WHICH IS 45 DEG 43 MIN 40 SEC, THE RADIUS OF WHICH IS 100.00 FEET; THE CHORD OF WHICH IS NORTH 85 DEG 48 MIN 40 SEC WEST, 77.71 FEET, ALONG AN ARC LENGTH OF 79.81 FEET TO THE POINT OF BEGINNING.

TOGETHER WITH EASEMENTS FOR PARKING AND ACCESS OVER A PORTION OF LOT 2, AS SET FORTH IN BOOK 1445, PAGE 245.

EXHIBIT A-85

Morningside of Hopkinsville

4190 Lafayette Road

Hopkinsville, KY  42240

(See attached copy.)

Morningside of Hopkinsville

4190 Lafayette Road

Hopkinsville, Kentucky  42240

Exhibit A-4

Legal Description

BEING- a tract of land located in Hopkinsville, Christian County, Kentucky and being the same property as conveyed to Morningside of Hopkinsville, Limited Partnership in Deed Book 539, page 311 as recorded in the Office of the County Clerk of Christian County, Kentucky and. being more particularly described as follows:

Beginning at an iron pin (found) at the intersection of the northeast right of way of the Hopkinsville By-Pass and the southeast right of way of Kentucky Highway 107, said iron pin being 110 feet northeast of the centerline of said By-Pass; thence continuing with said right of way of Kentucky Highway 107, North 10 degrees 56 minutes 26 seconds East for a distance of 176.10 feet to a point in said right of way of Kentucky Highway 107; thence continuing with said right of way of Kentucky Highway 107, North 19 degrees 43 minutes 21 seconds East for distance of 156.86 feet to a ½” dia. steel pin with surveyor’s cap #3171 (found) in said right of way of Kentucky Highway 107; thence continuing with said right of way of Kentucky Highway 107, North 11 degrees 06 minutes 37 seconds East for a distance of 46.30 feet to a ½” dia. steel pin with surveyor’s cap #3171 (found) in said right of way of Kentucky Highway 107, said pin being the Southwest corner of the James S. Rucker property as described in Deed Book 503, page 404; thence leaving said right of way of Kentucky Highway 107, South 75 degrees 39 minutes 32 seconds East for a distance of 166.96 feet to a ½” dia. steel pin (found); thence South 72 degrees 18 minutes 16 seconds East for a distance of 291.76 feet to a ½” dia. steel pin with surveyor’s cap #3171 (found); thence South 12 degrees 14 minutes 31 seconds West for a distance of 60.17 feet to a ½” dia. steel pin with surveyor’s cap #3171 (found); thence South 76 degrees 12 minutes 30 seconds East for a distance of 36.04 feet to a ½” dia. x 24” lng. steel with surveyor’s cap #3437 set, said pin being the Northwest corner of the Donald Sholar property (Deed Book 553, page 508); thence with the West line of said Donald Sholar, South 10 degrees 33 minutes 30 seconds West for a distance of 525.00 feet to a ½” dia. x 24” lng. steel pin with surveyor’s cap #3437 set, said pin being the southwest corner of said Donald Sholar property, said pin also being in the north right of way of Old Foston Chapel Road; thence leaving said west line of Sholar and with said North right of way, of Old Foston Chapel Road, North 64 degrees 36 minutes 26 seconds West for a distance of 218.30 feet to a ½” dia. steel pin with surveyor’s cap #3171 (found) at the intersection of said North right of way Of Old Foston Chapel Road and said Northeast right of way of the Hopkinsville By-Pass, thence North 50 degrees 34 minutes 52 seconds West for a distance of 78.83 feet to a ½” dia. steel pin with surveyor’s cap #3171 (found) in said Northeast right of way of the Hopkinsville By-Pass, thence continuing with said Northeast right of way of the Hopkinsville By-Pass, North 25 degrees 53 minutes 20 seconds West for a distance of 53.85 feet to a point in said Northeast right of way of the Hopkinsville By-Pass; thence continuing with said Northeast right of way the Hopkinsville By-Pass North 49 degrees 05 minutes 50 seconds West for a distance of 237.37 feet to the point of beginning according to a survey by Dennis W. Looper KY RLS #3437 of Purchase Area Surveying on 10-22-04.

Said property is subject to a detention basin easement as recorded in Deed Book 539, page 311, same office. Said property is subject to all other conveyances, right of ways, easements, and restrictions of record.

Said property contains 5.882 acres or 256,220.44 square feet.

BEING the same property conveyed to Morningside of Hopkinsville, Limited Partnership, from James S. Rucker, et ux., by deed dated July 8, 1997, and recorded in Deed. Book 539 at page 311, Christian County, Kentucky, Court Clerk’s Office, as more particularly described as follows:

Real property located in Christian County, Kentucky, and being the same property a plat of which is recorded in Plat Cabinet 4, File 561, of the Christian County Clerk’s Office, to which plat reference is hereby made, and more particularly described as follows:

Beginning at an iron pin (found) at the intersection of the Northeast right of way of the Hopkinsville By-Pass and the Southeast right of way of Kentucky Highway 107, said iron pin being 110 feet Northeast of the centerline of said by-pass; thence continuing with said right of way of Kentucky Highway 107, North 10 degrees 54 minutes 09 seconds East for a distance of 176.01 feet to an iron pin (found) in said right of way of Kentucky Highway 107, thence continuing with said right of way of Kentucky Highway 107, North 19 degrees 42 minutes 10 seconds East for distance of 156.95 feet to an iron pin (found) in said right of way of Kentucky Highway 107; thence continuing with said right of way of Kentucky Highway 107, North 11 degrees 02 minutes 33 seconds East for a distance of 46.22 feet to an iron pin (set) in said right of way of Kentucky Highway 107; thence leaving said right of way of Kentucky Highway 107 and on a new line, South 75 degrees 41 minutes 19 seconds East for a distance of 167.07 feet to an Iron pin (set) ; thence on another new line, South 72 degrees 19 minutes 41 seconds East for a distance of 291.50 feet to an iron pin (set); thence on another new line, South 12 degrees 12 minutes 41 seconds West for a distance of 60.12 feet to an iron pin (set); thence on another new line, south 76 degrees 09 minutes 36 seconds East for a distance of 36.04 feet to an iron pin (found), said iron pin being the northwest corner of the John S. Howard property (Deed Book 494, Page 482); thence leaving said new line and with the West line of said John Howard, South 10 degrees 31 minutes 40 seconds West for a distance of 525.00 feet to an iron pin (found), said iron pin being the Southwest corner of said John Howard property, said iron pin also being in the North right of way of Old Foston Chapel Road; thence leaving said West line of Howard and with said North right of way of Old Foston Chapel Road, North 64 degrees 34 minutes 25 seconds West for a distance of 218.30 feet to an iron pin (found) at the intersection of said North right of way of Old Foston Chapel Road and said Northeast right of way of the Hopkinsville By-Pass; thence leaving said North right of way of Old Foston Chapel Road and with the Northeast right of way of the Hopkinsville By-Pass, North 50 degrees 44 minutes 35 seconds West for a distance of 78.67 feet to an iron pin (found) in said Northeast right of way of the Hopkinsville By-Pass; thence continuing with said Northeast right of way of the Hopkinsville By-Pass, North 25 degrees 54 minutes 57 seconds West for a distance of 53.85 feet to an iron pin (found) in said Northeast right of way of the Hopkinsville By-Pass; thence continuing with said Northeast right of way of the Hopkinsville By-Pass North 49 degrees 05 minutes 57 seconds West for a distance of 237.40 feet to the point of beginning and according to a survey dated December 17, 1993 and revised January 30, 1997 and March 27, 1997 and May 2, 1997 by Joseph C. Deering, Kentucky Registered Land Surveyor License Number 3171 of Patrick Engineering, Inc.

Said property contains 5.879 acres more or less or 256,103.94 square feet more or less.

EX-10.4

Exhibit 10.4

ACCESSION AGREEMENT

THIS ACCESSION AGREEMENT, dated as of November 1, 2012, is entered into by SNH SE TENANT TRS, INC., a Maryland corporation (the “Company”).

RECITALS:

(a)The Company has entered into Management Agreements with FVE Managers, Inc., a Maryland corporation (“Manager”), dated as of November 1, 2012, with respect to each of the following senior living facilities: (i) that certain senior living facility located at 24552 Paseo de Valencia, Laguna Hills, California (“Villa Valencia”); and (ii) that certain senior living facility located at 1250 West Central Road, Arlington Heights, Illinois (“Church Creek”) (each, a “Management Agreement”).

(b)Manager, the Company and certain affiliates of the Company are parties to that certain Pooling Agreement No. 2, dated as of October 30, 2012, by and among the Manager and the parties listed on Schedule A thereto (the “Pooling Agreement”).  Capitalized terms used in this Accession Agreement without definition shall have the meanings given to such terms in the Pooling Agreement.

(c)The Company desires to become a party to the Pooling Agreement with respect to each of Villa Valencia and Church Creek.

NOW, THEREFORE:

The Company hereby accedes and becomes a party to the Pooling Agreement with respect to each of Villa Valencia and Church Creek as an Additional Facility, agrees to be bound by the provisions of the Pooling Agreement with respect to each of Villa Valencia and Church Creek, and acknowledges that provisions of each Management Agreement will be superseded as provided therein, on and after the date first above written.

[Signature Page Follows]

IN WITNESS WHEREOF, this Accession Agreement has been duly executed and delivered by the Company with the intention of creating an instrument under seal.

COMPANY:
SNH SE TENANT TRS, INC.,
a Maryland corporation
By:	/s/ Richard A. Doyle
	Richard A. Doyle
	President

ACCEPTED:
FVE MANAGERS, INC.,
a Maryland corporation
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	President

[Signature Page to Accession Agreement]

Schedule to Exhibit 10.4

There are five accession agreements to the Pooling Agreement with FVE Managers, Inc., a representative form of which is filed herewith.  The other accession agreements, with the respective parties and applicable to the respective communities listed below, are substantially identical in all material respects to the representative form of accession agreement filed herewith.

Entity	Community	Date
SNH SE Tenant TRS, Inc.	Fieldstone Place, 51 Patel Way, Clarksville, Tennessee 37043 Gateway Villas and Gardens, 601 Steve Hawkins Parkway and 605 Gateway Central, Marble Falls, Texas 78654	December 19, 2012
	Gracemont Assisted Living & Memory Care, 4940 and 4960 Jot Em Down Road, Cumming, Georgia 30041	August 1, 2013
	Cameron Hall, 114 Penland Street, Ellijay, Georgia 30540 and 240 Marietta Highway, Canton, Georgia 30114	October 1, 2013
	Chandler House, 550 Deer View Way, Jefferson City, Tennessee 37760	October 15, 2013

EX-10.5

Exhibit 10.5

FIVE STAR QUALITY CARE, INC.

RESTRICTED SHARE AGREEMENT

This Restricted Share Agreement (this “Agreement”) is made as of                        ,         , between                                         (the “Recipient”) and Five Star Quality Care, Inc. (the “Company”).

In consideration of the mutual promises and covenants contained in this Agreement, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.Grant of Shares.  Subject to the terms and conditions hereinafter set forth and the terms and conditions of the 2001 Stock Option and Stock Incentive Plan of Five Star Quality Care, Inc., as amended and as it may be further amended from time to time (the “Plan”), the Company hereby grants to the Recipient, effective as of the date of this Agreement,         shares of its common stock, par value $.01 per share.  The shares so granted are hereinafter referred to as the “Shares,” which term shall also include any shares of the Company issued to the Recipient by virtue of his or her ownership of the Shares, by share dividend, share split, recapitalization or otherwise.

2.Vesting; Repurchase of Shares.

(a)Subject to Sections 2(b) and 2(c) hereof, the Shares shall vest one-fifth of the total number of Shares as of the date hereof and as to a further one-fifth of such total number of Shares on each anniversary of the date hereof for the next four calendar years.  Any Shares not vested as of any date are herein referred to as “Unvested Shares.”

(b)Subject to Section 2(c) hereof, in the event the Recipient ceases to render significant services, whether as an employee or otherwise, to (i) the Company, (ii) the entity which is the manager or shared services provider to the Company or an entity controlled by, under common control with or controlling such entity (collectively, the “Manager”), or (iii) an affiliate of the Company (which shall be deemed for such purpose to include any other entity to which the Manager is the manager or shared services provider), the Company shall have the right and option to purchase from the Recipient, for an amount equal to $.01 per share (as adjusted for any share split or combination, share dividend, recapitalization or similar event) all or any portion of the Unvested Shares as of the date the Recipient ceases to render such services.  The Company may exercise such purchase option by delivering or mailing to the Recipient (or his or her estate), at any time after the Recipient has ceased to render such services, a written notice of exercise of such option.  Such notice shall specify the number of Unvested Shares to be purchased.  The price to be paid for the Unvested Shares to be repurchased may be payable, at the option of the Company, by wire transfer of immediately available funds or in cash (by check) or any other reasonable method.

(c)Notwithstanding anything in this Agreement to the contrary, immediately upon the occurrence of an Acceleration Event (as defined below), all of the Unvested Shares shall vest and any repurchase or other rights of the Company described in Section 2(b) shall lapse in their entirety, and such vesting and lapse of repurchase or other Company rights shall also immediately apply to each other share of common stock, par value $.01 per share, of the Company previously granted to the Recipient which then remains subject to comparable restrictions and rights.  For purposes of this Section 2(c), an Acceleration Event shall be deemed to occur immediately upon the occurrence of any of the following events: a Change in Control, a Termination Event (as each such term is defined in Exhibit A hereto) or the death of the Recipient.

3.Legends.  Share certificates, if any, evidencing the Shares shall prominently bear a legend in substantially the following terms:

“THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED PURSUANT TO AN INCENTIVE PLAN MAINTAINED BY THE CORPORATION.  THESE SHARES MAY BE SUBJECT TO TRANSFER AND/OR VESTING RESTRICTIONS, AND UNVESTED SHARES ARE SUBJECT TO REPURCHASE RIGHTS CONTAINED IN THE PLAN, THE RELATED GRANT OF SHARES OR AN AGREEMENT BETWEEN THE CORPORATION AND THE INITIAL HOLDER OF THESE SHARES.  A COPY OF APPLICABLE RESTRICTIONS AND REPURCHASE RIGHTS WILL BE FURNISHED TO THE HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON REQUEST TO THE SECRETARY OF THE CORPORATION.”

In the event that the Shares are not evidenced by share certificates, the share books and records of the Company shall contain a notation in substantially the following terms:

“THE SHARES COVERED BY THIS STATEMENT WERE ISSUED PURSUANT TO AN INCENTIVE PLAN MAINTAINED BY THE CORPORATION.  THESE SHARES MAY BE SUBJECT TO TRANSFER AND/OR VESTING RESTRICTIONS, AND UNVESTED SHARES ARE SUBJECT TO REPURCHASE RIGHTS CONTAINED IN THE PLAN, THE RELATED GRANT OF SHARES OR AN AGREEMENT BETWEEN THE CORPORATION AND THE INITIAL HOLDER OF THESE SHARES.  A COPY OF APPLICABLE RESTRICTIONS AND REPURCHASE RIGHTS WILL BE FURNISHED TO THE HOLDER OF THE SHARES COVERED BY THIS STATEMENT WITHOUT CHARGE UPON REQUEST TO THE SECRETARY OF THE CORPORATION.”

Certificates evidencing Shares and Shares not evidenced by certificates shall also bear or contain, as applicable, legends and notations as may be required by the Plan or the Company’s charter or bylaws, each as in effect from time to time, or as the Company may otherwise determine appropriate.

Promptly following the request of the Recipient with respect to any Shares (or any other share of common stock, par value $.01 per share, of the Company previously granted to the Recipient) which have become vested, the Company shall take, at its sole cost and expense, all such actions as may be required to permit the Recipient to resell such shares including, without limitation, providing to the Company’s transfer agent certificates of officers of the Company, and opinions of counsel and/or filing an appropriate registration statement, and taking all such other actions as may be required to remove the legends set forth above with respect to transfer and vesting restrictions from the certificates evidencing such shares and, if applicable, from the share books and records of the Company.  The Company shall reimburse the Recipient, promptly upon the receipt of a request for payment, for all expenses (including legal expenses) reasonably incurred by the Recipient in connection with the enforcement of the Recipient’s rights under this paragraph.

4.Tax Withholding.  To the extent required by law, the Company shall withhold or cause to be withheld income and other taxes incurred by the Recipient by reason of a grant of Shares, and the Recipient agrees that he or she shall upon request of the Company pay to the Company an amount sufficient to satisfy its tax withholding obligations from time to time (including as Shares become vested) as the Company may request.

5.Miscellaneous.

(a)Amendments.  Neither this Agreement nor any provision hereof may be changed or modified except by an agreement in writing executed by the Recipient and the Company; provided, however, that any change or modification that does not adversely affect the rights hereunder of the Recipient, as they may exist immediately prior to the effective date of such change or modification, may be adopted by the Company without an agreement in writing executed by the Recipient, and the Company shall give the Recipient written notice of such change or modification reasonably promptly following the adoption of such change or modification.

(b)Binding Effect of the Agreement.  This Agreement shall inure to the benefit of, and be binding upon , the Company, the Recipient and their respective estates, heirs, executors, transferees, successors, assigns and legal representatives.

(c)Provisions Separable.  In the event that any of the terms of this Agreement shall be or become or is declared to be illegal or unenforceable by any court or other authority of competent jurisdiction, such terms shall be null and void and shall be deemed deleted from this Agreement, and all the remaining terms of this Agreement shall remain in full force and effect.

(d)Notices.  Any notice in connection with this Agreement shall be deemed to have been properly delivered if it is in writing and is delivered by hand or by facsimile or sent by registered certified mail, postage prepaid, to the party addressed as follows, unless another address has been substituted by notice so given:

To the Recipient:To the Recipient’s address as set forth on the signature page hereof.

To the Company:	Five Star Quality Care, Inc.
	Two Newton Place
	255 Washington Street, Suite 300
	Newton, MA  02458
	Attn: Secretary

(e)Construction.  The headings and subheadings of this Agreement have been inserted for convenience only, and shall not affect the construction of the provisions hereof.  All references to sections of this Agreement shall be deemed to refer as well to all subsections which form a part of such section.

(f)Employment Agreement.  This Agreement shall not be construed as an agreement by the Company, the Manager or any affiliate of the Company or the Manager to employ the Recipient, nor is the Company, the Manager or any affiliate of the Company or the Manager obligated to continue employing the Recipient by reason of this Agreement or the grant of Shares to the Recipient hereunder.

(g)Applicable Law.  This Agreement shall be construed and enforced in accordance with the laws of The Commonwealth of Massachusetts.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or caused this Agreement to be executed under seal, as of the date first above written.

FIVE STAR QUALITY CARE, INC.

By:

Name:

Title:

RECIPIENT:

Exhibit A

A “Change in Control” shall be deemed to have occurred if any of the events set forth in any one of the following paragraphs shall have occurred:

(a)any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 50% or more of either the then outstanding common shares of the Company or the combined voting power of the Company’s then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in paragraph (c)(i) below;

(b)the following individuals cease for any reason to constitute a majority of the number of Directors then serving: individuals who, on the date of the Agreement, constitute the Board and any new Director (other than a Director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of Directors) whose appointment or election by the Board or nomination for election by the Company’s shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the Directors then in office who either were Directors on the date of the Agreement or whose appointment, election or nomination for election was previously so approved or recommended;

(c)there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other entity, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 50% or more of the combined voting power of the Company’s then outstanding securities; or

(d)the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.

A “Termination Event” shall occur if Reit Management & Research LLC (or any entity controlled by, under common control with or controlling Reit Management & Research LLC) ceases to be the manager or shared services provider to the Company.

For purposes of the definitions set forth on this Exhibit A, the following definitions shall apply, with capitalized terms used but not defined in this Exhibit A having the meaning set forth in the Plan:

“Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.

“Agreement” shall mean the Restricted Share Agreement to which this Exhibit A is attached.

“Beneficial Owner” shall have the meaning set forth in Rule 13d-3 under the Exchange Act.

“Director” is a member of the Board of Directors of the Company.

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

“Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities and (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of shares of the Company.

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)

I, Bruce J. Mackey Jr., certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Five Star Quality Care, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))  for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 15, 2014	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)

I, Paul V. Hoagland, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Five Star Quality Care, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))  for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 15, 2014	/s/ Paul V. Hoagland
	Paul V. Hoagland
	Treasurer and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SEC. 1350

In connection with the filing by Five Star Quality Care, Inc. (the “Company”) of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 (the “Report”), each of the undersigned hereby certifies, to the best of his knowledge:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Bruce J. Mackey Jr.

Bruce J. Mackey Jr.

President and Chief Executive Officer

/s/ Paul V. Hoagland

Paul V. Hoagland

Treasurer and Chief Financial Officer

Date:April 15, 2014

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Off Balance Sheet Arrangements (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013 property
Off Balance Sheet Arrangements
Carrying value of accounts receivable pledged	$ 12,706
Number of properties leased from SNH on which pledge arises	26
Off balance sheet arrangements, asset	0
Off balance sheet arrangements, liability	$ 0

XML

Basis of Presentation and Organization (Details)	9 Months Ended
	Sep. 30, 2013 item	Sep. 30, 2013 Outpatient clinics unit	Sep. 30, 2013 Senior Living Communities state unit property	Sep. 30, 2013 Independent and assisted living communities property unit	Sep. 30, 2013 SNF property unit	Sep. 30, 2013 Independent living apartment unit	Sep. 30, 2013 Assisted living suites unit	Sep. 30, 2013 Skilled nursing units unit	Sep. 30, 2013 Assisted living communities unit	Jun. 30, 2013 Assisted living communities property	Sep. 30, 2013 SNH Rehabilitation hospitals bed property	Aug. 31, 2013 SNH Rehabilitation hospitals property	Sep. 30, 2013 SNH Rehabilitation hospitals - satellite locations property	Sep. 30, 2013 SNH Senior Living Communities property	Aug. 31, 2013 SNH Senior Living Communities unit	May 31, 2011 SNH Senior Living Communities property	Sep. 30, 2013 SNH SNF unit	Sep. 30, 2013 SNH Assisted living communities unit property
Real estate properties
Number of properties operated			251	220	31											6
Number of states in which real estate properties are located			31
Number of living units in properties operated			29,743	26,921	2,822	10,368	14,119	5,256
Number of living units in properties excluded due to temporary closing for renovations			48
Number of properties from which 48 living units were excluded			1
Number of properties owned and operated			30
Number of living units in properties owned and operated			2,946
Number of properties leased and operated			181								2		3	187
Number of units in properties leased and operated			20,026
Number of properties managed			40											40
Number of units in properties managed			6,771
Number of real estate properties classified as discontinued operations			11											10				4
Number of units in real estate property classified as discontinued operations									32						112		6	712
Number of units in properties leased and operated		13
Number of beds used to provide in-patient rehabilitation services to patients											321
Number of properties to be sold										1		2
Number of operating segments	3
Number of reportable segments	1

XML

Litigation Settlement (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended	0 Months Ended
	Sep. 30, 2012	May 29, 2012 Settlement Agreement with Sunrise for certain insurance programs
Litigation Settlement
Cash received pursuant to the Settlement Agreement		$ 4,000
Gain on settlement, net of legal fees	$ 3,365	$ 3,365

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Accumulated Other Comprehensive Income

9 Months Ended

Sep. 30, 2013

Accumulated Other Comprehensive Income

Accumulated Other Comprehensive Income

Note 3. Accumulated Other Comprehensive Income

The following table details the changes in accumulated other comprehensive income, net of tax, for the nine months ended September 30, 2013:

	Equity Investment in Affiliates Insurance Company			Investments in Available for Sale Securities (Restated)			Accumulated Other Comprehensive Income (Restated)
Balance at January 1, 2013	$	99		$	3,264		$	3,363
Unrealized gain on investments, net of tax	—			60			60
Equity interest in investee’s unrealized loss on investments	(8		)	—			(8		)
Reclassification adjustment:
Realized gain on investments, net of tax	—			(52		)	(52		)
Balance at March 31, 2013	$	91		$	3,272		$	3,363
Unrealized loss on investments, net of tax	—			(233		)	(233		)
Equity interest in investee’s unrealized loss on investments	(73		)	—			(73		)
Reclassification adjustment:
Realized loss on investments, net of tax	—			70			70
Balance at June 30, 2013	$	18		$	3,109		$	3,127
Unrealized gain on investments, net of tax	—			108			108
Equity interest in investee’s unrealized gain on investments	13			—			13
Reclassification adjustment:
Realized gain on investments, net of tax	—			(22		)	(22		)
Balance at September 30, 2013	$	31		$	3,195		$	3,226

Accumulated other comprehensive income represents the unrealized appreciation of our investments, net of tax, and our share of other comprehensive income of Affiliates Insurance Company, or AIC.

XML

Earnings Per Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Earnings Per Share
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01	$ 0.01	$ 0.01	$ 0.01
Unvested common shares included in calculation of weighted average shares outstanding	540	553	540	553
Income (loss)
Income from continuing operations	$ 727	$ 3,088	$ 5,965	$ 9,831
Effect of the Notes	13	149	344	528
Diluted income from continuing operations	727	3,237	5,965	9,831
Diluted (loss) income from discontinued operations	$ (925)	$ 13,125	$ (5,382)	$ 17,726
Shares
Income from continuing operations (in shares)	48,272	47,927	48,253	47,913
Effect of the Notes (in shares)	145	1,913	1,318	2,272
Diluted income from continuing operations (in shares)	48,417	49,840	49,571	50,185
Diluted (loss) income from discontinued operations (in shares)	48,417	49,840	49,571	50,185
Per Share
Income from continuing operations (in dollars per share)	$ 0.02	$ 0.06	$ 0.12	$ 0.21
Diluted income from continuing operations (in dollars per share)	$ 0.02	$ 0.06	$ 0.12	$ 0.21
Diluted (loss) income from discontinued operations (in dollars per share)	$ (0.02)	$ 0.27	$ (0.06)	$ 0.23

XML

Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Income Taxes
Tax expense from continuing operations	$ (226)	$ (905)	$ (582)	$ (5,523)
Tax benefit relating to a work opportunity tax credit program			1,468
Tax benefit from discontinued operations	556	(7,013)	2,157	(5,962)
Net operating loss carry forward, which begins to expire in 2026 if unused					70,765
Tax credit carry forward, which begins to expire in 2022 if unused					$ 11,729

XML

Fair Values of Assets and Liabilities (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013 item	Sep. 30, 2012	Dec. 31, 2012
Fair Values of Assets and Liabilities
Available for sale securities, current	$ 19,042		$ 12,920
Long term investments in available for sale securities	11,597		10,580
Amortized cost of available for sale securities	28,974		21,720
Unrealized gains on available for sale securities	1,947		2,050
Unrealized losses on available for sale securities	282		270
Number of available for sale securities in a loss position less than 12 months	37
Fair value of securities which is in loss position for less than 12 months	5,391
Number of available for sale securities in a loss position 12 months or longer	0
Gross proceeds from sale of available for sale securities	5,925	928
Gross realized gains recorded on sale of available for sale securities	314	65
Gross realized losses recorded on sale of available for sale securities	308	3
International bond fund
Fair Values of Assets and Liabilities
Unfunded commitment	0
High yield fund
Fair Values of Assets and Liabilities
Unfunded commitment	0
Total
Fair Values of Assets and Liabilities
Cash equivalents	13,075		22,149
Available for sale securities	30,639		23,500
Total	43,714		45,649
Total | Equity securities
Fair Values of Assets and Liabilities
Available for sale securities	8,027		7,284
Total | Financial services industry
Fair Values of Assets and Liabilities
Available for sale securities	3,711		6,025
Total | Non-equity investment instrument
Fair Values of Assets and Liabilities
Available for sale securities	1,021
Total | REIT industry
Fair Values of Assets and Liabilities
Available for sale securities	606		484
Total | Utilities industry
Fair Values of Assets and Liabilities
Available for sale securities	512
Total | Other
Fair Values of Assets and Liabilities
Available for sale securities	2,177		775
Total | Debt securities
Fair Values of Assets and Liabilities
Available for sale securities	22,612		16,216
Total | International bond fund
Fair Values of Assets and Liabilities
Available for sale securities	2,322		2,345
Total | High yield fund
Fair Values of Assets and Liabilities
Available for sale securities	2,233		2,168
Total | Industrial bonds
Fair Values of Assets and Liabilities
Available for sale securities	5,271		5,186
Total | Government bonds
Fair Values of Assets and Liabilities
Available for sale securities	7,104		4,666
Total | Energy industry bonds
Fair Values of Assets and Liabilities
Available for sale securities	1,876
Total | Financial bonds
Fair Values of Assets and Liabilities
Available for sale securities	963		982
Total | Other
Fair Values of Assets and Liabilities
Available for sale securities	2,843		869
Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Values of Assets and Liabilities
Cash equivalents	13,075		22,149
Available for sale securities	12,601		11,950
Total	25,676		34,099
Quoted Prices in Active Markets for Identical Assets (Level 1) | Equity securities
Fair Values of Assets and Liabilities
Available for sale securities	8,027		7,284
Quoted Prices in Active Markets for Identical Assets (Level 1) | Financial services industry
Fair Values of Assets and Liabilities
Available for sale securities	3,711		6,025
Quoted Prices in Active Markets for Identical Assets (Level 1) | Non-equity investment instrument
Fair Values of Assets and Liabilities
Available for sale securities	1,021
Quoted Prices in Active Markets for Identical Assets (Level 1) | REIT industry
Fair Values of Assets and Liabilities
Available for sale securities	606		484
Quoted Prices in Active Markets for Identical Assets (Level 1) | Utilities industry
Fair Values of Assets and Liabilities
Available for sale securities	512
Quoted Prices in Active Markets for Identical Assets (Level 1) | Other
Fair Values of Assets and Liabilities
Available for sale securities	2,177		775
Quoted Prices in Active Markets for Identical Assets (Level 1) | Debt securities
Fair Values of Assets and Liabilities
Available for sale securities	4,574		4,666
Quoted Prices in Active Markets for Identical Assets (Level 1) | Government bonds
Fair Values of Assets and Liabilities
Available for sale securities	4,574		4,666
Significant Other Observable Inputs (Level 2)
Fair Values of Assets and Liabilities
Available for sale securities	18,038		11,550
Total	18,038		11,550
Significant Other Observable Inputs (Level 2) | Debt securities
Fair Values of Assets and Liabilities
Available for sale securities	18,038		11,550
Significant Other Observable Inputs (Level 2) | International bond fund
Fair Values of Assets and Liabilities
Available for sale securities	2,322		2,345
Significant Other Observable Inputs (Level 2) | High yield fund
Fair Values of Assets and Liabilities
Available for sale securities	2,233		2,168
Significant Other Observable Inputs (Level 2) | Industrial bonds
Fair Values of Assets and Liabilities
Available for sale securities	5,271		5,186
Significant Other Observable Inputs (Level 2) | Government bonds
Fair Values of Assets and Liabilities
Available for sale securities	2,530
Significant Other Observable Inputs (Level 2) | Energy industry bonds
Fair Values of Assets and Liabilities
Available for sale securities	1,876
Significant Other Observable Inputs (Level 2) | Financial bonds
Fair Values of Assets and Liabilities
Available for sale securities	963		982
Significant Other Observable Inputs (Level 2) | Other
Fair Values of Assets and Liabilities
Available for sale securities	$ 2,843		$ 869

XML

Fair Values of Assets and Liabilities (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Carrying value and fair value
Transfers of assets between Level 1 to Level 2	$ 0
Transfers of liabilities between Level 1 to Level 2	0
Transfers of assets between Level 2 to Level 1	0
Transfers of liabilities between Level 2 to Level 1	0
Mortgage notes payable	36,758	37,621
AIC
Carrying value and fair value
Number of other current shareholders of the related party	5
Level two | AIC
Carrying value and fair value
Number of other current shareholders of the related party	7
Carrying value | Level two
Carrying value and fair value
Convertible senior notes		24,872
Carrying value | Level three
Carrying value and fair value
Mortgage notes payable	37,900	46,260
Fair value | Level two
Carrying value and fair value
Convertible senior notes		24,623
Fair value | Level three
Carrying value and fair value
Mortgage notes payable	$ 31,548	$ 53,115

XML

Property and Equipment

9 Months Ended

Sep. 30, 2013

Property and Equipment

Property and Equipment

Note 2. Property and Equipment

Property and equipment, at cost, consists of the following:

	September 30, 2013			December 31, 2012 (Restated)
Land	$	21,714		$	21,714
Buildings and improvements	275,948			277,330
Furniture, fixtures and equipment	113,704			103,707
	411,366			402,751
Accumulated depreciation	(80,258		)	(65,257		)
	$	331,108		$	337,494

We recorded depreciation expense of $6,442 and $5,889 for the three months ended September 30, 2013 and 2012, respectively, and $18,824 and $16,884 for the nine months ended September 30, 2013 and 2012, respectively, relating to our property and equipment.

As of September 30, 2013, we had $4,870 of assets included in our property and equipment that we expected to request that SNH purchase from us for an increase in future rent pursuant to the terms of our leases with SNH; however, we are not obligated to make these sales and SNH is not obligated to purchase those assets.

XML

Indebtedness (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended	9 Months Ended			0 Months Ended		1 Months Ended		3 Months Ended		9 Months Ended				3 Months Ended		9 Months Ended				0 Months Ended	1 Months Ended	3 Months Ended		9 Months Ended			3 Months Ended		9 Months Ended					9 Months Ended	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012	Dec. 31, 2013 Rehabilitation hospitals Subsequent event property	Sep. 30, 2013 Senior Living Communities property	Aug. 31, 2013 SNH Senior Living Communities property	May 31, 2011 SNH Senior Living Communities property	Sep. 30, 2013 Credit Agreement	Sep. 30, 2012 Credit Agreement	Sep. 30, 2013 Credit Agreement	Sep. 30, 2012 Credit Agreement	Apr. 14, 2014 Credit Agreement	Dec. 31, 2013 Credit Agreement Subsequent event	Sep. 30, 2013 Credit Facility	Sep. 30, 2012 Credit Facility	Sep. 30, 2013 Credit Facility item	Sep. 30, 2012 Credit Facility	Apr. 14, 2014 Credit Facility	Sep. 30, 2013 Credit Facility Senior Living Communities property unit	Jul. 08, 2013 Notes	Oct. 31, 2006 Notes	Sep. 30, 2013 Notes	Sep. 30, 2012 Notes	Sep. 30, 2013 Notes	Sep. 30, 2012 Notes	Dec. 31, 2012 Notes	Sep. 30, 2013 Mortgage notes	Sep. 30, 2012 Mortgage notes	Sep. 30, 2013 Mortgage notes	Sep. 30, 2012 Mortgage notes	Sep. 30, 2013 Mortgage notes FNMA property	Sep. 30, 2013 Mortgage notes FMCC property	Sep. 30, 2013 Mortgage notes Senior Living Communities property	Sep. 30, 2012 Bridge Loan SNH	Dec. 31, 2011 Bridge Loan SNH	May 31, 2011 Bridge Loan SNH
Indebtedness
Maximum borrowing capacity									$ 35,000		$ 35,000			$ 25,000	$ 150,000		$ 150,000
Number of real estate properties sold					2		1
Variable rate basis											LIBOR						LIBOR
Basis spread (as a percent)											2.50%						2.50%
Interest rate at period end (as a percent)									2.68%		2.68%				2.68%		2.68%
Principal repayment											0						0
Amount borrowed during the period		60,000	47,500						0	0	0	0
Amount outstanding under credit facility									0		0		0		10,000		10,000		15,000
Facility costs									35	154	277	509			542	762	1,442	1,287					21	245	511	876		581	709	2,425	2,134
Interest expense and other associated costs incurred																																			314
Number of extensions to maturity date																	2
Extension period available																	1 year
Number of real estate properties mortgaged																																1	3	4
Number of real estate properties securing borrowings on the new credit facility																				15
Number of units in real estate properties securing borrowings on the new credit facility																				1,549
Proceeds from issue of notes																						122,600
Interest rate (as a percent)																						3.75%
Conversion ratio, number of common shares																						0.0769231
Initial conversion price of shares (in dollars per share)																						$ 13.00
Percentage of principal amount at which notes may be required to be repurchased in event of fundamental change																						100.00%
Amount of notes outstanding redeemed																					24,872
Loss on early extinguishment of debt, net of unamortized issuance costs	(599)	(599)	45																		599
Principal amount of notes outstanding				24,872																			0		0		24,872
Mortgage notes, total																																		37,900
Weighted average interest rate (as a percent)															3.15%	2.92%	3.15%	2.92%										6.91%		6.91%
Loan amount																						126,500														80,000	80,000
Number of properties operated						251		6
Repayments of borrowing			$ 38,000																																	$ 42,000

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 19,580	$ 24,638
Accounts receivable, net of allowance of $4,308 and $2,792 at September 30, 2013 and December 31, 2012, respectively	38,226	39,205
Due from related persons	6,884	6,881
Investments in available for sale securities, of which $5,100 and $3,684 are restricted at September 30, 2013 and December 31, 2012, respectively	19,042	12,920
Restricted cash	8,913	6,548
Prepaid expenses and other current assets	34,534	38,318
Assets of discontinued operations	21,499	30,100
Total current assets	148,678	158,610
Property and equipment, net	331,108	337,494
Equity investment in Affiliates Insurance Company	5,781	5,629
Restricted cash	8,184	12,166
Restricted investments in available for sale securities	11,597	10,580
Goodwill and other intangible assets	26,829	27,708
Other long term assets	40,548	40,382
TOTAL ASSETS	572,725	592,569
Current liabilities:
Revolving credit facility, secured, principally by real estate	10,000
Convertible senior notes		24,872
Accounts payable	30,743	38,035
Accrued expenses	26,780	28,010
Accrued compensation and benefits	39,302	35,302
Due to related persons	21,227	19,484
Mortgage notes payable	1,142	1,092
Accrued real estate taxes	14,058	10,723
Security deposit liability	8,493	9,057
Other current liabilities	15,675	14,775
Liabilities of discontinued operations, of which $0 and $7,547 relate to mortgage notes payable at September 30, 2013 and December 31, 2012, respectively	9,232	16,977
Total current liabilities	176,652	198,327
Long term liabilities:
Mortgage notes payable	36,758	37,621
Continuing care contracts	1,635	1,708
Accrued self-insurance obligations	35,148	34,647
Other long term liabilities	5,583	6,712
Total long term liabilities	79,124	80,688
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.01; 75,000,000 shares authorized, 48,271,522 and 48,234,022 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively	482	482
Additional paid in capital	354,956	354,164
Accumulated deficit	(41,715)	(44,455)
Accumulated other comprehensive income	3,226	3,363
Total shareholders' equity	316,949	313,554
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 572,725	$ 592,569

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash flows from operating activities:
Net income	$ 2,740	$ 21,595
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	19,691	18,196
Loss (gain) on early extinguishment of debt	599	(45)
Loss (income) from discontinued operations	5,382	(17,726)
Gain on sale of available for sale securities	(6)	(62)
Equity in earnings of Affiliates Insurance Company	(219)	(236)
Stock-based compensation	792	783
Provision for losses on receivables	4,414	2,958
Changes in assets and liabilities:
Accounts receivable	(3,435)	(3,127)
Prepaid expenses and other assets	3,319	2,296
Accounts payable and accrued expenses	(3,627)	1,199
Accrued compensation and benefits	4,000	7,269
Due from (to) related persons, net	1,740	(5,667)
Other current and long term liabilities	2,970	4,757
Cash provided by operating activities	38,360	32,190
Cash flows from investing activities:
Acquisition of property and equipment	(37,267)	(36,520)
Payments from (to) restricted cash and investment accounts, net	1,617	(6,236)
Purchase of available for sale securities	(13,416)	(5,076)
Proceeds from sales of improvements to Senior Housing Properties Trust	19,934	14,888
Proceeds from sale of available for sale securities	5,925	928
Cash (used in) provided by investing activities	(23,207)	(32,016)
Proceeds from sale of pharmacy business		0
Cash flows from financing activities:
Proceeds from borrowings on credit facilities	60,000	47,500
Repayments of borrowings on credit facilities	(50,000)	(47,500)
Repayments of borrowings on bridge loan from Senior Housing Properties Trust		(38,000)
Purchase and retirement of convertible senior notes	(24,872)	(12,038)
Repayments of mortgage notes payable	(813)	(765)
Cash used in financing activities	(15,685)	(50,803)
Net cash flows from discontinued operations:
Net cash (used in) provided by operating activities	(4,595)	1,463
Net cash provided by investing activities	7,603	35,193
Net cash used in financing activities	(7,534)	(106)
Net cash (used in) provided by discontinued operations	(4,526)	36,550
Change in cash and cash equivalents during the period	(5,058)	(14,079)
Cash and cash equivalents at beginning of period	24,638	28,374
Cash and cash equivalents at end of period	19,580	14,295
Supplemental cash flow information:
Cash paid for interest	2,656	3,711
Cash paid for income taxes	1,775	1,552
Non-cash activities:
Issuance of common stock	$ 182	$ 114

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Related Person Transactions (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended			1 Months Ended	3 Months Ended		9 Months Ended		1 Months Ended	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012	Jul. 31, 2013 RMR item	Sep. 30, 2013 RMR	Sep. 30, 2012 RMR	Sep. 30, 2013 RMR	Sep. 30, 2012 RMR	Jun. 30, 2013 AIC	Sep. 30, 2013 AIC item	Sep. 30, 2012 AIC	Sep. 30, 2013 AIC item	Sep. 30, 2012 AIC	Dec. 31, 2012 AIC
Related person transactions
Business management fees							$ 3,014	$ 3,218	$ 10,175	$ 9,696
Annual rent expense under leases									767
Utilities and real estate taxes	48,743	47,659	145,035	142,451			355	359	1,049	1,067
Number of other current shareholders of the related party												5		5
Ownership percentage												12.50%		12.50%
Amount invested in equity investee												5,209		5,209
Equity investment in Affiliates Insurance Company	5,781		5,781		5,629							5,781		5,781		5,629
Income (loss) arising from investment	64	115	219	236								64	115	219	236
Coverage of property insurance														500,000
Period for which property insurance program was extended											1 year
Annual premiums paid											5,428
Number of entities to whom RMR provides management services						4
Aggregate primary layer coverage of combined directors' and officers' liability insurance policy purchased by the related party						10,000
Aggregate excess layer coverage of combined directors' and officers' liability insurance policy purchased by the related party						5,000
Premium paid for combined directors' and officers' liability insurance policy						$ 133

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Fair Values of Assets and Liabilities (Tables)

9 Months Ended

Sep. 30, 2013

Fair Values of Assets and Liabilities

Schedule of assets measured at fair value, categorized by the level of inputs used in the valuation of each asset

	As of September 30, 2013								As of December 31, 2012
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1) (Restated)		Significant Other Observable Inputs (Level 2) (Restated)		Significant Unobservable Inputs (Level 3)
Cash equivalents (1)	$	13,075	$	13,075	$	—	$	—	$	22,149	$	22,149	$	—	$	—
Available for sale securities: (2)
Equity securities
Financial services industry	3,711		3,711		—		—		6,025		6,025		—		—
Non-equity investment instrument	1,021		1,021		—		—		—		—		—		—
REIT industry	606		606		—		—		484		484		—		—
Utilities industry	512		512		—		—		—		—		—		—
Other	2,177		2,177		—		—		775		775		—		—
Total equity securities	8,027		8,027		—		—		7,284		7,284		—		—
Debt securities
International bond fund (3)	2,322		—		2,322		—		2,345		—		2,345		—
High yield fund (4)	2,233		—		2,233		—		2,168		—		2,168		—
Industrial bonds	5,271		—		5,271		—		5,186		—		5,186		—
Government bonds	7,104		4,574		2,530		—		4,666		4,666		—		—
Energy industry bonds	1,876		—		1,876		—		—		—		—		—
Financial bonds	963		—		963		—		982		—		982		—
Other	2,843		—		2,843		—		869		—		869		—
Total debt securities	22,612		4,574		18,038		—		16,216		4,666		11,550		—
Total available for sale securities	30,639		12,601		18,038		—		23,500		11,950		11,550		—
Total	$	43,714	$	25,676	$	18,038	$	—	$	45,649	$	34,099	$	11,550	$	—

(1) Cash equivalents, consisting of money market funds held principally for obligations arising from our self-insurance programs.

(2) Investments in available for sale securities are reported on our balance sheet as current and long term investments in available for sale securities and are reported at fair value of $19,042 and $11,597, respectively, at September 30, 2013 and $12,920 and $10,580, respectively, at December 31, 2012.  We estimate the fair value of our available for sale securities by reviewing each security’s current market price, the ratings of the security, the financial condition of the issuer and our intent and ability to retain the investment during temporary market price fluctuations or until maturity.   In evaluating the factors described above, we presume a decline in value to be an “other than temporary impairment” if the quoted market price of the security is below the security’s cost basis for an extended period.  However, this presumption may be overcome if there is persuasive evidence indicating the value decline is temporary in nature, such as when the operating performance of the obligor is strong or if the market price of the security is historically volatile.  Additionally, there may be instances in which impairment losses are recognized even if the decline in value does not fall within the criteria described above, such as if we plan to sell the security in the near term and the fair value is below our cost basis.  When we believe that a change in fair value of an available for sale security is temporary, we record a corresponding credit or charge to other comprehensive income for any unrealized gains and losses.  When we determine that an impairment in the fair value of an available for sale security is an “other than temporary impairment”, we record a charge to earnings.

(3) The investment strategy of this fund is to invest principally in fixed income securities.  The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of U.S.dollar investment grade fixed income securities. There are no unfunded commitments and the investment can be redeemed weekly.

(4) The investment strategy of this fund is to invest principally in fixed income securities.  The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of primarily fixed income securities issued by companies with below investment grade ratings.  There are no unfunded commitments and the investment can be redeemed weekly.

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Discontinued Operations (Details) (USD $)	3 Months Ended		9 Months Ended					1 Months Ended		1 Months Ended	3 Months Ended			9 Months Ended	1 Months Ended	3 Months Ended	1 Months Ended	3 Months Ended			0 Months Ended			1 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012	Jun. 30, 2013 Assisted living communities unit property	Jun. 30, 2013 Assisted living communities SNH property unit	Jan. 31, 2014 Assisted living communities SNH Subsequent event property unit	Aug. 31, 2011 Assisted living communities SNH Pennsylvania property unit	Aug. 31, 2011 Assisted living communities SNH Pennsylvania Forecast	Jun. 30, 2013 Senior Living Communities	Sep. 30, 2013 Senior Living Communities SNH property	Jun. 30, 2013 Senior Living Communities SNH property unit	Sep. 30, 2013 Senior Living Communities SNH Forecast	Sep. 30, 2012 Pharmacy business	Sep. 30, 2012 Pharmacy business	Sep. 30, 2012 Pharmacy business South Carolina item	Sep. 30, 2013 Rehabilitation hospitals	Aug. 31, 2013 Rehabilitation hospitals SNH property	Dec. 31, 2013 Rehabilitation hospitals SNH Subsequent event	Dec. 31, 2013 Rehabilitation hospitals SNH and others Subsequent event	Apr. 30, 2013 SNF Michigan property	Dec. 31, 2011 SNF Michigan unit property	Aug. 31, 2013 SNF SNH property unit	Jun. 30, 2013 SNF SNH unit property
Discontinued Operations
Number of properties offered for sale																							2
Number of units in real estate property offered for sale								48															271
Number of real estate properties sold								1														2		1
Sale consideration								$ 2,400,000														$ 8,000,000		$ 2,550,000
HUD mortgage debt to be prepaid by the buyer	0		0		7,547,000																	7,510,000
Number of properties in process of being offered for sale by the related party									1			8
Number of living units in property sold by the related party																								112
Decrease in annual lease rent payable as a percentage of net proceeds of sale								8.75%		9.00%				10.00%										10.00%
Proceeds from sale of pharmacy business															34,298,000
Working capital included in proceeds from sale of business															3,789,000
Gain on sale		23,347,000		23,347,000											23,347,000
Number of pharmacies whose real estate was not acquired by Omnicare																	1
Working capital investment																				10,468,000
Asset impairment charge	1,127,000	644,000	2,358,000	644,000							1,231,000					350,000		1,029,000
Decrease in annual lease rent payable								210,000													11,500,000			255,000
Number of properties to be sold						1	3						10						2						7
Number of living units in property to be sold						32	143		103				721												578
Summary of the operating results of discontinued operations
Revenues	35,198,000	52,526,000	115,332,000	170,653,000
Expenses	(35,552,000)	(55,091,000)	(118,356,000)	(175,630,000)
Gain on sale		23,347,000		23,347,000											23,347,000
Impairment of long lived assets	(1,127,000)	(644,000)	(2,358,000)	(644,000)							(1,231,000)					(350,000)		(1,029,000)
Benefit (provision) for income taxes	556,000	(7,013,000)	2,157,000	(5,962,000)
Net (loss) income	$ (925,000)	$ 13,125,000	$ (5,382,000)	$ 17,726,000

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Restatement of Previously Issued Financial Statements (Tables)

9 Months Ended

Sep. 30, 2013

Restatement of Previously Issued Financial Statements

Schedule of effect of the restatement by financial statement line item

	For the Three Months Ended September 30, 2012
				Error Corrections															Retrospective Adjustments for
	As Reported			Income Taxes			Insurance Claims			Other Errors			Total Error Corrections			As Corrected			Discontinued Operations			As Restated
Consolidated Statement of Income data:
Senior living revenue	$	277,568		$	—		$	—		$	(310	)		(310	)		277,258			(8,613	)	$	268,645
Rehabilitation hospital revenue	26,328			—			—			—			—			26,328			(26,328		)	—
Total revenues	332,420			—			—			(310		)	(310		)	332,110			(34,941		)	297,169
Senior living wages and benefits	137,816			—			—			22			22			137,838			(6,454		)	131,384
Other senior living operating expenses	66,858			—			390			(371		)	19			66,877			(2,298		)	64,579
Rehabilitation hospital expense	23,734			—			—			—			—			23,734			(23,734		)	—
Rent expense	50,523			—			—			—			—			50,523			(2,864		)	47,659
General and administrative	14,602			—			—			45			45			14,647			—			14,647
Depreciation and amortization	6,324			—			—			(20		)	(20		)	6,304			(129		)	6,175
Total operating expenses	327,104			—			390			(324		)	66			327,170			(35,479		)	291,691
Operating income	5,316			—			(390		)	14			(376		)	4,940			538			5,478
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company	3,716			—			(390		)	14			(376		)	3,340			538			3,878
Provision for income taxes	(426		)	(260		)	—			—			(260		)	(686		)	(219		)	(905		)
Income from continuing operations	3,405			(260		)	(390		)	14			(636		)	2,769			319			3,088
Income from discontinued operations	13,034			408			—			2			410			13,444			(319		)	13,125
Net income	16,439			148			(390		)	16			(226		)	16,213			—			16,213
Per Share data:
Basic income per share from:
Continuing operations	$	0.07														$	0.06					$	0.06
Discontinued operations	0.27															0.28						0.28
Net income per share - basic	$	0.34														$	0.34					$	0.34
Diluted income per share from:
Continuing operations	$	0.07														$	0.06					$	0.06
Discontinued operations	0.26															0.27						0.27
Net income per share - diluted	$	0.33														$	0.33					$	0.33

	For the Three Months Ended September 30, 2012
	As Reported		Error Corrections		As Restated
Consolidated Statement of Comprehensive Income:
Net income	16,439		(226	)	16,213
Other comprehensive income (loss):
Unrealized gain on investments in available for sale securities, net of tax	188		(76	)	112
Realized loss (gain) on investments in available for sale securities reclassified and included in net income, net of tax	(63	)	25		(38	)
Unrealized gains on equity investment in Affiliates Insurance Company	35		—		35
Other comprehensive income (loss)	160		(51	)	109
Comprehensive income	16,599		(277	)	16,322

	For the Nine Months Ended September 30, 2012
				Error Corrections															Retrospective Adjustments for
	As Reported			Income Taxes			Insurance Claims			Other Errors			Total Error Corrections			As Corrected			Discontinued Operations			As Restated
Consolidated Statement of Income data:
Senior living revenue	$	831,864		$	—		$	—		$	(677	)	$	(677	)	$	831,187		$	(26,644	)	$	804,543
Rehabilitation hospital revenue	79,501			—			—			—			—			79,501			(79,501		)	—
Total revenues	991,781			—			—			(677		)	(677		)	991,104			(106,144		)	884,960
Senior living wages and benefits	412,808			—			—			58			58			412,866			(19,420		)	393,446
Other senior living operating expenses	200,062			—			390			(861		)	(471		)	199,591			(6,955		)	192,636
Rehabilitation hospital expense	71,725			—			—			—			—			71,725			(71,725		)	—
Rent expense	151,043			—			—			—			—			151,043			(8,592		)	142,451
General and administrative	45,445			—			—			134			134			45,579			1			45,580
Depreciation and amortization	18,631			—			—			(59		)	(59		)	18,572			(376		)	18,196
Total operating expenses	973,099			—			390			(728		)	(338		)	972,761			(107,067		)	865,694
Operating income	18,682			—			(390		)	51			(339		)	18,343			923			19,266
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company	14,534			—			(390		)	51			(339		)	14,195			923			15,118
Provision for income taxes	(4,835		)	(312		)	—			—			(312		)	(5,147		)	(376		)	(5,523		)
Income from continuing operations	9,935			(312		)	(390		)	51			(651		)	9,284			547			9,831
Income from discontinued operations	11,511			796			—			4			800			12,311			(547		)	11,764
Net income	21,446			484			(390		)	55			149			21,595			—			21,595
Per Share data:
Basic income per share from:
Continuing operations	$	0.21														$	0.19					$	0.21
Discontinued operations	0.24															0.26						0.24
Net income per share - basic	$	0.45														$	0.45					$	0.45
Diluted income per share from:
Continuing operations	$	0.21														$	0.19					$	0.21
Discontinued operations	0.24															0.25						0.23
Net income per share - diluted	$	0.45														$	0.44					$	0.44

	For the Nine Months Ended September 30, 2012
	As Reported		Error Corrections		As Restated
Consolidated Statement of Comprehensive Income:
Net income	21,446		149		21,595
Other comprehensive income (loss):
Unrealized gain on investments in available for sale securities, net of tax	469		(189	)	280
Realized loss (gain) on investments in available for sale securities reclassified and included in net income, net of tax	(62	)	25		(37	)
Unrealized gains on equity investment in Affiliates Insurance Company	31		—		31
Other comprehensive income (loss)	438		(164	)	274
Comprehensive income	21,884		(15	)	21,869

	For the Nine Months Ended September 30, 2012
				Error Corrections												Retrospective
	As Reported			Income Taxes		Insurance Claims		Other Errors		Presentation and Classification		Total Error Corrections		As Corrected		Adjustments for Discontinued Operations		As Restated
Consolidated Statement of Cash Flows data:
Net income	$	21,446		484		(390	)	55		—		149		21,595		—		21,595
Depreciation and amortization	18,631			—		—		(59	)	—		(59	)	18,572		(376	)	18,196
Loss from discontinued operations	(11,511		)	—		—		(4	)	(7,134	)	(7,138	)	(18,649	)	923		(17,726	)
Stock-based compensation	649			—		—		134		—		134		783		—		783
Provision for losses on receivables	3,949			—		—		—		—		—		3,949		(991	)	2,958
Changes in assets and liabilities:
Accounts receivable	(2,320		)	—		—		58		286		344		(1,976	)	(1,151	)	(3,127	)
Prepaid expenses and other assets	2,408			(429	)	390		—		(105	)	(144	)	2,264		32		2,296
Accounts payable and accrued expenses	906			(55	)	—		—		(181	)	(236	)	670		529		1,199
Accrued compensation and benefits	9,143			—		—		—		—		—		9,143		(1,874	)	7,269
Due to related persons, net	(5,868		)	—		—		—		201		201		(5,667	)	—		(5,667	)
Other current and long term liabilities	6,145			—		—		(184	)	(201	)	(385	)	5,760		(1,003	)	4,757
Cash provided by operating activities	43,235			—		—		—		(7,134	)	(7,134	)	36,101		(3,911	)	32,190
Acquisition of property and equipment	(40,251		)	—		—		—		—		—		(40,251	)	3,731		(36,520	)
Proceeds from sale of pharmacy business	34,298			—		—		—		(34,298	)	(34,298	)	—		—		0
Proceeds from disposition of property and equipment held for sale	18,249			—		—		—		—		—		18,249		(3,361	)	14,888
Cash provided by investing activities	1,912			—		—		—		(34,298	)	(34,298	)	(32,386	)	370		(32,016	)
Repayments of mortgage notes payable	(871		)	—		—		—		106		106		(765	)	—		(765	)
Cash used in financing activities	(50,909		)	—		—		—		106		106		(50,803	)	—		(50,803	)
Net cash used in operating activities of discontinued operations	(8,317		)	—		—		—		5,869		5,869		(2,448	)	3,911		1,463
Net cash provided by investing activities of discontinued operations	—			—		—		—		35,563		35,563		35,563		(370	)	35,193
Net cash used in financing activities of discontinued operations	—			—		—		—		(106	)	(106	)	(106	)	—		(106	)
Net cash provided by discontinued operations	(8,317		)	—		—		—		41,326		41,326		(33,009	)	3,541		36,550

	As of December 31, 2012
				Error Corrections																				Retrospective Adjustments
	As Reported			Income Taxes			Insurance Claims			Other Errors			Asset Additions and Related Accruals		Presentation and Classification			Total Error Corrections			As Corrected			for Discontinued Operations			As Restated
Consolidated Balance Sheet data:
Accounts receivable	$	53,134		$	—		$	—		$	(331	)	$	—	$	1,391		$	1,060		$	54,194		$	(14,989	)	$	39,205
Due from related persons	—			—			—			—			—		6,881			6,881			6,881			—			6,881
Prepaid and other current assets	29,644			9,507			(1,763		)	—			—		1,681			9,425			39,069			(751		)	38,318
Assets of discontinued operations	10,430			—			—			—			693		—			693			11,123			18,977			30,100
Total current assets	137,314			9,507			(1,763		)	(331		)	693		9,953			18,059			155,373			3,237			158,610
Property and equipment, net	335,612			—			—			110			4,929		—			5,039			340,651			(3,157		)	337,494
Goodwill and other intangible assets	27,788			—			—			—			—		—			—			27,788			(80		)	27,708
Other long term assets	42,267			(1,885		)	—			—			—		—			(1,885		)	40,382			—			40,382
Total assets	571,356			7,622			(1,763		)	(221		)	5,622		9,953			21,213			592,569			—			592,569
Accounts payable	36,920			—			—			—			—		2,768			2,768			39,688			(1,653		)	38,035
Accrued expenses	22,996			(544		)	—			—			4,929		827			5,212			28,208			(198		)	28,010
Accrued compensation and benefits	40,986			—			—			—			—		—			—			40,986			(5,684		)	35,302
Due to related persons	11,715			—			—			—			—		7,769			7,769			19,484			—			19,484
Accrued real estate taxes	11,905			—			—			—			—		(888		)	(888		)	11,017			(294		)	10,723
Security deposit liability	9,727			—			—			(647		)	—		—			(647		)	9,080			(23		)	9,057
Other current liabilities	15,299			—			—			—			—		(523		)	(523		)	14,776			(1		)	14,775
Liabilities of discontinued operations	8,448			—			—			(21		)	693		—			672			9,120			7,857			16,977
Total current liabilities	183,960			(544		)	—			(668		)	5,622		9,953			14,363			198,323			4			198,327
Other long term liabilities	6,615			101			—			—			—		—			101			6,716			(4		)	6,712
Total long term liabilities	80,591			101			—			—			—		—			101			80,692			(4		)	80,688
Additional paid in capital	354,083			—			—			81			—		—			81			354,164			—			354,164
Accumulated deficit	(49,637		)	6,579			(1,763		)	366			—		—			5,182			(44,455		)	—			(44,455		)
Cumulative other comprehensive income	1,877			1,486			—			—			—		—			1,486			3,363			—			3,363
Total shareholders’ equity	306,805			8,065			(1,763		)	447			—		—			6,749			313,554			—			313,554
Total liabilities and shareholders’ equity	$	571,356		$	7,622		$	(1,763	)	$	(221	)	$	5,622	$	9,953		$	21,213		$	592,569		$	—		$	592,569

XML

Basis of Presentation and Organization

9 Months Ended

Sep. 30, 2013

Basis of Presentation and Organization

Basis of Presentation and Organization

Note 1.  Basis of Presentation and Organization

General

The accompanying condensed consolidated financial statements of Five Star Quality Care, Inc. and its subsidiaries, which we refer to as we, us or our, have been prepared without audit.  Certain information and disclosures required by U.S. generally accepted accounting principles 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 financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2012, Items 1, 1A, 2, 6, 7, 9A and 15 of which were subsequently amended and restated to, among other things, correct errors in our accounting for income taxes.  Specifically, the accounting for income tax errors relate to, among other things, the measurement of deferred tax assets for net operating losses and tax credits and the measurement of deferred tax assets and liabilities for temporary differences related to fixed assets, intangible assets and investments.  In addition, as part of the restatement we have corrected certain other errors related to insurance receivables, security deposits, accrual of fixed asset additions, classification of senior living operating expenses, and certain other immaterial items.  We have also corrected the footnote presentation in Note 6 of certain of our available for sale debt securities from Level 1 assets to Level 2 assets as defined in the fair value hierarchy. Those amended and restated items, including our restated financial statements for the years ended December 31, 2012 and 2011 and related interim periods, are included in our Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2012, which was filed with the Securities and Exchange Commission, or SEC, on April 15, 2014.  We refer in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, or this Quarterly Report, to our Annual Report on Form 10-K for the year ended December 31, 2012, as amended and restated in part by our Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2012, as our Annual Report.  We have also restated our condensed consolidated financial statements for the quarters ended March 31, 2013 and June 30, 2013, and those restated financial statements are included in our Amendment No.1 to each of our Quarterly Reports on Form 10-Q/A for the quarters ended March 31, 2013 and June 30, 2013, respectively.  In the opinion of our management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.  All material intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated.  Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

We operate senior living communities, including independent living communities, assisted living communities and skilled nursing facilities, or SNFs.  As of September 30, 2013, we operated 251 senior living communities (excluding those senior living communities we have classified as discontinued operations) located in 31 states containing 29,743 living units, including 220 primarily independent and assisted living communities with 26,921 living units and 31 SNFs with 2,822 living units.  As of September 30, 2013, we owned and operated 30 communities (2,946 living units), we leased and operated 181 communities (20,026 living units) and we managed 40 communities (6,771 living units).  These 251 senior living communities included 10,368 independent living apartments, 14,119 assisted living suites and 5,256 skilled nursing units.  We have excluded from the amounts above 48 living units of one senior living community that has been temporarily closed for renovations, but that senior living community is included in the 251 total senior living communities referenced above.  We have classified as discontinued operations one assisted living community owned and operated by us containing 32 living units as well as six SNFs and four assisted living communities we lease from Senior Housing Properties Trust or its subsidiaries, or SNH, and operate containing 712 living units; the 251 total senior living communities referenced above excludes these 11 communities classified as discontinued operations.

As of September 30, 2013, we also leased from SNH and operated two rehabilitation hospitals with 321 available beds that provide in-patient rehabilitation services to patients at the two hospitals and at three satellite locations.  In addition, as of that date, we leased and operated 13 out-patient clinics affiliated with these rehabilitation hospitals.  On December 31, 2013, we transferred the operations of these rehabilitation hospitals and the affiliated clinics to a third party in connection with SNH’s sale of the real estate associated with these rehabilitation hospitals.  We have classified our rehabilitation hospital business as discontinued operations as of the quarter ended September 30, 2013 (see Notes 9 and 10).

Restatement of Previously Issued Financial Statements

As discussed further in Note 12, we are restating our condensed consolidated financial statements for the three and nine months ended September 30, 2012 and for the year ended December 31, 2012, to correct certain errors in the accounting for income taxes. In addition, as part of the restatement we have corrected certain other errors related to insurance receivables, security deposits, accrual of fixed asset additions, classification of senior living operating expenses and certain other immaterial items. We corrected the presentation and disclosure of our consolidated statements of cash flows to separately identify the net cash flows from discontinued operations, by category and in total. We have also corrected the footnote presentation of certain of our available for sale debt securities from Level 1 assets to Level 2 assets as defined in the fair value hierarchy and corrected the disclosure of the fair value of our mortgage notes payable.

Recently Issued Accounting Pronouncements

In April 2014, the FASB issued Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, or ASU 2014-08.  ASU 2014-08 changes the criteria for reporting a discontinued operation.  Under the new pronouncement, a disposal of a part of an organization that has a major effect on its operations and financial results is a discontinued operation.  We are required to adopt ASU 2014-08 prospectively for all disposals or components of our business classified as held for sale during fiscal periods beginning after December 15, 2014 and are currently evaluating what impact, if any, its adoption will have to the presentation of our condensed consolidated financial statements.

Segment Information

We have three operating segments: senior living communities, rehabilitation and wellness and rehabilitation hospitals. In the senior living community segment, we operate for our own account or manage for the account of SNH independent living communities, assisted living communities and SNFs that are subject to centralized oversight and provide housing and services to elderly residents. Our rehabilitation and wellness operating segment does not meet any of the quantitative thresholds of a reportable segment as prescribed under Financial Accounting Standards Board, or FASB, Accounting Standards CodificationTM, or ASC, Topic 280, and as discussed further in Note 10, our rehabilitation hospital operating segment has been reclassified as discontinued operations. After the reclassification of our rehabilitation hospital business as discontinued operations, our business is comprised of one reportable segment, senior living.  All of our operations and assets are located in the United States, except for the operations of our captive insurance company subsidiary, which participates in our workers’ compensation, professional liability and automobile insurance programs and which is organized in the Cayman Islands.

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
CONDENSED CONSOLIDATED BALANCE SHEETS
Accounts receivable, allowance (in dollars)	$ 4,308	$ 2,792
Investments in available for sale securities, restricted (in dollars)	5,100	3,684
Liabilities of discontinued operations, related to mortgage notes payable (in dollars)	$ 0	$ 7,547
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	75,000,000	75,000,000
Common stock, shares issued	48,271,522	48,234,022
Common stock, shares outstanding	48,271,522	48,234,022

XML

Litigation Settlement

9 Months Ended

Sep. 30, 2013

Litigation Settlement

Litigation Settlement

Note 11.   Litigation Settlement

On May 29, 2012, we entered into a settlement agreement, or the Settlement Agreement, with subsidiaries of Sunrise Senior Living, Inc., or Sunrise, pursuant to which we agreed to settle our long running litigation with Sunrise, involving amounts charged by Sunrise to us for certain insurance programs for senior living communities previously managed by Sunrise for us.  Pursuant to the Settlement Agreement, Sunrise paid us $4,000 in cash and we recorded a gain of $3,365, net of legal fees, in our condensed consolidated statements of income.

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Apr. 14, 2014
Document and Entity Information
Entity Registrant Name	FIVE STAR QUALITY CARE INC
Entity Central Index Key	0001159281
Document Type	10-Q
Document Period End Date	Sep. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	No
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		48,613,442
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3

XML

Restatement of Previously Issued Financial Statements

9 Months Ended

Sep. 30, 2013

Restatement of Previously Issued Financial Statements

Restatement of Previously Issued Financial Statements

Note 12. Restatement of Previously Issued Financial Statements

Subsequent to the issuance of our Annual Report, we identified certain errors primarily related to the accounting for income taxes. The Audit Committee of our Board of Directors, or our Audit Committee, after consideration of relevant facts and circumstances and after consultation with our management, concluded that our consolidated financial statements for the years ended December 31, 2012 and 2011 contained within our Annual Report, and our condensed consolidated financial statements for the quarters ended March 31, 2013 and June 30, 2013 contained within our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, respectively, should be restated, and that those financial statements previously filed with the SEC should no longer be relied upon.

Our condensed consolidated financial statements for the three and nine months ended September 30, 2012 are restated to correct certain errors related to the accounting for income taxes and other errors. We have corrected our condensed consolidated  balance sheet as of December 31, 2012 to reflect the effects of the restatement of our 2012 and 2011 annual financial statements. The accounting for income tax errors relate to, among other things, the measurement of deferred tax assets for net operating losses and tax credits and the measurement of deferred tax assets and liabilities for temporary differences related to fixed assets, intangible assets and investments.

Prior to 2011, we recognized a valuation allowance for most of our net deferred tax assets; therefore, errors in the measurement of our deferred tax assets and liabilities for years prior to 2011 were substantially offset by corresponding errors in the valuation allowance, with minimal net impact to our consolidated financial statements. We have corrected the errors relating to the quarter ended September 30, 2012 by increasing the income tax provision by $260 and $312 for the three and nine months ended September 30, 2012, respectively.

In addition, as part of the restatement, our condensed consolidated financial statements for the three and nine months ended September 30, 2012 also have been adjusted to correct certain other errors in those periods, including:

·      In 2013, we discovered certain errors relating to our security deposit liability.  We have corrected the errors relating to the three and nine months ended September 30, 2012 by increasing senior living revenues by $61 and $184, respectively.

·      In the fourth quarter of 2013, we determined that certain assets acquired and placed into service as of December 31, 2012 were not recorded in the proper time period. We have corrected the balance sheet error by recording $5,622 of fixed asset additions and related accrued liabilities as of December 31, 2012.

·      We also corrected classification errors pertaining to our related party balance sheet accounts by increasing due from related persons by $6,881 and increasing due to related persons by $7,769 at December 31, 2012.

·      We also made certain other immaterial corrections that impacted our condensed consolidated statements of income, including adjustments to general and administrative and depreciation expense, and made other balance sheet classification changes that are not material, individually or in aggregate, in the restated condensed consolidated financial statements included herein.

The net impact of correcting the errors resulted in an increase to our shareholders’ equity of $6,749 at December 31, 2012 and an increase of $272 and $375 to net income for the three and nine months ended September 30, 2012, respectively.

We corrected the presentation and disclosure of our consolidated statements of cash flows to separately identify the net cash flows from discontinued operations, by category and in total.  The restated financial statements include the proceeds from the sale of our pharmacy business of $34,298 for the nine months ended September 30, 2012 as cash provided by investing activities of discontinued operations and reflect the correction of other errors in the separate disclosure of cash flows for continuing operations and discontinued operations.

We have also corrected the footnote presentation in Note 6 of the classification of $11,550 as of December 31, 2012 of our available for sale debt securities from Level 1 assets to Level 2 assets as defined in the fair value hierarchy and corrected the disclosure of the fair value of our mortgage notes payable which increased $9,947 as of December 31, 2012.

In the third quarter of 2013, in connection with entering into a purchase agreement with SNH and certain unrelated parties, we reclassified our rehabilitation hospital business as discontinued operations and our rehabilitation hospital business is retrospectively presented as discontinued operations throughout the financial statements. These reclassifications decreased our income from continuing operations by $319 and $547, and decreased our loss from discontinued operations by those same amounts for the three and nine months ended September 30, 2012, respectively.

The financial information included in the accompanying financial statements and the Notes thereto reflect the effects of the corrections and retrospective adjustments described above.

The following tables summarize the effect of the retrospective adjustments to reflect discontinued operations and the correction of errors by financial statement line item for the three and nine months ended September 30, 2012 and as of December 31, 2012:

	For the Three Months Ended September 30, 2012
				Error Corrections															Retrospective Adjustments for
	As Reported			Income Taxes			Insurance Claims			Other Errors			Total Error Corrections			As Corrected			Discontinued Operations			As Restated
Consolidated Statement of Income data:
Senior living revenue	$	277,568		$	—		$	—		$	(310	)		(310	)		277,258			(8,613	)	$	268,645
Rehabilitation hospital revenue	26,328			—			—			—			—			26,328			(26,328		)	—
Total revenues	332,420			—			—			(310		)	(310		)	332,110			(34,941		)	297,169
Senior living wages and benefits	137,816			—			—			22			22			137,838			(6,454		)	131,384
Other senior living operating expenses	66,858			—			390			(371		)	19			66,877			(2,298		)	64,579
Rehabilitation hospital expense	23,734			—			—			—			—			23,734			(23,734		)	—
Rent expense	50,523			—			—			—			—			50,523			(2,864		)	47,659
General and administrative	14,602			—			—			45			45			14,647			—			14,647
Depreciation and amortization	6,324			—			—			(20		)	(20		)	6,304			(129		)	6,175
Total operating expenses	327,104			—			390			(324		)	66			327,170			(35,479		)	291,691
Operating income	5,316			—			(390		)	14			(376		)	4,940			538			5,478
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company	3,716			—			(390		)	14			(376		)	3,340			538			3,878
Provision for income taxes	(426		)	(260		)	—			—			(260		)	(686		)	(219		)	(905		)
Income from continuing operations	3,405			(260		)	(390		)	14			(636		)	2,769			319			3,088
Income from discontinued operations	13,034			408			—			2			410			13,444			(319		)	13,125
Net income	16,439			148			(390		)	16			(226		)	16,213			—			16,213
Per Share data:
Basic income per share from:
Continuing operations	$	0.07														$	0.06					$	0.06
Discontinued operations	0.27															0.28						0.28
Net income per share - basic	$	0.34														$	0.34					$	0.34
Diluted income per share from:
Continuing operations	$	0.07														$	0.06					$	0.06
Discontinued operations	0.26															0.27						0.27
Net income per share - diluted	$	0.33														$	0.33					$	0.33

	For the Three Months Ended September 30, 2012
	As Reported		Error Corrections		As Restated
Consolidated Statement of Comprehensive Income:
Net income	16,439		(226	)	16,213
Other comprehensive income (loss):
Unrealized gain on investments in available for sale securities, net of tax	188		(76	)	112
Realized loss (gain) on investments in available for sale securities reclassified and included in net income, net of tax	(63	)	25		(38	)
Unrealized gains on equity investment in Affiliates Insurance Company	35		—		35
Other comprehensive income (loss)	160		(51	)	109
Comprehensive income	16,599		(277	)	16,322

	For the Nine Months Ended September 30, 2012
				Error Corrections															Retrospective Adjustments for
	As Reported			Income Taxes			Insurance Claims			Other Errors			Total Error Corrections			As Corrected			Discontinued Operations			As Restated
Consolidated Statement of Income data:
Senior living revenue	$	831,864		$	—		$	—		$	(677	)	$	(677	)	$	831,187		$	(26,644	)	$	804,543
Rehabilitation hospital revenue	79,501			—			—			—			—			79,501			(79,501		)	—
Total revenues	991,781			—			—			(677		)	(677		)	991,104			(106,144		)	884,960
Senior living wages and benefits	412,808			—			—			58			58			412,866			(19,420		)	393,446
Other senior living operating expenses	200,062			—			390			(861		)	(471		)	199,591			(6,955		)	192,636
Rehabilitation hospital expense	71,725			—			—			—			—			71,725			(71,725		)	—
Rent expense	151,043			—			—			—			—			151,043			(8,592		)	142,451
General and administrative	45,445			—			—			134			134			45,579			1			45,580
Depreciation and amortization	18,631			—			—			(59		)	(59		)	18,572			(376		)	18,196
Total operating expenses	973,099			—			390			(728		)	(338		)	972,761			(107,067		)	865,694
Operating income	18,682			—			(390		)	51			(339		)	18,343			923			19,266
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company	14,534			—			(390		)	51			(339		)	14,195			923			15,118
Provision for income taxes	(4,835		)	(312		)	—			—			(312		)	(5,147		)	(376		)	(5,523		)
Income from continuing operations	9,935			(312		)	(390		)	51			(651		)	9,284			547			9,831
Income from discontinued operations	11,511			796			—			4			800			12,311			(547		)	11,764
Net income	21,446			484			(390		)	55			149			21,595			—			21,595
Per Share data:
Basic income per share from:
Continuing operations	$	0.21														$	0.19					$	0.21
Discontinued operations	0.24															0.26						0.24
Net income per share - basic	$	0.45														$	0.45					$	0.45
Diluted income per share from:
Continuing operations	$	0.21														$	0.19					$	0.21
Discontinued operations	0.24															0.25						0.23
Net income per share - diluted	$	0.45														$	0.44					$	0.44

	For the Nine Months Ended September 30, 2012
	As Reported		Error Corrections		As Restated
Consolidated Statement of Comprehensive Income:
Net income	21,446		149		21,595
Other comprehensive income (loss):
Unrealized gain on investments in available for sale securities, net of tax	469		(189	)	280
Realized loss (gain) on investments in available for sale securities reclassified and included in net income, net of tax	(62	)	25		(37	)
Unrealized gains on equity investment in Affiliates Insurance Company	31		—		31
Other comprehensive income (loss)	438		(164	)	274
Comprehensive income	21,884		(15	)	21,869

	For the Nine Months Ended September 30, 2012
				Error Corrections												Retrospective
	As Reported			Income Taxes		Insurance Claims		Other Errors		Presentation and Classification		Total Error Corrections		As Corrected		Adjustments for Discontinued Operations		As Restated
Consolidated Statement of Cash Flows data:
Net income	$	21,446		484		(390	)	55		—		149		21,595		—		21,595
Depreciation and amortization	18,631			—		—		(59	)	—		(59	)	18,572		(376	)	18,196
Loss from discontinued operations	(11,511		)	—		—		(4	)	(7,134	)	(7,138	)	(18,649	)	923		(17,726	)
Stock-based compensation	649			—		—		134		—		134		783		—		783
Provision for losses on receivables	3,949			—		—		—		—		—		3,949		(991	)	2,958
Changes in assets and liabilities:
Accounts receivable	(2,320		)	—		—		58		286		344		(1,976	)	(1,151	)	(3,127	)
Prepaid expenses and other assets	2,408			(429	)	390		—		(105	)	(144	)	2,264		32		2,296
Accounts payable and accrued expenses	906			(55	)	—		—		(181	)	(236	)	670		529		1,199
Accrued compensation and benefits	9,143			—		—		—		—		—		9,143		(1,874	)	7,269
Due to related persons, net	(5,868		)	—		—		—		201		201		(5,667	)	—		(5,667	)
Other current and long term liabilities	6,145			—		—		(184	)	(201	)	(385	)	5,760		(1,003	)	4,757
Cash provided by operating activities	43,235			—		—		—		(7,134	)	(7,134	)	36,101		(3,911	)	32,190
Acquisition of property and equipment	(40,251		)	—		—		—		—		—		(40,251	)	3,731		(36,520	)
Proceeds from sale of pharmacy business	34,298			—		—		—		(34,298	)	(34,298	)	—		—		0
Proceeds from disposition of property and equipment held for sale	18,249			—		—		—		—		—		18,249		(3,361	)	14,888
Cash provided by investing activities	1,912			—		—		—		(34,298	)	(34,298	)	(32,386	)	370		(32,016	)
Repayments of mortgage notes payable	(871		)	—		—		—		106		106		(765	)	—		(765	)
Cash used in financing activities	(50,909		)	—		—		—		106		106		(50,803	)	—		(50,803	)
Net cash used in operating activities of discontinued operations	(8,317		)	—		—		—		5,869		5,869		(2,448	)	3,911		1,463
Net cash provided by investing activities of discontinued operations	—			—		—		—		35,563		35,563		35,563		(370	)	35,193
Net cash used in financing activities of discontinued operations	—			—		—		—		(106	)	(106	)	(106	)	—		(106	)
Net cash provided by discontinued operations	(8,317		)	—		—		—		41,326		41,326		(33,009	)	3,541		36,550

	As of December 31, 2012
				Error Corrections																				Retrospective Adjustments
	As Reported			Income Taxes			Insurance Claims			Other Errors			Asset Additions and Related Accruals		Presentation and Classification			Total Error Corrections			As Corrected			for Discontinued Operations			As Restated
Consolidated Balance Sheet data:
Accounts receivable	$	53,134		$	—		$	—		$	(331	)	$	—	$	1,391		$	1,060		$	54,194		$	(14,989	)	$	39,205
Due from related persons	—			—			—			—			—		6,881			6,881			6,881			—			6,881
Prepaid and other current assets	29,644			9,507			(1,763		)	—			—		1,681			9,425			39,069			(751		)	38,318
Assets of discontinued operations	10,430			—			—			—			693		—			693			11,123			18,977			30,100
Total current assets	137,314			9,507			(1,763		)	(331		)	693		9,953			18,059			155,373			3,237			158,610
Property and equipment, net	335,612			—			—			110			4,929		—			5,039			340,651			(3,157		)	337,494
Goodwill and other intangible assets	27,788			—			—			—			—		—			—			27,788			(80		)	27,708
Other long term assets	42,267			(1,885		)	—			—			—		—			(1,885		)	40,382			—			40,382
Total assets	571,356			7,622			(1,763		)	(221		)	5,622		9,953			21,213			592,569			—			592,569
Accounts payable	36,920			—			—			—			—		2,768			2,768			39,688			(1,653		)	38,035
Accrued expenses	22,996			(544		)	—			—			4,929		827			5,212			28,208			(198		)	28,010
Accrued compensation and benefits	40,986			—			—			—			—		—			—			40,986			(5,684		)	35,302
Due to related persons	11,715			—			—			—			—		7,769			7,769			19,484			—			19,484
Accrued real estate taxes	11,905			—			—			—			—		(888		)	(888		)	11,017			(294		)	10,723
Security deposit liability	9,727			—			—			(647		)	—		—			(647		)	9,080			(23		)	9,057
Other current liabilities	15,299			—			—			—			—		(523		)	(523		)	14,776			(1		)	14,775
Liabilities of discontinued operations	8,448			—			—			(21		)	693		—			672			9,120			7,857			16,977
Total current liabilities	183,960			(544		)	—			(668		)	5,622		9,953			14,363			198,323			4			198,327
Other long term liabilities	6,615			101			—			—			—		—			101			6,716			(4		)	6,712
Total long term liabilities	80,591			101			—			—			—		—			101			80,692			(4		)	80,688
Additional paid in capital	354,083			—			—			81			—		—			81			354,164			—			354,164
Accumulated deficit	(49,637		)	6,579			(1,763		)	366			—		—			5,182			(44,455		)	—			(44,455		)
Cumulative other comprehensive income	1,877			1,486			—			—			—		—			1,486			3,363			—			3,363
Total shareholders’ equity	306,805			8,065			(1,763		)	447			—		—			6,749			313,554			—			313,554
Total liabilities and shareholders’ equity	$	571,356		$	7,622		$	(1,763	)	$	(221	)	$	5,622	$	9,953		$	21,213		$	592,569		$	—		$	592,569

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Revenues:
Senior living revenue	$ 269,839	$ 268,645	$ 807,906	$ 804,543
Management fee revenue	2,290	1,277	6,873	3,667
Reimbursed costs incurred on behalf of managed communities	51,983	27,247	156,194	76,750
Total revenues	324,112	297,169	970,973	884,960
Operating expenses:
Senior living wages and benefits	130,824	131,384	393,641	393,446
Other senior living operating expenses	68,227	64,579	200,317	192,636
Costs incurred on behalf of managed communities	51,983	27,247	156,194	76,750
Rent expense	48,743	47,659	145,035	142,451
General and administrative	15,081	14,647	45,664	45,580
Depreciation and amortization	6,736	6,175	19,691	18,196
Gain on settlement				(3,365)
Total operating expenses	321,594	291,691	960,542	865,694
Operating income	2,518	5,478	10,431	19,266
Interest, dividend and other income	191	199	599	638
Interest and other expense	(1,179)	(1,762)	(3,990)	(4,793)
Acquisition related costs	(78)	(100)	(119)	(100)
(Loss) gain on early extinguishment of debt	(599)		(599)	45
Gain on sale of available for sale securities reclassified from other comprehensive income	36	63	6	62
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company	889	3,878	6,328	15,118
Provision for income taxes	(226)	(905)	(582)	(5,523)
Equity in earnings of Affiliates Insurance Company	64	115	219	236
Income from continuing operations	727	3,088	5,965	9,831
(Loss) income from discontinued operations	(925)	13,125	(5,382)	17,726
Net income (loss)	$ (198)	$ 16,213	$ 2,740	$ 21,595
Weighted average shares outstanding - basic (in shares)	48,272	47,927	48,253	47,913
Weighted average shares outstanding - diluted (in shares)	48,417	49,840	49,571	50,185
Basic income per share from:
Continuing operations (in dollars per share)	$ 0.02	$ 0.06	$ 0.12	$ 0.21
Discontinued operations (in dollars per share)	$ (0.02)	$ 0.28	$ (0.06)	$ 0.24
Net income per share - basic (in dollars per share)		$ 0.34	$ 0.06	$ 0.45
Diluted income per share from:
Continuing operations (in dollars per share)	$ 0.02	$ 0.06	$ 0.12	$ 0.21
Discontinued operations (in dollars per share)	$ (0.02)	$ 0.27	$ (0.06)	$ 0.23
Net income per share - diluted (in dollars per share)		$ 0.33	$ 0.06	$ 0.44

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Fair Values of Assets and Liabilities

9 Months Ended

Sep. 30, 2013

Fair Values of Assets and Liabilities

Fair Values of Assets and Liabilities

Note 6.  Fair Values of Assets and Liabilities

Our assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with ASC Topic 820.  We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels.

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in inactive markets.

Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date. 

The table below presents the assets measured at fair value at September 30, 2013 and December 31, 2012 categorized by the level of inputs used in the valuation of each asset.

	As of September 30, 2013								As of December 31, 2012
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1) (Restated)		Significant Other Observable Inputs (Level 2) (Restated)		Significant Unobservable Inputs (Level 3)
Cash equivalents (1)	$	13,075	$	13,075	$	—	$	—	$	22,149	$	22,149	$	—	$	—
Available for sale securities: (2)
Equity securities
Financial services industry	3,711		3,711		—		—		6,025		6,025		—		—
Non-equity investment instrument	1,021		1,021		—		—		—		—		—		—
REIT industry	606		606		—		—		484		484		—		—
Utilities industry	512		512		—		—		—		—		—		—
Other	2,177		2,177		—		—		775		775		—		—
Total equity securities	8,027		8,027		—		—		7,284		7,284		—		—
Debt securities
International bond fund (3)	2,322		—		2,322		—		2,345		—		2,345		—
High yield fund (4)	2,233		—		2,233		—		2,168		—		2,168		—
Industrial bonds	5,271		—		5,271		—		5,186		—		5,186		—
Government bonds	7,104		4,574		2,530		—		4,666		4,666		—		—
Energy industry bonds	1,876		—		1,876		—		—		—		—		—
Financial bonds	963		—		963		—		982		—		982		—
Other	2,843		—		2,843		—		869		—		869		—
Total debt securities	22,612		4,574		18,038		—		16,216		4,666		11,550		—
Total available for sale securities	30,639		12,601		18,038		—		23,500		11,950		11,550		—
Total	$	43,714	$	25,676	$	18,038	$	—	$	45,649	$	34,099	$	11,550	$	—

(1) Cash equivalents, consisting of money market funds held principally for obligations arising from our self-insurance programs.

(2) Investments in available for sale securities are reported on our balance sheet as current and long term investments in available for sale securities and are reported at fair value of $19,042 and $11,597, respectively, at September 30, 2013 and $12,920 and $10,580, respectively, at December 31, 2012.  We estimate the fair value of our available for sale securities by reviewing each security’s current market price, the ratings of the security, the financial condition of the issuer and our intent and ability to retain the investment during temporary market price fluctuations or until maturity.   In evaluating the factors described above, we presume a decline in value to be an “other than temporary impairment” if the quoted market price of the security is below the security’s cost basis for an extended period.  However, this presumption may be overcome if there is persuasive evidence indicating the value decline is temporary in nature, such as when the operating performance of the obligor is strong or if the market price of the security is historically volatile.  Additionally, there may be instances in which impairment losses are recognized even if the decline in value does not fall within the criteria described above, such as if we plan to sell the security in the near term and the fair value is below our cost basis.  When we believe that a change in fair value of an available for sale security is temporary, we record a corresponding credit or charge to other comprehensive income for any unrealized gains and losses.  When we determine that an impairment in the fair value of an available for sale security is an “other than temporary impairment”, we record a charge to earnings.

(3) The investment strategy of this fund is to invest principally in fixed income securities.  The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of U.S.dollar investment grade fixed income securities. There are no unfunded commitments and the investment can be redeemed weekly.

(4) The investment strategy of this fund is to invest principally in fixed income securities.  The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of primarily fixed income securities issued by companies with below investment grade ratings.  There are no unfunded commitments and the investment can be redeemed weekly.

Our investments in available for sale securities had amortized costs of $28,974 and $21,720 as of September 30, 2013 and December 31, 2012, respectively, had unrealized gains of $1,947 and $2,050 as of September 30, 2013 and December 31, 2012, respectively, and had unrealized losses of $282 and $270 as of September 30, 2013 and December 31, 2012, respectively.  At September 30, 2013, 37 of the securities we hold, with a fair value of $5,391, have been in a loss position for less than 12 months.  At September 30, 2013, none of the securities we hold have been in a loss position for 12 months or longer.  We do not believe these securities are impaired primarily because the financial conditions of the issuers of these securities remain strong with solid fundamentals, we currently intend to hold these securities until recovery and other factors that support our conclusion that the loss is temporary.  During the nine months ended September 30, 2013 and 2012, we received gross proceeds of $5,925 and $928, respectively, in connection with the sales of available for sale securities and recorded gross realized gains totaling $314 and $65, respectively, and gross realized losses totaling $308 and $3, respectively.  We record gains and losses on the sales of our available for sale securities using the specific identification method.

During the nine months ended September 30, 2013, we did not change the type of inputs used to determine the fair value of any of our assets and liabilities that we measure at fair value; however, we did correct the classification of $11,550 of our available for sale debt securities from Level 1 assets to Level 2 assets presented as of December 31, 2012 and corrected the disclosure of the fair value of our mortage notes which increased $9,947 at December 31, 2012. There were no other transfers of assets or liabilities between levels of the fair value hierarchy during the nine months ended September 30, 2013.

The carrying values of accounts receivable and accounts payable approximate fair value as of September 30, 2013 and December 31, 2012.  The carrying value and fair value of the Notes were $24,872 and $24,623, respectively, as of December 31, 2012 and were categorized in Level 2 of the fair value hierarchy in their entirety.  We estimated the fair value of the Notes using an average of the bid and ask prices of our then outstanding Notes.  The carrying value and fair value of our mortgage notes payable were $37,900 and $40,834, respectively, as of September 30, 2013 and $46,260 and $53,115 respectively, as of December 31, 2012 and are categorized in Level 3 of the fair value hierarchy in their entirety.  We estimate the fair values of our mortgage notes payable by using discounted cash flow analyses and currently prevailing market terms as of the measurement date.  Because these Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.  We measured the fair value of our equity investment in AIC, which is an Indiana insurance company that we currently own in equal proportion as each of the other seven shareholders of that company (see Note 9), and categorized that investment in Level 2 of the fair value hierarchy in its entirety, by considering, among other things, the individual assets and liabilities held by AIC, AIC’s overall financial condition and earning trends, and the financial condition and prospects for the insurance industry generally.

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Earnings Per Share

9 Months Ended

Sep. 30, 2013

Earnings Per Share

Earnings Per Share

Note 5.  Earnings Per Share

We computed basic earnings per common share, or EPS, for the three and nine months ended September 30, 2013 and 2012 using the weighted average number of shares of our common stock, $.01 par value per share, or our common shares, outstanding during the periods.  Diluted EPS reflects the more dilutive earnings per common share amount calculated using the two-class method or the treasury stock method. The treasury stock method reflects dilutive potential common shares related to the Notes that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income applicable to common shareholders that would result from their assumed issuance.  The weighted average shares outstanding used to calculate basic and diluted EPS include 540 and 553 unvested common shares as of September 30, 2013 and 2012, respectively, issued to our officers and others under our equity compensation plan, or the Share Award Plan.  Unvested shares issued under the Share Award Plan are deemed participating securities because they participate equally in earnings with all of our other common shares.

The following table provides a reconciliation of income from continuing operations to diluted income (loss) from discontinued operations and a reconciliation of the number of common shares used in the computations of EPS from continuing operations to diluted EPS from continuing operations and diluted loss per share from discontinued operations:

	Three Months Ended September 30,
	2013							2012 (Restated)
	Income (loss)			Shares	Per Share			Income		Shares	Per Share
Income from continuing operations	$	727		48,272	$	0.02		$	3,088	47,927	$	0.06
Effect of the Notes	13			145				149		1,913
Diluted income from continuing operations	$	727		48,417	$	0.02		$	3,237	49,840	$	0.06
Diluted (loss) income from discontinued operations	$	(925	)	48,417	$	(0.02	)	$	13,125	49,840	$	0.27

	Nine Months Ended September 30,
	2013							2012 (Restated)
	Income (loss)			Shares	Per Share			Income		Shares	Per Share
Income from continuing operations	$	5,965		48,253	$	0.12		$	9,831	47,913	$	0.21
Effect of the Notes	344			1,318				528		2,272
Diluted income from continuing operations	$	5,965		49,571	$	0.12		$	9,831	50,185	$	0.21
Diluted (loss) income from discontinued operations	$	(3,225	)	49,571	$	(0.06	)	$	11,764	50,185	$	0.23

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Discontinued Operations (Tables)

9 Months Ended

Sep. 30, 2013

Discontinued Operations

Summary of the operating results of discontinued operations included in the financial statements

	Three months ended September 30,						Nine months ended September 30,
				2012						2012
	2013			(Restated)			2013			(Restated)
Revenues	$	35,198		$	52,526		$	115,332		$	170,653
Expenses	(35,552		)	(55,091		)	(118,356		)	(175,630		)
Gain on sale	—			23,347			—			23,347
Impairment of long-lived assets	(1,127		)	(644		)	(2,358		)	(644		)
Benefit (provision) for income taxes	556			(7,013		)	2,157			(5,962		)
Net (loss) income	$	(925	)	$	13,125		$	(3,225	)	$	11,764

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Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2013

Property and Equipment

Schedule of property and equipment, at cost

	September 30, 2013			December 31, 2012 (Restated)
Land	$	21,714		$	21,714
Buildings and improvements	275,948			277,330
Furniture, fixtures and equipment	113,704			103,707
	411,366			402,751
Accumulated depreciation	(80,258		)	(65,257		)
	$	331,108		$	337,494

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Related Person Transactions

9 Months Ended

Sep. 30, 2013

Related Person Transactions

Related Person Transactions

Note 9. Related Person Transactions

We were formerly a 100% owned subsidiary of SNH, SNH is our largest landlord and our largest stockholder and we manage senior living communities for SNH.  In 2001, SNH distributed substantially all of our then outstanding common shares to its shareholders.  As of September 30, 2013, SNH owned 4,235 of our common shares, or approximately 8.8% of our outstanding common shares.  One of our Managing Directors, Barry Portnoy, is a managing trustee of SNH.  Barry Portnoy’s son, Adam Portnoy, also serves as a managing trustee of SNH.

As of September 30, 2013, we leased 187 senior living communities (including 10 that we have classified as discontinued operations) and two rehabilitation hospitals (which we have also classified as discontinued operations) from SNH.  Under our leases with SNH, we pay SNH minimum rent plus percentage rent based on increases in gross revenues at certain properties.  Our total minimum annual rent payable to SNH as of September 30, 2013 was $199,257, excluding percentage rent.  Our total rent expense (which includes rent for all properties we lease from SNH, including properties that we have classified as discontinued operations) under all of our leases with SNH, net of lease inducement amortization, was $50,622 and $50,119 for the three months ended September 30, 2013 and 2012, respectively, and $152,089 and $149,842 for the nine months ended September 30, 2013 and 2012, respectively.  As of September 30, 2013 and 2012, we had outstanding rent due and payable to SNH of $17,863 and $17,614, respectively.  During the nine months ended September 30, 2013, pursuant to the terms of our leases with SNH, we sold $22,501 of improvements made to properties leased from SNH, and, as a result, our annual rent payable to SNH increased by approximately $1,800.  As of September 30, 2013, our property and equipment included $4,870 for similar improvements we have made to properties we lease from SNH that we expected to request that SNH purchase from us for an increase in future rent; however, we are not obligated to make these sales and SNH is not obligated to purchase those assets.

In August 2013, we and SNH entered into an asset purchase agreement, or the Purchase Agreement, with certain unrelated third parties, pursuant to which SNH agreed to sell the real estate associated with two rehabilitation hospitals and certain related assets, and in connection with such sale, we agreed to transfer the operations of those hospitals and several leased in-patient and out-patient clinics that are affiliated with those hospitals to those third parties.  As a result of the transfer, we retained our net working capital investment in those hospitals of approximately $10,468.  Each hospital was leased to us by SNH under one of our combination leases with SNH, Lease No. 2, and the in-patient and out-patient clinics were leased to us by third parties.  In September 2013, we entered into an amendment to Lease No. 2 in connection with SNH’s agreement to sell the real estate associated with these rehabilitation hospitals and our agreement to transfer our related hospital operations.  The lease amendment provided, among other things, that effective upon the sale of the rehabilitation hospitals pursuant to the Purchase Agreement, Lease No. 2 would terminate with respect to the rehabilitation hospitals and the annual rent we pay to SNH under Lease No. 2 would be reduced by $9,500.  The lease amendment also provided for an allocation of indemnification obligations under the Purchase Agreement between SNH and us.  The transfer of the operations of the rehabilitation hospitals was completed on December 31, 2013.

We and SNH have agreed to offer for sale 10 senior living communities we lease from SNH, which we have classified as discontinued operations.  Our rent payable to SNH will be reduced if and as these sales occur pursuant to terms set in our leases with SNH.  In August 2013, SNH 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, our annual minimum rent payable to SNH decreased by $255, or 10% of the net proceeds of the sale to SNH, in accordance with the terms of the applicable lease with SNH.  In January 2014, SNH sold another one of these communities, an assisted living community with 48 living units, for a sales price of $2,400, and as a result of this sale, our annual minimum rent payable to SNH decreased by $210, or 8.75% of the net proceeds of the sale to SNH, in accordance with the terms of the applicable lease with SNH.  We can provide no assurance that the remaining eight senior living communities that we and SNH have agreed to offer for sale will be sold or what the terms of any sales may provide.

As of September 30, 2013, we managed 40 senior living communities for the account of SNH.  We manage these SNH communities pursuant to long term management agreements on substantially similar terms.  In connection with the management agreements, we and SNH have entered into four combination agreements, or pooling agreements, three pooling agreements that combine our management agreements with SNH for communities consisting only of assisted living units, or the AL Pooling Agreements, and a fourth pooling agreement, which combines our management agreements with SNH for communities that include only independent living units, or the IL Pooling Agreement.  Each of our first and second AL Pooling Agreements includes 20 identified communities (including three assisted living communities that we began managing in October 2013, the management agreements for which are included under the second AL Pooling Agreement).  We and SNH entered into the third AL Pooling Agreement in November 2013 and that pooling agreement currently includes the management agreement for the community we began managing in November 2013, as further described below.  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 the applicable pooling agreement, including determinations of our incentive fees.  The senior living community in New York described below that we manage is not included in any of our Pooling Agreements.  We earned management fees from SNH of $2,290 and $1,284 for the three months ended September 30, 2013 and 2012, respectively, and $6,866 and $3,431 for the nine months ended September 30, 2013 and 2012, respectively.

In August 2013, we began managing for SNH a senior living community in Georgia with 93 assisted living units.  In October 2013, we began managing for SNH three senior living communities with an aggregate of 213 assisted living units; one of those communities is located in Tennessee, and the other two are located in Georgia.  In November 2013, we began managing for SNH a senior living community in Wisconsin with 68 assisted living units.  We entered into separate long term management agreements with SNH for each of those senior living communities on terms similar to those management agreements that we currently have with SNH for senior living communities that include assisted living units.  The management agreements for the senior living communities we began managing in August and October 2013 were added to the second AL Pooling Agreement and the management agreement for the senior living community we began managing in November 2013 was added to the third AL Pooling Agreement.  We expect that we may enter additional management arrangements with SNH for senior living communities that SNH may acquire in the future on terms similar to those management arrangements we currently have with SNH.

We manage a portion of a senior living community in New York that is not subject to the requirements of New York healthcare licensing laws, consisting of 198 living units, pursuant to a long term management agreement with SNH.  The terms of this management agreement are substantially consistent with the terms of our other management agreements with SNH for communities that include assisted living units, except that the management fee payable to us is equal to 5% of the gross revenues realized at that portion of the community, and there is no incentive fee payable to us under this management agreement.  In order to accommodate certain requirements of New York healthcare licensing laws, SNH subleases a portion of this senior living community that is subject to those requirements, consisting of 111 living units, to an entity, D&R Yonkers LLC, which is owned by SNH’s President and Chief Operating Officer and its Treasurer and Chief Financial Officer.  We manage this portion of the community pursuant to a long term management agreement with D&R Yonkers LLC.  Pursuant to that management agreement, D&R Yonkers LLC pays us a management fee equal to 3% of the gross revenues realized at that portion of the community and we are not entitled to any incentive fee under that agreement.

As discussed above in Note 7, in May 2011, we and SNH entered into the Bridge Loan, under which SNH lent to us $80,000.  In April 2012, we repaid in full the then outstanding principal amount under the Bridge Loan, resulting in the termination of the Bridge Loan.  We incurred interest expense and other associated costs on the Bridge Loan of $314 for the nine months ended September 30, 2012.

RMR provides business management and shared services to us pursuant to our business management agreement.  RMR also provides management services to SNH.  One of our Managing Directors, Barry Portnoy, is Chairman, majority owner and an employee of RMR.  Barry Portnoy’s son, Adam Portnoy, is an owner of RMR and serves as President, Chief Executive Officer and a director of RMR.  Our other Managing Director, Gerard Martin, is a director of RMR.  Bruce Mackey, our President and Chief Executive Officer, is an Executive Vice President of RMR and Paul Hoagland, our Treasurer and Chief Financial Officer, is a Senior Vice President of RMR.  SNH’s executive officers are officers of RMR and SNH’s President and Chief Operating Officer is a director of RMR.  Our Independent Directors also serve as independent directors or independent trustees of other public companies to which RMR provides management services.  Barry Portnoy serves as a managing director or managing trustee of those companies, including SNH, and Adam Portnoy serves as a managing trustee of a majority of those companies, including SNH.  In addition, officers of RMR serve as officers of those companies.

Pursuant to our business management agreement with RMR, we recognized aggregate business management, administrative and information system service fees of $3,014 and $3,218 for the three months ended September 30, 2013 and 2012, respectively, and $10,175 and $9,696 for the nine months ended September 30, 2013 and 2012, respectively.  These amounts are included in general and administrative expenses in our condensed consolidated statements of income.  We also lease our headquarters from an affiliate of RMR for annual rent of approximately $767, which amount is subject to fixed increases.  Our rent expense for our headquarters, which included our utilities and real estate taxes that we are required to pay as additional rent, under this lease, was $355 and $359 for the three months ended September 30, 2013 and 2012, respectively, and $1,049 and $1,067 for the nine months ended September 30, 2013 and 2012, respectively.

We, RMR, SNH and five other companies to which RMR provides management services each currently own 12.5% of AIC, an Indiana insurance company.  All of our Directors, all of the trustees and directors of the other publicly held AIC shareholders and nearly all of the directors of RMR 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.

As of September 30, 2013, we have invested $5,209 in AIC since its formation in 2008.  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 Directors are also directors of AIC.  Our investment in AIC had a carrying value of $5,781 and $5,629 as of September 30, 2013 and December 31, 2012, respectively.  We recognized income of $64 and $115 for the three months ended September 30, 2013 and 2012, respectively, and $219 and $236 for the nine months ended September 30, 2013 and 2012, respectively, arising from our investment in AIC. We and the other shareholders of AIC have purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts.  This program was modified and extended in June 2013 for a one year term, and we paid a premium, including taxes and fees, of $5,428 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 this program.  We periodically consider the possibilities for expanding our insurance relationships with AIC to include other types of insurance and may in the future participate in additional insurance offerings AIC may provide or arrange.  We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so.  By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro rata share of any profits of this insurance business.

In July 2013, we, RMR, SNH and four other companies to which RMR provides management services purchased from an unrelated third party insurer a combined directors’ and officers’ liability insurance policy providing $10,000 of aggregate primary layer coverage and $5,000 of aggregate excess layer coverage.  We paid a premium of approximately $133 in connection with this policy.

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Indebtedness

9 Months Ended

Sep. 30, 2013

Indebtedness

Indebtedness

Note 7.  Indebtedness

As of September 30, 2013, we had a $35,000 revolving secured line of credit, or our Credit Agreement, available for general business purposes, including acquisitions.  On December 31, 2013, in connection with the transfer of our rehabilitation hospitals’ operations, we reduced the borrowings available under our Credit Agreement to $25,000 because the accounts receivable generated at the two rehabilitation hospitals were no longer available as collateral.  The maturity date of our Credit Agreement is March 18, 2016.  Borrowings under our Credit Agreement typically bear interest at LIBOR plus a premium of 250 basis points, or 2.68% as of September 30, 2013.  We may draw, repay and redraw funds under our Credit Agreement until maturity, and no principal repayment is due until maturity.  We made no borrowings under our Credit Agreement during the three and nine months ended September 30, 2013 and 2012.  As of April 14, 2014 and September 30, 2013, we had $0 outstanding under our Credit Agreement.  We incurred facility costs related to our Credit Agreement of $35 and $154 for the three months ended September 30, 2013 and 2012, respectively, and $277 and $509 for the nine months ended September 30, 2013 and 2012, respectively.

We are the borrower under our Credit Agreement and certain of our subsidiaries guarantee our obligations under our Credit Agreement, which is secured by our and our guarantor subsidiaries’ accounts receivable and related collateral. Our Credit Agreement provides for acceleration of payment of all amounts outstanding thereunder upon the occurrence and continuation of certain events of default, such as a change of control of us, which includes termination of our business management and shared services agreement, or our business management agreement, with Reit Management & Research LLC, or RMR.

We also have a $150,000 secured revolving credit facility, or our Credit Facility, that is available for general business purposes, including acquisitions.  The maturity date of our Credit Facility is April 13, 2015, and, subject to the payment of extension fees and meeting certain other conditions, our Credit Facility includes options for us to extend its stated maturity date for two one-year periods.  Borrowings under our Credit Facility typically bear interest at LIBOR plus a premium of 250 basis points, or 2.68% as of September 30, 2013.  We may draw, repay and redraw funds under our Credit Facility until maturity, and no principal repayment is due until maturity.  The weighted average interest rate for borrowings under our Credit Facility was 3.15% and 2.92% for the nine months ended September 30, 2013 and September 30, 2012, respectively.  As of April 14, 2014 and September 30, 2013, we had $15,000 and $10,000, respectively, outstanding under our Credit Facility.  We incurred interest expense and other associated costs related to our Credit Facility of $542 and $762 for the three months ended September 30, 2013 and 2012, respectively, and $1,442 and $1,287 for the nine months ended September 30, 2013 and 2012, respectively.

We are the borrower under our Credit Facility, and certain of our subsidiaries guarantee our obligations under our Credit Facility, which is secured by real estate mortgages on 15 senior living communities with 1,549 living units owned by our guarantor subsidiaries and our guarantor subsidiaries’ accounts receivable and related collateral.  Our Credit Facility 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.

Our Credit Agreement and our Credit Facility contain a number of financial and other covenants, including covenants that restrict our ability to incur indebtedness or to pay dividends or make other distributions under certain circumstances and require us to maintain financial ratios and a minimum net worth.  Our Credit Agreement and Credit Facility require that we deliver quarterly and annual financial statements within the time periods specified within those agreements.  The lenders under each of our Credit Agreement and Credit Facility have waived, until April 15, 2014, any default resulting from our not timely delivering our financial statements for the quarter ended September 30, 2013, and until May 15, 2014, any default arising from our not timely delivering our financial statements for the year ended December 31, 2013, as required under those credit facilities.  Our financial statements for the quarter ended September 30, 2013 were delivered to our lenders contemporaneously with the filing of this Quarterly Report.

In October 2006, we issued $126,500 principal amount of the Notes.  Our net proceeds from this issuance were approximately $122,600.  The Notes bore interest at a rate of 3.75% per annum and were convertible into our common shares at any time.  The conversion rate, which was subject to adjustment, was 76.9231 common shares per $1 principal amount of the Notes, which represented a conversion price of $13.00 per share.  The Notes were guaranteed by certain of our wholly owned subsidiaries.  The Notes were scheduled to mature on October 15, 2026.  We could prepay the Notes at any time and the holders had rights to require us to purchase all or a portion of these Notes on each of October 15, 2013, 2016 and 2021 at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest.  We had periodically repurchased Notes in open market transactions or in privately negotiated transactions, and, on July 8, 2013, we redeemed all of the $24,872 principal amount of the Notes then outstanding at a redemption price equal to the principal amount, plus accrued and unpaid interest.  We recorded a loss on early extinguishment of debt, net of unamortized issuance costs, of $599 in the third quarter of 2013.   As of September 30, 2013 and December 31, 2012, we had $0 and $24,872, respectively, principal amount of the Notes outstanding, which were classified as current liabilities in our condensed consolidated balance sheet as of December 31, 2012.  We incurred interest expense and other associated costs related to the Notes of $21 and $245 for the three months ended September 30, 2013 and 2012, respectively, and $511 and $876 for the nine months ended September 30, 2013 and 2012, respectively.

At September 30, 2013, four of our senior living communities were encumbered by mortgage notes with an aggregate outstanding principal balance of $37,900: (1) one of our communities was encumbered by a Federal National Mortgage Association, or FNMA, mortgage note and (2) three of our communities were encumbered by Federal Home Loan Mortgage Corporation, or FMCC, mortgage notes.  These mortgages contain FNMA and FMCC, respectively, standard mortgage covenants.  We recorded a mortgage premium in connection with our assumption of the FNMA and FMCC mortgage notes as part of our acquisitions of the encumbered communities in order to record the assumed mortgage notes at their estimated fair value.  We are amortizing the mortgage premiums as a reduction of interest expense until the maturity of the respective mortgage notes.  The weighted average interest rate on these four notes was 6.91% as of September 30, 2013.  Payments of principal and interest are due monthly until maturities at varying dates ranging from June 2023 to September 2032.  We incurred mortgage interest expense, net of premium amortization, of $581 and $709 for the three months ended September 30, 2013 and 2012, respectively, and $2,425 and $2,134 for the nine months ended September 30, 2013 and 2012, respectively, including some interest expense recorded in discontinued operations.  Our mortgages require monthly payments into escrows for taxes, insurance and property replacement funds; withdrawals from these escrows require applicable FNMA and FMCC approval.  As of September 30, 2013, we believe we were in compliance with all applicable covenants under these mortgages.

In May 2011, we entered into a bridge loan, or the Bridge Loan, agreement with SNH under which SNH agreed to lend us up to $80,000 to fund a part of the purchase price for our acquisitions of certain assets of six senior living communities located in Indiana, or the Indiana Communities. During 2011, we completed our acquisitions of the assets of the Indiana Communities and, in connection with the acquisitions, borrowed $80,000 under the Bridge Loan. During 2011, we repaid $42,000 of this advance with proceeds from a public offering of our common shares and cash generated by operations. In April 2012, we repaid in full the principal amount then outstanding under the Bridge Loan, resulting in termination of the Bridge Loan. We funded the April 2012 repayment of the Bridge Loan with borrowings under our Credit Facility and cash on hand. We incurred interest expense and other associated costs related to the Bridge Loan of $314 for the nine months ended September 30, 2012.

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Off Balance Sheet Arrangements

9 Months Ended

Sep. 30, 2013

Off Balance Sheet Arrangements

Off Balance Sheet Arrangements

Note 8. Off Balance Sheet Arrangements

We have pledged our accounts receivable and certain other assets, with a carrying value, as of September 30, 2013, of $12,706 arising from our operation of 26 properties owned by SNH and leased to us to secure SNH’s borrowings from its lender, FNMA.  As of September 30, 2013, we had no other 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 or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Discontinued Operations

9 Months Ended

Sep. 30, 2013

Discontinued Operations

Discontinued Operations

Note 10.  Discontinued Operations

In 2011, we decided to offer for sale two SNFs we owned located in Michigan with a total of 271 living units.  On April 30, 2013, we sold these two SNFs for an aggregate sales price of $8,000, which included as part of the sales price the prepayment by the buyer of the then outstanding $7,510 of United States Department of Housing and Urban Development mortgage debt that encumbered these SNFs.

In August 2011, we agreed with SNH that SNH should sell one assisted living community we lease from SNH located in Pennsylvania with 103 living units.  We and SNH are in the process of offering this assisted living community for sale and, if sold, our annual minimum rent payable to SNH will decrease by 9.0% of the net proceeds of the sale to SNH, in accordance with the terms of our applicable lease with SNH.

In September 2012, we sold our pharmacy business to Omnicare. We received $34,298 in sale proceeds from Omnicare, including $3,789 in working capital and excluding transaction costs and taxes.  We recorded a pre-tax capital gain on the sale of the pharmacy business of $23,347.  In connection with the sale, Omnicare did not acquire the real estate we owned associated with one pharmacy located in South Carolina.  We intend to sell this real estate and we recorded a $350 asset impairment charge during the third quarter of 2012 to reduce the carrying value of this property to its estimated fair value less costs to sell.  The fair value of assets held for sale is determined based upon the use of appraisals, input from market participants and/or our experience selling similar assets.

In June 2013, we agreed with SNH that SNH will offer for sale 10 senior living communities we lease from SNH with 721 living units.  Seven of these 10 communities with 578 living units are SNFs and three of these 10 communities with 143 living units are assisted living communities.  In August 2013, SNH 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, our annual minimum rent payable to SNH decreased by $255, or 10% of the net proceeds of the sale to SNH, in accordance with the terms of our applicable lease with SNH.  In January 2014, SNH sold another one of these communities, an assisted living community with 48 living units, for a sales price of $2,400, and as a result of this sale, our annual minimum rent payable to SNH decreased by $210, or 8.75% of the net proceeds of the sale to SNH, in accordance with the terms of the applicable lease with SNH.  We and SNH are in the process of offering the other eight communities for sale, and if sold, our annual minimum rent payable to SNH will decrease by 10% of the net proceeds of the sales to SNH, in accordance with the terms of our applicable leases with SNH.  We can provide no assurance that these eight communities will be sold or what the terms or timing for any sale of the communities may be.  We recorded a $1,231 asset impairment charge during the second quarter of 2013 to reduce the assets we own relating to these 10 communities to their estimated fair market values, less costs to sell.

Also in June 2013, we decided to offer for sale one assisted living community we own with 32 living units.  We are in the process of offering this community for sale but we can provide no assurance that this community will be sold or what the terms or timing for any sale of this community may be.

In August 2013, we and SNH entered into the Purchase Agreement with certain unrelated parties, pursuant to which SNH agreed to sell the real estate associated with two rehabilitation hospitals and certain related assets, and in connection with such sale, we agreed to transfer the operations of those hospitals and several leased in-patient and out-patient clinics that are affiliated with those hospitals to those third parties.  As of December 31, 2013, we completed the transfer of our rehabilitation hospital business, and, as a result of the transfer, we retained our net working capital investment in those hospitals of approximately $10,468 and our annual rent payable to SNH and others decreased by approximately $11,500.  We recorded a $1,029 asset impairment charge during the third quarter of 2013 to reduce the fixed assets we own relating to the rehabilitation hospitals to their estimated fair market values.

We have reclassified the condensed consolidated balance sheets, the condensed consolidated statements of income and the consolidated statement of cash flows for all periods presented to show the financial position, results of operations and cash flows of our rehabilitation hospitals, pharmacies and the communities that have been sold or are expected to be sold as discontinued.  Below is a summary of the operating results of these discontinued operations included in the condensed consolidated financial statements for the three and nine months ended September 30, 2013 and 2012:

	Three months ended September 30,						Nine months ended September 30,
				2012						2012
	2013			(Restated)			2013			(Restated)
Revenues	$	35,198		$	52,526		$	115,332		$	170,653
Expenses	(35,552		)	(55,091		)	(118,356		)	(175,630		)
Gain on sale	—			23,347			—			23,347
Impairment of long-lived assets	(1,127		)	(644		)	(2,358		)	(644		)
Benefit (provision) for income taxes	556			(7,013		)	2,157			(5,962		)
Net (loss) income	$	(925	)	$	13,125		$	(3,225	)	$	11,764

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Related Person Transactions (Details) (USD $) Share data in Thousands, unless otherwise specified	3 Months Ended		9 Months Ended				9 Months Ended		0 Months Ended				3 Months Ended		9 Months Ended					1 Months Ended					9 Months Ended								1 Months Ended		1 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013 AL Pooling Agreements property	Sep. 30, 2013 Senior Living Communities unit property	Sep. 30, 2013 Senior Living Communities D&R Yonkers LLC	Aug. 31, 2013 Rehabilitation hospitals property	Dec. 31, 2013 Rehabilitation hospitals Subsequent event property	Sep. 30, 2013 Assisted living communities unit	Jun. 30, 2013 Assisted living communities property	Oct. 31, 2013 Assisted living units Subsequent event property	Sep. 30, 2013 SNH	Sep. 30, 2012 SNH	Sep. 30, 2013 SNH item	Sep. 30, 2012 SNH	Sep. 30, 2012 SNH Bridge Loan	Dec. 31, 2011 SNH Bridge Loan	May 31, 2011 SNH Bridge Loan	Aug. 31, 2013 SNH Senior Living Communities property unit	Sep. 30, 2013 SNH Senior Living Communities property	May 31, 2011 SNH Senior Living Communities property	Jan. 31, 2014 SNH Senior Living Communities Forecast property	Aug. 31, 2013 SNH Senior Living Communities Georgia property	Sep. 30, 2013 SNH Senior Living Communities New York property	Oct. 31, 2013 SNH Senior Living Communities Subsequent event property unit	Oct. 31, 2013 SNH Senior Living Communities Subsequent event Georgia property	Oct. 31, 2013 SNH Senior Living Communities Subsequent event Tennessee property	Nov. 30, 2013 SNH Senior Living Communities Subsequent event Wisconsin property	Sep. 30, 2013 SNH Senior Living Communities D&R Yonkers LLC New York property	Sep. 30, 2013 SNH Rehabilitation hospitals property	Aug. 31, 2013 SNH Rehabilitation hospitals property	Sep. 30, 2013 SNH Rehabilitation hospitals Lease No. 2	Sep. 30, 2013 SNH Assisted living communities property unit	Jan. 31, 2014 SNH Assisted living communities Subsequent event property unit
Related person transactions
Ownership percentage by former parent													100.00%		100.00%
Number of shares owned													4,235		4,235
Percentage of outstanding common shares owned													8.80%		8.80%
Number of real estate properties leased						181		2													187
Number of properties operated						251																6
Number of real estate properties classified as discontinued operations						11															10										2			4
Total minimum annual rent payable													$ 199,257,000		$ 199,257,000
Rent expense under leases, net of lease inducement amortization													50,622,000	50,119,000	152,089,000	149,842,000
Outstanding rent due and payable													17,863,000	17,614,000	17,863,000	17,614,000
Real estate improvements sold															22,501,000
Increase (decrease) in annual lease rent payable															1,800,000
Assets held for sale for increased rent pursuant to the terms of leases with SNH													4,870,000		4,870,000
Working capital investment																																10,468,000
Number of properties to be sold											1																					2
Decrease in annual lease rent payable																				255,000													9,500,000		210,000
Number of real estate properties offered for sale classified as discontinued operations																					10
Number of real estate properties sold									2											1															1
Number of remaining real estate properties classified as discontinued operations																							8
Number of properties managed					20	40						3									40
Number of combination agreements															4
Number of pooling agreement for communities that include assisted living units															3
Management fee revenue	2,290,000	1,277,000	6,873,000	3,667,000									2,290,000	1,284,000	6,866,000	3,431,000
Number of additional properties managed																										3	2	1
Number of units in additional properties managed																										213
Number of units in properties managed						6,771																		93	198				68	111
Management fees receivable under property management agreement as a percentage of gross revenues							3.00%																		5.00%
Incentive fee payable under the management agreement																									0
Number of units in real estate property offered for sale										32										112														712	48
Sales price																				2,550,000															2,400,000
Decrease in annual lease rent payable as a percentage of net proceeds of sale																				10.00%															8.75%
Loan amount																		80,000,000	80,000,000
Interest expense and other associated costs incurred																	$ 314,000

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2013

Earnings Per Share

Schedule of reconciliation of income from continuing operations to diluted income (loss) from discontinued operations and the number of common shares used in the computations of EPS from continuing operations to diluted EPS from continuing operations and diluted loss per share from discontinued operations

	Three Months Ended September 30,
	2013							2012 (Restated)
	Income (loss)			Shares	Per Share			Income		Shares	Per Share
Income from continuing operations	$	727		48,272	$	0.02		$	3,088	47,927	$	0.06
Effect of the Notes	13			145				149		1,913
Diluted income from continuing operations	$	727		48,417	$	0.02		$	3,237	49,840	$	0.06
Diluted (loss) income from discontinued operations	$	(925	)	48,417	$	(0.02	)	$	13,125	49,840	$	0.27

	Nine Months Ended September 30,
	2013							2012 (Restated)
	Income (loss)			Shares	Per Share			Income		Shares	Per Share
Income from continuing operations	$	5,965		48,253	$	0.12		$	9,831	47,913	$	0.21
Effect of the Notes	344			1,318				528		2,272
Diluted income from continuing operations	$	5,965		49,571	$	0.12		$	9,831	50,185	$	0.21
Diluted (loss) income from discontinued operations	$	(3,225	)	49,571	$	(0.06	)	$	11,764	50,185	$	0.23

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Property and Equipment (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Property and Equipment
Property and equipment, gross	$ 411,366		$ 411,366		$ 402,751
Accumulated depreciation	(80,258)		(80,258)		(65,257)
Property and equipment, net	331,108		331,108		337,494
Depreciation expense	6,442	5,889	18,824	16,884
SNH
Property and Equipment
Assets held for sale for increased rent pursuant to the terms of leases with SNH	4,870		4,870
Land
Property and Equipment
Property and equipment, gross	21,714		21,714		21,714
Building and Improvements
Property and Equipment
Property and equipment, gross	275,948		275,948		277,330
Furniture, fixtures and equipment
Property and Equipment
Property and equipment, gross	$ 113,704		$ 113,704		$ 103,707

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$ (198)	$ 16,213	$ 2,740	$ 21,595
Other comprehensive income:
Unrealized gain (loss) on investments in available for sale securities, net of tax	108	112	(65)	280
Unrealized gain (loss) on equity investment in Affiliates Insurance Company	13	35	(68)	31
Realized gain on investments in available for sale securities reclassified and included in net income, net of tax	(22)	(38)	(4)	(37)
Other comprehensive income (loss)	99	109	(137)	274
Comprehensive income (loss)	$ (99)	$ 16,322	$ 2,603	$ 21,869

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Income Taxes

9 Months Ended

Sep. 30, 2013

Income Taxes

Income Taxes

Note 4.  Income Taxes

For the nine months ended September 30, 2013, we recognized tax expense from continuing operations of $582, which includes a tax benefit of $1,468 related to the work opportunity tax credit program that expired in 2012 and was retroactively reinstated on January 3, 2013 and extended by the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013.  As prescribed by FASB ASC Topic 740, Accounting for Income Taxes, the effects of tax law changes are recognized in the period in which new legislation is enacted.  The total effect of the reinstatement of work opportunity tax credits related to 2012 employee wages was required to be recorded as a component of income tax expense in continuing operations during the first quarter of 2013.  For the nine months ended September 30, 2013, we also recognized a tax benefit from discontinued operations of $2,157.  As of December 31, 2012, our federal net operating loss carry forward, which begins to expire in 2026 if unused, was approximately $70,765, and our tax credit carry forward, which begins to expire in 2022 if unused, was approximately $11,729.  Our net operating loss carry forwards and tax credit carry forwards may be subject to audit and adjustments by the Internal Revenue Service.

We maintain a partial valuation allowance against our state net operating losses and certain deferred tax assets related to impaired investments.  When we believe that we will more likely than not realize the benefit of these deferred tax assets, we will record deferred tax assets as an income tax benefit in our condensed consolidated statements of income, which will affect our results of operations.

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Accumulated Other Comprehensive Income (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013
Changes in accumulated other comprehensive income
Balance at the beginning of the period	$ 3,127	$ 3,363	$ 3,363
Unrealized gain (loss) on investments, net of tax	108	(233)	60
Equity interest in investee's unrealized loss on investments	13	(73)	(8)
Reclassification adjustment: Realized (gain) loss on investments, net of tax	(22)	70	(52)
Balance at the end of the period	3,226	3,127	3,363
Equity Investment in Affiliates Insurance Company
Changes in accumulated other comprehensive income
Balance at the beginning of the period	18	91	99
Equity interest in investee's unrealized loss on investments	13	(73)	(8)
Balance at the end of the period	31	18	91
Investments in Available for Sale Securities
Changes in accumulated other comprehensive income
Balance at the beginning of the period	3,109	3,272	3,264
Unrealized gain (loss) on investments, net of tax	108	(233)	60
Reclassification adjustment: Realized (gain) loss on investments, net of tax	(22)	70	(52)
Balance at the end of the period	$ 3,195	$ 3,109	$ 3,272

XML

Restatement of Previously Issued Financial Statements (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012
Other comprehensive income	$ 99	$ 109	$ (137)	$ 274
Proceeds from sale of pharmacy business				0
Mortgage notes payable	1,142		1,142				1,092
Consolidated Statement of Income data:
Senior living revenue	269,839	268,645	807,906	804,543
Total revenues	324,112	297,169	970,973	884,960
Senior living wages and benefits	130,824	131,384	393,641	393,446
Other senior living operating expenses	68,227	64,579	200,317	192,636
Rent expense	48,743	47,659	145,035	142,451
General and administrative	15,081	14,647	45,664	45,580
Depreciation and amortization	6,736	6,175	19,691	18,196
Total operating expenses	321,594	291,691	960,542	865,694
Operating income	2,518	5,478	10,431	19,266
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company	889	3,878	6,328	15,118
Provision for income taxes	(226)	(905)	(582)	(5,523)
Income from continuing operations	727	3,088	5,965	9,831
Income from discontinued operations	(925)	13,125	(5,382)	17,726
Net income	(198)	16,213	2,740	21,595
Basic income per share from:
Continuing operations (in dollars per share)	$ 0.02	$ 0.06	$ 0.12	$ 0.21
Discontinued operations (in dollars per share)	$ (0.02)	$ 0.28	$ (0.06)	$ 0.24
Net income per share - basic (in dollars per share)		$ 0.34	$ 0.06	$ 0.45
Diluted income per share from:
Continuing operations (in dollars per share)	$ 0.02	$ 0.06	$ 0.12	$ 0.21
Discontinued operations (in dollars per share)	$ (0.02)	$ 0.27	$ (0.06)	$ 0.23
Net income per share - diluted (in dollars per share)		$ 0.33	$ 0.06	$ 0.44
Consolidated Statement of Comprehensive Income:
Net income	(198)	16,213	2,740	21,595
Other comprehensive income (loss):
Unrealized gain on investments in available for sale securities, net of tax	108	112	(65)	280
Realized gain on investments in available for sale securities reclassified and included in net income, net of tax	(22)	(38)	(4)	(37)
Unrealized gains on equity investment in Affiliates Insurance Company	13	35	(68)	31
Other comprehensive income (loss)	99	109	(137)	274
Comprehensive income (loss)	(99)	16,322	2,603	21,869
Consolidated Statement of Cash Flows data:
Net income	(198)	16,213	2,740	21,595
Depreciation and amortization			19,691	18,196
Loss from discontinued operations	925	(13,125)	5,382	(17,726)
Stock-based compensation			792	783
Provision for losses on receivables			4,414	2,958
Changes in assets and liabilities:
Accounts receivable			(3,435)	(3,127)
Prepaid expenses and other assets			3,319	2,296
Accounts payable and accrued expenses			(3,627)	1,199
Accrued compensation and benefits			4,000	7,269
Due to related persons, net			1,740	(5,667)
Other current and long term liabilities			2,970	4,757
Cash provided by operating activities			38,360	32,190
Acquisition of property and equipment			(37,267)	(36,520)
Proceeds from disposition of property and equipment held for sale			19,934	14,888
Cash used in investing activities			(23,207)	(32,016)
Repayments of mortgage notes payable			(813)	(765)
Cash used in financing activities			(15,685)	(50,803)
Net cash used in operating activities of discontinued operations			(4,595)	1,463
Net cash provided by investing activities of discontinued operations			7,603	35,193
Net cash used in financing activities of discontinued operations			(7,534)	(106)
Net cash provided by discontinued operations			(4,526)	36,550
Consolidated Balance Sheet data:
Accounts receivable	38,226		38,226				39,205
Due from related persons	6,884		6,884				6,881
Prepaid and other current assets	34,534		34,534				38,318
Assets of discontinued operations	21,499		21,499				30,100
Total current assets	148,678		148,678				158,610
Property and equipment, net	331,108		331,108				337,494
Goodwill and other intangible assets	26,829		26,829				27,708
Other long term assets	40,548		40,548				40,382
Total assets	572,725		572,725				592,569
Accounts payable	30,743		30,743				38,035
Accrued expenses	26,780		26,780				28,010
Accrued compensation and benefits	39,302		39,302				35,302
Due to related persons	21,227		21,227				19,484
Accrued real estate taxes	14,058		14,058				10,723
Security deposit liability	8,493		8,493				9,057
Other current liabilities	15,675		15,675				14,775
Liabilities of discontinued operations	9,232		9,232				16,977
Total current liabilities	176,652		176,652				198,327
Other long term liabilities	5,583		5,583				6,712
Total long term liabilities	79,124		79,124				80,688
Additional paid in capital	354,956		354,956				354,164
Accumulated deficit	(41,715)		(41,715)				(44,455)
Cumulative other comprehensive income	3,226		3,226		3,127	3,363	3,363
Total shareholders' equity	316,949		316,949				313,554
Total liabilities and shareholders' equity	572,725		572,725				592,569
Level 1
Available for sale securities	12,601		12,601				11,950
Level 2
Available for sale securities	18,038		18,038				11,550
Debt securities | Level 1
Available for sale securities	4,574		4,574				4,666
Debt securities | Level 2
Available for sale securities	18,038		18,038				11,550
As Reported
Other comprehensive income		160		438
Proceeds from sale of pharmacy business				34,298
Consolidated Statement of Income data:
Senior living revenue		277,568		831,864
Rehabilitation hospital revenue		26,328		79,501
Total revenues		332,420		991,781
Senior living wages and benefits		137,816		412,808
Other senior living operating expenses		66,858		200,062
Rehabilitation hospital expenses		23,734		71,725
Rent expense		50,523		151,043
General and administrative		14,602		45,445
Depreciation and amortization		6,324		18,631
Total operating expenses		327,104		973,099
Operating income		5,316		18,682
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company		3,716		14,534
Provision for income taxes		(426)		(4,835)
Income from continuing operations		3,405		9,935
Income from discontinued operations		13,034		11,511
Net income		16,439		21,446
Basic income per share from:
Continuing operations (in dollars per share)		$ 0.07		$ 0.21
Discontinued operations (in dollars per share)		$ 0.27		$ 0.24
Net income per share - basic (in dollars per share)		$ 0.34		$ 0.45
Diluted income per share from:
Continuing operations (in dollars per share)		$ 0.07		$ 0.21
Discontinued operations (in dollars per share)		$ 0.26		$ 0.24
Net income per share - diluted (in dollars per share)		$ 0.33		$ 0.45
Consolidated Statement of Comprehensive Income:
Net income		16,439		21,446
Other comprehensive income (loss):
Unrealized gain on investments in available for sale securities, net of tax		188		469
Realized gain on investments in available for sale securities reclassified and included in net income, net of tax		(63)		(62)
Unrealized gains on equity investment in Affiliates Insurance Company		35		31
Other comprehensive income (loss)		160		438
Comprehensive income (loss)		16,599		21,884
Consolidated Statement of Cash Flows data:
Net income		16,439		21,446
Depreciation and amortization				18,631
Loss from discontinued operations		(13,034)		(11,511)
Stock-based compensation				649
Provision for losses on receivables				3,949
Changes in assets and liabilities:
Accounts receivable				(2,320)
Prepaid expenses and other assets				2,408
Accounts payable and accrued expenses				906
Accrued compensation and benefits				9,143
Due to related persons, net				(5,868)
Other current and long term liabilities				6,145
Cash provided by operating activities				43,235
Acquisition of property and equipment				(40,251)
Proceeds from disposition of property and equipment held for sale				18,249
Cash used in investing activities				1,912
Repayments of mortgage notes payable				(871)
Cash used in financing activities				(50,909)
Net cash used in operating activities of discontinued operations				(8,317)
Net cash provided by discontinued operations				(8,317)
Consolidated Balance Sheet data:
Accounts receivable							53,134
Prepaid and other current assets							29,644
Assets of discontinued operations							10,430
Total current assets							137,314
Property and equipment, net							335,612
Goodwill and other intangible assets							27,788
Other long term assets							42,267
Total assets							571,356
Accounts payable							36,920
Accrued expenses							22,996
Accrued compensation and benefits							40,986
Due to related persons							11,715
Accrued real estate taxes							11,905
Security deposit liability							9,727
Other current liabilities							15,299
Liabilities of discontinued operations							8,448
Total current liabilities							183,960
Other long term liabilities							6,615
Total long term liabilities							80,591
Additional paid in capital							354,083
Accumulated deficit							(49,637)
Cumulative other comprehensive income							1,877
Total shareholders' equity							306,805
Total liabilities and shareholders' equity							571,356
Error Corrections
Other comprehensive income		(51)		(164)
Proceeds from sale of pharmacy business				34,298
Consolidated Statement of Income data:
Senior living revenue		(310)		(677)
Total revenues		(310)		(677)
Senior living wages and benefits		22		58
Other senior living operating expenses		19		(471)
General and administrative		45		134
Depreciation and amortization		(20)		(59)
Total operating expenses		66		(338)
Operating income		(376)		(339)
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company		(376)		(339)
Provision for income taxes		(260)		(312)
Income from continuing operations		(319)		(547)
Income from discontinued operations		(319)		7,138
Net income		(226)		149
Increase to net income		272		375
Consolidated Statement of Comprehensive Income:
Net income		(226)		149
Other comprehensive income (loss):
Unrealized gain on investments in available for sale securities, net of tax		(76)		(189)
Realized gain on investments in available for sale securities reclassified and included in net income, net of tax		25		25
Other comprehensive income (loss)		(51)		(164)
Comprehensive income (loss)		(277)		(15)
Consolidated Statement of Cash Flows data:
Net income		(226)		149
Depreciation and amortization				(59)
Loss from discontinued operations		319		(7,138)
Stock-based compensation				134
Changes in assets and liabilities:
Accounts receivable				344
Prepaid expenses and other assets				(144)
Accounts payable and accrued expenses				(236)
Due to related persons, net				201
Other current and long term liabilities				(385)
Cash provided by operating activities				(7,134)
Cash used in investing activities				(34,298)
Repayments of mortgage notes payable				106
Cash used in financing activities				106
Net cash used in operating activities of discontinued operations				5,869
Net cash provided by investing activities of discontinued operations				35,563
Net cash used in financing activities of discontinued operations				(106)
Net cash provided by discontinued operations				41,326
Consolidated Balance Sheet data:
Accounts receivable							1,060
Due from related persons							6,881
Prepaid and other current assets							9,425
Assets of discontinued operations							693
Total current assets							18,059
Property and equipment, net							5,039
Other long term assets							(1,885)
Total assets							21,213
Accounts payable							2,768
Accrued expenses							5,212
Due to related persons							7,769
Accrued real estate taxes							(888)
Security deposit liability							(647)
Other current liabilities							(523)
Liabilities of discontinued operations							672
Total current liabilities							14,363
Other long term liabilities							101
Total long term liabilities							101
Additional paid in capital							81
Accumulated deficit							5,182
Cumulative other comprehensive income							1,486
Total shareholders' equity							6,749
Total liabilities and shareholders' equity							21,213
As Corrected
Consolidated Statement of Income data:
Senior living revenue		277,258		831,187
Rehabilitation hospital revenue		26,328		79,501
Total revenues		332,110		991,104
Senior living wages and benefits		137,838		412,866
Other senior living operating expenses		66,877		199,591
Rehabilitation hospital expenses		23,734		71,725
Rent expense		50,523		151,043
General and administrative		14,647		45,579
Depreciation and amortization		6,304		18,572
Total operating expenses		327,170		972,761
Operating income		4,940		18,343
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company		3,340		14,195
Provision for income taxes		(686)		(5,147)
Income from continuing operations		2,769		9,284
Income from discontinued operations		13,444		18,649
Net income		16,213		21,595
Basic income per share from:
Continuing operations (in dollars per share)		$ 0.06		$ 0.19
Discontinued operations (in dollars per share)		$ 0.28		$ 0.26
Net income per share - basic (in dollars per share)		$ 0.34		$ 0.45
Diluted income per share from:
Continuing operations (in dollars per share)		$ 0.06		$ 0.19
Discontinued operations (in dollars per share)		$ 0.27		$ 0.25
Net income per share - diluted (in dollars per share)		$ 0.33		$ 0.44
Consolidated Statement of Comprehensive Income:
Net income		16,213		21,595
Consolidated Statement of Cash Flows data:
Net income		16,213		21,595
Depreciation and amortization				18,572
Loss from discontinued operations		(13,444)		(18,649)
Stock-based compensation				783
Provision for losses on receivables				3,949
Changes in assets and liabilities:
Accounts receivable				(1,976)
Prepaid expenses and other assets				2,264
Accounts payable and accrued expenses				670
Accrued compensation and benefits				9,143
Due to related persons, net				(5,667)
Other current and long term liabilities				5,760
Cash provided by operating activities				36,101
Acquisition of property and equipment				(40,251)
Proceeds from disposition of property and equipment held for sale				18,249
Cash used in investing activities				(32,386)
Repayments of mortgage notes payable				(765)
Cash used in financing activities				(50,803)
Net cash used in operating activities of discontinued operations				(2,448)
Net cash provided by investing activities of discontinued operations				35,563
Net cash used in financing activities of discontinued operations				(106)
Net cash provided by discontinued operations				33,009
Consolidated Balance Sheet data:
Accounts receivable							54,194
Due from related persons							6,881
Prepaid and other current assets							39,069
Assets of discontinued operations							11,123
Total current assets							155,373
Property and equipment, net							340,651
Goodwill and other intangible assets							27,788
Other long term assets							40,382
Total assets							592,569
Accounts payable							39,688
Accrued expenses							28,208
Accrued compensation and benefits							40,986
Due to related persons							19,484
Accrued real estate taxes							11,017
Security deposit liability							9,080
Other current liabilities							14,776
Liabilities of discontinued operations							9,120
Total current liabilities							198,323
Other long term liabilities							6,716
Total long term liabilities							80,692
Additional paid in capital							354,164
Accumulated deficit							(44,455)
Cumulative other comprehensive income							3,363
Total shareholders' equity							313,554
Total liabilities and shareholders' equity							592,569
Retrospective Adjustments for Discontinued Operations
Consolidated Statement of Income data:
Senior living revenue		(8,613)		(26,644)
Rehabilitation hospital revenue		(26,328)		(79,501)
Total revenues		(34,941)		(106,144)
Senior living wages and benefits		(6,454)		(19,420)
Other senior living operating expenses		(2,298)		(6,955)
Rehabilitation hospital expenses		(23,734)		(71,725)
Rent expense		(2,864)		(8,592)
General and administrative				1
Depreciation and amortization		(129)		(376)
Total operating expenses		(35,479)		(107,067)
Operating income		538		923
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company		538		923
Provision for income taxes		(219)		(376)
Income from continuing operations		319		547
Income from discontinued operations		(319)		(923)
Consolidated Statement of Cash Flows data:
Depreciation and amortization				(376)
Loss from discontinued operations		319		923
Provision for losses on receivables				(991)
Changes in assets and liabilities:
Accounts receivable				(1,151)
Prepaid expenses and other assets				32
Accounts payable and accrued expenses				529
Accrued compensation and benefits				(1,874)
Other current and long term liabilities				(1,003)
Cash provided by operating activities				(3,911)
Acquisition of property and equipment				3,731
Proceeds from disposition of property and equipment held for sale				(3,361)
Cash used in investing activities				370
Net cash used in operating activities of discontinued operations				3,911
Net cash provided by investing activities of discontinued operations				(370)
Net cash provided by discontinued operations				3,541
Consolidated Balance Sheet data:
Accounts receivable							(14,989)
Prepaid and other current assets							(751)
Assets of discontinued operations							18,977
Total current assets							3,237
Property and equipment, net							(3,157)
Goodwill and other intangible assets							(80)
Accounts payable							(1,653)
Accrued expenses							(198)
Accrued compensation and benefits							(5,684)
Accrued real estate taxes							(294)
Security deposit liability							(23)
Other current liabilities							(1)
Liabilities of discontinued operations							7,857
Total current liabilities							4
Other long term liabilities							(4)
Total long term liabilities							(4)
Income Taxes | Error Corrections
Consolidated Statement of Income data:
Provision for income taxes		(260)		(312)
Income from continuing operations		(260)		(312)
Income from discontinued operations		408		4
Net income		148		484
Consolidated Statement of Comprehensive Income:
Net income		148		484
Consolidated Statement of Cash Flows data:
Net income		148		484
Loss from discontinued operations		(408)		(4)
Changes in assets and liabilities:
Prepaid expenses and other assets				(429)
Accounts payable and accrued expenses				(55)
Cash provided by operating activities				(7,134)
Repayments of mortgage notes payable				106
Cash used in financing activities				106
Net cash used in operating activities of discontinued operations				5,869
Net cash used in financing activities of discontinued operations				(106)
Consolidated Balance Sheet data:
Prepaid and other current assets							9,507
Total current assets							9,507
Other long term assets							(1,885)
Total assets							7,622
Accrued expenses							(544)
Total current liabilities							(544)
Other long term liabilities							101
Total long term liabilities							101
Accumulated deficit							6,579
Cumulative other comprehensive income							1,486
Total shareholders' equity							8,065
Total liabilities and shareholders' equity							7,622
Insurance Claims | Error Corrections
Consolidated Statement of Income data:
Other senior living operating expenses		390		390
Total operating expenses		390		390
Operating income		(390)		(390)
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company		(390)		(390)
Income from continuing operations		(390)		(390)
Net income		(390)		(390)
Consolidated Statement of Comprehensive Income:
Net income		(390)		(390)
Consolidated Statement of Cash Flows data:
Net income		(390)		(390)
Changes in assets and liabilities:
Prepaid expenses and other assets				(390)
Consolidated Balance Sheet data:
Prepaid and other current assets							(1,763)
Total current assets							(1,763)
Total assets							(1,763)
Accumulated deficit							(1,763)
Total shareholders' equity							(1,763)
Total liabilities and shareholders' equity							(1,763)
Other Errors | Error Corrections
Increase (decrease) in security deposit liability		(61)		(184)
Consolidated Statement of Income data:
Senior living revenue		(310)		(677)
Total revenues		(310)		(677)
Senior living wages and benefits		22		58
Other senior living operating expenses		(371)		(861)
General and administrative		45		134
Depreciation and amortization		(20)		(59)
Total operating expenses		(324)		(728)
Operating income		14		51
Income from continuing operations before income taxes and equity in earnings of Affiliates Insurance Company		14		51
Income from continuing operations		14		51
Income from discontinued operations		2		7,134
Net income		16		55
Consolidated Statement of Comprehensive Income:
Net income		16		55
Consolidated Statement of Cash Flows data:
Net income		16		55
Depreciation and amortization				(59)
Loss from discontinued operations		(2)		(7,134)
Stock-based compensation				134
Changes in assets and liabilities:
Accounts receivable				58
Other current and long term liabilities				(184)
Consolidated Balance Sheet data:
Accounts receivable							(331)
Total current assets							(331)
Property and equipment, net							110
Total assets							(221)
Security deposit liability		(61)		(61)
Liabilities of discontinued operations							(21)
Total current liabilities							(668)
Additional paid in capital							81
Accumulated deficit							(668)
Total shareholders' equity							447
Total liabilities and shareholders' equity							(221)
Asset Additions and Related Accruals | Error Corrections
Consolidated Balance Sheet data:
Assets of discontinued operations							693
Total current assets							693
Property and equipment, net							5,622
Total assets							5,622
Accrued expenses							5,622
Liabilities of discontinued operations							693
Total current liabilities							5,622
Total liabilities and shareholders' equity							5,622
Presentation and Classification | Error Corrections
Proceeds from sale of pharmacy business				34,298
Mortgage notes payable							9,947
Changes in assets and liabilities:
Accounts receivable				286
Prepaid expenses and other assets				(105)
Accounts payable and accrued expenses				(181)
Due to related persons, net				201
Other current and long term liabilities				(201)
Cash used in investing activities				(34,298)
Net cash provided by investing activities of discontinued operations				35,563
Net cash provided by discontinued operations				41,326
Consolidated Balance Sheet data:
Accounts receivable							1,391
Due from related persons							6,881
Prepaid and other current assets							1,681
Total current assets							9,953
Total assets							9,953
Accounts payable							2,768
Accrued expenses							827
Due to related persons							7,769
Accrued real estate taxes							(888)
Other current liabilities							(523)
Total current liabilities							9,953
Total liabilities and shareholders' equity							9,953
Presentation and Classification | Error Corrections | Debt securities | Level 1
Available for sale securities							(11,550)
Presentation and Classification | Error Corrections | Debt securities | Level 2
Available for sale securities							$ 11,550

XML

Accumulated Other Comprehensive Income (Tables)

9 Months Ended

Sep. 30, 2013

Accumulated Other Comprehensive Income

Schedule of changes in accumulated other comprehensive income, net of tax

	Equity Investment in Affiliates Insurance Company			Investments in Available for Sale Securities (Restated)			Accumulated Other Comprehensive Income (Restated)
Balance at January 1, 2013	$	99		$	3,264		$	3,363
Unrealized gain on investments, net of tax	—			60			60
Equity interest in investee’s unrealized loss on investments	(8		)	—			(8		)
Reclassification adjustment:
Realized gain on investments, net of tax	—			(52		)	(52		)
Balance at March 31, 2013	$	91		$	3,272		$	3,363
Unrealized loss on investments, net of tax	—			(233		)	(233		)
Equity interest in investee’s unrealized loss on investments	(73		)	—			(73		)
Reclassification adjustment:
Realized loss on investments, net of tax	—			70			70
Balance at June 30, 2013	$	18		$	3,109		$	3,127
Unrealized gain on investments, net of tax	—			108			108
Equity interest in investee’s unrealized gain on investments	13			—			13
Reclassification adjustment:
Realized gain on investments, net of tax	—			(22		)	(22		)
Balance at September 30, 2013	$	31		$	3,195		$	3,226