10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 2006

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 of Incorporation)	(IRS Employer Identification No.)

400 Centre Street, Newton, Massachusetts 02458

(Address of Principal Executive Offices)

617-796-8387

(Registrant’s Telephone Number)

Securities to be registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock	American Stock Exchange

Securities to be registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  o  No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  o  No  x

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  x  No  o

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

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

Large accelerated filer  o  Accelerated filer  x  Non-accelerated filer  o

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

The aggregate market value of the voting shares of the registrant held by non-affiliates was $343.4 million based on the $11.07 closing price per common share on the American Stock Exchange on June 30, 2006.   For purposes of this calculation, an aggregate of 557,582.6 shares of common stock are held by the directors and officers of the registrant and have been included in the number of shares of common stock held by affiliates, which includes 35,000 shares of common stock held by Senior Housing Properties Trust.

Number of the registrant’s shares of common stock outstanding as of March 5, 2007: 31,684,134.

In this Annual Report on Form 10-K, the terms the “Company,” “Five Star”, “FVE”, “we”, “us” or “our” include Five Star Quality Care, Inc., and its consolidated subsidiaries, unless the context indicates otherwise.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required in Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K is incorporated by reference from our definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 15, 2007, or our definitive Proxy Statement.

WARNING CONCERNING FORWARD LOOKING STATEMENTS

THIS ANNUAL REPORT CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER FEDERAL 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.  ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.

IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN OUR FORWARD LOOKING STATEMENTS ARE:

·THE TERMINATION OF OUR MANAGEMENT AGREEMENTS WITH SUNRISE SENIOR LIVING SERVICES, INC., OR SLS, MAY NOT IMPROVE OUR FINANCIAL RESULTS OR MAY CAUSE US TO EXPERIENCE OPERATING LOSSES.  ALTHOUGH OUR EXPECTATION IS OTHERWISE, WE MAY BE UNABLE TO OPERATE THE COMMUNITIES SLS MANAGED FOR US AS PROFITABLY AS THEY WERE OPERATED BY SLS; AND

·OPERATING MARGINS FOR OUR TWO REHABILITATION HOSPITALS MAY BE LOWER THAN WE CURRENTLY ANTICIPATE OR MAY DECLINE.  WE MAY BE UNABLE TO OPERATE THESE HOSPITALS PROFITABLY AND WE MAY EXPERIENCE LOSSES FROM OUR OPERATION OF THESE HOSPITALS.  ALSO, THE PERCENTAGE OF PATIENTS AT THESE HOSPITALS WHICH MEET CERTAIN MEDICARE REQUIREMENTS MAY NOT BE AS HIGH AS WE CURRENTLY ANTICIPATE OR MAY DECLINE AND, AS A RESULT, THESE HOSPITALS MAY RECEIVE LOWER MEDICARE RATES THAN WE CURRENTLY ANTICIPATE.

OTHER RISKS MAY ADVERSELY IMPACT US, AS DESCRIBED MORE FULLY IN THIS ANNUAL REPORT UNDER “ITEM 1A. RISK FACTORS.”

YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.

EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

FIVE STAR QUALITY CARE, INC.
2006 ANNUAL REPORT ON FORM 10-K

Table of Contents

	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	19
Item 3.	Legal Proceedings	22
Item 4.	Submission of Matters to a Vote of Security Holders	23
	PART II
Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24
Item 6.	Selected Financial Data	25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 8.	Financial Statements and Supplementary Data	39
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	39
Item 9A.	Controls and Procedures	39
Item 9B.	Other Information	39
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	40
Item 11.	Executive Compensation*	40
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	40
Item 13.	Certain Relationships and Related Transactions, and Director Independence*	40
Item 14.	Principal Accountant Fees and Services*	40
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	41

* Incorporated by reference from our Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 15, 2007, to be filed pursuant to Regulation 14A.

PART I

Item 1.   Business

GENERAL

We operate senior living communities, including independent living and congregate care communities, assisted living communities and nursing homes. As of December 31, 2006, we operated 162 communities containing 18,117 living units, including 113 primarily independent and assisted living communities containing 13,701 living units and 49 nursing homes containing 4,416 living units. Of our 113 primarily independent and assisted living communities, we leased 97 communities containing 12,498 living units from Senior Housing Properties Trust, or Senior Housing, our former parent, and we own or lease from parties other than Senior Housing 16 communities containing 1,203 living units. We lease all but two of our nursing homes from Senior Housing. Our 162 communities include 5,601 independent living apartments, 6,541 assisted living suites and 5,975 skilled nursing beds. We also operate six institutional pharmacies, one of which provides mail order pharmaceuticals to the general public, and we operate two rehabilitation hospitals that we lease from Senior Housing. Our two rehabilitation hospitals contain 342 beds available for inpatient services and 21 affiliated outpatient clinics. Our principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is (617) 796-8387.

OUR HISTORY

Spin off from Senior Housing

We were created by Senior Housing in April 2000 to operate nursing homes repossessed or acquired from two former Senior Housing tenants. We were incorporated in Delaware in April 2000 and reincorporated in Maryland on September 17, 2001. On December 31, 2001, Senior Housing distributed substantially all of our outstanding shares to its shareholders and we became a separate publicly owned company listed on the American Stock Exchange, or AMEX. Pursuant to the transaction agreement governing this spin off:

·Senior Housing capitalized us with approximately $50.0 million of equity, consisting of cash and working capital, primarily operating receivables, net of operating payables;

·we agreed to lease 31 primarily independent and assisted living communities then operated by Marriott Senior Living Services, Inc., or MSLS, a wholly owned subsidiary of Marriott International Inc., or Marriott, upon their acquisition by Senior Housing which occurred in 2002, as described below;

·we leased 53 nursing homes and two assisted living communities from Senior Housing;

·we assumed one lease from the town of Campbell, Nebraska; and

·we agreed to acquire FSQ, Inc., or FSQ, the former operating company of the healthcare business we owned in order to acquire the personnel, systems and assets necessary for our business.

In 2002, we commenced operations at 51 senior living communities, including the 31 communities then operated by MSLS, and subsequently operated by SLS, a wholly owned subsidiary of Sunrise Senior Living, Inc., or Sunrise, and 20 additional communities. In 2003, we commenced operations at three senior living communities which we lease from Senior Housing.

Acquisitions

In November 2004, we acquired 100% of the capital stock of LTA Holdings, Inc., or LTA, for approximately $211.0 million, excluding closing costs. LTA owned, leased and operated 47 senior living communities with 2,636 living units, which primarily offer assisted living services, located in seven states. In addition, LTA had two management contracts with third parties for 12 assisted living communities. We terminated one contract for 11 of these communities on March 1, 2005.

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In March 2005, we acquired a 62 unit assisted living community located in Georgia for approximately $6.9 million. In June 2005, we acquired six assisted living communities for approximately $59.0 million. In order to finance this acquisition, we sold four senior living communities to Senior Housing in June 2005 for $24.0 million and Senior Housing leased these communities back to us for initial rent of $2.2 million per year. In August 2005, we sold the six communities to Senior Housing for net proceeds of $56.7 million and Senior Housing leased these communities back to us for initial rent of $5.2 million per year.

Between September and December 2006, we agreed to lease from Senior Housing 11 senior living communities with 1,284 units that Senior Housing acquired from third parties. Six of these communities are assisted living communities (three of which offer some skilled nursing services), three are independent living communities and two are continuing care retirement communities which offer independent living, assisted living and skilled nursing services. Our rent payable to Senior Housing for these 11 communities is $9.0 million per year, plus future increases calculated as a percentage of the revenue increases at these communities after 2007. We added these communities to our existing lease with Senior Housing which has a current term ending in 2020, plus renewal options thereafter. Residents pay substantially all of our charges at these communities from their private resources.

Pharmacies

Between September 2003 and November 2006, we acquired a total of six institutional pharmacies located in Wisconsin, Nebraska, California, South Carolina and Virginia.

Rehabilitation Hospitals

In February 2006, we agreed to lease two rehabilitation hospitals from Senior Housing. We commenced operations at these two hospitals on October 1, 2006. Our lease with Senior Housing for these two hospitals expires on June 30, 2026, subject to our right to extend the term of the lease for an additional 20 years. These two hospitals provide health rehabilitation services and are located in Braintree and Woburn, Massachusetts. Our rent payable to Senior Housing for these hospitals is $10.3 million per year. These hospitals offer extensive inpatient and outpatient services that we believe are similar to services we currently provide in many of our senior living communities.

Termination of SLS Management Agreements

During 2005 and 2006, we terminated management agreements for the 30 senior living communities that SLS managed for us and began to directly operate these communities for our own account. In connection with these terminations, we paid SLS termination fees totaling $216.1 million. We no longer pay management fees to SLS.

Discontinued Operations

During 2003 and 2004, we ceased operations at one skilled nursing facility which we previously leased from Senior Housing and seven assisted living facilities, one of which we previously leased from Senior Housing.

During 2005, we ceased operations at one assisted living community in Los Angeles, California, and one skilled nursing facility in Milwaukee, Wisconsin. We leased this community and this facility from Senior Housing.  Senior Housing sold the assisted living community in California in December 2005 for net proceeds of approximately $2.6 million, which caused a $260,000 reduction in the annual minimum rent we pay to Senior Housing in accordance with our lease terms. Senior Housing sold the skilled nursing facility located in Wisconsin in December 2006 for net proceeds of approximately $1.3 million, which caused a $130,000 reduction in the annual minimum rent we pay to Senior Housing in accordance with our lease terms.

During 2006, we ceased operations at two skilled nursing facilities located in Connecticut that we leased from Senior Housing. Senior Housing sold these facilities in November 2006 for net proceeds of approximately $5.6 million, which caused a $559,000 reduction in the annual minimum rent we pay to Senior Housing in accordance with our lease terms.

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Equity and Debt Financings

In 2002, we issued 3,823,000 shares of our common stock, or common shares, in an underwritten public offering raising net proceeds of $26.1 million. In December 2004 and January 2005, we issued 3,620,000 common shares in an underwritten public offering raising net proceeds of $28.8 million. In 2005, we issued 7,750,000 common shares in an underwritten public offering raising net proceeds of $55.6 million. In 2006, we issued 11,500,000 common shares in an underwritten public offering raising net proceeds of $114.1 million and we issued in a private placement $126.5 million principal amount of our 3.75% Convertible Senior Notes due 2026. The notes bear interest at 3.75% per annum, payable semi-annually, and will mature on October 15, 2026, but are redeemable by us beginning on October 20, 2011. In addition, we may be required by the note holders to redeem the notes on each of October 15, 2013, October 15, 2016 and October 15, 2021.

OUR GROWTH STRATEGY

We believe that the aging of the U.S. population will increase demand for independent living properties, assisted living communities, nursing homes and pharmacy and rehabilitation services. Our principal growth strategy is to profit from this increasing demand by operating properties that provide high quality services to senior residents who pay with private resources and by acquiring and operating pharmacy and rehabilitation health service providers.

We seek to improve the profitability of our existing operations by increasing revenues and improving margins. We attempt to increase revenues by increasing rates and utilization of our facilities and services. We attempt to improve margins by limiting increases in expenses and improving operating efficiencies.

In addition to managing our existing operations, we intend to continue to grow our business through acquisitions of independent and assisted living communities where residents’ private resources account for a large majority of revenues. Since we became a public company in late 2001, we have acquired 112 primarily independent and assisted living communities which in 2006 generated approximately 89% of their revenue from residents’ private resources, rather than from Medicare or Medicaid. We prefer to acquire communities which have achieved or are close to stabilized operations. We also seek to make acquisitions where we can realize cost savings by combining acquired operations with our existing operations.

We also intend to expand our institutional pharmacy business. We acquired our first pharmacy in Wisconsin in 2003. Between 2004 and 2006, we acquired five additional pharmacies: two located in Nebraska, one located in California, one located in South Carolina and one located in Virginia. One of our pharmacies provides mail order pharmaceuticals to the general public. Whenever we buy an institutional pharmacy business, we seek to grow its business by providing pharmacy services at our senior living communities within the same service area. We are currently interested in acquiring pharmacies in other areas where we own senior living communities.

In October 2006, we began to operate two rehabilitation hospitals located in Braintree and Woburn, Massachusetts. These hospitals offer extensive inpatient and outpatient services that are similar to services we currently provide in many of our senior living communities. We may seek to acquire additional rehabilitation hospitals, as well as expand our rehabilitation business at our existing senior living communities.

Although expansion of our nursing home business is not our primary growth strategy, we have in the past considered acquiring additional nursing homes. Most nursing homes are financially dependent upon the Medicare and Medicaid programs. Accordingly, we believe the potential for profitable operations of nursing homes is limited by government rate settings. In these circumstances, we are only interested in expanding our nursing home operations at prices which we believe take into account the risks inherent in government funding. In the past few years, we have been unable to buy nursing homes at prices we consider appropriate, but we may continue to investigate such opportunities in the future.

TYPES OF PROPERTIES

Our present business plan contemplates the ownership, leasing and management of independent living apartments or congregate care communities, assisted living communities, nursing homes and rehabilitation hospitals.

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Some of our properties combine more than one type of service in a single building or campus. We operate most of our pharmacies and several of our outpatient rehabilitation clinics from leased commercial spaces.

Independent Living Apartments or Congregate Care Communities. Independent living apartments, or congregate care communities, provide high levels of privacy to residents and require residents to be capable of relatively high degrees of independence. An independent living apartment usually bundles several services as part of a regular monthly charge. For example, one or two meals per day in a central dining room, weekly maid service or services of a social director may be included in the base charge. Additional services are generally available from staff employees on a fee for service basis. In some independent living properties, separate parts of the community are dedicated to assisted living or nursing services. As of March 5, 2007, our business includes 5,601 independent living apartments in 43 communities.

Assisted Living Communities. Assisted living communities are typically comprised of one bedroom units which include private bathrooms and efficiency kitchens. Services bundled within one charge usually include three meals per day in a central dining room, daily housekeeping, laundry, medical reminders and 24 hour availability of assistance with the activities of daily living such as dressing and bathing. Professional nursing and healthcare services are usually available at the community on call or at regularly scheduled times. As of March 5, 2007, our business includes 6,541 assisted living suites in 103 communities.

Nursing Homes. Nursing homes generally provide extensive nursing and healthcare services similar to those available in hospitals, without the high costs associated with operating theaters, emergency rooms or intensive care units. A typical purpose built nursing home includes mostly two bed rooms with a separate bathroom in each room and shared dining and bathing facilities. Some private rooms are available for those residents who pay higher rates or for residents whose medical conditions require segregation. Nursing homes are staffed by licensed nursing professionals 24 hours per day. As of March 5, 2007, our business includes 5,975 skilled nursing beds in 76 communities.

Rehabilitation Hospitals. Rehabilitation hospitals, also known as inpatient rehabilitation facilities, or IRFs, provide intensive physical therapy, occupational therapy and speech language pathology services. Patients in IRFs generally receive a minimum of three hours of rehabilitation services daily. IRFs also provide onsite pharmacy, radiology, laboratory, telemetry, hemodialysis and orthotics/prosthetics services. Outpatient satellite clinics are often included as part of the services offered by IRFs. The two rehabilitation hospitals that we began operating in 2006 have 341 beds available for inpatient services and provide extensive outpatient services from the hospitals premises. In addition, these two hospitals operate 21 affiliated outpatient clinics where patients discharged from the hospitals can continue their therapy programs, and receive amputee, brain injury, cardio-pulmonary, orthopedic, spinal cord injury, stroke and neurorehabilitation rehabilitation services.

Pharmacies. Our institutional pharmacies are located in six leased commercial spaces and one owned commercial space containing approximately 41,114 square feet plus parking areas for our delivery vehicles.

OPERATING STRUCTURE

We have four divisional offices which are located throughout the country. Each divisional office is responsible for multiple regions and is headed by a divisional vice president with extensive experience in the senior living and health rehabilitative industries. We have several regional offices within each division. Each regional office is responsible for multiple communities and is headed by a regional director of operations with extensive experience in the senior living industry. Each regional office is typically supported by a clinical or wellness director, a rehabilitation services director, a regional accounts manager, a human resources specialist and a sales and marketing specialist. Regional staffs are responsible for all our community operations within the region, including:

·resident services;

·marketing and sales;

·hiring of community personnel;

·compliance with applicable legal and regulatory requirements; and

·supporting our development and acquisition plans within their region.

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Our home office staff performs the following tasks:

·general oversight of our regional staff, pharmacy and rehabilitation hospital operations;

·the establishment of company wide policies and procedures relating to resident care;

·human resources policies and procedures;

·information technology;

·Medicare and Medicaid billing;

·licensing and certification maintenance;

·legal services;

·central purchasing;

·budgeting and supervision of maintenance and capital expenditures;

·implementation of our growth strategy; and

·accounting and finance functions, including operations budgeting, portions of accounts receivable and collections, accounts payable, portions of payroll, financial reporting, and tax planning and compliance.

STAFFING

Independent and assisted living community staffing. Each of the independent and assisted living communities we operate for our own account has an executive director responsible for the day to day operations of the community, including quality of care, resident services, sales and marketing, financial performance and staff supervision. The executive director is supported by department heads, who oversee the care and service of the residents, a wellness director, who is responsible for coordinating the services necessary to meet the health care needs of our residents and a marketing director, who is responsible for selling our services. Other important staff include the dining services coordinator, the activities coordinator and the property maintenance coordinator.

Nursing home staffing. Each of our nursing homes is managed by a state licensed administrator who is supported by other professional personnel, including a director of nursing, an activities director, a marketing director, a social services director, a business office manager, and physical, occupational and speech therapists. Our directors of nursing are state licensed nurses who supervise our registered nurses, licensed practical nurses and nursing assistants. Staff size and composition vary depending on the size and occupancy of each nursing home and on the type of care provided by the nursing home. Our nursing homes also contract with physicians who provide certain medical services.

Pharmacy operations and staffing. Our institutional pharmacy operation provides prescriptions, medical supplies, equipment and services to operators and residents of senior living communities. We do not sell “over the counter” to the public, but our mail order business provides prescriptions and medical supplies to the general public. Each of our pharmacies is managed by an executive director, who is responsible for the day to day operations of each pharmacy and our mail order business, including billings, sales and marketing, financial performance, compliance with regulatory codes regarding the dispensing of controlled substances and staff supervision. Other pharmacy personnel include licensed dispensing pharmacists, a director of pharmacy consultation, a medical records director, a nurse consultant, pharmacy technicians and billing personnel.

Rehabilitation hospital staffing. Each IRF is operated under the leadership of a hospital based chief executive officer with the support of senior staff, including a medical director, chief financial officer, director of patient care services, director of rehabilitation and director of case management. The hospitals are also staffed with board certified physicians who primarily specialize in internal medicine, neurology or physiatry, as well as other licensed professionals, including rehabilitation nurses, physical therapists, occupational therapists, speech and language pathologists, nutrition counselors, neuropsychologists and pharmacists. Each outpatient clinic associated with our IRFs is managed by an outpatient director who is a registered occupational or physical therapist.

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EMPLOYEES

As of March 5, 2007, we had approximately 17,108 employees, including 11,960 full time equivalents. Approximately 93 employees, including approximately 78 full time equivalents, are represented under two collective bargaining agreements, which have remaining terms of approximately 3 years. Except for seven contracts entered into with former owner operators of certain pharmacies which we acquired, we have no employment agreements with our employees. We believe our relations with our union and non-union employees are good.

GOVERNMENT REGULATION AND REIMBURSEMENT

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

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

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

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

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may increase in value because these limitations upon development may help ensure higher occupancy and higher non-governmental rates.

The US. Department of Health and Human Services, the Government Accountability Office, or GAO, and the Senate Special Committee on Aging have recently studied and reported on the development of assisted living and its role in the continuum of long term care and as an alternative to nursing homes. In 2003, the GAO recommended that CMS strengthen its oversight of state quality assurance in Medicaid home and community-based services waiver programs. Since then, CMS has commenced a series of actions to increase its oversight of state quality assurance programs for assisted living facilities and has provided guidance and technical assistance to the states to improve their ability to monitor and improve the quality of services paid for through Medicaid waiver programs. Also in 2003, a working group of assisted living providers, consumers and regulatory organizations made recommendations to the Senate Special Committee on Aging on a range of subjects, including staffing, funding and regulation of assisted living. We cannot predict whether these studies and reports will result in governmental policy changes or new legislation, or what impact any changes may have. Based upon our analysis of current economic and regulatory trends, we do not believe that the federal government is likely to have a material impact upon the current regulatory environment in which the assisted living industry operates unless it also undertakes expanded funding obligations. Although CMS is implementing provisions of the Deficit Reduction Act of 2005, or the DRA, enacted in February 2006, that encourage state Medicaid programs to expand their use of home and community based services as alternatives to institutional services, we do not believe a materially increased financial commitment from the federal government to fund assisted living is presently likely. However, we do anticipate that assisted living communities will increasingly be licensed and regulated by the various states, and that, in the absence of federal standards, the states’ policies will continue to vary widely.

Nursing Homes-Reimbursement. About 62% of all nursing home revenues in the U.S. in 2005 (the most recent date for which information is publicly available) came from publicly funded programs, including about 44% from Medicaid programs and 16% from the Medicare program. Nursing homes are among the most highly regulated businesses in the Country. The federal and state governments regularly monitor the quality of care provided at nursing homes. State health departments conduct surveys of resident care and inspect the physical condition of nursing home properties. These periodic inspections and occasional changes in life safety and physical plant requirements sometimes require nursing home operators to make significant capital improvements. These mandated capital improvements have in the past usually resulted in Medicare and Medicaid rate adjustments, albeit on the basis of amortization of expenditures over expected useful lives of the improvements. A Medicare prospective payment system, or the PPS, was phased in over three years beginning with cost reporting years starting on or after July 1, 1998. Under the PPS, capital costs are part of the prospective rate and are not community specific. The PPS and other recent legislative and regulatory actions with respect to state Medicaid rates are limiting the reimbursement levels for some nursing home services. At the same time, federal and state enforcement and oversight of nursing homes have been increasing, making licensing and certification of these communities more rigorous.

The PPS was established by the Balanced Budget Act of 1997, and was intended to reduce the rate of growth in Medicare payments for skilled nursing communities. Before the current Medicare payment system, Medicare rates were community specific and cost based. Under the current Medicare payment system, skilled nursing facilities receive a fixed payment for each day of care provided to residents who are Medicare beneficiaries. Each resident is assigned to a care group depending on that resident’s medical characteristics and service needs. These care groups are known as Resource Utilization Groups, or RUGs. Per diem payment rates are established for each of these care groups. Medicare payments cover substantially all services provided to Medicare residents in skilled nursing communities, including ancillary services such as rehabilitation therapies. The PPS is intended to provide incentives to providers to furnish only necessary services and to deliver those services efficiently. During the three year phase in period, Medicare rates for skilled nursing communities were based on a blend of community specific costs and rates established by the new Medicare payment system. According to the GAO, between fiscal year 1998 and fiscal year 1999, the first full year of the changed Medicare payment system phase in, the average Medicare payment per day declined by about 9%.

From November 1999 to January 2006, Congress and CMS have provided some periodic relief from the impact of the Balanced Budget Act of 1997 through temporary increases in skilled nursing facility payment rates and temporary moratoria on some therapy limitations for skilled nursing residents covered under Medicare Part B. Effective January 1, 2006, CMS implemented changes to the payment categories it uses to set daily payment rates for Medicare beneficiaries in skilled nursing facilities. CMS introduced nine new payment categories for medically complex patients, increasing the

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number of categories from 44 to 53, and made revisions to its payment rates for current RUGS. Also effective January 1, 2006, these RUG changes caused the elimination of certain temporary additional payments for certain skilled nursing care and rehabilitation groups. The financial impact of these changes to the Medicare rates on our operations was to effectively eliminate an October 2005 Medicare 3% rate increase; but then in October 2006, the Medicare rates were increased by 3%.

Under the DRA, the federal government is slowing the growth of Medicare and Medicaid payments for nursing home services by several methods. Medicare bad debt reimbursement has been reduced from 100% to 70% for uncollected cost sharing payments from Medicare beneficiaries who are not eligible for Medicaid. Limits on Medicare payments were also implemented for outpatient therapies in 2006, with an exception process under which beneficiaries could request an exemption from the cap and be granted the amount of services deemed medically necessary by Medicare. Under the Tax Relief and Health Care Act of 2006, enacted in December 2006, the exemption process has been extended an additional year through 2007. In addition, the DRA increased the “look-back” period for prohibited asset transfers that disqualify individuals from Medicaid nursing home benefits from three to five years. The period of Medicaid ineligibility begins on the date of the prohibited transfer or the date an individual has entered the nursing home and would otherwise be eligible for Medicaid coverage, whichever occurs later, rather than on the date of the prohibited transfer, effectively extending the Medicaid penalty period and placing added burdens on nursing homes to collect charges from residents and their transferees. The DRA includes a demonstration project that will award competitive grants to states to provide home and community based long term care services to qualified individuals relocated from nursing homes, providing an increased federal medical assistance percentage for 12 months for each qualifying beneficiary, during a grant period of at least two years. The DRA also includes a post acute payment reform demonstration program that will compare and assess costs and outcomes of services at different long term care sites over three years. Effective January 1, 2007, states may include home and community based services as optional services under their Medicaid state plans, rather than only pursuant to waivers or demonstration projects, and permits such states to cap enrollment, maintain waiting lists and offer the services in only some regions of a state, as they may with waivers. These initiatives will likely decrease the demand for nursing home services and nursing home occupancy and services may decline.

Nursing Homes-Survey and Enforcement. In July 1998, GAO issued a report which found inadequate care in a significant proportion of California nursing homes. Since 1999, the U.S. Department of Health and Human Services, Office of Inspector General has issued several reports concerning quality of care in nursing homes, and the GAO has issued several reports recommending that CMS and the states strengthen their compliance and enforcement practices, including federal oversight of state actions, to better ensure that nursing homes provide adequate care and states act more consistently. The Senate Special Committee on Aging also held hearings on these issues. As a result, CMS has undertaken an initiative to increase the effectiveness of Medicare and Medicaid nursing home survey and enforcement activities. CMS is taking steps to focus more survey and enforcement efforts on nursing homes with findings of substandard care or repeat violations of Medicare and Medicaid standards and to identify chain operated communities with patterns of noncompliance. CMS is increasing its oversight of state survey agencies and requiring state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeat violations are identified, to investigate complaints more promptly, and to survey communities more consistently. In addition, CMS adopted regulations expanding federal and state authority to impose civil money penalties in instances of noncompliance. Medicare survey results, including fire safety reports, and average nursing staff hours per resident for each nursing home are posted on the Medicare website at www.medicare.gov. CMS issued a proposed rule in 2006 that would require older nursing homes to install sprinklers and to install battery powered smoke detectors in the interim. When deficiencies under state licensing and Medicare and Medicaid standards are identified, sanctions and remedies such as denials of payment for new Medicare and Medicaid admissions, civil monetary penalties, state oversight and loss of Medicare and Medicaid participation or licensure may be imposed on nursing home operators. Our communities incur sanctions and penalties from time to time. If we are unable to cure deficiencies which have been identified or that are identified in the future, additional sanctions may be imposed, and if imposed, may adversely affect our ability to meet our financial obligations and negatively affect our financial condition and results of operations.

In 2000 and 2002, the Department of Health and Human Services and CMS issued reports linking nursing staffing levels with quality of care. The Bush administration has indicated that it does not intend to impose minimum staffing levels or to increase Medicare or Medicaid rates to cover the costs of increased staffing at this time; however, CMS is publishing the nurse staffing level at each nursing home on the internet (www.medicare.gov) to create market pressure to improve nursing home operations.

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Rehabilitation Hospital Regulations and Rate Setting. The two rehabilitation hospitals that we began operating in 2006 are subject to federal, state and local regulation that affect their business activities and determine the rates they receive for services. These facilities are subject to periodic inspection by governmental and non-governmental agencies to ensure continued compliance with various licensure and accreditation standards. In addition, these facilities are certified by CMS to participate in the Medicare program and receive a significant portion of their revenues from that program.

On May 7, 2004, CMS issued a rule establishing revised Medicare standards that rehabilitation hospitals are required to meet in order to participate as IRFs in the Medicare program, known as the “75% Rule.” The 75% Rule generally provides that, to be considered an IRF and receive reimbursement for services under the IRF-prospective payment system, at least 75% of a facility’s total inpatient population must require intensive rehabilitation services associated with treatment of at least one of 13 designated medical conditions. This means that to maintain their current levels of revenues many rehabilitation hospitals may need to reduce the number of non-qualifying patients treated and replace them with qualifying patients, establish other sources of revenues or both. The 75% Rule is being phased in over a four year period that began on July 1, 2004. For cost reporting periods starting on and after July 1, 2006, 60% of a facility’s inpatient population must require intensive rehabilitation services for one of CMS’ designated medical conditions. For cost reporting periods starting on and after July 1, 2007, the requirement is 65%, and for cost reporting periods starting on and after July 1, 2008, the requirement is 75%. An IRF that fails to meet the requirements of the 75% Rule is subject to reclassification as a different type of healthcare provider; and the effect of such reclassification would be to lower Medicare payment rates. We believe our hospitals are operating in compliance with the current requirements of the 75% Rule and we are taking actions to assure continued compliance with this rule during its full phase in; however, we can provide no assurance that we will be able to continue to comply with these intensifying rules.

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

Other Matters. Federal efforts to target fraud and abuse and violations of anti-kickback laws and physician referral laws by Medicare and Medicaid providers have also increased. In March 2000, the U.S. Department of Health and Human Services Office of Inspector General issued compliance guidelines for nursing communities to assist them in developing voluntary compliance programs to prevent fraud and abuse. The Office of Inspector General issued compliance program guidance for hospitals in 1998 and supplemental guidance in 2005. Rules governing the privacy, use and disclosure of individually identified health information took effect in 2003, with civil and criminal sanctions for noncompliance. An adverse determination concerning any of our licenses or eligibility for Medicare or Medicaid reimbursement or the costs of required compliance with applicable federal or state regulations could adversely affect our ability to meet our financial obligations and negatively affect our financial condition and results of operations.

Under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or the MPDIMA, Medicare beneficiaries may receive prescription drug benefits effective January 1, 2006 by enrolling in private health plans or managed care organizations, or if they remain in traditional Medicare, by enrolling in stand alone prescription drug plans. We believe that this new Medicare drug benefit may increase the demand for pharmacy products and services, but may also reduce the profitability of providing those services as the Government implements various cost control procedures. We cannot predict the net impact of this program at this time.

A number of legislative proposals that would affect major reforms of the healthcare system have been introduced in the U.S. Congress and many are being considered by some state governments, such as programs for national health insurance, the option of block grants for states rather than federal matching money for certain state Medicaid services, policies encouraging state Medicaid programs to use home and community based long term care services rather than nursing homes, laws authorizing or directing Medicare to negotiate rate reductions for prescription drugs, additional Medicare and Medicaid reforms and federal and state cost containment measures, such as freezing Medicare or Medicaid nursing home payment rates at their current levels and reducing or eliminating annual Medicare

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or Medicaid inflation allowances or gradually reducing rates for nursing homes and rehabilitation hospitals. In connection with recent fiscal pressures on state governments and increasing costs of Medicaid funding, legislation and regulation to reduce Medicaid nursing home payment rates in some states are possible in the future. We cannot predict whether any of these legislative or regulatory proposals will be adopted or, if adopted, what effect, if any, these proposals would have on our business.

INSURANCE

Litigation against senior living operators has been increasing during the past few years. As a result, liability insurance costs are rising. In recent years, our insurance costs for workers compensation and employee healthcare have also increased significantly. To partially offset these insurance cost increases, we have taken a number of actions including the following:

·we have increased the deductible or retention amounts for which we are liable under our liability insurance;

·we have established an offshore captive insurance company which participates in our liability insurance program. Some of our premiums for liability insurance are paid to this company which may retain some of these amounts and the earnings on these amounts based upon our actual claims experiences;

·we have acquired another offshore insurance company and established a captive insurance program for our workers compensation insurance obligations in those states which permit such arrangements. This program may allow us to reduce our net workers compensation insurance costs by allowing us to retain the earnings on our reserves, provided our claims experience is as projected by various statutory and actuarial formulas;

·we have increased the amounts which some of our employees are required to pay for health insurance coverage and as co-payments for health services and pharmaceutical prescriptions and decreased the amount of certain healthcare benefits;

·we are fully self insured for all employees health related claims;

·we have hired professional advisors to help us establish programs to reduce our insured workers compensation and professional and general liabilities, including a program to monitor and pro-actively settle liability claims and to reduce workplace injuries; and

·we have hired professionals to help us establish appropriate reserves for our retained liabilities and captive insurance programs.

We self insure up to certain limits for workers compensation and professional liability. Claims in excess of these limits are retained by third party insurance providers up to contractual limits, over which we are self insured. Our current insurance arrangements generally are renewable in June 2007. We do not know if our insurance charges and self-insurance reserve requirements will continue to increase, and we cannot now predict the amount of any such increase, or to what extent, if at all, we may be able to offset any increase through use of higher deductibles, retention amounts, self insurance or other means in the future.

COMPETITION

The senior living services, pharmacy and the health rehabilitation businesses are highly competitive. We compete with service providers offering alternate types of services, such as home healthcare services, as well as other companies providing community based services and rehabilitation services. We may expand our business with Senior Housing; however, Senior Housing is not obligated to provide us with opportunities to lease additional properties. We have large lease obligations and limited financeable assets. Many of our competitors have greater financial resources than we do. For all of these reasons and others, we cannot provide any assurance that we will be able to compete successfully for business in the senior living industry.

ENVIRONMENTAL MATTERS

Under various federal, state and local laws, owners as well as tenants and operators of real estate may be required to investigate and clean up hazardous substances released or otherwise present at a property, and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean up costs incurred in connection with any such hazardous substances. Under our leases with Senior Housing, we

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have also agreed to indemnify Senior Housing for any such liabilities related to the properties we lease from Senior Housing. In addition, some environmental laws create a lien on a contaminated site in favor of the government for damages and costs it incurs in connection with the contamination, which lien may be senior in priority to our leases. We have reviewed environmental surveys of all of our leased and owned communities. Based upon that review we do not believe that any of these properties are subject to any material environmental contamination. However, no assurances can be given that a prior owner, operator or occupant of our communities did not create a material environmental condition not known to us which might have been revealed by a more in depth study of the properties or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in the imposition of environmental liability upon us. The presence or discovery of any material environmental contaminants at our communities could have a material adverse impact on us.

INTERNET WEBSITES

Our internet website address is www.5sqc.com. Copies of our governance guidelines, code of business conduct and ethics and the charters of our audit, quality of care, compensation and nominating and governance committees may be obtained free of charge by writing to our Secretary, Five Star Quality Care, Inc., 400 Centre Street, Newton, MA 02458 or at our website. We make available, free of charge, on our website, our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to, the Securities and Exchange Commission, or the SEC. Any shareholder or other interested party who desires to communicate with our independent directors, individually or as a group, may do so by filling out a report on our website. Our board also provides a process for security holders to send communications to the entire board. Information about the process for sending communications to our board can be found on our website. Our website address and website addresses of one or more unrelated third parties are included several times in this Annual Report on Form 10-K as textual references only and the information in the websites are not incorporated by reference into this Annual Report on Form 10-K.

Item 1A.    Risk Factors

Our business faces many risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our business operations or financial results. If any of the events or circumstances described in the following risks occurs, our business, financial condition or results of operations could suffer and the trading price of our debt or equity securities could decline. Investors and prospective investors should consider the following risks and the information contained under the heading “Warning Concerning Forward Looking Statements” before deciding whether to invest in our securities.

RISKS RELATED TO OUR BUSINESS

A small percentage decline in our revenues or increase in our expenses could have a material negative impact upon our operating results.

For the year ended December 31, 2006, our revenues were $827.3 million and our operating expenses were $941.8 million (including our SLS termination expense of approximately $129.9 million related to 17 management agreements). A small percentage decline in our revenues or increase in our expenses could have a material negative impact upon our operating results.

We may not achieve the anticipated benefits of our termination of management agreements for the 30 communities that SLS previously managed for us.

Between November 2005 and December 2006, we terminated management agreements for the 30 communities that SLS managed for us. The financial benefits we expect to realize from the termination of these management agreements are largely dependent upon our ability to maintain or increase the occupancy of these communities and to lower certain operating costs. Changing management at senior living communities sometimes results in decreased occupancy, declining revenues and increased costs. The transition of operations at senior living

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communities is often complicated and we can provide no assurance that the benefits we hope to achieve by terminating these SLS management agreements will be realized.

We may not achieve the anticipated benefits from our lease of the two rehabilitation hospitals.

The historical operating and financial information we have concerning the two rehabilitation hospitals’ operations that we received from their prior operator, HealthSouth Corporation, or HealthSouth, may not be accurate. Also, recent changes in Medicare rate formulas applicable to rehabilitation hospitals make it difficult to project these hospitals’ future financial results.  In these circumstances, any projection or implication that our future operation of these hospitals will be profitable may prove to be inaccurate.  In addition, the two rehabilitation hospitals may be subject to retroactive rate adjustments. In fact, we may be unable to operate these hospitals profitably and we may experience losses from our operation of these hospitals.

If we are unable to operate these hospitals successfully, our reputation as a provider of health and rehabilitation services may be damaged. Even if we successfully operate these hospitals, these operations may have little or no benefit to our other operations.

The rehabilitation hospitals may be subject to Medicare reclassification, resulting in lower Medicare rates.

A significant amount of the revenues at our rehabilitation hospitals is paid by Medicare and we became more dependent upon the Medicare program when we began to operate these hospitals than we were before we assumed these operations. Under the “75% Rule,” in order to qualify under Medicare as an IRF, at least 75% of a facility’s total inpatient population must require intensive rehabilitation services associated with treatment of at least one of 13 designated medical conditions. The rule is being phased in over four years. For cost reporting periods starting on and after July 1, 2006, the requirement is 60%; for cost reporting periods starting on and after July 1, 2007 and July 1, 2008, the requirement will be 65% and 75%, respectively. We believe that 60% of the patients at the rehabilitation hospitals we began to operate on October 1, 2006 meet these requirements. If these rehabilitation hospitals are unable to meet the requirements of the 75% Rule, they will be subject to Medicare reclassification as a different type of provider and receive lower Medicare reimbursement rates.

The failure of Medicare and Medicaid rates to match our costs will reduce our income.

Some of our current operations, especially our nursing homes and rehabilitation hospitals, receive significant revenues from the Medicare and Medicaid programs. During the year ended December 31, 2006, approximately 33% of our net revenues from residents and 72% of our hospital revenues were received from these programs. The federal government and some states are now experiencing or have recently experienced fiscal deficits. Historically, when governmental deficits have increased, cut backs in Medicare and Medicaid funding have often followed. These cut backs sometimes include rate reductions, but more often result in a failure of Medicare and Medicaid rates to increase by sufficient amounts to offset increasing costs. For example, since the beginning of 2006, there have been cut backs to Medicare funding which have affected profitability of our current and continuing nursing home operations. We cannot now predict whether future Medicare and Medicaid rates will be sufficient to cover our future cost increases. Future Medicare and Medicaid rate declines or a failure of these rates to cover increasing costs could result in our experiencing lower earnings or losses. The rehabilitation hospitals we began to operate on October 1, 2006 receive a significant part of their revenues from the Medicare program, and these operations will increase our exposure to Medicare rate risks.

Our growth strategy may not succeed.

Since our spin off from Senior Housing on December 31, 2001, we have grown rapidly through acquisitions. Our business plan includes acquiring additional senior living communities, pharmacies and, possibly, additional rehabilitation hospitals. Our growth strategy involves risks, including the following:

·we may be unable to locate senior living communities, pharmacies or rehabilitation hospitals available for purchase at acceptable prices;

·we may be unable to access capital to make acquisitions or operate acquired businesses;

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·acquired operations may not perform in accord with our expectations;

·we may be required to make significant capital expenditures to improve acquired facilities, including capital expenditures that may not have been anticipated by us at the time of the acquisition;

·we may have difficulty retaining key employees and other personnel at acquired facilities;

·acquired operations may subject us to unanticipated contingent liabilities or regulatory problems;

·to the extent we incur acquisition debt or leases, our operating leverage may increase and, to the extent we issue additional equity, our shareholders’ percentage of ownership will be diluted; and

·combining our present operations with newly acquired operations may disrupt operations or cost more than anticipated.

For these reasons and others:

·our business plan to grow may not succeed;

·the benefits which we hope to achieve by growing may not be achieved;

·we may suffer declines in profitability or suffer recurring losses; and

·our existing operations may suffer from a lack of management attention or financial resources if such attention and resources are devoted to a failed growth strategy.

When we acquire new communities, we sometimes see a decline in community occupancy and it may take a period of time for us to stabilize acquired community operations. Our efforts to restore occupancy or stabilize acquired communities’ operations may not be successful. In addition, we cannot provide any assurance that we will not experience a decline in occupancy at the rehabilitation hospitals we recently began to operate. We have recently expanded into the institutional and mail order pharmacy businesses. Rehabilitation hospitals and pharmacies are businesses with which we have limited experience, and our initiatives in these areas may not be successful.

The nature of our business exposes us to litigation risks. As a result, our insurance costs have increased and may continue to increase, and we self insure a large portion of our litigation risks.

The nature of our business exposes us to litigation, and we are subject to lawsuits in the ordinary course of our business. In several well publicized instances, private litigation by residents of senior living communities for alleged abuses has resulted in large damage awards against other operating companies. Today, some lawyers and law firms specialize in bringing litigation against senior living companies. As a result of this litigation and potential litigation, our cost of liability insurance has increased dramatically during the past few years. Medical liability insurance reform has become a topic of political debate and some states have enacted legislation to limit future liability awards. However, if such reforms are not generally adopted, we expect our insurance costs may continue to increase. To reduce costs, we self insure a significant amount of our litigation liability risks. Although our reserves for liability self insurance have been determined with guidance from third party professionals, our reserves may prove inadequate. Increasing liability insurance costs and increasing self insurance reserves may materially negatively affect our results of operations.

Our business is subject to extensive regulation which increases our costs and may result in losses.

Licensing and Medicare and Medicaid laws require operators of senior living communities and rehabilitation hospitals to comply with extensive standards governing operations. There are also various laws prohibiting fraud by senior living and rehabilitation hospital operators, including criminal laws that prohibit false claims for Medicare and Medicaid coverage and that regulate patient referrals. In recent years, the federal and state governments have devoted increased resources to monitoring the quality of care at senior living communities and to anti-fraud investigations. When quality of care deficiencies are identified or improper billing is uncovered, various sanctions may be imposed, including

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denial of new admissions, exclusion from Medicare or Medicaid program participation, monetary penalties, governmental oversight or loss of licensure. Our communities incur sanctions and penalties from time to time. As a result of this extensive regulatory system and increasing enforcement initiatives, we have experienced increased costs for monitoring quality of care compliance and billing procedures, and we expect these costs may continue to increase. Also, if we become subject to regulatory sanctions, our business may be adversely affected and we might experience financial losses.

A significant increase in our labor costs may have a material adverse effect on us.

Wages and employee benefits represent approximately 47% of our 2006 total operating costs, exclusive of the termination fees we paid to SLS. We compete with other operators of senior living communities and rehabilitation hospitals with respect to attracting and retaining qualified personnel responsible for the day to day operations of each of our communities. A shortage of nurses or other trained personnel may require us to increase the wages and benefits offered to our employees in order to attract and retain these personnel or to hire more expensive temporary personnel. Also, we have to compete for lesser skilled workers with numerous other employers. Further, when we acquire new facilities, we may be required to pay increased compensation or offer other incentives to retain key personnel and other employees. Employment statistics published by the government indicate a tightening job market. Historically, these statistics have often foretold increased wage pressures and we may experience such wage pressures in the near future. For example, recent wage increases in Connecticut made our previous operations in that state unprofitable. Employee benefits costs, including employee health insurance and workers compensation insurance costs, have materially increased in recent years. To help control these costs, we partially self insure our workers compensation insurance and fully self insure our employee health insurance. Although our self insurance reserves have been determined with guidance from third party professionals, our reserves may be inadequate. Increasing employee health and workers compensation insurance costs and increasing self insurance reserves for this type of insurance may materially negatively affect our earnings. No assurance can be given that our labor costs will not increase or that any increase will be matched by corresponding increases in rates charged to residents. Any significant failure by us to control our labor costs or to pass on any increased labor costs to residents through rate increases could have a material adverse effect on our business, financial condition and results of operations.

Our business requires us to make significant capital expenditures to maintain and improve our facilities.

Physical characteristics of senior living communities and rehabilitation hospitals are mandated by various governmental authorities. Changes in these regulations may require us to make significant expenditures. Our communities sometimes require significant expenditures to address ongoing required maintenance and to make them attractive to residents. In addition, we often are required to make significant capital expenditures when we acquire new facilities. Our available financial resources may be insufficient to fund these expenditures. In addition to capital expenditures we are making at some of our senior living communities, we expect that we will need to make certain capital expenditures at the rehabilitation hospitals we recently began to operate, which could be significant. Senior Housing has historically provided most of the capital we need to improve the properties we lease from it. However, whenever Senior Housing provides such capital, our rent increases and we may be unable to pay the increased rent without experiencing losses.

Our business is highly competitive and we may be unable to operate profitably.

We compete with numerous other companies that provide senior living and rehabilitation hospital services, including home healthcare companies and other real estate based service providers. Historically, nursing homes and rehabilitation hospitals have been somewhat protected from competition by state laws requiring certificates of need to develop new communities; however, these barriers have been eliminated in many states. Also, there are few barriers to competition for home healthcare or for independent and assisted living services. Growth in the availability of nursing home alternatives, including assisted living communities, has had and may in the future have the effect of reducing the occupancy or profitability at nursing homes, including those we operate. Many of our existing competitors are larger and have greater financial resources than us. Accordingly, we cannot provide any assurances that we will be able to attract a sufficient number of residents to our communities or that we will be able to attract employees and keep wages and other employee benefits, insurance costs and other operating expenses at levels which will allow us to compete successfully or to operate profitably.

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We are subject to possible conflicts of interest; we have engaged in, and expect to continue to engage in, transactions with related parties.

Our business is subject to possible conflicts of interest as follows:

·our Chief Executive Officer, Evrett W. Benton, and our Chief Financial Officer, Bruce J. Mackey Jr., are also part-time employees of Reit Management & Research LLC, or RMR.  RMR is the manager for Senior Housing and we purchase various services from RMR pursuant to a shared services agreement;

·our managing directors, Barry M. Portnoy and Gerard M. Martin, are managing trustees of Senior Housing. Mr. Portnoy also is the majority beneficial owner and the chairman of RMR; a subsidiary of RMR leases office space to us; and Messrs Portnoy and Martin are directors of RMR;

·under our shared services agreement with RMR, in the event of a conflict between Senior Housing and us, RMR may act on behalf of Senior Housing rather than on our behalf; and

·as of December 31, 2006, we leased from Senior Housing 144 of the 162 senior living communities that we operated for total annual minimum rent of approximately 114.1 million.  In addition, we also lease our two rehabilitation hospitals from Senior Housing for total annual minimum rent of approximately $10.3 million.

On December 31, 2001, Senior Housing distributed substantially all of its ownership of our shares to its shareholders. Simultaneously with the spin off, we entered into agreements with Senior Housing which, among other things, limit ownership of more than 9.8% of our voting shares, restrict our ability to take any action that could jeopardize the tax status of Senior Housing as a real estate investment trust and limit our ability to acquire real estate of types which are owned by Senior Housing or other real estate investment trusts managed by RMR. As a result of these agreements, our leases with Senior Housing and our shared services agreement with RMR, Senior Housing, RMR and their respective affiliates have significant roles in our business and we do not anticipate any changes to those roles in the future. Future business dealings between us, Senior Housing, RMR and their respective affiliates may be on terms less favorable to us than we could achieve on an arm’s length basis. Although we do not believe these conflicts have adversely affected, or will adversely affect, our business, not everyone may agree with our position.

The limitations on the ownership of our shares and other anti-takeover provisions in our governing documents and in our material agreements may prevent our shareholders from receiving a takeover premium for their shares.

Our charter places restrictions on the ability of any person or group to acquire beneficial ownership of more than 9.8% (in number of shares or value, whichever is more restrictive) of any class of our equity securities. The terms of our leases with Senior Housing and our shared services agreement with RMR provide that our rights under these agreements may be cancelled by Senior Housing and RMR, respectively, upon the acquisition by any person or group of more than 9.8% of our voting stock, and upon other change in control events, as defined in those documents. If the breach of these ownership limitations causes a lease default, shareholders causing the default may become liable to us or to other shareholders for damages. Additionally, on March 10, 2004, we entered into a rights agreement whereby in the event a person or group of persons acquires or attempts to acquire 10% or more of our outstanding common shares, our shareholders, other than such person or group, will be entitled to purchase additional shares or other securities or property at a discount. These agreements and other provisions in our charter and bylaws may increase the difficulty of acquiring control of us by means of a tender offer, open market purchases, a proxy fight or otherwise, if the acquisition is not approved by our board of directors. Other provisions in our governing documents which may deter takeover proposals include the following:

·staggered terms for members of our board of directors;

·the power of our board of directors, without a shareholders’ vote, to authorize and issue additional shares and create classes of shares on terms that it determines;

·a 75% shareholder vote and cause requirements for removal of directors; and

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·advance notice procedures with respect to nominations of directors and shareholder proposals.

For all of these reasons, shareholders may be unable to cause a change of control of us or to realize a change of control premium for their shares.

Circumstances that adversely affect the ability of seniors to pay for our services could have a material adverse effect on us.

Approximately 67% of our net revenues from residents from our senior living communities for the year ended December 31, 2006 were paid by residents from their private resources. We expect to continue to rely on the ability of our residents to pay for our services from their own financial resources. Inflation or other circumstances that adversely affect the ability of the elderly to pay for our services could have a material adverse effect on our business, financial condition and results of operations.

The price of our common shares has fluctuated, and a number of factors may cause our common share price to decline.

The market price of our common shares has fluctuated and could fluctuate significantly in the future in response to various factors and events, including, but not limited to, the risks set out in this Annual Report on form 10-K, as well as:

·the liquidity of the market for our common shares;

·variations in our operating results;

·variations from analysts’ expectations; and

·general economic and industry trends and conditions.

In addition, the stock market in recent years has experienced broad price and volume fluctuations that often have been unrelated to the operating performance of particular companies.  These market fluctuations may also cause the market price of our common shares to decline.  Our shareholders may be unable to resell their common shares at or above price at which they purchased our shares.

RISKS RELATED TO OUR NOTES

The notes we issued in October 2006, and any notes we may issue in the future will be, effectively subordinated to the debts of our subsidiaries and to our secured debt.

We are a holding company and conduct substantially all of our operations through our subsidiaries. Consequently, our ability to pay debt service on our parent company notes will be dependent upon the cash flow of our subsidiaries and payments by those subsidiaries to us as dividends or otherwise. Our subsidiaries are separate legal entities and have their own liabilities. Payments due on our parent company notes are effectively subordinated to liabilities of our subsidiaries.  Certain of our subsidiaries guarantee our obligations under the notes issued in October 2006 and those subsidiaries and additional subsidiaries guarantee our obligations under our revolving credit facility.  In addition, as of December 31, 2006, our subsidiaries had approximately $44.8 million of secured indebtedness outstanding, all of which are obligations of our subsidiaries that are not guarantors of the notes issued in October 2006, and may add additional secured indebtedness under our secured revolving credit facility available for borrowing by us that would effectively rank senior to the outstanding notes, and any new notes we may issue.  The outstanding notes, and any new notes we may issue will be, effectively subordinated to our secured debt.  In addition, non-guarantor subsidiaries have substantial additional obligations, including trade payables and lease obligations, to which our notes are and will be effectively subordinated.

Our right to receive assets of any of our subsidiaries upon its liquidation or reorganization will be structurally subordinated to the claims of our subsidiaries, creditors, except to the extent that we are recognized as a creditor of such

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subsidiary, in which case our claims would still be subordinated to any security interests in the assets of such subsidiaries and any indebtedness of our subsidiaries that is senior to that held by us. In the event of our insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up, we and the subsidiaries that guarantee our outstanding notes, or any new notes we may issue, may not have sufficient assets to pay amounts due on any or all the notes.

We may be required to prepay our debts at the option of note holders or upon a change of control.

In certain change of control circumstances or if our common shares are no longer traded on a national securities exchange or on an established over the counter market in the United States, holders of our outstanding notes may have the right to require us to purchase their notes at their principal amount plus accrued interest.  Holders of our notes also have the right to require us to purchase for cash all or a portion of their notes on each of October 15, 2013, October 15, 2016 and October 15, 2021; however, we may not have sufficient financial resources at those times to pay the repurchase price and our then existing indebtedness could restrict or prohibit the repurchase.  Any notes we may issue in the future may have similar or even more onerous terms.

If we redeem the notes before maturity, and our noteholders may be unable to reinvest proceeds at the same or a higher rate.

We may redeem all or a portion of our outstanding notes after a certain amount of time.  Generally, the redemption price will equal the principal amount being redeemed, plus any accrued and unpaid interest to, but excluding the redemption date.  If a redemption occurs, holders of these notes may be unable to reinvest the money they receive in the redemption at a rate that is equal to or higher than the rate of return on the redeemed notes.  Notes we may issue in the future may also permit redemption before maturity and create similar risks.

There may be no public market for our notes.

Although resales of our notes have been registered with the SEC and our outstanding notes are traded in the Private Offerings, Resale and Trading through Automated Linkages Market of the National Association of Securities Dealers, Inc., these notes are not listed on any securities exchange.  We can provide no assurance that an active trading market for these notes will exist in the future.  Also the limited liquidity of the trading market for our existing notes, or any notes we may issue in the future, and the market price quoted for our notes may be adversely affected by changes in the overall market for fixed income securities, by changes in our financial performance or prospects, or by changes in the prospects for the senior living industry generally.

Increased leverage may harm our financial condition and results of operations.

Our total consolidated long term debt as of December 31, 2006 was approximately $138.0 million and represented approximately 67% of our total book capitalization as of that date.  In addition to our indebtedness, we have substantial lease and other obligations.  The indenture governing our outstanding notes does not limit the amount of additional indebtedness, including senior or secured indebtedness, which we can create, incur, assume or guarantee, nor does the indenture limit the amount of indebtedness or other liabilities that our subsidiaries can create, incur, assume or guarantee.

Our level of indebtedness could have important consequences to our investors, because:

·it could affect our ability to satisfy our debt obligations;

·the portion of our cash flows from operations required to make interest and principal payments will not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes;

·it may impair our ability to obtain additional financing in the future;

·it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and

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·it may make us more vulnerable to downturns in our business, our industry or the economy in general than a company with less debt leverage.

Conversion rights of our outstanding notes may be detrimental to holders of our common shares.

Outstanding notes are convertible into our common shares in various circumstances.  The initial conversion rate (equivalent to an initial conversion price of $13.00 per common share) is subject to adjustment upon the occurrence of various events, including if we make dividends or distributions on our common shares.  If a holder elects to convert these notes in connection with a “make whole fundamental change”, as defined in the indenture governing these notes, that occurs on or prior to October 20, 2011, the conversion rate may be increased by a premium based on the market price of our common shares at the time.  Make whole fundamental changes include certain transactions constituting a change of control, our liquidation or dissolution and certain related events.

The conversion of some or all of our outstanding notes will dilute the ownership interests of our shareholders.  Any sales in the public market of the common shares issuable upon such conversion could adversely affect prevailing market prices of our common shares.  In addition, the existence of the outstanding convertible notes may encourage short selling by market participants because the conversion of these notes could depress the price of our common shares.  These conversion rights also may make more difficult or discourage a party from taking over our company and removing incumbent management and may discourage or impede transactions that might otherwise be in the interests of our common shareholders.  Any future issuance of convertible securities by us may create similar risks.

Future issuances of common shares and hedging activities may depress the trading price of our common shares.

Any issuance of equity securities, including the issuance of shares upon conversion of our outstanding notes, could dilute the interests of our existing shareholders, including holders who have received shares upon conversion of their notes, and could substantially decrease the trading price of our common shares and of the notes.  We may issue equity securities in the future for a number of reasons, including to finance our operations and growth strategy, to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons.

In addition, the price of our common shares could also be affected by possible sales of our common shares by investors who view our outstanding notes as a more attractive means of equity participation in us and by hedging or arbitrage trading activity involving both our outstanding notes and common shares.  This hedging or arbitrage could, in turn, affect the trading price of our outstanding notes and of our common shares.

We do not intend to pay cash dividends on our common shares in the foreseeable future.

We have never declared or paid any cash dividends on our common shares, and we currently do not anticipate paying any cash dividends in the foreseeable future. Because we do not anticipate paying cash dividends for the foreseeable future, holders who convert our outstanding notes into our common shares will not realize a return on their investment unless the trading price of our common shares appreciates.

Item 1B.  Unresolved Staff Comments

None.

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Item 2.  Properties

OUR SENIOR LIVING COMMUNITIES

As of December 31, 2006, we operated 162 senior living communities which we have categorized into two groups as follows:

		Type of units
Type of community	No. of communities	Indep. living apts.	Assist. living suites	Nursing home beds	Total living units	Occupancy for the year ended Dec. 31, 2006		Revenues for the year ended Dec. 31, 2006 (in thousands)		Percent of revenues from private resources
Independent and assisted living communities	113	5,506	6,541	1,654	13,701	92	%	$	503,246	90	%
Skilled nursing facilities	49	95	—	4,321	4,416	89	%	242,843		22	%
Totals:	162	5,601	6,541	5,975	18,117	91	%	$	746,089	67	%

Independent and Assisted Living Communities 

As of December 31, 2006, we operated 113 independent and assisted living communities.  We lease 97 of these communities from Senior Housing and four of these communities from Health Care Property Investors, or HCPI, and we own the remaining 12 communities.  These communities have 13,701 living units and are located in 24 states.  The following table provides additional information about these communities and their operations as of December 31, 2006:

		Type of units
Location	No. of communities	Indep. living apts.	Assist. living suites	Nursing home beds	Total living units	Occupancy for the year ended Dec. 31, 2006		Revenues for the year ended Dec. 31, 2006 (in thousands)		Percent of revenues from private resources
1. Alabama	6	—	258	—	258	93	%	$	7,822	100	%
2. Arizona	4	520	221	188	929	90	%	35,417		89	%
3. California	4	461	180	59	700	93	%	27,075		94	%
4. Delaware	5	335	199	341	875	92	%	48,518		76	%
5. Florida	8	1,205	595	153	1,953	94	%	55,682		83	%
6. Georgia	10	111	481	40	632	94	%	14,157		99	%
7. Illinois	1	110	—	—	110	85	%	595		100	%
8. Indiana	1	117	30	74	221	95	%	13,124		82	%
9. Kansas	2	253	30	60	343	92	%	12,871		86	%
10. Kentucky	9	483	291	183	957	95	%	33,974		86	%
11. Massachusetts	1	—	125	—	125	91	%	6,674		100	%
12. Maryland	6	275	324	—	599	95	%	24,618		100	%
13. Mississippi	2	—	130	—	130	77	%	870		100	%
14. Missouri	1	114	—	—	114	68	%	1,793		100	%
15. Nebraska	1	—	73	—	73	84	%	2,206		100	%
16. North Carolina	5	—	461	—	461	87	%	16,491		99	%
17. New Jersey	1	217	139	60	416	87	%	15,634		75	%
18. New Mexic	1	114	35	60	209	94	%	11,219		94	%
19. Ohio	1	144	112	60	316	92	%	16,479		78	%
20. Pennsylvania	6	—	609	—	609	84	%	16,818		100	%
21. South Carolina	13	—	652	68	720	94	%	25,258		99	%
22. Tennessee	10	—	586	14	600	93	%	16,410		100	%
23. Texas	5	900	346	294	1,540	93	%	70,949		85	%
24. Virginia	10	147	664	—	811	89	%	28,592		100	%
Totals:	113	5,506	6,541	1,654	13,701	92	%	$	503,246	90	%

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Skilled Nursing Facilities

As of December 31, 2006, we operated 49 skilled nursing facilities.  We lease 47 of these facilities from Senior Housing and we own the other two facilities.  These facilities have 4,416 living units and are located in 11 states.  The following table provides additional information about these facilities and their operations as of December 31, 2006:

		Type of units
Location	No. of communities	Indep. living apts.	Assist. living suites	Nursing home beds	Total living units	Occupancy for the year ended Dec. 31, 2006		Revenues for the year ended Dec. 31, 2006 (in thousands)		Percent of revenues from private resources
1. Arizona	1	—	—	125	125	81	%	$	6,287	24	%
2. California	4	—	—	396	396	95	%	27,321		19	%
3. Colorado	7	64	—	759	823	88	%	47,908		26	%
4. Georgia	3	—	—	334	334	94	%	16,122		8	%
5. Iowa	7	19	—	476	495	89	%	26,453		16	%
6. Kansas	1	4	—	55	59	97	%	2,788		31	%
7. Michigan	2	—	—	273	273	88	%	22,866		13	%
8. Missouri	2	—	—	180	180	89	%	7,001		23	%
9. Nebraska	14	—	—	817	817	86	%	36,744		29	%
10. Wisconsin	6	—	—	723	723	89	%	41,287		23	%
11. Wyoming	2	8	—	183	191	80	%	8,066		28	%
Totals:	49	95	—	4,321	4,416	89	%	$	242,843	22	%

OUR INPATIENT REHABILITATION HOSPITALS

As of December 31, 2006, we operated two inpatient rehabilitation hospitals that we lease from Senior Housing that are located in Massachusetts.  We commenced operations at these two hospitals on October 1, 2006.  These two hospitals have 342 beds available for inpatient services and 21 affiliated outpatient clinics.  The hospitals had $26.1 million in revenues for the three months ended December 31, 2006 and occupancy was 60% for the three months ended December 31, 2006.  During the three months ended December 31, 2006 approximately 72% of the revenues related to these hospitals came from the Medicare and Medicaid programs, and 59% came from the Medicare program.

OUR SENIOR HOUSING LEASES

We have six leases with Senior Housing.  Four of these leases are for 114 skilled nursing facilities and independent and assisted living communities that we operate, one of these leases is for the 30 communities previously managed by SLS that we now operate for our own account and one of these leases is for the two rehabilitation hospitals that we operate.  The following is a summary of the material terms of our leases.  Because it is a summary, it does not contain all of the information that may be important to you.  If you would like more information, you should read the leases which we have listed in Item 15 of this Annual Report on Form 10-K and incorporated herein by reference.

The following table is a summary of our leases:

	Number of properties	Annual minimum rent as of December 31, 2006		Initial expiration date	Renewal terms
1. Four leases for skilled nursing facilities and independent and assisted living communities (1)	114	$	49.1	December 31, 2020	One 15-year renewal option.
2. One lease for communities previously managed by SLS	30	65.0		December 31, 2017	Two consecutive renewal options for 10 and 5 years (15 years total).
3. One lease for rehabilitation hospitals	2	10.3		June 30, 2026	One 20-year renewal option.
Totals	146	$	124.4

(1)Three of these four leases exist to accommodate mortgage financings in affect at the time Senior Housing acquired the leased properties; we have agreed to combine all four of these leases into one lease when these mortgages are paid.

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Percentage rent. All of our leases with Senior Housing, other than our lease for the two rehabilitation hospitals, require us to pay additional rent equal to 4% of the amount by which gross revenues of the communities we operate exceed gross revenues in a base year.

Operating costs.  Each lease is a so-called “triple-net” lease which requires us to pay all costs incurred in the operation of the properties, including the costs of personnel, services to residents, insurance and real estate and personal property taxes.

Rent during renewal term.  Rent during each renewal term is the same as the minimum rent and percentage rent payable during the initial term.

Non economic circumstances.  If we determine that continued operations of one or more properties is not economically practical, we may negotiate with Senior Housing to close or sell that community, including Senior Housing’s ownership in the property. In the event of such a sale, Senior Housing receives the net proceeds and our rent for the remaining properties in the affected lease is reduced according to formulas in the leases.

Licenses.  Our leases require us to obtain, maintain and comply with all applicable permits and licenses necessary to operate our properties.

Maintenance and alterations.  We are required to operate continuously and maintain, at our expense, the leased properties in good order and repair, including structural and nonstructural components. We may request Senior Housing to fund amounts needed for repairs and renovations in return for rent adjustments to provide Senior Housing a return on its investment according to formulas set forth in the leases. At the end of each lease term, we are required to surrender the leased properties in substantially the same condition as existed on the commencement date of the lease, subject to any permitted alterations and ordinary wear and tear.

Assignment and subletting.  Senior Housing’s consent is generally required for any direct or indirect assignment or sublease of any of the properties. In the event of any assignment or subletting, we will remain liable under the applicable lease.

Indemnification and insurance.  With limited exceptions, we are required to indemnify Senior Housing from all liabilities which may arise from the ownership or operation of the leased properties. We generally are required to maintain commercially reasonable insurance, including captive self insurance, for:

·“all-risk” property insurance, in an amount equal to 100% of the full replacement cost of the properties;

·business interruption insurance;

·comprehensive general liability insurance, including bodily injury and property damage, in amounts as are generally maintained by companies providing senior living services;

·flood insurance if any property is located in whole or in part in a flood plain;

·workers compensation insurance if required by law; and

·such additional insurance as may be generally maintained by companies providing senior living services, including professional and general liability insurance.

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Each lease requires that Senior Housing be named as an additional insured under these policies.

Damage, destruction, condemnation and environmental matters.  If any of the leased properties is damaged by fire or other casualty or taken for a public use, we are generally obligated to rebuild unless the community cannot be restored. If the property cannot be restored, Senior Housing will generally receive all insurance or taking proceeds and we are liable to Senior Housing for the amount of any deductible or deficiency between the replacement cost and the insurance proceeds, and our rent will be adjusted pro rata.  We are also required to remove and dispose of any hazardous substance at the leased properties in compliance with all applicable environmental laws and regulations.

Events of default.  Events of default under each lease include the following:

·our failure to pay rent or any other sum when due;

·our failure to maintain the insurance required under such lease;

·any person or group acquiring ownership of 9.8% or more of our outstanding voting stock or any change in our control or sale of a material portion of our assets without Senior Housing’s consent;

·the occurrence of certain events with respect to our insolvency or dissolution;

·our default under indebtedness which gives the holder the right to accelerate;

·our being declared ineligible to receive reimbursement under Medicare or Medicaid programs for any of the leased properties which participate in such programs or the revocation of any material license required for our operations; and

·our failure to perform any terms, covenants or agreements of the leases and the continuance thereof for a specified period of time after written notice.

Remedies.  Upon the occurrence of any event of default, each lease provides that, among other things, Senior Housing may, to the extent legally permitted:

·accelerate the rents;

·terminate the leases in whole or in part;

·enter the property and take possession of any and all our personal property and retain or sell the same at a public or private sale;

·make any payment or perform any act required to be performed by us under the leases; and

·rent the property and recover from us the difference between the amount of rent which would have been due under the lease and the rent received from the re-letting.

We are obligated to reimburse Senior Housing for all costs and expenses incurred in connection with any exercise of the foregoing remedies.

Management.  We may not enter into any new management agreement affecting any leased property without the prior written consent of Senior Housing.

Lease subordination.  Our leases may be subordinated to any mortgages on properties leased from Senior Housing.

Financing limitations; security.  Without Senior Housing’s consent we may not incur debt secured by our investments in our tenant subsidiaries. Further, our tenant subsidiaries are prohibited from incurring liabilities other than operating liabilities incurred in the ordinary course of business, liabilities secured by our accounts receivable or purchase money debt. We have pledged 100% of the equity interests of certain of our tenant subsidiaries to Senior Housing and to certain of its lenders, and we may pledge interests in our leases only if the pledge is consented to by Senior Housing.

Item 3.    Legal Proceedings

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

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

None.

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PART II

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

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

2005	High		Low
First Quarter	$	9.19	$	6.80
Second Quarter	8.65		5.60
Third Quarter	9.09		6.75
Fourth Quarter	7.98		6.02

2006
First Quarter	$	12.10	$	7.70
Second Quarter	11.64		9.20
Third Quarter	11.95		8.75
Fourth Quarter	11.25		9.43

The closing price of our common shares on the AMEX on March 5, 2007, was $10.51 per share.

As of March 5, 2007, there were 3,177 shareholders of record, and we estimate that as of such date there were in excess of 35,200 beneficial owners of our common shares.

We have not paid any dividends in the past and do not expect to pay dividends in the foreseeable future.

Issuances of unregistered shares during the fourth quarter were as follows: on November 15, 2006, pursuant to our stock option and stock incentive plan, certain of our employees and others who provide services to us received grants totaling 97,200 shares of common stock, par value $0.01 per share, valued at $10.51 per share, the closing price of our common shares on the AMEX on that day.  All of these grants were made pursuant to an exemption from registration contained in section 4(2) of the Securities Act of 1933, as amended.

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Item 6.    Selected Financial Data

The following table sets forth selected financial data for the periods and dates indicated.  Comparative results are impacted by community acquisitions and dispositions during the periods shown.  This data should be read in conjunction with, and is qualified in its entirety by reference to, management’s discussion and analysis of financial condition and results of operations and the consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K.

	Year ended December 31,
	2006			2005			2004			2003			2002
	(in thousands, except per share data)
Operating data:
Total revenues	$	827,337		$	734,023		$	597,824		$	545,380		$	487,902
Net (loss) income from continuing operations	(112,040		)	(81,159		)	5,181			(5,079		)	(9,796		)
Net loss from discontinued operations	(4,625		)	(3,000		)	(1,890		)	(2,860		)	(3,378		)
Net (loss) income	$	(116,665	)	$	(84,159	)	$	3,291		$	(7,939	)	$	(13,174	)
Net (loss) income per share:
(Loss) income from continuing operations	$	(3.92	)	$	(5.45	)	$	0.59		$	(0.60	)	$	(1.30	)
Loss from discontinued operations	(0.16		)	(0.20		)	(0.22		)	(0.34		)	(0.45		)
Net (loss) income	$	(4.08	)	$	(5.65	)	$	0.37		$	(0.94	)	$	(1.74	)
Balance sheet data (as of December 31):
Total assets	$	366,411		$	228,940		$	222,985		$	147,370		$	133,197
Total indebtedness	171,271			45,329			42,581			10,436			16,123
Other long term obligations	28,098			25,465			18,065			16,196			17,723
Total shareholders’ equity	$	67,430		$	68,804		$	95,904		$	64,427		$	65,047

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

GENERAL INDUSTRY TRENDS

The senior living industry is experiencing growth as a result of demographic factors.  According to census data, the population in the United States over age 75 is growing much faster than the general population.  A large number of independent and assisted living communities were built in the 1990s.  This development activity caused an excess supply of new, high priced communities.  Longer than projected fill up periods resulted in low occupancy, price discounting and financial distress for many independent and assisted living operators.  Development activity was significantly reduced in the early part of this decade.  We believe that the supply and demand for these types of facilities is today nationwide about balanced.  We believe that the aging of the U.S. population and the almost complete reliance of independent and assisted living services upon revenues from residents’ private pay resources should mean that these types of facilities can be profitably operated for the foreseeable future.  However, it appears to us that today some investors may be assuming that the improvements in financial results realized at these types of communities during the past few years may continue indefinitely.  The reported sales prices being paid today for some independent and assisted living communities seem to exceed replacement cost, including fill up losses.  We are concerned that new development activity may occur in the near future, and it is currently unclear whether this activity will result in excess or moderate new supply which can be absorbed without adversely affecting existing market conditions.

The increasing availability of assisted living facilities in the 1990s caused occupancy at many nursing homes to decline.  This fact, together with restrictions on development of new nursing homes by most states, has caused nursing care to be delivered in many older facilities.  We believe that many nursing homes currently in operation are becoming physically obsolete and that eventually political pressures from an aging population will cause governmental authorities to permit increased new construction.

Rehabilitation hospitals provide intensive medical services, intensive physical therapy, occupational therapy and speech language services beyond the capability customarily available in skilled nursing facilities.  We believe that if

25

we are successful in our operation of our rehabilitation hospitals, our reputation in the rehabilitation business (including providing outpatient rehabilitation services) will be enhanced.  This may provide other possible opportunities for us to acquire additional IRFs or to provide increasing amounts of rehabilitation services at our senior living communities.

Institutional pharmacies provide large quantities of drugs at locations where patients with recurring pharmacy requirements are concentrated.  The business rationale for an institutional pharmacy is to deliver drugs and pharmacy services more efficiently and at lower costs than from expensive retail locations which cater to short term requirements.  The aging of the population and recent pharmacological innovations have created rapidly growing demand for pharmacy drugs and services.  We believe that the Medicare D benefits program which became effective January 1, 2006 will increase the demand for pharmacy drugs and services and that cost containment pressures, which inevitably will be part of this government funded program, will increase business for efficient institutional pharmacy businesses such as those we have recently begun to operate, but that these same cost containment pressures may limit the long term profitability of this business.

We earn our revenues from residents primarily by providing housing and services to our residents.  During 2006, approximately 33% of our net revenues from residents at our senior living communities came from the Medicare and Medicaid programs and 67% of our net revenues from residents came from private pay and other resources.  We bill all private pay residents in advance for the housing and services to be provided in the following month.

Our material expenses were:

·Wages and benefits — includes wages for our employees working at our senior living communities and wage related expenses such as health insurance, workers compensation insurance and other benefits.

·Other operating expenses — includes utilities, housekeeping, dietary, maintenance, marketing, insurance and community level administrative costs at our senior living communities.

·Hospital expenses — includes wages and benefits for our hospital based staff and other operating expenses related to our hospital business.

·Pharmacy expenses — includes the cost of drugs dispensed to our patients as well as wages and benefits for our pharmacies and staff and other operating expenses related to our pharmacy business.

·Rent expense — we lease 144 of our 162 senior living communities and two rehabilitation hospitals from Senior Housing and four senior living communities from HCPI.

·Management fee to SLS — fees for the senior living communities SLS historically managed for us.

·General and administrative expenses — principally wage related costs for headquarters and regional staff supporting our communities.

·Depreciation and amortization expense — we incur depreciation expense on buildings and furniture and equipment.

·Interest expense — includes interest on outstanding debt balances and amortization of deferred financing costs.

The following information should be read in conjunction with the consolidated financial statements included in this Annual Report on Form 10-K.

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Year ended December 31, 2006 versus year ended December 31, 2005

The following tables present an overview of our portfolio for the years ended December 31, 2006 and 2005:

	For the years ended December 31,
	2006			2005			$ Variance			Change
	(dollars in thousands, except per day amounts)
Net revenues from residents	$	748,003		$	700,891		$	47,112		7	%
Hospital revenue	26,130			—			26,130			—
Pharmacy revenue	53,204			33,132			20,072			61	%
Wages and benefits	384,005			356,367			27,638			8	%
Other operating expenses	187,335			180,694			6,641			4	%
Hospital expenses	23,589			—			23,589			—
Pharmacy expenses	52,972			31,823			21,149			66	%
Management fee to SLS	8,744			21,256			(12,512		)	-59	%
Termination expense for SLS management agreements	129,913			86,286			43,627			51	%
Rent expense	111,481			98,890			12,591			13	%
General and administrative	33,829			28,221			5,608			20	%
Depreciation and amortization	9,950			7,114			2,836			40	%
Impairment of assets	—			2,333			(2,333		)	—
Interest and other income	6,806			1,543			5,263			341	%
Interest expense	4,365			3,741			624			17	%
Provision for income taxes	—			—			—			—
Loss from discontinued operations	(4,625		)	(3,000		)	(1,625		)	-54	%
Net loss	(116,665		)	(84,159		)	(32,506		)	-39	%
No. of senior living communities (end of period)	162			151			—			11
No. of living units (end of period)	18,117			16,810			—			1,307
Occupancy	91		%	90		%	—			1	%
Average daily rate	$	124		$	127		$	(3	)	-2	%
Percent of net revenues from residents from Medicare	14		%	15		%	—			-1	%
Percent of net revenues from residents from Medicaid	19		%	20		%	—			-1	%
Percent of net revenues from residents from private and other sources	67		%	65		%	—			2	%

Comparable Communities (communities that we operated continuously since January 1, 2005):

	For the years ended December 31,
	2006			2005			$ Variance		Change
	(dollars in thousands, except per day amounts)
Net revenues from residents	$	716,170		$	688,782		$	27,388	4	%
Community expenses	544,333			527,524			16,809		3	%
No. of communities (end of period)	144			144			—		—
No. of living units (end of period)	16,160			16,160			—		—
Occupancy	90		%	90		%	—		—
Average daily rate	$	135		$	130		5		4	%
Percent of net revenues from residents from Medicare	14		%	15		%	—		-1	%
Percent of net revenues from residents from Medicaid	20		%	20		%	—		—
Percent of net revenues from residents from private and other sources	66		%	65		%	—		1	%

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The 7% increase in net revenues from residents is due primarily to revenues from the six communities we acquired in June 2005, the 11 communities we acquired in the fourth quarter of 2006, higher per diem charges to residents and a 1% increase in occupancy.  The 4% increase in net revenues from residents at the communities that we have operated continuously since January 1, 2005 is due primarily to higher per diem charges to residents.  The increase in revenues from our hospitals is a result of our beginning operations at our hospitals in October 2006.  The 61% increase in revenues from our pharmacies is a result of our acquiring one pharmacy in each of June 2005, December 2005, May 2006 and November 2006.

Our 8% increase in wages and benefits costs is primarily due to wages and benefits at the six communities we acquired in June 2005, the 11 communities we acquired in the fourth quarter of 2006 and wage increases.  The 4% increase in other operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, primarily results from the other operating expenses at the six communities we acquired in June 2005, the 11 communities we acquired in the fourth quarter of 2006 and increased charges from third parties.  The community expenses for the communities that we have operated continuously since January 1, 2005 have increased by 3%, principally due to wage and benefit increases.  The increase in hospital expenses is a result of our beginning operations at our hospitals in October 2006.  The 66% increase in pharmacy expenses is a result of our acquiring one pharmacy in each of June 2005, December 2005, May 2006 and November 2006.  Management fees to SLS decreased by 59% due to our termination of 12 management agreements in November 2005, one agreement in February 2006, 10 agreements in June 2006 and seven agreements in December 2006.  The 13% rent expense increase is primarily due to the communities that we began to lease in 2005 and 2006, the hospitals we began to lease in October 2006 and our payment of additional rent for capital improvements purchased by Senior Housing since January 1, 2005.

In April 2006, we sent notices to SLS to terminate management agreements for 10 of the 17 senior living communities that SLS then managed for us.  In June 2006, we paid SLS termination fees totaling $89.8 million and terminated the SLS management agreements for these 10 communities.  In December 2006, we terminated the last seven agreements under which SLS managed senior living communities for us and paid SLS termination fees totaling $40.1 million.  We no longer pay management fees to SLS.

The 20% increase in general and administrative expenses for the year ended December 31, 2006 results from the six communities we acquired in June 2005, the 11 communities we acquired in the fourth quarter of 2006, the 30 communities we began to operate that were previously managed for us by SLS and the rehabilitation hospitals we began to operate in October 2006.

The 40% increase in depreciation and amortization for the year ended December 31, 2006 is primarily attributable to our purchase of furniture and fixtures for our communities and in connection with our pharmacy acquisitions.

Our interest and other income increased by $5.3 million, or 341%, for the year ended December 31, 2006, compared to the year ended December 31, 2005, primarily as a result of a payment from HealthSouth to settle numerous transition matters and claims related to our assumption of the operations of the two rehabilitation hospitals.  The amount of this settlement was approximately $2.4 million.  Interest and other income also increased as a result of higher levels of investable cash and increased yields on our cash and investments.

Our interest expense increased by 17%, primarily due to the issuance of our convertible notes in October 2006.

Because of our operating loss carryforwards, we do not anticipate owing federal tax in 2006.

Loss from discontinued operations for the year ended December 31, 2006 was $4.6 million, compared to a loss of $3.0 million for the year ended December 31, 2005.  The losses in both years are primarily due to operating expenses we incurred as a result of our shutting down operations at two communities in 2005 and 2006.

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Year ended December 31, 2005 versus year ended December 31, 2004

The following tables present an overview of our portfolio for the years ended December 31, 2005 and 2004:

	For the years ended December 31,
	2005			2004			$ Variance			Change
	(dollars in thousands, except per day amounts)
Net revenues from residents	$	700,891		$	584,615		$	116,276		20	%
Pharmacy revenue	33,132			13,209			19,923			151	%
Wages and benefits	356,367			302,282			54,085			18	%
Other operating expenses	180,694			153,472			27,222			18	%
Pharmacy expenses	31,823			12,093			19,730			163	%
Management fee to SLS	21,256			19,293			1,963			10	%
Termination expense for SLS management agreements	86,286			—			86,286			—
Rent expense	98,890			82,453			16,437			20	%
General and administrative	28,221			20,052			8,169			41	%
Depreciation and amortization	7,114			3,372			3,742			111	%
Impairment of assets	2,333			—			2,333			—
Interest and other income	1,543			1,666			(123		)	-7	%
Interest expense	3,741			1,172			2,569			219	%
Provision for income taxes	—			120			(120		)	—
Loss from discontinued operations	(3,000		)	(1,890		)	(1,110		)	-59	%
Net (loss) income	(84,159		)	3,291			(87,450		)	-2,657	%
No. of senior living communities (end of period)	151			144			—			7
No. of living units (end of period)	16,810			16,054			—			756
Occupancy	90		%	89		%	—			1	%
Average daily rate	$	127		$	112		$	15		13	%
Percent of net revenues from residents from Medicare	15		%	16		%	—			-1	%
Percent of net revenues from residents from Medicaid	20		%	20		%	—			—
Percent of net revenues from residents from private and other sources	65		%	64		%	—			1	%

Comparable Communities (communities that we operated continuously since January 1, 2004):

	For the years ended December 31,
	2005			2004			$ Variance		Change
	(dollars in thousands, except per day amounts)
Net revenues from residents	$	604,967		$	574,952		$	30,015	5	%
Community expenses	469,062			448,161			20,901		5	%
No. of communities (end of period)	97			97			—		—
No. of living units (end of period)	13,410			13,410			—		—
Occupancy	90		%	90		%	—		—
Average daily rate	$	137		$	131		6		5	%
Percent of net revenues from residents from Medicare	17		%	18		%	—		-1	%
Percent of net revenues from residents from Medicaid	23		%	23		%	—		—
Percent of net revenues from residents from private and other sources	60		%	57		%	—		3	%

The 20% increase in net revenues from residents is due primarily to revenues from the 47 communities we acquired in November 2004, the six communities we acquired in June 2005, higher per diem charges to residents and a 1% increase in occupancy.  The 5% increase in net revenues from residents at the communities that we operated

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continuously since January 1, 2004 is due primarily to higher per diem charges to residents.  The increase in revenues from our pharmacies is a result of our acquiring one pharmacy in September 2004 and another pharmacy in June 2005.

Our 18% increase in wages and benefits costs is primarily due to wages and benefits at the 47 communities we acquired in November 2004, the six communities we acquired in June 2005 and wage increases.  The 18% increase in other operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, primarily results from the other operating expenses at the 47 communities we acquired in November 2004, the six communities we acquired in June 2005 and increased charges from third parties.  The community expenses for the communities that we have operated continuously since January 1, 2004 increased by 5% principally due to wage and benefit increases.  The 163% increase in pharmacy expenses is a result of our acquiring one pharmacy in September 2004 and another pharmacy in June 2005.  Management fees related to the 30 communities that SLS managed for us increased by 10% because of increased revenues at these communities and a contractual increase in the formula for calculating the management fee.  The 20% rent expense increase is due to additional communities that we began to lease in 2004 and 2005, and our payment of additional rent for capital improvements purchased by Senior Housing since January 1, 2004.

The termination expense for SLS management agreements arose from our termination of management agreements for 13 of the 30 senior living communities that SLS then managed for us.  In August 2005, we notified SLS of the termination of management agreements for 12 senior living communities, and, in November 2005, we terminated these SLS management agreements for a payment of $81.5 million.  In February 2006, we terminated the management agreement for one additional community for a payment of $4.8 million, but because we sent a binding termination notice to SLS for this community in December 2005, we accrued this termination fee in 2005.

The 41% increase in general and administrative expenses for the year ended December 31, 2005 primarily results from our increased operations at the 47 communities we acquired in November 2004, the six communities we acquired in June 2005, integration costs associated with our acquisition of those communities and increased audit and professional services fees for compliance with the requirements of the Sarbanes-Oxley Act of 2002.

The 111% increase in depreciation and amortization for the year ended December 31, 2005 is primarily attributable to the 47 communities we acquired in November 2004, the six communities we acquired in June 2005 and our purchase of furniture and fixtures for our communities then managed by SLS.

To partially fund our termination fees for the 12 management agreements with SLS on November 1, 2005, we sold the six communities that we acquired in June 2005 to Senior Housing for net proceeds of $56.7 million, and Senior Housing leased these communities back to us.  In connection with the sale of these communities to Senior Housing, we recognized a $2.3 million impairment charge to reduce the carrying value of these communities to the amount realized upon their sale to Senior Housing.  The purchase price paid to us by Senior Housing is the same amount as the purchase price we paid to the seller of the communities.  The impairment loss which we recognized in 2005 relates principally to transaction costs which we previously capitalized.

Our interest and other income decreased by 7% primarily because of lower levels of investable cash.

Our interest expense increased by $2.6 million, or 219%, primarily due to the mortgages we assumed in connection with certain acquisitions.

The provision for income taxes decreased because we do not anticipate owing tax under the alternative minimum tax regime in 2005.  We accrued $120,000 of federal alternative minimum income tax expense during the year ended December 31, 2004.

Loss from discontinued operations for the year ended December 31, 2005 was $3.0 million, compared to a loss of $1.9 million for the year ended December 31, 2004.  The losses in both years are primarily the result of our ceasing operations at two communities in 2005 and three communities in 2004.

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LIQUIDITY AND CAPITAL RESOURCES

We believe that a combination of our cash on hand, our efforts to increase revenues and contain costs, our ability to borrow on our revolving credit facility, our ability to sell to Senior Housing certain capital improvements made to communities that we lease from Senior Housing and the possibility of sales or financings of our owned communities will be sufficient to meet our working capital needs, operating expenses, rent payments to Senior Housing, debt service and capital expenditures for the next 12 months and the foreseeable future.

Assets and Liabilities

Our current assets at December 31, 2006 were $205.8 million, compared to $94.1 million at December 31, 2005.  At December 31, 2006 and 2005, we had cash and cash equivalents of $46.2 million and $16.4 million, respectively.  This increase in cash and cash equivalents is primarily the result of the issuance of our convertible notes in October 2006.  Our current liabilities were $132.9 million at December 31, 2006, compared to $90.0 million at December 31, 2005.  The increase in current liabilities is primarily the result of our electing to prepay seven mortgages in accordance with the terms of the related indebtedness.    We expect to complete these prepayments totaling approximately $28.7 million by March 31, 2007.

Our Leases with Senior Housing

As of March 5, 2007, we lease 144 senior living communities and two rehabilitation hospitals from Senior Housing under six leases.  Our leases with Senior Housing require us to pay minimum rent of $124.4 million annually and percentage rent for most communities.

The terms of our leases with Senior Housing contain provisions whereby Senior Housing may cancel our rights under these agreements upon the acquisition by any person or group of more than 9.8% of our voting stock and upon other “change of control” events.  These leases also limit our ability to create, incur, assume or guarantee indebtedness.  As of March 5, 2007, we believe we are in compliance with the terms of our leases with Senior Housing.

Upon our request, Senior Housing reimburses our capital expenditures made at the communities we lease from Senior Housing and increases our rent pursuant to contractual formulas.  Senior Housing reimbursed us $23.7 million during the year ended December 31, 2006 for capital expenditures made at these leased communities and increased our annual rent by approximately $2.3 million.

                In February 2006, we assumed the operations of a community from SLS which is located in Coral Springs, Florida. We began a significant capital improvement project at this community in 2006 that will continue into 2007 and the cost of this project may total approximately $5.0 million.  Pursuant to the terms of our lease with Senior Housing, Senior Housing will fund the cost of this capital improvement project and our annual rent payable to Senior Housing will increase pursuant to the formula set forth in the lease.

Our Revenues

Our revenues from services to residents at our communities are our primary source of cash to fund our operating expenses, including rent, principal and interest payments on our debt and our capital expenditures.  At some of our communities, operating revenues for nursing home services are received from the Medicare and Medicaid programs.  Medicare and Medicaid revenues from residents were earned primarily at our 49 nursing homes.  We derived 33% and 35% of our net revenues from residents from these programs for the years ended December 31, 2006 and 2005, respectively.

Our Medicare net revenues from senior living community residents totaled $103.7 million and $105.0 million for the years ended December 31, 2006 and 2005, respectively.  In each of October 2006 and 2005, our Medicare rates increased by approximately 3% over the prior period.  Our change in Medicare revenues from 2005 to 2006 resulted from a slight decrease in the number of residents at our facilities who were eligible for Medicare. Effective January 1, 2006, CMS implemented changes to the payment categories it uses to set daily payment rates for Medicare beneficiaries in skilled nursing facilities.  These categories are known as Resource Utilization Groups, or RUGs.  CMS has introduced nine new payment categories for medically complex patients, increasing the number of categories from 44 to 53, and

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has made revisions to its payment rates for current RUGs.  Also effective January 1, 2006, these RUG changes eliminated certain temporary additional payments for certain skilled nursing care and rehabilitation groups.  These changes to Medicare reimbursement rates effectively eliminated the benefit of the October 2005 Medicare rate increases.

Our Medicaid net revenues from senior living community residents totaled $141.7 million and $137.0 million for the years ended December 31, 2006 and 2005, respectively.  The Bush administration and certain members of the Senate and the House of Representatives have recently proposed Medicare and Medicaid policy changes and rate reductions to be phased in during the next several years.  In addition, some of the states in which we operate either have not raised Medicaid rates by amounts sufficient to offset increasing costs or are expected to reduce Medicaid funding.  The magnitude of the potential Medicare and Medicaid rate reductions and the impact of the failure of these programs to increase rates to match increasing expenses, as well as the magnitude of the potential Medicare and Medicaid policy changes, cannot currently be estimated, but they may be material to our operations, may affect our future results of operations and may produce losses.

We began to operate two rehabilitation hospitals in October 2006.  Approximately 72% of our revenues from these hospitals came from the Medicare and Medicaid programs.  In May 2004, CMS issued a rule establishing revised Medicare standards that rehabilitation hospitals are required to meet in order to participate as IRFs in the Medicare program, known as the “75% Rule”.  The 75% Rule is being phased in over a four year period that began on July 1, 2004.  For cost reporting periods starting on and after July 1, 2006, 60% of a facility’s inpatient population must require intensive rehabilitation services for one of CMS’ designated medical conditions.  For cost reporting periods starting on and after July 1, 2007, the requirement is 65% and for cost reporting periods starting on and after July 1, 2008, the requirement is 75%.  An IRF that fails to meet the requirements of the 75% Rule is subject to reclassification as a different type of healthcare provider; and the effect of such reclassification would be to lower Medicare payment rates.

Under the MPDIMA, Medicare beneficiaries may receive prescription drug benefits effective January 1, 2006 by enrolling in private health plans or managed care organizations, or if they remain in a traditional Medicare program, by enrolling in stand alone prescription drug plans.  As a result, our pharmacy operations became more dependent upon the Medicare program.

Insurance

Recent increases in the costs of insurance, especially tort liability insurance, workers compensation and employee health insurance, may continue to have an adverse impact upon our future results of operations.  Although we self insure a large portion of these costs, our costs have increased as a result of the higher costs that we incur to settle claims.

Acquisitions and Related Financings

In March 2005, we acquired a 62 unit assisted living community located in Georgia for approximately $6.9 million.  We financed the acquisition with cash on hand.

In June 2005, we acquired six assisted living communities for approximately $59.0 million; these communities had a combined licensed resident capacity of 654 and are located in western Pennsylvania.  We funded this purchase using $10.0 million drawn under our revolving credit facility, the proceeds of a sale leaseback transaction and a mortgage transaction with Senior Housing.  In connection with these transactions, we sold four assisted living communities to Senior Housing for $24.0 million and Senior Housing leased these communities back to us for initial rent of $2.2 million per year.  Senior Housing also provided us with a $43.5 million first mortgage line of credit secured by the six purchased communities.  We borrowed $24.0 million under the first mortgage line of credit when we closed this purchase and repaid it in August 2005 with proceeds raised from our sale of common shares.

In October 2005, we sold six communities to Senior Housing for net proceeds of $56.7 million and Senior Housing leased these communities back to us.  Our initial rent to Senior Housing for these communities was $5.2 million per annum.  The purchase price paid to us by Senior Housing is the same amount as the purchase price we paid

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to acquire the communities.  In connection with the sale and leaseback of the six communities, we terminated the first mortgage line of credit with Senior Housing which had been secured by these facilities.

Between September and December 2006, we agreed to lease 11 senior living communities with 1,284 units which Senior Housing acquired from third parties.  Six of these communities are assisted living communities (three of which offer some skilled nursing services), three are independent living communities and two are continuing care retirement communities which offer independent living, assisted living and skilled nursing services.  Our rent payable to Senior Housing for these 11 communities is $9.0 million per year, plus future increases calculated as a percentage of the revenue increases at these communities after 2007.  We added these communities to our existing lease with Senior Housing which has a current term ending in 2020, plus renewal options thereafter.  Residents pay substantially all of our charges at these communities from their private resources.

Between June 2005 and November 2006, we acquired four institutional pharmacy businesses located in Omaha, Nebraska, West Hills, California, Myrtle Beach, South Carolina and Vienna, Virginia for approximately $4.6 million, $450,000, $3.6 million and $2.3 million, respectively.

Rehabilitation Hospitals

In October 2006, we began to lease two rehabilitation hospitals from Senior Housing.  The term of the lease for these two hospitals expires on June 30, 2026, subject to our right to extend the term of the lease for an additional 20 years. These two hospitals provide health rehabilitation services and are located in Braintree and Woburn, Massachusetts.  Our rent payable to Senior Housing for these hospitals is $10.3 million per year.  These hospitals offer extensive inpatient and outpatient services that we believe are similar to services we provide, or may provide, in many of our senior living communities.

Discontinued Operations

                During 2005, we ceased operations at one assisted living community in Los Angeles, California and one skilled nursing facility in Milwaukee, Wisconsin.  We leased this community and this facility from Senior Housing.  Senior Housing sold the assisted living community located in California in December 2005 for net proceeds of approximately $2.6 million, which caused a $260,000 reduction in the annual minimum rent we pay to Senior Housing in accordance with our lease terms.  Senior Housing sold the skilled nursing facility located in Wisconsin in December 2006 for net proceeds of approximately $1.3 million, which caused a $130,000 reduction in the annual minimum rent we pay to Senior Housing in accordance with our lease terms.

                In June 2006, we ceased operations at two skilled nursing facilities located in Connecticut that we leased from Senior Housing.  Senior Housing sold those facilities in November 2006 for net proceeds of approximately $5.6 million, which caused a $559,000 reduction in the annual minimum rent we pay to Senior Housing in accordance with our lease terms.

Termination of SLS Management Agreements

In November 2005, we terminated management agreements for 12 of the 30 senior living communities that SLS then managed for us, paid SLS termination fees totaling $81.5 million and began to directly operate these communities.  We funded this termination payment with cash on hand, including the proceeds from our August and September 2005 common share offering, and with the proceeds of a sale leaseback transaction with Senior Housing for the six communities we acquired in June 2005.  In February 2006, we terminated a management agreement for one senior living community that SLS then managed for us, paid SLS a termination fee of $4.8 million and began to directly operate this community.  In June 2006, we terminated management agreements for 10 of the 17 senior living communities that SLS then managed for us, paid SLS termination fees totaling $89.8 million and began to directly operate these communities.  We funded this termination payment with cash on hand, including the proceeds from our April 2006 common share offering.  In December 2006, we terminated management agreements for all of the remaining senior living communities that SLS then managed for us, paid SLS termination fees totaling $40.1 million and began to directly operate these communities.  We funded this termination payment with cash on hand, including the proceeds from our issuance of the convertible notes in October 2006.  We no longer pay management fees to SLS.

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Equity and Debt Financings

In December 2004 and January 2005, we issued 3,620,000 common shares in an underwritten public offering raising net proceeds of $28.8 million.  We used a portion of the proceeds raised in this offering to pay off a $16.8 million mortgage loan with Senior Housing, and we added the remainder to our cash balances.  In August and September 2005, we issued 7,750,000 common shares in an underwritten public offering raising net proceeds of $55.6 million.  We used a portion of the proceeds raised in this offering to pay off the $24.0 million first mortgage line of credit with Senior Housing described above and to reduce amounts outstanding under our revolving credit facility, and we added the remainder to available cash balances.  In April 2006, we issued 11,500,000 common shares in an underwritten public offering raising net proceeds of $114.0 million.  We used a portion of the proceeds raised in this offering to pay the $89.8 million in termination fees for the 10 SLS management agreements we terminated in June 2006, and we added the remainder to available cash balances.  In October 2006, we issued in a private placement $126.5 million principal amount of our convertible notes.  We used the proceeds raised in this private placement to pay the termination fees for the remaining management agreements with SLS, and we added the remainder to available cash balances.

Contractual Obligations Table

              As of December 31, 2006, our contractual obligations were as follows (dollars in thousands):

	Payment due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Debt Obligations (1)	$	171,271	$	33,317	$	406	$	353	$	137,195
Operating Lease Obligations (2)	1,611,820		125,584		251,167		251,167		983,902
Other Long Term Liabilities Reflected on our Balance Sheet (3)	18,464		—		14,433		4,031		—
Total	$	1,801,555	$	158,901	$	266,006	$	255,551	$	1,121,097

(1)Debt Obligations are the amounts due under several HUD insured mortgages as well as our outstanding convertible notes.  Debt Obligations due in less than one year include the entire balances for the seven mortgages that we expect to prepay by March 31, 2007.

(2)Operating Lease Obligations are the minimum lease payments to Senior Housing and HCPI through the current lease terms ending between 2014 and 2026.  These amounts do not include percentage rent that may become payable under these leases.

(3)Other Long Term Liabilities Reflected on our Balance Sheet are primarily insurance reserves related to workers compensation and professional liability insurance.

Debt Instruments and Covenants

The interest rate on borrowings under our revolving credit facility is LIBOR plus a premium.  The maximum amount available under this facility is $25.0 million, and is subject to limitations based upon qualifying collateral.  We are the borrower under the revolving credit facility and certain of our subsidiaries guarantee our obligations under the facility.  The facility is secured by our and our guarantor subsidiaries’ accounts receivable, deposit accounts and related assets.  The facility is available for acquisitions, working capital and general business purposes.  The facility contains covenants requiring us to maintain collateral, minimum net worth and certain other financial ratios, places limits on our ability to incur or assume debt or create liens with respect to certain of our properties and has other customary provisions.  In certain circumstances and subject to available collateral and lender approvals, the maximum amount which we may draw under this credit facility may be increased to $50.0 million.  In July 2006, we entered into an amendment to the facility to lower the interest paid on drawings under the facility and to extend the termination date to May 8, 2008.  The termination date may be further extended twice, in each case by twelve months, subject to lender approval, our payment of extension fees and other conditions.  As of December 31, 2006 and March 5, 2007, no amounts were outstanding under this credit facility.  As of December 31, 2006 and March 5, 2007, we believe we are in compliance with all applicable covenants under this revolving credit facility.

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At December 31, 2006, we had 11 HUD insured mortgage loans totaling $44.8 million that were secured by nine of our communities.  By March 31, 2007, we expect to have prepaid seven mortgages that were secured by six of our communities.  We expect to pay approximately $28.7 million to payoff these seven mortgages, which will consist of approximately $27.8 million in principal and approximately $881,000 in prepayment penalties.  Because we had carried these mortgages at a premium to their fair value, we will recognize a gain of approximately $4.5 million in connection with the early extinguishment of debt.  The weighted average interest rate on these mortgages was 7.3%.  The weighted average interest rate on the remaining four mortgages is 6.1%.  Payments of principal and interest are due monthly on our remaining four mortgages until maturities at varying dates ranging from February 2032 to June 2039.  These mortgages contain standard HUD mortgage covenants.  As of December 31, 2006 and March 5, 2007, we believe we are in compliance with all covenants of these four mortgages.

In October 2006, we issued in a private placement $126.5 million principal amount of convertible notes, which included $16.5 million principal amount of the notes issued pursuant to the underwriters exercise of an over allotment option. Our net proceeds from this private placement were approximately $122.6 million.  These notes are convertible into our common shares at any time.  The initial conversion rate, which is subject to possible adjustment, is 76.9231 common shares per $1,000 principal amount of notes, which represents an initial conversion price of $13.00 per share.  A holder that surrenders notes for conversion in connection with a “make whole fundamental change,” as defined in the indenture governing the notes, that occurs before October 20, 2011 may in some circumstances be entitled to an increased conversion rate (i.e., a lower per share conversion price).

The convertible notes bear interest at a rate of 3.75% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, starting on April 15, 2007.  The notes mature on October 15, 2026.  On or after October 20, 2011, we may redeem the notes, in whole or in part, at a redemption price in cash equal to 100% of the principal amount of the notes we redeem, plus any accrued and unpaid interest.  On each of October 15, 2013, October 15, 2016 and October 15, 2021, holders of the notes may require us to purchase all or a portion of their notes at a purchase price in cash equal to 100% of the principal amount of the notes to be purchased, plus any accrued and unpaid interest.  If a “fundamental change,” as defined in the indenture governing the notes, occurs, holders of the notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest and, in certain circumstances, plus a make whole premium as defined in the indenture governing the notes.  The notes are guaranteed by certain of our wholly owned subsidiaries.  Our subsidiary guarantors may be released from their obligations under certain circumstances.  As of  December 31, 2006 and March 5, 2007, we believe we are in compliance with all covenants of the indenture pursuant to which these notes were issued.

Off Balance Sheet Arrangements

As of December 31, 2006, we had no off balance sheet arrangements, commercial paper, derivatives, swaps, hedges, third party guarantees, or material joint ventures or partnerships.

Related Person Transactions

We were a 100% owned subsidiary of Senior Housing before December 31, 2001.  On December 31, 2001, Senior Housing distributed substantially all of our then outstanding shares to its shareholders.  In order to effect this spin off and to govern relations after the spin off, we entered into agreements with Senior Housing and others pursuant to which it was agreed, among other things, that:

·so long as Senior Housing remains a real estate investment trust, or a REIT, we may not waive the share ownership restrictions in our charter on the ability of any person or group to acquire more than 9.8% of any class of our equity shares without the consent of Senior Housing;

·so long as we are a tenant of Senior Housing, we will not permit nor take any action that, in the reasonable judgment of Senior Housing or HRPT Properties Trust (another REIT), or HRPT, might jeopardize the tax status of Senior Housing or HRPT as REITs;

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·Senior Housing has the option, upon the acquisition by a person or group of more than 9.8% of our voting stock and upon other change in control events, as defined, to cancel all of our rights under the leases we have with Senior Housing; and

·so long as we maintain our shared services agreement with RMR we will not acquire or finance any real estate without first giving Senior Housing, HRPT or any other publicly owned REIT or other entity managed by RMR, the opportunity to acquire or finance real estate investments of the type in which Senior Housing, HRPT or any other publicly owned REIT or other entity managed by RMR, respectively, invest.

At the time of our spin off from Senior Housing, all of the persons serving as our directors were trustees of Senior Housing.  Our two managing directors, Messrs. Martin and Portnoy, are currently the managing trustees of Senior Housing.

Of the 162 senior living communities we operate, 144 are leased from Senior Housing for total annual minimum rent of $114.1 million.

Since January 1, 2006, we have entered into several transactions with Senior Housing, including:

·In October 2006, we began to lease two rehabilitation hospitals from Senior Housing.  The term of the lease for these two hospitals expires on June 30, 2026, subject to our right to extend the term of the lease for an additional 20 years.   These two hospitals provide health rehabilitation services and are located in Braintree and Woburn, Massachusetts.  Our rent payable to Senior Housing for these hospitals is $10.3 million per year.  These hospitals offer extensive inpatient and outpatient services that we believe are similar to services we provide, or may provide, in many of our senior living communities.

·In June 2006, we ceased operations at two communities located in Connecticut that were leased from Senior Housing.  In November 2006, Senior Housing sold these two communities for net proceeds of approximately $5.6 million, which will reduce the annual minimum rent we pay to Senior Housing under our lease by $559,000.

·Between September and December 2006, we agreed to lease 11 senior living communities with 1,284 units which Senior Housing acquired from third parties.  Six of these communities are assisted living communities (three of which offer some skilled nursing services), three are independent living communities and two are continuing care retirement communities which offer independent living, assisted living and skilled nursing services.  Our rent payable to Senior Housing for these 11 communities is $9.0 million per year, plus future increases calculated as a percentage of the revenue increases at these communities after 2007.  We added these communities to our existing lease with Senior Housing which has a current term ending in 2020, plus renewal options thereafter.  Residents pay substantially all of our charges at these communities from their private resources.

·During 2006, as permitted by our leases with Senior Housing, we sold to Senior Housing, at cost, approximately $23.7 million of improvements made to properties leased from Senior Housing, and, as a result, our annual rent payable to Senior Housing increased by approximately $2.3 million.

RMR provides certain management and administrative services to us under a shared services agreement. RMR is compensated at an annual rate equal to 0.6% of our total revenues. Aggregate fees earned by RMR for services during 2006, 2005 and 2004, were $4.9 million, $4.7 million and $3.7 million, respectively.  RMR also provides the internal audit function for us and for other publicly owned companies to which it provides management or other services.  Our pro rata share of RMR’s costs in providing that function for the years ended 2006, 2005 and 2004 was $173,000, $106,938 and $80,489, respectively.  Our audit committee appoints our director of internal audit, and our compensation committee approves his salary.  Our compensation committee also approves the costs we pay with respect to our internal audit function.  The fact that RMR has responsibilities to other entities, including our most significant landlord, Senior Housing, could create conflicts; and in the event of such conflicts between Senior Housing and us, the shared services agreement allows RMR to act on behalf of Senior Housing rather than on our behalf.  RMR is beneficially owned by Messrs. Barry M. Portnoy, one of our managing directors, and his son, Adam D. Portnoy, President and Chief Executive Officer and a director of RMR, a managing trustee of HRPT and Hospitality Properties Trust (another

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REIT) and a nominee for election as a managing trustee of Senior Housing.  All transactions between us and RMR are approved by our compensation committee.

Our Chief Executive Officer and Chief Financial Officer are also officers and employees of RMR. These officers devote a substantial majority of their business time to our affairs and the remainder to RMR’s business which is separate from our business. We believe the compensation we pay to these officers reasonably reflects their division of business time; however, periodically, these individuals may divide their business time differently than they do currently and their compensation from us may become disproportionate to this division.

A subsidiary of RMR is the owner of the building in which our headquarters is located.  This lease expires in 2011. We paid rent, which includes our proportional share of utilities and real estate taxes, under this lease during 2006, 2005 and 2004 of $938,000, $711,000 and $561,000, respectively.  This lease has been amended at various times to take into account our needs for increasing space.

In December 2006, we commenced leasing space for a regional office in Atlanta, Georgia from HRPT.  This lease expires in 2011.  We paid rent, which includes our proportional share of utilities and real estate taxes, under this lease during 2006 of $4,709.

We believe that all our transactions with related parties are on reasonable commercial terms; and all such transactions between us and related parties are approved by our independent directors.

Critical Accounting Policies

Our critical accounting policies concern revenue recognition, our assessment of the net realizable value of our accounts receivable, the realizable value of long term assets, accounting for long term care contracts, accounting for business combinations and our assessment of reserves related to our self insurance programs.

Our revenue recognition policies involve judgments about Medicare and Medicaid rate calculations.  These judgments are based principally upon our experience with these programs and our knowledge and familiarity with the current rules and regulations of these programs.  We recognize revenues when services are provided and these amounts are reported at their estimated net realizable amounts.  Some Medicare and Medicaid revenues are subject to audit and retroactive adjustment, and sometimes retroactive legislative changes.

Our policies for valuing accounts receivable involve significant judgments based upon our experience, including consideration of the age of the receivables, the terms of the agreements with our residents, their third party payors or other obligors, the residents or payors stated intent to pay, the residents or payors financial capacity and other factors which may include litigation or appeal proceedings.

We regularly evaluate whether events or changes in circumstances have occurred that could indicate impairment in the value of long lived assets.  If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows from the asset to determine if an impairment loss should be recognized.  We determine the amount of impairment loss by comparing the historical carrying value of the asset to its estimated fair value.  We determine estimated fair value through an evaluation of recent financial performance, recent sales of similar assets, market conditions and projected discounted cash flows of properties using standard industry valuation techniques.  This process requires that estimates be made and errors in our judgments or estimates could have a material effect on our financial statements.

At one of our communities, we offer continuing care contracts under which residents may pay admission fees in exchange for reduced charges during their occupancy.  These fees may be refundable or non-refundable, or partially refundable and partially non-refundable.  We record these fees as obligations and amortize the non-refundable amounts into revenue over the actuarially determined remaining lives of the individual residents which are the expected periods of occupancy.  Actuarially determined remaining lives are estimates based upon general demographic samplings and averages.  Our decision to amortize the non-refundable fees over actuarially determined lives is based upon our estimates that these residents will remain at our facilities for that period.  The actual remaining lives and the actual period of occupancy of the individual residents who pay the non-refundable fees may differ materially from these estimates.  In the future, if we find that such differences are material, we may change the actuarial tables which

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we use and we may change our estimates that these residents will remain at our facilities for these periods; and these changes could have a material impact upon our financial statements.

Each of our acquisitions has been accounted for as a purchase business combination in accordance with Statement of Financial Accounting Standards No. 141.  Purchase accounting requires that we make certain judgments and estimates based on our experience, including determining the fair value and useful lives of assets acquired and the fair value of liabilities assumed.  Some of our judgments and estimates are also based upon published industry statistics and in some cases third party appraisals.

Determining reserves for the self insurance portions of our insurance programs involves significant judgments based upon our experience, including projected settlements for pending claims, known incidents which we expect may result in claims, estimates of incurred but not yet reported claims, claims experience, estimated litigation costs and other factors.  We also periodically receive and rely upon recommendations from professional consultants in establishing these reserves; however, these reserves may prove to be materially inaccurate.

In the future we may need to revise the judgments, estimates and assessments we use to formulate our critical accounting policies to incorporate information which is not now known.  We cannot predict the effect changes to these premises underlying our critical accounting policies may have on our future results of operations, although such changes could be material and adverse.

Inflation and Deflation

Inflation in the past several years in the U.S. has been modest.  Future inflation might have either positive or negative impacts on our business.  Rising price levels may allow us to increase occupancy charges to residents, but may also cause our operating costs, including our percentage rent, to increase.  Also, our ability to affect rate increases paid by the Medicare and Medicaid programs will be limited despite inflation.

Deflation would likely have a negative impact upon us.  A large component of our expenses consists of our minimum rental obligations to Senior Housing and HCPI.  Accordingly we believe that a general decline in price levels which could cause our charges to residents to decline would likely not be fully offset by a decline in our expenses.

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 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 increased costs or discharges to hospitals. As a result of these factors, nursing home and assisted living operations sometimes produce greater earnings in 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 7A.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to risks associated with market changes in interest rates.  We manage our exposure to this market risk by monitoring available financing alternatives.  Our strategy to manage exposure to changes in interest rates is unchanged from December 31, 2005.  Other than as described below, we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.

 Changes in market interest rates also affect the fair value of our debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt.   For example: based upon discounted cash flow analysis, if prevailing interest rates were to increase by 10%, the market value of our $171.3 million mortgage debt and convertible notes outstanding on December 31, 2006 would decline by about $6.8 million; and, similarly, if prevailing interest rates were to decline by 10% and other

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credit market considerations remained unchanged, the market value of our $171.3 million mortgage debt and convertible notes outstanding on December 31, 2006, would increase by about $7.4 million.

Our revolving credit facility bears interest at floating rates and matures in May 2008.  As of December 31, 2006 and March 5, 2007, no amounts were outstanding under this credit facility.  We borrow in U.S. dollars and borrowings under our revolving credit facility bear interest at LIBOR plus 150 basis points.  Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR.  A change in interest rates would not affect the value of any outstanding floating rate debt but could affect our operating results.  For example, if the maximum amount of $25.0 million were drawn under our credit facility and interest rates decreased or increased by 1% per annum, our interest expense would decrease or increase by $250,000 per year, or $0.01 per share, based on currently outstanding common shares.  If interest rates were to change gradually over time, the impact would occur over time.

Our exposure to fluctuations in interest rates may increase in the future if we incur debt to fund acquisitions or otherwise.

Item 8. Financial Statements and Supplementary Data

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

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

None.

Item 9A.  Controls and Procedures

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our 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.  Based upon that evaluation, our President and Chief Executive Officer and our Treasurer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management Report on Assessment of Internal Control Over Financial Reporting

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

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Integrated Framework . Based on our assessment, we believe that, as of December 31, 2006, our internal control over financial reporting is effective.

Ernst & Young LLP, the independent registered public accounting firm that audited our 2006 consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on our assessment of our internal control over financial reporting. Its report appears elsewhere herein.

Item 9B.  Other Information

None.

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PART III

Item 10.  Directors and Executive Officers and Corporate Governance

We have a code of business conduct and ethics that applies to all our representatives, including our officers and directors.  Our code of business conduct and ethics is posted on our website, www.5sqc.com.  A printed copy of our code of business conduct and ethics is also available free of charge to any person who requests a copy.  We intend to disclose any amendments or waivers to our code of business conduct and ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller (or any person performing similar functions) on our website.

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

Item 11.  Executive Compensation

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

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

Equity Compensation Plan Information.  We may grant options and common shares to our officers, directors, employees and other individuals who render services to us, subject to vesting requirements under our 2001 Stock Option and Stock Incentive Plan, as amended, or the Plan.  In addition, each of our directors receives 4,000 shares per year as part of his or her annual compensation for serving as a director and such shares may be awarded under the Plan.  The terms of grants made under the Plan are determined by our board of directors or a committee thereof at the time of the grant.  The following table is as of December 31, 2006.

	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)	(c)
Equity compensation plans approved by security holders	None	None	2,645,500	(1)
Equity compensation plans not approved by security holders	None	None	None
Total	None	None	2,645,500

(1) Pursuant to the terms of the Plan, in no event shall the number of shares issued exceed 3,000,000.

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

Item 13.  Certain Relationships and Related Transactions and Directors Independence

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

Item 14.  Principal Accountant Fees and Schedules

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

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Item 15.  Exhibits and Financial Statement Schedules

(a)  Index to Financial Statements

Consolidated Financial Statements of Five Star Quality Care, Inc.
Reports of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheet at December 31, 2006 and 2005	F-3
Consolidated Statement of Operations for the years ended December 31, 2006, 2005 and 2004	F-4
Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2006, 2005 and 2004	F-5
Consolidated Statement of Cash Flows for the years ended December 31, 2006, 2005 and 2004	F-6
Notes to Consolidated Financial Statements	F-7

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

 (b)Exhibits

Exhibit No.	Description
2.1	Transaction Agreement, dated as of December 7, 2001, by and among Senior Housing Properties Trust, certain subsidiaries of Senior Housing Properties Trust party thereto, the Company, certain subsidiaries of the Company party thereto, FSQ, Inc., Hospitality Properties Trust, HRPT Properties Trust and Reit Management & Research LLC. (Incorporated by reference to Senior Housing Properties Trust’s Current Report on Form 8-K dated December 13, 2001.)
2.2	Purchase and Sale Agreement, dated as of March 1, 2004, by and among Ellicott City Land I, LLC and Ellicott City Land II, LLC, collectively as Sellers and SNH CHS Properties Trust, as Purchaser.(Incorporated by reference to the Company’s Current Report on Form 8-K dated March 1, 2004.)
2.3	Purchase and Sale Agreement, dated as of January 21, 2005, by and among the Company, as Purchaser, and Franciscan Manor Associates, LLC, Muirfield Associates, LLC, Prestwicke Associates, LLC, Royal Aberdeen, LLC, Troon Associates, LLC and Turnberry Associates, LLC, as Seller. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004).
2.4	First Amendment to Purchase and Sale Agreement, dated as of February 3, 2005, by and among the Company, as Purchaser, and Franciscan Manor Associates, LLC, Muirfield Associates, LLC, Prestwicke Associates, LLC, Royal Aberdeen, LLC, Troon Associates, LLC and Turnberry Associates, LLC, as Seller. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004).
2.5	Second Amendment to Purchase and Sale Agreement, dated as of May 13, 2005, by and among the Company, as Purchaser, and Franciscan Manor Associates, LLC, Muirfield Associates, LLC, Prestwicke Associates, LLC, Royal Aberdeen Associates, LLC, Troon Associates, LLC and Turnberry Associates, LLC, as Sellers. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 3, 2005.)
2.6	Third Amendment to Purchase and Sale Agreement, dated as of May 16, 2005, by and among the Company, as Purchaser, and Franciscan Manor Associates, LLC, Muirfield Associates, LLC, Prestwicke Associates, LLC, Royal Aberdeen Associates, LLC, Troon Associates, LLC and Turnberry Associates, LLC, as Sellers.(Incorporated by reference to the Company’s Current Report on Form 8-K dated June 3, 2005.)
2.7	Fourth Amendment to Purchase and Sale Agreement, dated as of May 25, 2005, by and among the Company, as Purchaser, and Franciscan Manor Associates, LLC, Muirfield Associates, LLC, Prestwicke Associates, LLC, Royal Aberdeen Associates, LLC, Troon Associates, LLC and Turnberry Associates, LLC, as Sellers.(Incorporated by reference to the Company’s Current Report on Form 8-K dated June 3, 2005.)

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2.8	Fifth Amendment to Purchase and Sale Agreement, dated as of May 27, 2005, by and among the Company, as Purchaser, and Franciscan Manor Associates, LLC, Muirfield Associates, LLC, Prestwicke Associates, LLC, Royal Aberdeen Associates, LLC, Troon Associates, LLC and Turnberry Associates, LLC, as Sellers. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 3, 2005.)
2.9	Sixth Amendment to Purchase and Sale Agreement, dated as of June 3, 2005, by and among the Company, as Purchaser, and Franciscan Manor Associates, LLC, Muirfield Associates, LLC, Prestwicke Associates, LLC, Royal Aberdeen Associates, LLC, Troon Associates, LLC and Turnberry Associates, LLC, as Sellers.(Incorporated by reference to the Company’s Current Report on Form 8-K dated June 3, 2005.)
2.10	Purchase and Sale Agreement, dated as of June 3, 2005, by and among FSQ Crown Villa Business Trust, Morningside of Belmont, LLC, Morningside of Greenwood, L.P. and Five Star Quality Care-GA, LLC, as Sellers, and SNH CHS Properties Trust, SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Purchasers. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 3, 2005.)
2.11	Purchase and Sale Agreement, dated as of October 31, 2005, by and among SNH/LTA Properties Trust, as Purchaser, and Five Star Quality Care-GHV, LLC and Five Star Quality Care-MVSP, LLC, as Sellers.(Incorporated by reference to the Company’s Current Report on Form 8-K dated November 4, 2005.)
3.1	Composite copy of Articles of Amendment and Restatement of the Company. (Incorporated by reference to the Company’s Current Report on Form 8-K dated March 31, 2006.)
3.2	Composite copy of Amended and Restated Bylaws of the Company. (Incorporated by reference to the Company’s Current Report on Form 8-K dated March 10, 2004.)
3.3	Articles Supplementary, as corrected by Certificate of Correction dated as of March 19, 2004. (Incorporated by reference to the Company’s 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.)
4.1	Specimen Certificate for shares of common stock of the Company. (Incorporated by reference to the Company’s Registration Statement on Form S-1, File No. 333-69846, as amended on November 8, 2001.)
4.2	Description of Capital Stock of the Company.(Contained in Exhibits 3.1 and 3.2.)
4.3	Rights Agreement, dated as of March 10, 2004, by and between the Company and Equiserve Trust Company, N.A.(Incorporated by reference to the Company’s Current Report on Form 8-K dated March 10, 2004.)
4.4	Appointment of Successor Rights Agent, dated as of December 13, 2004, by and between the Company and Wells Fargo Bank, National Association, a national banking association. (Incorporated by reference to the Company’s Current Report on Form 8-K dated December 13, 2004.)
4.5	Indenture related to 3.75% Convertible Senior Notes due 2026, dated as of October 18, 2006, by and 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.)
4.6	Registration Rights Agreement, dated as of October 18, 2006, by and among the Company, each of the guarantors named therein and the Initial Purchasers named therein. (Incorporated by reference to the Company’s Current Report on Form 8-K dated October 24, 2006.)
10.1†	2001 Stock Option and Stock Incentive Plan of the Company, as amended. (Incorporated by reference to the Company’s Current Report on Form 8-K dated May 25, 2006.)
10.2†#	Form of Restricted Share Agreement. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.)
10.3†#	Representative Indemnification Agreement. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.)
10.4†	Summary of Director Compensation. (Incorporated by reference to the Company’s Current Report on Form 8-K dated May 25, 2006.)
10.5	Shared Services Agreement, dated as of January 2, 2002, by and between the Company and Reit Management & Research LLC. (Incorporated by reference to the Company’s Registration Statement on Form S-1, File No. 333-83648, as amended on December 5, 2001.)
10.6	Amendment No. 1 to Shared Services Agreement, dated as of January 14, 2002, by and between the Company and Reit Management & Research LLC. (Incorporated by reference to the Company’s Registration Statement on Form S-1, File No. 333-83648.)

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10.7	Amendment No. 2 to Shared Services Agreement, dated as of March 10, 2004, by and between the Company and Reit Management & Research LLC.(Incorporated by reference to the Company’s Current Report on Form 8-K dated March 10, 2004.)
10.8	Mortgage, dated as of April 19, 2004, between Five Star Quality Care-Howell, LLC and Love Funding Corporation. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,  2004.)
10.9	Second Amended and Restated Lease Agreement, dated as of November 19, 2004, by and among, Ellicott City Land I LLC, Ellicott City Land II LLC, HRES2 Properties Trust, SNH CHS Properties Trust, SPTIHS Properties Trust, SPT-Michigan Trust, SPTMNR Properties Trust, SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Landlord, and Five Star Quality Care Trust, as Tenant.(Incorporated by reference to the Company’s Registration Statement on Form S-1, File No. 333-119955, as amended on November 29, 2004.)
10.10	First Amendment to Second Amended and Restated Lease Agreement, dated as of May 17, 2005, by and among Ellicott City Land I LLC, Ellicott City Land II LLC, HRES2 Properties Trust, SNH CHS Properties Trust, SPTIHS Properties Trust, SPT-Michigan Trust, SPTMNR Properties Trust, SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 3, 2005.)
10.11	Second Amendment to Second Amended and Restated Lease Agreement, dated as of June 3, 2005, by and among Ellicott City Land I LLC, Ellicott City Land II LLC, HRES2 Properties Trust, SNH CHS Properties Trust, SPTIHS Properties Trust, SPT-Michigan Trust, SPTMNR Properties Trust, SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Landlord, and Five Star Quality Care Trust, as Tenant.(Incorporated by reference to the Company’s Current Report on Form 8-K dated June 3, 2005.)
10.12	Third Amendment to Second Amended and Restated Lease Agreement, dated as of October 31, 2005, by and among Ellicott City Land I LLC, Ellicott City Land II LLC, HRES2 Properties Trust, SNH CHS Properties Trust, SPTIHS Properties Trust, SPT-Michigan Trust, SPTMNR Properties Trust, SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Landlord, and Five Star Quality Care Trust, as Tenant.(Incorporated by reference to the Company’s Current Report on Form 8-K dated November 4, 2005.)
10.13	Third [Fourth] Amendment to Second Amended and Restated Lease Agreement, dated as of December 30, 2005, by and among Ellicott City Land I LLC, Ellicott City Land II LLC, HRES2 Properties Trust, SNH CHS Properties Trust, SPTIHS Properties Trust, SPT-Michigan Trust, SPTMNR Properties Trust, SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated October 5, 2006.)
10.14	Letter Agreement, dated as of March 13, 2006, by and between Senior Housing Properties Trust and Five Star Quality Care Trust. (Incorporated by reference to the Company’s Current Report on Form 8-K dated October 5, 2006.)
10.15	Fifth Amendment to Second Amended and Restated Lease Agreement, dated as of September 1, 2006, by and among Ellicott City Land I LLC, Ellicott City Land II LLC, HRES2 Properties Trust, SNH CHS Properties Trust, SPTIHS Properties Trust, SPT-Michigan Trust, SPTMNR Properties Trust, SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated October 5, 2006.)
10.16	Sixth Amendment to Second Amended and Restated Lease Agreement, dated as of October 1, 2006, by and among Ellicott City Land I LLC, Ellicott City Land II LLC, HRES2 Properties Trust, SNH CHS Properties Trust, SPTIHS Properties Trust, SPT-Michigan Trust, SPTMNR Properties Trust, SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Landlord, and Five Star Quality Care Trust, as Tenant.(Incorporated by reference to the Company’s Current Report on Form 8-K dated October 5, 2006.)
10.17	Seventh Amendment to Second Amended and Restated Lease Agreement, dated as of October 1, 2006, by and among Ellicott City Land I LLC, Ellicott City Land II LLC, HRES2 Properties Trust, SNH CHS Properties Trust, SPTIHS Properties Trust, SPT-Michigan Trust, SPTMNR Properties Trust, SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated October 11, 2006.)

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10.18	Eighth Amendment to Second Amended and Restated Lease Agreement, dated as of November 1, 2006, by and among Ellicott City Land I LLC, Ellicott City Land II LLC, HRES2 Properties Trust, SNH CHS Properties Trust, SPTIHS Properties Trust, SPT-Michigan Trust, SPTMNR Properties Trust, SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.)
10.19	Ninth Amendment to Second Amended and Restated Lease Agreement, dated as of November 1, 2006, by and among Ellicott City Land I LLC, Ellicott City Land II LLC, HRES2 Properties Trust, SNH CHS Properties Trust, SPTIHS Properties Trust, SPT-Michigan Trust, SPTMNR Properties Trust, SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Landlord, and Five Star Quality Care Trust, as Tenant. (Filed herewith.)
10.20	Tenth Amendment to Second Amended and Restated Lease Agreement, dated as of November 6, 2006, by and among Ellicott City Land I LLC, Ellicott City Land II LLC, HRES2 Properties Trust, SNH CHS Properties Trust, SPTIHS Properties Trust, SPT-Michigan Trust, SPTMNR Properties Trust, SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Landlord, and Five Star Quality Care Trust, as Tenant. (Filed herewith.)
10.21	Eleventh Amendment to Second Amended and Restated Lease Agreement, dated as of December 22, 2006, by and among Ellicott City Land I LLC, Ellicott City Land II LLC, HRES2 Properties Trust, SNH CHS Properties Trust, SPTIHS Properties Trust, SPT-Michigan Trust, SPTMNR Properties Trust, SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Landlord, and Five Star Quality Care Trust, as Tenant. (Filed herewith.)
10.22	Twelfth Amendment to Second Amended and Restated Lease Agreement, dated as of January 1, 2007, by and among Ellicott City Land I LLC, Ellicott City Land II LLC, HRES2 Properties Trust, SNH CHS Properties Trust, SPTIHS Properties Trust, SPT-Michigan Trust, SPTMNR Properties Trust, SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Landlord, and Five Star Quality Care Trust, as Tenant. (Filed herewith.)
10.23	Guaranty Agreement, dated as of December 31, 2001, made by the Company, as Guarantor, for the benefit of the Landlord under the Second Amended and Restated Master Lease Agreement, dated as of November 19, 2004, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant, as amended. (Incorporated by reference to Senior Housing Properties Trust’s Current Report on Form 8-K dated December 31, 2001.)
10.24	Security Agreement, dated as of December 31, 2001, by and among Five Star Quality Care Trust and the Landlord under the Second Amended and Restated Master Lease Agreement, dated as of November 19, 2004, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant, as amended. (Incorporated by reference to the Company’s Registration Statement on Form S-1, File No. 333-83648, as amended on December 5, 2001.)
10.25	First Amendment to Security Agreement, dated as of April 19, 2004, by and among Five Star Quality Care Trust and the Landlord under the Second Amended and Restated Master Lease Agreement, dated as of November 19, 2004, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant, as amended.(Filed herewith.)
10.26	Second Amendment to Security Agreement, dated as of May 17, 2005, by and among Five Star Quality Care Trust and the Landlord under the Second Amended and Restated Master Lease Agreement, dated as of November 19, 2004, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant, as amended.(Incorporated by reference to the Company’s Current Report on Form 8-K dated June 3, 2005.)
10.27	Guaranty Agreement, dated as of October 25, 2002, made by the Company, as Guarantor, for the benefit of SNH CHS Properties Trust and Senior Housing Properties Trust. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.)
10.28	Guaranty Agreement, dated as of October 25, 2002, made by Five Star Quality Care-MD, LLC, Five Star Quality Care-NC, LLC and Five Star Quality Care-VA, LLC, as Guarantors, for the benefit of SNH CHS Properties Trust. (Incorporated by reference to the Company’s Report on Form 10-K for the year ended December 31, 2002.)
10.29	Security Agreement, dated as of October 25, 2002, by and between FVE-CHS LLC and SNH CHS Properties Trust. (Incorporated by reference to the Company’s Report on Form 10-K for the year ended December 31, 2002.)

44

10.30	Security Agreement, dated as of October 25, 2002, by and among Five Star Quality Care-MD, LLC, Five Star Quality Care-NC, LLC, Five Star Quality Care-VA, LLC and SNH CHS Properties Trust. (Incorporated by reference to the Company’s Report on Form 10-K for the year ended December 31, 2002.)
10.31	Amended and Restated Pledge of Shares of Beneficial Interest Agreement, dated as of May 6, 2005, made by FSQ, Inc. for the benefit of the Landlord under the Second Amended and Restated Lease Agreement, dated as of November 19, 2004, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant, as amended.(Incorporated by reference to the Company’s Current Report on Form 8-K dated June 3, 2005.)
10.32	Confirmation of Guarantees and Confirmation and Amendment of Other Incidental Documents, dated as of June 3, 2005, by and among the Company, certain affiliates of the Company and certain affiliates of Senior Housing Properties Trust.(Incorporated by reference to the Company’s Current Report on Form 8-K dated June 3, 2005.)
10.33	Confirmation of Guarantees and Confirmation and Amendment of Other Incidental Documents, dated as of October 31, 2005, by and among the Company, certain affiliates of the Company and certain affiliates of Senior Housing Properties Trust.(Incorporated by reference to the Company’s Current Report on Form 8-K dated November 4, 2005.)
10.34	Confirmation of Guarantees and Confirmation and Amendment of Other Incidental Documents, dated as of September 1, 2006, by and among the Company, certain affiliates of the Company and certain affiliates of Senior Housing Properties Trust. (Incorporated by reference to the Company’s Current Report on Form 8-K dated October 5, 2006.)
10.35	Confirmation of Guarantees and Confirmation and Amendment of Other Incidental Documents, dated as of October 1, 2006, by and among the Company, certain affiliates of the Company and certain affiliates of Senior Housing Properties Trust. (Incorporated by reference to the Company’s Current Report on Form 8-K dated October 5, 2006.)
10.36	Confirmation of Guarantees and Confirmation and Amendment of Other Incidental Documents, dated as of November 1, 2006, by and among the Company, certain affiliates of the Company and certain affiliates of Senior Housing Properties Trust.(Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.)
10.37	Partial Termination and Confirmation of Guarantees and Other Incidental Documents, dated as of November 1, 2006, by and among the Company, certain affiliates of the Company and certain affiliates of Senior Housing Properties Trust.(Filed herewith.)
10.38	Confirmation of Guarantees and Confirmation and Amendment of Other Incidental Documents, dated as of November 6, 2006, by and among the Company, certain affiliates of the Company and certain affiliates of Senior Housing Properties Trust.(Filed herewith.)
10.39	Confirmation of Guarantees and Confirmation and Amendment of Other Incidental Documents, dated as of December 22, 2006, by and among the Company, certain affiliates of the Company and certain affiliates of Senior Housing Properties Trust.(Filed herewith.)
10.40	Confirmation of Guarantees and Confirmation and Amendment of Other Incidental Documents, dated as of January 1, 2007, by and among the Company, certain affiliates of the Company and certain affiliates of Senior Housing Properties Trust.(Filed herewith.)
10.41	Amended Master Lease Agreement, dated as of January 11, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant. (Incorporated by reference to Senior Housing Properties Trust’s Current Report on Form 8-K dated December 31, 2001.)
10.42	First Amendment to Amended Master Lease Agreement, dated as of October 1, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.)
10.43	Second Amendment to Amended Master Lease Agreement, dated as of March 1, 2004, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, collectively as Tenant.(Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 .)
10.44	Letter Agreement, dated as of March 13, 2006, by and among Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, collectively as Tenant.(Filed herewith.)

45

10.45	Guaranty Agreement, dated as of January 11, 2002, made by the Company, as Guarantor, for the benefit of the Landlord under the Amended Master Lease Agreement, dated January 11, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant. (Incorporated by reference to Senior Housing Properties Trust’s Current Report on Form 8-K dated December 31, 2001.)
10.46	Pledge of Shares of Beneficial Interest Agreement, dated as of January 11, 2002, made by FSQ, Inc. for the benefit of the Landlord under the Amended Master Lease Agreement, dated January 11, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant. (Incorporated by reference to the Company’s Registration Statement on Form S-1, File No. 333-83648, as amended on December 5, 2001.)
10.47	Security Agreement, dated as of January 11, 2002, by and among FS Tenant Holding Company Trust and the Landlord under the Amended Master Lease Agreement, dated January 11, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant. (Incorporated by reference to the Company’s Registration Statement on Form S-1, File No. 333-83648, as amended on December 5, 2001.)
10.48	Lease Agreement, dated as of November 19, 2004, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and certain affiliates of the Company as Tenant.(Incorporated by reference to the Company’s Registration Statement on Form S-1, File No. 333-119955, as amended on November 29, 2004.)
10.49	Lease Agreement, dated as of November 19, 2004, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and certain affiliates of the Company as Tenant.(Incorporated by reference to the Company’s Registration Statement on Form S-1, File No. 333-119955, as amended on November 29, 2004.)
10.50	Guaranty Agreement, dated as of November 19, 2004, made by the Company in favor of the Beneficiaries named therein. (Incorporated by reference to the Company’s Registration Statement on Form S-1, File No. 333-119955, as amended on November 29, 2004.)
10.51	Guaranty Agreement, dated as of November 19, 2004, made by the Company in favor of the Beneficiaries named therein. (Incorporated by reference to the Company’s Registration Statement on Form S-1, File No. 333-119955, as amended on November 29, 2004.)
10.52	Amended and Restated Master Lease Agreement, dated as of October 1, 2006, by and among HRES1 Properties Trust, as landlord, and FS Patriot LLC and FS Commonwealth LLC, jointly and severally as tenant. (Filed herewith.)
10.53	Amended and Restated Guaranty Agreement, dated as of October 1, 2006, by the Company for the benefit of Senior Housing Properties Trust and HRES1 Properties Trust.(Filed herewith.)
10.54	Amended and Restated Security Agreement, dated as of October 1, 2006, between FS Patriot LLC and FS Commonwealth LLC, as tenant, and HRES1 Properties Trust, as secured party.(Filed herewith.)
10.55	Amended and Restated Pledge Agreement, dated as of October 1, 2006, by FSQ, Inc. for the benefit of HRES1 Properties Trust.(Filed herewith.)
10.56	Credit and Security Agreement, dated as of May 9, 2005, by and among the Company, each of the Guarantors party thereto and Wachovia Bank, National Association.(Incorporated by reference to the Company’s Current Report on Form 8-K dated May 13, 2005.)
10.57	First Amendment to Credit and Security Agreement, dated as of July 22, 2005, by and among the Company, each of the Guarantors party thereto and Wachovia Bank, National Association.(Incorporated by reference to the Company’s Current Report on Form 8-K dated August 23, 2005.)
10.58	Second Amendment to Credit and Security Agreement, dated as of August 15, 2005, by and among the Company, each of the Guarantors party thereto and Wachovia Bank, National Association.(Incorporated by reference to the Company’s Current Report on Form 8-K dated August 23, 2005.)
10.59	Third Amendment to Credit and Security Agreement, dated as of July 11, 2006, by and among the Company, each of the Guarantors party thereto and Wachovia Bank, National Association. (Incorporated by reference to the Company’s Current Report on Form 8-K dated July 17, 2006.)
10.60	Fourth Amendment to Credit and Security Agreement, dated as of October 11, 2006, by and among the Company, each of the Guarantors party thereto and Wachovia Bank, National Association. (Incorporated by reference to the Company’s Current Report on Form 8-K dated October 11, 2006.)

46

12.1	Computation of Ratio of Earnings to Fixed Charges. (Filed herewith.)
21.1	Subsidiaries of the Company. (Filed herewith.)
23.1	Consent of Ernst & Young LLP.(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.)

†                   Indicates a management contract or a compensatory plan, contract or arrangement.

#                   Agreement filed is illustrative of numerous other agreements to which the Company is a party.

47

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Five Star Quality Care, Inc.

We have audited the accompanying consolidated balance sheets of Five Star Quality Care, Inc., as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2006.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Five Star Quality Care, Inc. at December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Five Star Quality Care, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts

February 28, 2007

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Five Star Quality Care, Inc.

We have audited management’s assessment, included in Item 9A of Five Star Quality Care, Inc.’s Annual Report on Form 10-K under the heading Management Report on Assessment of Internal Control Over Financial Reporting, that Five Star Quality Care, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”).  Five Star Quality Care, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, management’s assessment that Five Star Quality Care, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria.  Also, in our opinion, Five Star Quality Care, Inc., maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Five Star Quality Care, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2006 and our report dated February 28, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts

February 28, 2007

F-2

FIVE STAR QUALITY CARE, INC.

CONSOLIDATED BALANCE SHEET

(dollars in thousands, except share data)

	December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	46,241		$	16,376
Accounts receivable, net of allowance of $5,005 and $6,124 at December 31, 2006 and 2005, respectively	67,791			46,124
Prepaid expenses	16,112			7,560
Investments	50,434			632
Restricted cash — insurance arrangements	3,043			2,639
Restricted investments — insurance arrangements	2,448			2,442
Restricted cash — other	4,925			10,281
Other current assets	14,766			8,060
Total current assets	205,760			94,114
Property and equipment, net	114,898			96,743
Restricted cash — insurance arrangements	7,786			6,528
Restricted investments — insurance arrangements	6,262			6,039
Restricted cash — other	774			914
Mortgage notes receivable	2,484			5,337
Goodwill and other intangible assets	22,611			18,048
Other long term assets	5,836			1,217
	$	366,411		$	228,940
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	22,805		$	14,639
Accrued expenses	18,825			14,470
Accrued compensation and benefits	19,218			18,341
Due to Senior Housing Properties Trust (“SNH”)	9,988			8,659
Due to Sunrise Senior Living Services, Inc. (“SLS”)	—			7,185
Mortgage notes payable	33,317			626
Accrued real estate taxes	6,035			7,872
Security deposit liability	12,309			11,854
Other current liabilities	10,432			6,322
Total current liabilities	132,929			89,968
Long term liabilities:
Mortgage notes payable	11,454			44,703
Convertible senior notes	126,500			—
Continuing care contracts	3,649			3,638
Other long term liabilities	24,449			21,827
Total long term liabilities	166,052			70,168
Commitments and contingencies
Shareholders’ equity:
Preferred stock, par value $0.01: 1,000,000 shares authorized, none issued	—			—
Common stock, par value $0.01: 50,000,000 shares authorized, 31,682,134 and 20,060,934 shares issued and outstanding at December 31, 2006 and 2005, respectively	316			201
Additional paid-in capital	286,344			171,552
Accumulated deficit	(219,435		)	(102,770		)
Unrealized gain (loss) on investments	205			(179		)
Total shareholders’ equity	67,430			68,804
	$	366,411		$	228,940

See accompanying notes.

F-3

FIVE STAR QUALITY CARE, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands, except per share data)

	For the year ended December 31,
	2006			2005			2004
Revenues:
Net revenues from residents	$	748,003		$	700,891		$	584,615
Hospital revenue	26,130			—			—
Pharmacy revenue	53,204			33,132			13,209
Total revenues	827,337			734,023			597,824
Operating expenses:
Wages and benefits	384,005			356,367			302,282
Other operating expenses	187,335			180,694			153,472
Hospital expenses	23,589			—			—
Pharmacy expenses	52,972			31,823			12,093
Management fee to SLS	8,744			21,256			19,293
Termination expense for SLS management agreements	129,913			86,286			—
Rent expense	111,481			98,890			82,453
General and administrative	33,829			28,221			20,052
Depreciation and amortization	9,950			7,114			3,372
Impairment of assets	—			2,333			—
Total operating expenses	941,818			812,984			593,017
Operating (loss) income	(114,481		)	(78,961		)	4,807
Interest and other income	6,806			1,543			1,666
Interest expense	(4,365		)	(3,741		)	(1,172		)
(Loss) income from continuing operations before income taxes	(112,040		)	(81,159		)	5,301
Provision for income taxes	—			—			(120		)
(Loss) income from continuing operations	(112,040		)	(81,159		)	5,181
Loss from discontinued operations	(4,625		)	(3,000		)	(1,890		)
Net (loss) income	$	(116,665	)	$	(84,159	)	$	3,291
Weighted average shares outstanding	28,605			14,879			8,716
Basic and diluted (loss) income per share from:
Continuing operations	$	(3.92	)	$	(5.45	)	$	0.59
Discontinued operations	(0.16		)	(0.20		)	(0.22		)
Net (loss) income per share	$	(4.08	)	$	(5.65	)	$	0.37

See accompanying notes.

F-4

FIVE STAR QUALITY CARE, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(dollars in thousands, except share data)

	Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Gain (Loss) on Investments			Total
Balance at December 31, 2003	8,513,634	$	85	$	86,244	$	(21,902	)	$	—		$	64,427
Comprehensive income:
Net income	—	—		—		3,291			—			3,291
Unrealized loss on investments	—	—		—		—			(40		)	(40		)
Total comprehensive income	—	—		—		3,291			(40		)	3,251
Stock grants	83,000	1		540		—			—			541
Issuance of stock, pursuant to equity offering	3,500,000	35		27,650		—			—			27,685
Balance at December 31, 2004	12,096,634	121		114,434		(18,611		)	(40		)	95,904
Comprehensive income:
Net loss	—	—		—		(84,159		)	—			(84,159		)
Unrealized loss on investments	—	—		—		—			(139		)	(139		)
Total comprehensive income	—	—		—		(84,159		)	(139		)	(84,298		)
Stock grants	84,300	1		584		—			—			585
Issuance of stock, pursuant to equity offering	7,880,000	79		56,534		—			—			56,613
Balance at December 31, 2005	20,060,934	201		171,552		(102,770		)	(179		)	68,804
Comprehensive income:
Net loss	—	—		—		(116,665		)	—			(116,665		)
Unrealized gain on investments	—	—		—		—			384			384
Total comprehensive income	—	—		—		(116,665		)	384			(116,281		)
Stock grants	121,200	1		1,276		—			—			1,277
Issuance of stock, pursuant to equity offering	11,500,000	114		113,516		—			—			113,630
Balance at December 31, 2006	31,682,134	$	316	$	286,344	$	(219,435	)	$	205		$	67,430

See accompanying notes.

F-5

FIVE STAR QUALITY CARE, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(dollars in thousands)

	For the year ended December 31,
	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(116,665	)	$	(84,159	)	$	3,291
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:
Depreciation and amortization	9,950			7,113			3,372
Impairment of assets	—			2,333			—
Loss from discontinued operations	4,625			3,000			1,890
Provision for losses on receivables, net	(1,119		)	845			973
Unrealized gain (loss) on investments	384			(139		)	(40		)
Changes in assets and liabilities:
Accounts receivable	(20,232		)	(8,234		)	(6,098		)
Prepaid expenses and other assets	(16,433		)	(430		)	942
Investments	(49,802		)	(632		)	—
Accounts payable and accrued expenses	12,521			1,629			(10,093		)
Accrued compensation and benefits	877			3,511			4,066
Due to SNH	1,329			698			1,900
Due (from) to SLS	(7,185		)	6,876			(5,825		)
Other current and long term liabilities	5,159			13,955			7,114
Cash (used in) provided by operating activities	(176,591		)	(53,634		)	1,492
Net cash used in discontinued operations	(4,625		)	(3,000		)	(1,890		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits into restricted cash and investment accounts, net	(926		)	(10,050		)	(5,290		)
Acquisition of property and equipment	(51,134		)	(105,473		)	(138,936		)
Acquisition of pharmacy, net of cash acquired	(5,968		)	(4,880		)	(3,525		)
Proceeds from sales of property and equipment	—			80,678			122,682
Proceeds from disposition of property and equipment held for sale	23,729			15,470			9,457
Withdrawals from restricted cash for purchases of property and equipment	4,531			8,614			7,521
Cash used in investing activities	(29,768		)	(15,641		)	(8,091		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net	114,907			56,752			27,725
Proceeds from borrowings on revolving credit facility	38,000			32,000			22,000
Repayments of borrowings on revolving credit facility	(38,000		)	(32,000		)	(26,000		)
Proceeds from first mortgage line of credit	—			24,000			—
Repayments of first mortgage line of credit	—			(24,000		)	—
Proceeds from convertible senior notes payable	126,500			—			—
Proceeds from mortgage note payable	—			3,485			122,015
Repayments of mortgage notes payable	(558		)	(737		)	(123,467		)
Cash provided by financing activities	240,849			59,500			22,273
Change in cash and cash equivalents	29,865			(12,775		)	13,784
Cash and cash equivalents at beginning of year	16,376			29,151			15,367
Cash and cash equivalents at end of year	$	46,241		$	16,376		$	29,151
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	2,702		$	2,634		$	512
Non-cash investing and financing activities:
Issuance of common stock	1,277			585			541
Assumption of mortgage	—			—			86,764

See accompanying notes.

F-6

FIVE STAR QUALITY CARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

1. Organization and Business

We were organized on April 27, 2000, as a wholly owned subsidiary of Senior Housing Properties Trust, or Senior Housing.  On December 31, 2001, Senior Housing distributed all of our common shares to its shareholders.  Concurrent with our spin-off, we entered into agreements with Senior Housing and others to govern our initial capitalization and other matters.

As of December 31, 2006, we operated 162 senior living communities containing 18,117 living units, including 113 primarily independent and assisted living communities containing 13,701 living units and 49 nursing homes containing 4,416 living units.  Of our 113 primarily independent and assisted living communities, we leased 97 communities containing 12,498 living units from Senior Housing, our former parent, and we own or lease from parties other than Senior Housing 16 communities containing 1,203 living units.  We lease all but two of our nursing homes from Senior Housing.  Our 162 communities include 5,601 independent living apartments, 6,541 assisted living suites and 5,975 skilled nursing beds.  We also operate six institutional pharmacies, one of which provides mail order pharmaceuticals to the general public, and we operate two rehabilitation hospitals that we lease from Senior Housing.  Our two rehabilitation hospitals contain 342 beds available for inpatient services and 21 affiliated outpatient clinics.

We experienced losses in 2005 and 2006.  We believe that a combination of our cash on hand, our efforts to increase revenues and contain costs, our ability to borrow on our revolving credit facility, our ability to sell to Senior Housing certain capital improvements made to communities leased from Senior Housing and the possibility of sales or financings of our owned communities will be sufficient to meet our working capital needs, operating expenses, rent payments to Senior Housing, debt service and capital expenditures for the next 12 months and the foreseeable future.

2.  Summary of Significant Accounting Policies

Basis of Presentation.  The accompanying consolidated financial statements include our accounts and those of all of our subsidiaries. All intercompany transactions have been eliminated.

Use of Estimates.  Preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that may affect the amounts reported in these financial statements and related notes.  Some significant estimates include our self insurance reserves and the allowance for doubtful accounts and contractual allowances.  The actual results could differ from our estimates.  Estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the consolidated financial statements in the period that they are determined.

Cash and cash equivalents.  Cash and cash equivalents, consisting of investments with original maturities of three months or less at the date of purchase, are carried at cost plus accrued interest, which approximates market.

Investments.   Investments include securities that are held principally for resale in the near term.  These investments are classified as trading and are carried at fair value, with changes in fair value recorded in earnings.  Trading investments at December 31, 2006 consist entirely of auction rate securities.  We did not have any trading investments at December 31, 2005.  Interest and dividends are included in net interest income.  In 2006, these investments generated interest income of $330.

Securities not classified as trading are classified as available for sale and carried at fair value, with unrealized gains and losses reported as a separate component of shareholders’ equity.  Available for sale investments at December 31, 2006 and 2005 consisted of corporate bonds, preferred securities and variable rate demand obligations.  At December 31, 2006, our investments had a fair value of $4,334 and an unrealized holding gain of $231.  At December 31, 2005, our investments had a fair value of $632 and an unrealized holding loss of $18.

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Restricted cash —insurance arrangements.  Restricted cash - insurance arrangements is cash that we deposited as security for letters of credit which secure obligations arising from our self insurance programs.

Restricted investments — insurance arrangements.  Restricted investments — insurance arrangements are investments held by our captive insurance companies that may be used to pay claims under our self insurance programs.  These investments are classified as available for sale and carried at fair value, with unrealized gains and losses reported as a separate component of shareholders’ equity.  The unrealized loss on investments shown on the consolidated balance sheet represents the difference between the market value of these investments calculated by using quoted market prices on the date they were acquired and on December 31, 2006.  At December 31, 2006, our investments had a fair value of $8,710 and an unrealized holding gain of $153.  At December 31, 2005, our investments had a fair value of $8,481 and an unrealized holding loss of $161.

Restricted cash - other.  Restricted cash - other as of December 31, 2006 and 2005 includes the following amounts for which we are required to establish escrows: (i) Florida regulatory requirements; (ii) future capital expenditures, as required by our leases with Senior Housing and our management agreements with SLS; (iii) real estate taxes and capital expenditures as required by our mortgages; (iv) resident security deposits and (v) miscellaneous business reasons:  

		2006				2005
		Current		Long term		Current		Long term
(i)	Florida regulatory requirements	$	—	$	518	$	—	$	518
(ii)	Future capital expenditures, as required by our leases with  Senior Housing or our management agreements with SLS	—		—		5,060		—
(iii)	Real estate taxes and capital expenditures as required by our mortgages	2,870		—		2,000		—
(iv)	Resident security deposits	2,055		—		3,221		—
(v)	Regulatory	—		256		—		396
Total		$	4,925	$	774	$	10,281	$	914

Accounts receivable and allowance for doubtful accounts.  We record accounts receivable at their estimated net realizable value.  We estimate allowances for uncollectible amounts based upon factors which include, but are not limited to, the age of the receivable and the terms of the agreements, the residents’, patients’ or third party payors’ stated intent to pay, their financial capacity to pay and other factors which may include likelihood and cost of litigation.  Accounts receivable allowances are estimates.  We periodically review and revise these estimates based on new information and these revisions may be material.

During 2006, 2005 and 2004, we increased our allowance for doubtful accounts by $4,165, $3,950 and $3,600, respectively, and wrote off accounts receivable of $5,284, $3,104 and $2,627, respectively.

Included in accounts receivable as of December 31, 2006 and 2005 are amounts due from the Federal Government Medicare program of $32,586 and $14,103, respectively, and amounts due from various state Medicaid programs of $15,576 and $16,392, respectively.

Deferred finance costs.  We capitalize issuance costs related to borrowings and amortize the deferred costs over the terms of the respective loans.  The unamortized balance of deferred finance costs was $4,897 and $1,039 at December 31, 2006 and 2005, respectively.  Accumulated amortization related to deferred finance costs was $526 and $1,013 at December 31, 2006 and 2005, respectively.  At December 31, 2006, the weighted average amortization period remaining is approximately 21 years.  The amortization expenses to be incurred during the next five years as of December 31, 2006 are $384 in 2007 and $214 in each of 2008, 2009, 2010 and 2011.

Property and equipment.  Property and equipment is stated at cost.  We record depreciation on property and equipment on a straight line basis over estimated useful lives of up to 40 years for buildings, up to 15 years for building improvements and up to seven years for personal property.  We regularly evaluate whether events or changes in circumstances have occurred that could indicate impairment in the value of long lived assets.  If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows from the asset to determine if an impairment loss should be recognized.  We determine the amount of

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impairment loss by comparing the historical carrying value of the asset to its estimated fair value.  We determine estimated fair value through an evaluation of recent financial performance, recent sales of similar assets, market conditions and projected discounted cash flows of properties using standard industry valuation techniques.

During 2005, we recognized a $2,333 impairment charge to reduce the carrying value of six communities to the amount realized upon their sale to Senior Housing (see Note 11).

Goodwill and other intangible assets.   Goodwill represents the costs of business acquisitions in excess of the fair value of identifiable net assets acquired.  We review goodwill and other intangible assets annually, or more frequently if events or changes in circumstances exist, for impairment.  If our review indicates that the carrying amount of goodwill and other intangible assets exceeds its fair value, we reduce the carrying amount to fair value.

Self insurance.  We self insure up to certain limits for workers compensation and professional liability.  Claims in excess of these limits are retained by third party insurance providers up to contractual limits, over which we are self insured.  We fully self insure all employee health related claims.  We accrue the estimated cost of self insured amounts based on projected settlements for pending claims, known incidents which we expect may result in claims, estimates of incurred but not yet reported claims and incidents and expected changes in premiums for insurance provided by third party insurers whose policies provide for retroactive adjustments.  We periodically adjust these estimates based upon our claims experience, recommendations from our professional consultants, changes in market conditions and other factors; such adjustments may be material.

Continuing care contracts.  Residents at one of our communities may enter into continuing care contracts.  We offer two forms of continuing care contracts to new residents.  One form of contract provides that 10% of the resident admission fee becomes non-refundable upon occupancy, and the remaining 90% becomes non-refundable at the rate of 1.5% per month of the original amount over the subsequent 60 months.  The second form of contract provides that 30% of the resident admission fee is non-refundable upon occupancy and 70% is refundable.  Three other forms of continuing care contracts are in effect for existing residents but are not offered to new residents.  One historical form of contract provides that the resident admission fee is 10% non-refundable upon occupancy and 90% refundable.  A second historical form of contract provides that the resident admission fee is 100% refundable.  A third historical form of contract provides that the resident admission fee is 1% refundable and 99% non-refundable upon admission.  In each case, we amortize the non-refundable part of these fees into revenue over the actuarially determined remaining life of the resident, which is the expected period of occupancy by the resident.  We pay refunds of our admission fees when residents relocate from our communities.  We report the refundable amount of these admission fees as current liabilities and the nonrefundable amount as deferred revenue, a portion of which is classified as a current liability.  Portions of the refundable payments are included in restricted cash in our consolidated balance sheet.  The refundable admission fees as of December 31, 2006 and 2005 were $10,575 and $6,197, respectively.

Convertible debt.  In October 2006, we sold $126,500 in aggregate principal amount of convertible notes (see Note 8).  Holders of these notes may convert their notes into shares of our common stock subject to prior maturity, redemption or repurchase. On or after October 20, 2011, we have the option, or the Call Option, to redeem the notes at a redemption price equal to 100% of the principal amount of the notes, plus accrued but unpaid interest. On each of October 15, 2013, 2016 and 2021, holders of the notes have the option, or the Put Option, to require us to purchase all or a portion of their notes at a purchase price in cash equal to 100% of the principal amount of the notes, plus accrued but unpaid interest.  A holder that surrenders the notes for conversion in connection with a make whole fundamental change that occurs before October 20, 2011 may in certain circumstances be entitled to an increased conversion rate, or the Make Whole Payment.

Leases.  On the inception date of a lease and upon any relevant amendments to such lease, we test the classification of such lease as either a capital lease or an operating lease.  None of our leases have met any of the criteria to qualify as a capital lease under SFAS 13, “Accounting for Leases”, and, therefore, we have accounted for all of our leases as operating leases.

Income taxes.  We account for income taxes under the provisions of Statement of Financial Accounting Standards, or SFAS, No. 109, “Accounting for Income Taxes”, or SFAS 109.  Under SFAS No. 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets

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and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are expected to be realized (see Note 5).

We pay franchise taxes in certain states in which we have operations.  We have included franchise taxes in general and administrative and other operating expenses in our consolidated statement of operations.

Fair value of financial instruments.  Our financial instruments are limited to cash and cash equivalents,  trading securities, securities held for sale, accounts receivable, accounts payable, the refundable portion of continuing care contracts, mortgage notes receivable and payable and our convertible notes.  The fair value of these financial instruments was not materially different from their carrying values at December 31, 2006 and 2005.  Our estimates of fair values were based on current market prices and discounted cash flow analysis.

Revenue recognition.  Our revenues are derived primarily from services to residents and patients at our senior living communities and hospitals.  We accrue revenues when services are provided.  Some of our services are provided with the expectation of payment from governments or other third party payors.  We derived approximately 33%, 36% and 41% of our net resident revenues in 2006, 2005 and 2004, respectively, from payments under federal and state medical assistance programs.  For the three months ended December 31, 2006, approximately 72% of our hospital revenues were received from these programs.  Revenues under some of these programs are subject to audit and retroactive adjustment.

Medicare revenues from residents totaled $103,735, $105,033 and $102,287 during 2006, 2005 and 2004, respectively.  Medicaid revenues from residents totaled $141,661, $136,963 and $133,127 during 2006, 2005 and 2004, respectively.  Our Medicare and Medicaid revenues from our hospitals were $13,744 and $5,020, respectively for the three months ended December 31, 2006.  Both the Federal Government and some of the states in which we operate are considering plans to reduce Medicare and Medicaid funding, or to stop or reduce the projected increases in such funding.  We cannot estimate the magnitude of potential Medicaid and Medicare rate reductions but it may be material.  Medicaid and Medicare rates reductions or a failure of such program to increase rates to match our increasing costs, if they occur, may have a negative impact in our revenues, may decrease our net income and may cause us to incur losses.

Per common share amounts.  We computed earnings (loss) per share for the years ended December 31, 2006, 2005 and 2004, using the weighted average number of shares outstanding during each year.  We have no common share equivalents other than unvested restricted stock, or other dilutive instruments other than our convertible notes.

Reclassifications.  Reclassifications have been made to the prior years’ financial statements to conform to the current year’s presentation.  Material changes are limited to reclassifying identifiable intangible assets to goodwill and other intangible assets from other long term assets.  These reclassifications had no effect on net income (loss) or shareholders’ equity.

Recently Issued Accounting Standards. On December 16, 2004, the Financial Accounting Standards Board, or the FASB, issued SFAS Statement No. 123 (revised 2004), “Share-Based Payment”, or SFAS 123(R), which is a revision of SFAS Statement No. 123, “Accounting for Stock-Based Compensation”, or SFAS 123.  SFAS 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS Statement No. 95, “Statement of Cash Flows”. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123.  However, SFAS 123(R) requires all share based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro forma disclosure is no longer an alternative.  The Company adopted SFAS 123(R) on January 1, 2006 using the prospective method as described in SFAS No. 123(R).  The adoption of this standard did not have a material impact in our fiscal year 2006.

New Accounting Pronouncement. In June 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”, or FIN 48.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  FIN 48 prescribes how we should recognize, measure and present in our financial statements uncertain tax positions that we have taken or we expect to take in a tax return.  Pursuant to FIN 48, we can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit.   To the extent

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the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is more than 50% likely of being realized upon settlement.  We are currently evaluating the effect that adoption of FIN 48 will have on our consolidated financial statements; however, we do not anticipate the effect, if any, will be material.

3.  Property and Equipment

Property and equipment, at cost, as of December 31, 2006 and 2005, consists of:

	2006			2005
Land	$	6,685		$	6,439
Buildings and improvements	82,293			75,540
Furniture, fixtures and equipment	46,685			26,215
	135,663			108,194
Accumulated depreciation	(20,765		)	(11,451		)
	$	114,898		$	96,743

As of December 31, 2006 and 2005, we had assets classified as held for sale of $15,266 and $5,331, respectively, included in our property and equipment, that we intend to sell to Senior Housing as permitted by our leases.

4.  Goodwill and Other Intangible Assets

During 2006 and 2005, we recorded $3,663 and $1,426 of goodwill generated from acquisitions discussed in Note 11 to these consolidated financial statements.  As of December 31, 2006 and 2005, we had goodwill of $17,722 and $14,059, respectively.

During 2006 and 2005, we recorded $1,344 and $2,580 of intangible assets that related to customer relationships we acquired in connection with our pharmacy acquisitions. These intangible assets are subject to amortization.  As of December 31, 2006 and 2005, the unamortized balance of intangible assets was $5,986 and $4,305, respectively.  At December 31, 2006, the weighted average amortization period remaining is approximately 17 years.  We amortize intangible assets using the straight-line method over the useful lives of the assets commencing on the date of acquisition.  Amortization expense associated with customer agreements totaled $380, $219 and $118 in 2006, 2005 and 2004, respectively. Accumulated amortization was $716 and $337 at December 31, 2006 and 2005, respectively.  Amortization expense is estimated to be approximately $399 in 2007, $394 in 2008 and $311in 2009, 2010 and 2011, respectively.

5.  Income Taxes

Significant components of our deferred tax assets and liabilities as of December 31, 2006 and 2005, are as follows:

	2006			2005
Deferred tax assets:
Continuing care contracts	$	2,324		$	2,473
Depreciable assets	—			825
Allowance for doubtful accounts	2,197			2,462
Deferred gains on sale lease-back transactions	2,578			3,494
Insurance reserves	4,040			3,615
Tax credits	1,547			1,464
Tax loss carry forwards (including SLS termination expense)	81,714			33,042
Other	799			240
Total deferred tax asset before valuation allowance	95,199			47,632
Valuation allowance:	(91,884		)	(44,826		)
	3,315			2,807
Deferred tax liabilities:
Depreciable assets	(656		)	0
Lease expense	(2,271		)	(2,570		)
Goodwill	(433		)	(224		)
Other	45			(13		)
Total	(3,315		)	(2,807		)
Net deferred tax assets:	$	—		$	—

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As a result of our short operating history and reported losses, we have not currently recognized the benefit of our deferred tax assets.  We will continue to assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be utilized.  When we believe that we will more likely than not recover our deferred tax assets, we will record a reduction in the valuation reserve as an income tax benefit in the consolidated statement of operations, which will affect our results of operations.

Our operations in the year ended December 31, 2006 resulted in a taxable loss.  As of December 31, 2006 we have tax loss carry forwards of approximately $202,465 that may be carried forward to offset future taxable income.  Our net operating loss carry forwards will expire beginning in 2023, if unused.  The tax loss carry forward is subject to audit and adjustments by the Internal Revenue Service.

The principal reasons for the difference between our effective tax (benefit) rate and the U.S. Federal statutory income tax (benefit) rate are as follows:

	For the years ended December 31,
	2006		2005		2004
Taxes at statutory U.S. federal income tax rate	(35.0	)%	(35.0	)%	34.0	%
State and local income taxes, net of federal tax benefit	(5.2	)%	(5.2	)%	5.3	%
Tax credits	(0.1	)%	(0.3	)%	(17.9	)%
Alternative Minimum Tax	0.0	%	0.0	%	3.5	%
Change in federal statutory rate	0.0	%	(0.2	)%	0.0	%
Change in valuation allowance	40.4	%	41.7	%	(21.4	)%
Other differences, net	(0.1	)%	(1.0	)%	0.0	%
Effective tax rate	0.0	%	0.0	%	3.5	%

6.  Line of Credit

The maximum amount available under this facility is $25,000, and is subject to limitations based upon qualifying collateral.  We are the borrower under this revolving credit facility and certain of our subsidiaries guarantee our obligations under the facility.  The facility is secured by our and our guarantor subsidiaries’ accounts receivable, deposit accounts and related assets.  The facility is available for acquisitions, working capital and general business purposes.  The facility contains covenants requiring us to maintain collateral, minimum net worth and certain other financial ratios, places limits on our ability to incur or assume debt or create liens with respect to certain of our properties and has other customary provisions.  In certain circumstances and subject to available collateral and lender approvals, the maximum amount which we may draw under this credit facility may be increased to $50,000.  In July 2006, we entered into an amendment to the facility to lower the interest paid on drawings under the facility and to extend the termination date to May 8, 2008.  The termination date may be further extended twice, in each case by twelve months, subject to lender approval, our payment of extension fees and other

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conditions.  As of December 31, 2006 and March 5, 2007, no amounts were outstanding under this credit facility.  As of December 31, 2006 and March 5, 2007 we believe we are in compliance with all applicable covenants under this revolving credit facility.  Interest expense and other associated costs related to this facility and our prior revolving credit facility were $205, $167 and $85 for the years ended December 31, 2006, 2005 and 2004, respectively.

7.  Mortgages Payable

At December 31, 2006, nine of our communities were encumbered by 11 Department of Housing and Urban Development, or HUD, insured mortgages.  In order to record the mortgages that we assumed in connection with the November 2004 acquisition of mortgaged properties from LTA Holdings, Inc., or LTA, at their estimated fair value, we recorded mortgage premiums totaling $6,534.  We are amortizing the mortgage premiums as a reduction to interest expense over the remaining term of the mortgages.  Mortgage interest expense, net of premium amortization, was $2,768 and $2,427 for the years ended December 31, 2006 and 2005, respectively.  The mortgages require monthly payments into escrow for taxes, insurance and property replacement funds.  Withdrawals from escrow require HUD approval.

By March 31, 2007, we expect to have prepaid seven mortgages that were secured by six of our communities.  We will pay approximately $28,681 to payoff these seven mortgages, which will consist of approximately $27,826 in principal and approximately $881 in prepayment penalties.  Because we had carried these mortgages at a premium to their fair value, we will recognize a gain of approximately $4,464 in connection with the early extinguishment of debt in 2007.  The weighted average cash interest rate for these seven mortgages was 7.3%.

The following table is a summary of the mortgage notes payable that will be outstanding as of March 31, 2007:

Principal Balance as of December 31, 2006		Monthly Payment		Cash Interest Rate		Effective Interest Rate		Maturity Date	Fair Value Premium Adjustment as of December 31, 2006		Total Mortgage Payable as of December 31, 2006
$	4,885	$	27	5.55	%	5.55	%	May 2039	$	—	$	4,885
1,338		10		8.00	%	5.60	%	January 2038	382		1,720
3,410		19		5.25	%	5.25	%	June 2035	—		3,410
1,184		9		8.45	%	5.60	%	November 2037	400		1,584
$	10,817	$	65	6.08	%(1)				$	782	$	11,599

(1)Weighted average interest rate

Principal payments due under the terms of these four mortgages are as follows:

2007	$	127
2008	135
2009	143
2010	151
2011	160
Thereafter	10,101
	$	10,817

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8.  Convertible Senior Notes due 2026

In October 2006, we issued in a private placement $126,500 principal amount of convertible notes, which included $16,500 principal amount issued pursuant to the underwriters’ exercise of an option to cover over allotments.  Our net proceeds from this offering were approximately $122,600.

These notes are convertible into our common shares at any time.  The initial conversion rate, which is subject to adjustment, is 76.9231 common shares per $1 principal amount of notes, which represents an initial conversion price of $13.00 per share.  A holder that surrenders notes for conversion in connection with a “make-whole fundamental change”, as defined in the indenture governing the notes, that occurs before October 20, 2011 may in some circumstances be entitled to an increased conversion rate.

These notes bear interest at a rate of 3.75% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, starting on April 15, 2007.  The notes mature on October 15, 2026.  On or after October 20, 2011, we may redeem the notes, in whole or in part, at a redemption price in cash equal to 100% of the principal amount of the notes we redeem, plus any accrued and unpaid interest.  On each of October 15, 2013, October 15, 2016 and October 15, 2021, holders of the notes may require us to purchase all or a portion of their notes at a purchase price in cash equal to 100% of the principal amount of the notes to be purchased, plus any accrued and unpaid interest.  If a “fundamental change”, as defined in the indenture governing the notes, occurs, holders of the notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest and, in certain circumstances, plus a make whole premium as defined in the indenture governing the notes.  Interest expense related to the notes was $974 for the year ended December 31, 2006.  The notes are guaranteed by certain of our wholly owned subsidiaries.  Our subsidiary guarantors may be released from their obligations under certain circumstances.  As of  December 31, 2006 and March 5, 2007, we believe we are in compliance with all applicable covenants of the indenture pursuant to which the notes were issued.

9.  Leases

As of December 31, 2006, we leased 144 communities and two hospitals under six non-cancelable leases with Senior Housing, and leased 4 communities under a lease with Healthcare Property Investors, Inc., or HCPI.  These leases are “triple-net” leases which require that we pay for all costs incurred in the operation of the communities, including the cost of insurance and real estate taxes, maintain the communities and indemnify the landlord for any liability which may arise from its ownership during the lease term

Our leases with Senior Housing for our 144 senior living communities require us to pay additional rent equal to 4% of the amount by which gross revenues of the communities we operate exceed gross revenues in a base year.

Senior Housing has agreed to fund amounts that we request for renovations and improvements to communities we lease from them in return for rent increases according to formulas in the leases.  In 2006, Senior Housing funded $23,729 for renovations and improvements to some of our communities.  As a result and in accordance with our leases, our annual minimum rent to Senior Housing increased by $2,340.

The following table is a summary of our leases:

	Number of  properties	Annual minimum rent  as of December 31, 2006		Initial expiration  date	Renewal terms
1. Four Senior Housing leases for skilled nursing facilities and independent and assisted living communities (1)	114	$	49,139	December 31, 2020	One 15-year renewal option.
2. One Senior Housing lease for communities previously operated by SLS	30	65,012		December 31, 2017	Two consecutive renewal  options for 10 and 5 years  (15 years total).
3. One Senior Housing lease for rehabilitation hospitals	2	10,250		June 30, 2026	One 20-year renewal option.
4. One HCPI lease	4	1,183		June 30, 2014	Two 10-year renewal options.
Totals	150	$	125,584

(1)Three of these four leases exist to accommodate mortgage financings in affect at the time Senior Housing acquired the leased properties; we have agreed to combine all four of these leases into one lease when these mortgages are paid.

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The future minimum rents required by our leases as of December 31, 2006, are as follows:

2007	$	125,584
2008	125,584
2009	125,584
2010	125,584
2011	125,584
Thereafter	983,901
	$	1,611,821

10.   Shareholders’ Equity

In January, August and September 2005, we issued a total of 7,880,000 common shares in underwritten public offerings raising proceeds, net of underwriting commissions and other costs, of $56,613.

In April 2006, we issued 11,500,000 common shares in an underwritten public offering raising proceeds, net of underwriting commissions and other costs, of $113,630.

We issued 121,200 and 84,300 common shares in 2006 and 2005, respectively, to our directors, officers and others who provide services to us.  We valued the shares at the average price of our common shares on the American Stock Exchange on the dates of issue, or $1,277 in total in 2006, based on a $10.53 weighted average share price and $585 in total in 2005 based on a $6.95 weighted average share price.  Shares issued to directors vested immediately; shares issued to our officers and other individuals who provide services to us vest in three to five years and are recognized in our statement of operations ratably.  As of December 31, 2006, 2,645,500 of our common shares remain available for issuance under our 2001 Stock Option and Stock Incentive Plan.

11.   Acquisitions

In March 2005, we acquired a 62 unit assisted living community located in Georgia for approximately $6,900.  We financed this acquisition with cash on hand.

In June 2005, we acquired six assisted living communities for approximately $59,000, including closing costs.  These communities have a licensed resident capacity of 654 and are located in western Pennsylvania.  We funded this purchase using $10,000 drawn under our revolving credit facility and the proceeds from a sale leaseback and a mortgage transaction with Senior Housing.  We acquired these communities because they compliment our business strategy of focusing our operations in high quality senior living assets when residents pay for our services with private resources.  All of the revenues of these communities come from residents’ private resources.  In connection with this acquisition, we sold four different assisted living communities in June 2005 to Senior Housing

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for $24,000 and Senior Housing leased these communities back to us for initial rent of $2,160 per annum.  Senior Housing also provided a $43,500 first mortgage line of credit secured by six communities.  We borrowed $24,000 under this first mortgage line of credit when we closed the purchase and repaid it in August 2005 with the proceeds from our sale of common shares described in Note 10 above.  We allocated the purchase price of approximately $59,000 to land, buildings and equipment.

In connection with our termination of management agreements for 12 communities managed by SLS in November 2005, we sold the six communities to Senior Housing for $56,680, and Senior Housing leased these communities back to us.  Our initial rent to Senior Housing for these communities is $5,220 per annum.  We recognized a $2,333 impairment charge to reduce the carrying value of these communities to the amount realized upon the sale to Senior Housing, or $56,680.  The gross purchase price paid to us by Senior Housing was equal to the same amount as the purchase price we paid to the seller of the communities.  The impairment loss which we recognized relates principally to transaction costs.

In addition to our community acquisitions, we have purchased four institutional pharmacies in 2005 and 2006.  In June 2005, we purchased one pharmacy located in Nebraska for approximately $4,600.  In December 2005, we purchased another pharmacy located in California for approximately $450.  In May 2006, we purchased another pharmacy in South Carolina for approximately $3,600.  In November 2006, we purchased another pharmacy located in Virginia for approximately $2,300.  We allocated the purchase prices of these pharmacies to working capital assets, customer relationships and goodwill based on the fair value of the assets acquired and liabilities assumed.

We accounted for each of these acquisitions using the purchase method of accounting, and we have included the results of operations of these acquisitions in our consolidated statement of operations from the date of acquisition.  Our purchase accounting allocations for certain 2006 acquisitions is preliminary, primarily with respect to our valuations of intangibles.  We expect to complete our purchase accounting allocations during 2007.  Pro forma results for these 2006 acquisitions have not been presented because the effect of the acquisitions is not considered material.

12.   Discontinued Operations

During 2005, we ceased operations at one assisted living community in Los Angeles, California, and one skilled nursing facility in Milwaukee, Wisconsin.  We leased this community and this facility from Senior Housing.  Senior Housing sold the assisted living community located in California in December 2005 for net proceeds of approximately $2,600, which caused a $260 reduction in the annual minimum rent we pay to Senior Housing in accordance with our lease terms.  Senior Housing sold the skilled nursing facility located in Wisconsin in December 2006 for net proceeds of approximately $1,300, which caused a $130 reduction in the annual minimum rent we pay to Senior Housing in accordance with our lease terms.

During 2006, we ceased operations at two skilled nursing facilities located in Connecticut that we leased from Senior Housing.  Senior Housing sold these facilities in November 2006 for net proceeds of approximately $5,600, which caused a $559 reduction in the annual minimum rent we pay to Senior Housing in accordance with our lease terms.

As of December 31, 2006, substantially all of our assets and liabilities related to the communities where we have ceased operations have been disposed of and paid, respectively.  We have reclassified the consolidated statement of operations for all periods presented to show the results of operations of these communities as discontinued.  Below is a summary of the operating results of these discontinued operations included in the financial statements for the years ended December 31, 2006, 2005 and 2004:

	2006			2005			2004
Revenues	$	19,078		$	31,676		$	30,462
Expenses	23,703			34,676			32,352
Net loss	$	(4,625	)	$	(3,000	)	$	(1,890	)

F-16

13.  Transactions with Affiliates

We were a 100% owned subsidiary of Senior Housing before December 31, 2001.  On December 31, 2001, Senior Housing distributed substantially all of our then outstanding shares to its shareholders.  In order to effect this spin off and to govern relations after the spin off, we entered into agreements with Senior Housing and others pursuant to which it was agreed, among other things, that:

·so long as Senior Housing remains a real estate investment trust, or a REIT, we may not waive the share ownership restrictions in our charter on the ability of any person or group to acquire more than 9.8% of any class of our equity shares without the consent of Senior Housing;

·so long as we are a tenant of Senior Housing, we will not permit nor take any action that, in the reasonable judgment of Senior Housing or HRPT Properties Trust (another REIT which owns shares of Senior Housing), or HRPT, might jeopardize the tax status of Senior Housing or HRPT as REITs;

·Senior Housing has the option, upon the acquisition by a person or group of more than 9.8% of our voting stock and upon other change in control events, as defined, to cancel all of our rights under the leases we have with Senior Housing; and

·so long as we maintain our shared services agreement with RMR we will not acquire or finance any real estate without first giving Senior Housing, HRPT or any other publicly owned REIT or other entity managed by RMR, the opportunity to acquire or finance real estate investments of the type in which Senior Housing, HRPT or any other publicly owned REIT or other entity managed by RMR, respectively, invest.

At the time of our spin off from Senior Housing, all of the persons serving as our directors were trustees of Senior Housing.  Our two managing directors, Messrs. Martin and Portnoy, are currently the managing trustees of Senior Housing.

Of the 162 senior living communities we operate, 144 are leased from Senior Housing for total annual minimum rent of $114,151.

Since January 1, 2006, we have entered into several transactions with Senior Housing, including:

·In October 2006, we began to lease two rehabilitation hospitals from Senior Housing.  The term of the lease for these two hospitals expires on June 30, 2026, subject to our right to extend the term of the lease for an additional 20 years.   These two hospitals provide health rehabilitation services and are located in Braintree and Woburn, Massachusetts.  Our rent payable to Senior Housing for these hospitals is $10,250 per year.  These hospitals offer extensive inpatient and outpatient services that we believe are similar to services we provide, or may provide,  in many of our senior living communities.

·In June 2006, we ceased operations at two communities located in Connecticut that were leased from Senior Housing. In November 2006, Senior Housing sold these two facilities for net proceeds of approximately $5,600, which will reduce the annual minimum rent we pay to Senior Housing under our lease by $559.

·Between September and December 2006, we agreed to lease 11 senior living communities with 1,284 units which Senior Housing acquired from third parties.  Six of these communities are assisted living communities (three of which offer some skilled nursing services), three are independent living communities and two are continuing care retirement communities which offer independent living, assisted living and skilled nursing services.  Our rent payable to Senior Housing for these 11 communities is $9,007 per year, plus future increases calculated as a percentage of the revenue increases at these communities after 2007.  We added these communities to our existing lease with Senior Housing which has a current term ending in 2020, plus renewal options thereafter.  Residents pay substantially all of our charges at these communities from their private resources.

F-17

·During 2006, as permitted by our leases with Senior Housing, we sold to Senior Housing, at cost, approximately $23,729 of improvements made to properties leased from Senior Housing, and, as a result, our annual rent payable to Senior Housing increased by approximately $2,340.

RMR provides certain management and administrative services to us under a shared services agreement. RMR is compensated at an annual rate equal to 0.6% of our total revenues. Aggregate fees earned by RMR for services during 2006, 2005 and 2004, were $4,857, $4,663 and $3,700, respectively. RMR also provides the internal audit function for us and for other publicly owned companies to which it provides management  or other services.  Our pro rata share of RMR’s costs in providing that function for the years ended 2006, 2005 and 2004 was $173, $107 and $80, respectively.  Our audit committee appoints our director of internal audit, and our compensation committee approves his salary.  The fact that RMR has responsibilities to other entities, including our most significant landlord, Senior Housing, could create conflicts; and in the event of such conflicts between Senior Housing and us, the shared services agreement allows RMR to act on behalf of Senior Housing rather than on our behalf.  RMR is beneficially owned by Messrs. Barry M. Portnoy, one of our managing directors, and his son, Adam D. Portnoy, President and Chief Executive Officer and a director of RMR, a managing trustee of HRPT and Hospitality Properties Trust (another REIT) and a nominee for election as managing trustee of Senior Housing.  All transactions between us and RMR are approved by our compensation committee.

Our Chief Executive Officer and Chief Financial Officer are also officers and employees of RMR. These officers devote a substantial majority of their business time to our affairs and the remainder to RMR’s business which is separate from our business. We believe the compensation we pay to these officers reasonably reflects their division of business time; however, periodically, these individuals may divide their business time differently than they do currently and their compensation from us may become disproportionate to this division.

A subsidiary of RMR is the owner of the building in which our headquarters is located.  This lease expires in 2011. We paid rent, which includes our proportional share of utilities and real estate taxes, under this lease during 2006, 2005 and 2004 of $938, $711 and $561, respectively.  This lease has been amended at various times to take into account our needs for increasing space and all amendments to this lease have been approved by our independent directors.

In December 2006, we commenced leasing space for a regional office in Atlanta, Georgia from HRPT.  This lease expires in 2011.  We paid  rent  which includes our proportional share of utilities and real estate taxes, under this lease during 2006 of $5.

We believe that all our transactions with related parties are all on reasonable commercial terms; and all such transactions between us and related parties are approved by our independent directors.

14.  Employee Benefit Plans

We have established and assumed several employee savings plans under the provisions of Section 401(k) of the Internal Revenue Code.  All employees are eligible to participate in at least one of our plans and are entitled, upon termination or retirement, to receive their vested portion of the plan assets.  For some of our plans, we match a certain level of employee contributions.  We also pay certain expenses related to all of our plans.  Expenses for all our plans, including our contributions, were $193, $244 and $35 for the years ended December 31, 2006, 2005 and 2004, respectively.

15.  Segment Information

During 2005 and 2006 we operated substantially in one reportable segment, which is the business of operating senior living communities, including independent living and congregate care communities, assisted living communities and nursing homes.  Our pharmacy and rehabilitation hospital operations are not significant segments of our business and, accordingly, we combine those segments with our business of operating senior living communities.  If and as these businesses grow we may reconsider whether segment reporting is appropriate.  All of our operations and assets are located in the United States.

F-18

16.  Guarantor Financial Information

Our convertible notes are guaranteed by certain of our domestic wholly owned subsidiaries.  Such guarantees are full, unconditional and joint and several.  Separate financial statements of the wholly owned subsidiaries are not presented because we have determined that they would not be material.  Condensed consolidating financial information related to the Company, its guarantor subsidiaries and non-guarantor subsidiaries as of December 31, 2006, 2005 and 2004 are reflected below:

Condensed Consolidating Statement of Operations
For the year ended December 31, 2006
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations		Consolidated
Revenues:
Net revenues from residents	$	—		$	328,786		$	419,217		$	—	$	748,003
Hospital revenue	—						26,130			—		26,130
Pharmacy revenue	—						53,204			—		53,204
Total revenues				328,786			498,551			—		827,337
Operating expenses:
Wages and benefits	—			143,329			240,676			—		384,005
Other operating expenses	—			87,773			99,562			—		187,335
Hospital expenses	—			—			23,589			—		23,589
Pharmacy expenses	—			—			52,972			—		52,972
Management fee to SLS	—			8,744			—			—		8,744
Termination expense for SLS management agreements	—			129,913			—			—		129,913
Rent expense	—			65,171			46,310			—		111,481
General and administrative	—			—			33,829			—		33,829
Depreciation and amortization	—			4,192			5,758			—		9,950
Total operating expenses	—			439,122			502,696			—		941,818
Operating (loss) income	—			(110,336		)	(4,145		)	—		(114,481		)
Interest and other income	—			313			6,493			—		6,806
Interest expense	—			(24		)	(4,341		)	—		(4,365		)
Equity in earnings of subsidiaries	(116,665		)	—			—			116,665		—
(Loss) income from continuing operations before income taxes	(116,665		)	(110,047		)	(1,993		)	116,665		(112,040		)
Provision for income taxes	—			—			—			—		—
(Loss) income from continuing operations	(116,665		)	(110,047		)	(1,993		)	116,665		(112,040		)
Loss from discontinued operations	—			(74		)	(4,551		)	—		(4,625		)
Net (loss) income	$	(116,665	)	$	(110,121	)	$	(6,544	)	$	116,665	$	(116,665	)

F-19

Condensed Consolidating Statement of Operations
For the year ended December 31, 2005
	Parent			Guarantor  Subsidiaries			Non-  Guarantor  Subsidiaries			Eliminations		Consolidated
Revenues:
Net revenues from residents	$	—		$	314,990		$	385,901		$	—	$	700,891
Pharmacy revenue	—			—			33,132			—		33,132
Total revenues	—			314,990			419,033			—		734,023
Operating expenses:
Wages and benefits	—			131,779			224,588			—		356,367
Other operating expenses	—			90,368			90,326			—		180,694
Pharmacy expenses	—			—			31,823			—		31,823
Management fee to SLS	—			21,256			—			—		21,256
Termination expense for SLS management agreements	—			86,286			—			—		86,286
Rent expense	—			64,556			34,334			—		98,890
General and administrative	—			—			28,221			—		28,221
Depreciation and amortization	—			2,562			4,552			—		7,114
Impairment of assets	—			—			2,333			—		2,333
Total operating expenses	—			396,807			416,177			—		812,984
Operating (loss) income	—			(81,817		)	2,856			—		(78,961		)
Interest and other income	—			170			1,373			—		1,543
Interest expense	—			—			(3,741		)	—		(3,741		)
Equity in earnings of subsidiaries	(84,159		)	—			—			84,159		—
(Loss) income from continuing operations before income taxes	(84,159		)	(81,647		)	488			84,159		(81,159		)
Provision for income taxes	—			—			—			—		—
(Loss) income from continuing operations	(84,159		)	(81,647		)	488			84,159		(81,159		)
Loss from discontinued operations	—			(272		)	(2,728		)	—		(3,000		)
Net (loss) income	$	(84,159	)	$	(81,919	)	$	(2,240	)	$	84,159	$	(84,159	)

Condensed Consolidating Statement of Operations
For the year ended December 31, 2004
	Parent		Guarantor  Subsidiaries			Non-  Guarantor  Subsidiaries			Eliminations			Consolidated
Revenues:
Net revenues from residents	$	—	$	302,760		$	281,855		$	—		$	584,615
Pharmacy revenue	—		—			13,209			—			13,209
Total revenues	—		302,760			295,064			—			597,824
Operating expenses:
Wages and benefits	—		126,868			175,414			—			302,282
Other operating expenses	—		88,287			65,185			—			153,472
Pharmacy expenses	—		—			12,093			—			12,093
Management fee to SLS	—		19,293			—			—			19,293
Rent expense	—		64,023			18,430			—			82,453
General and administrative	—		—			20,052			—			20,052
Depreciation and amortization	—		1,339			2,033			—			3,372
Total operating expenses	—		299,810			293,207			—			593,017
Operating income	—		2,950			1,857			—			4,807
Interest and other income	—		66			1,600			—			1,666
Interest expense	—		—			(1,172		)	—			(1,172		)
Equity in earnings of subsidiaries	3,291		—			—			(3,291		)	—
Income (loss) from continuing operations before income taxes	3,291		3,016			2,285			(3,291		)	5,301
Provision for income taxes	—		—			(120		)	—			(120		)
Income (loss) from continuing operations	3,291		3,016			2,165			(3,291		)	5,181
Loss from discontinued operations	—		(692		)	(1,198		)	—			(1,890		)
Net income (loss)	$	3,291	$	2,324		$	967		$	(3,291	)	$	3,291

F-20

Condensed Consolidating Balance Sheet
As of December 31, 2006
	Parent		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	8,065	$	38,176	$	—		$	46,241
Accounts receivable, net	—		13,209		54,582		—			67,791
Investments	—		—		50,434		—			50,434
Prepaid expenses and other current assets	—		8,353		32,941		—			41,294
Total current assets	—		29,627		176,133		—			205,760
Property and equipment, net	—		23,061		91,837		—			114,898
Investment in subsidiary and long term receivable from (to) subsidiaries	200		—		200		(400		)	—
Restricted cash	—		3,072		11,750		—			14,822
Intercompany	228,656		—		—		(228,656		)	—
Mortgage notes receivable	—		—		2,484		—			2,484
Goodwill and other intangible assets	—		—		22,611		—			22,611
Other long term assets	—		—		5,836		—			5,836
	$	228,856	$	55,760	$	310,851	$	(229,056	)	$	366,411
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other current liabilities	$	—	$	41,852	$	57,760	$	—		$	99,612
Mortgage notes payable	—		—		33,317		—			33,317
Total current liabilities	—		41,852		91,077		—			132,929
Long term liabilities:
Mortgage notes payable	—		—		11,454		—			11,454
Convertible senior notes	—		—		126,500		—			126,500
Notes payable to related parties	200		—		—		(200		)	—
Other long term liabilities	—		6,431		21,667		—			28,098
Total long term liabilities	—		6,431		159,621		(200		)	166,052
Total shareholders’ equity	228,656		7,477		60,153		(228,856		)	67,430
	$	228,856	$	55,760	$	310,851	$	(229,056	)	$	366,411

F-21

Condensed Consolidating Balance Sheet
As of December 31, 2005
	Parent		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash	$	—	$	7,076	$	9,300	$	—		$	16,376
Accounts receivable, net	—		15,535		30,589		—			46,124
Investments	—		—		632		—			632
Prepaid expenses and other current assets	—		6,143		24,839		—			30,982
Total current assets	—		28,754		65,360		—			94,114
Property and equipment, net	—		19,200		77,543		—			96,743
Investment in subsidiary and long term receivable from (to) subsidiaries	200		—		200		(400		)	—
Restricted cash	—		3,798		9,683		—			13,481
Intercompany	113,749		—		—		(113,749		)	—
Mortgage notes receivable	—		—		5,337		—			5,337
Goodwill and other intangible assets	—		—		18,048		—			18,048
Other long term assets	—		402		815		—			1,217
	$	113,949	$	52,154	$	176,986	$	(114,149	)	$	228,940
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other current liabilities	$	—	$	25,262	$	64,080	$	—		$	89,342
Current mortgage notes payable	—		—		626		—			626
Total current liabilities	—		25,262		64,706		—			89,968
Long term liabilities:
Mortgage notes payable	—		—		44,703		—			44,703
Notes payable to related parties	200		—		—		(200		)	—
Other long term liabilities	—		6,179		19,286		—			25,465
Total long term liabilities	200		6,179		63,989		(200		)	70,168
Total shareholders’ equity	113,749		20,713		48,291		(113,949		)	68,804
	$	113,949	$	52,154	$	176,986	$	(114,149	)	$	228,940

F-22

Condensed Consolidating Balance Sheet
As of December 31, 2004
	Parent		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash	$	—	$	7,650	$	21,501	$	—		$	29,151
Accounts receivable, net	—		11,676		25,066		—			36,742
Prepaid expenses and other current assets	—		12,498		15,852		—			28,350
Total current assets	—		31,824		62,419		—			94,243
Property and equipment, net	—		12,671		82,518		—			95,189
Investment in subsidiary and long term receivable from (to) subsidiaries	200		—		200		(400		)	—
Restricted cash	—		8,842		3,322		—			12,164
Intercompany	56,551		—		—		(56,551		)	—
Mortgage notes receivable	—		—		6,099		—			6,099
Goodwill and other intangible assets	—		—		11,548		—			11,548
Other long term assets	—		402		3,340		—			3,742
	$	56,751	$	53,739	$	169,446	$	(56,951	)	$	222,985
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other current liabilities	$	—	$	24,597	$	41,838	$	—		$	66,435
Current mortgage notes payable	—		—		463		—			463
Total current liabilities	—		24,597		42,301		—			66,898
Long term liabilities:
Mortgage notes payable	—		—		42,118		—			42,118
Notes payable to related parties	200		—		—		(200		)	—
Other long term liabilities	—		6,320		11,745		—			18,065
Total long term liabilities	200		6,320		53,863		(200		)	60,183
Total shareholders’ equity	56,551		22,822		73,282		(56,751		)	95,904
	$	56,751	$	53,739	$	169,446	$	(56,951	)	$	222,985

F-23

Condensed Consolidating Cash Flow Statement
For the year ended December 31, 2006
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows from operating activities:
Net (loss) income	$	(116,665	)	$	(110,120	)	$	(6,545	)	$	116,665		$	(116,665	)
Undistributed equity in earnings of subsidiaries	116,665			—			—			(116,665		)	—
Adjustments to reconcile net income to cash provided by (used in) operating activities, net	—			118,138			(182,689		)	—			(64,551		)
Net cash used in operating activities	—			8,018			(189,234		)	—			(181,216		)
Cash Flows from investing activities:
Capital expenditures	—			(17,481		)	(39,621		)	—			(57,102		)
Proceeds from the sale of property and equipment	—			9,425			14,304			—			23,729
Other, net	—			1,027			2,578			—			3,605
Net cash (used in) provided by investing activities	—			(7,029		)	(22,739		)	—			(29,768		)
Cash Flows from financing activities:
Proceeds from issuance of common shares, net	—			—			114,907			—			114,907
Change in borrowings, net	—			—			125,942			—			125,942
Net cash provided by financing activities	—			—			240,849			—			240,849
Change in cash and cash equivalents	—			989			28,876			—			29,865
Cash and cash equivalents at beginning of period	—			7,076			9,300			—			16,376
Cash and cash equivalents at end of period	$	—		$	8,065		$	38,176		$	—		$	46,241

F-24

Condensed Consolidating Cash Flow Statement
For the year ended December 31, 2005
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows from operating activities:
Net (loss) income	$	(84,159	)	$	(81,919	)	$	(2,240	)	$	84,159		$	(84,159	)
Undistributed equity in earnings of subsidiaries	84,159			—			—			(84,159		)	—
Adjustments to reconcile net income to cash provided by (used in) operating activities, net	—			80,502			(52,977		)	—			27,525
Net cash used in operating activities	—			(1,417		)	(55,217		)	—			(56,634		)
Cash Flows from investing activities:
Capital expenditures	—			(19,722		)	(90,631		)	—			(110,353		)
Proceeds from the sale of property and equipment	—			7,769			88,379			—			96,148
Other, net	—			12,796			(14,232		)	—			(1,436		)
Net cash (used in) provided by investing activities	—			843			(16,484		)	—			(15,641		)
Cash Flows from financing activities:
Proceeds from issuance of common shares, net	—			—			56,752			—			56,752
Change in borrowings, net	—			—			2,748			—			2,748
Other, net	—			—			—			—			—
Net cash provided by financing activities	—			—			59,500			—			59,500
Change in cash and cash equivalents	—			(574		)	(12,201		)	—			(12,775		)
Cash and cash equivalents at beginning of period	—			7,650			21,501			—			29,151
Cash and cash equivalents at end of period	$	—		$	7,076		$	9,300		$	—		$	16,376

F-25

Condensed Consolidating Cash Flow Statement
For the year ended December 31, 2004
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows from operating activities:
Net income (loss)	$	3,291		$	2,324		$	967		$	(3,291	)	$	3,291
Undistributed equity in earnings of subsidiaries	(3,291		)	—			—			3,291			—
Adjustments to reconcile net income to cash provided by (used in) operating activities, net	—			7,721			(11,410		)	—			(3,689		)
Net cash (used in) provided by operating activities	—			10,045			(10,443		)	—			(398		)
Cash Flows from investing activities:
Capital expenditures	—			(18,813		)	(123,648		)	—			(142,461		)
Proceeds from the sale of property and equipment	—			5,746			126,393			—			132,139
Other, net	—			(2,484		)	4,715			—			2,231
Net cash (used in) provided by investing activities	—			(15,551		)	7,461			—			(8,091		)
Cash Flows from financing activities:
Proceeds from issuance of common shares, net	—			—			27,725			—			27,725
Change in borrowings, net	—			—			(5,452		)	—			(5,452		)
Other, net	—			—			—			—			—
Net cash provided by financing activities	—			—			22,273			—			22,273
Change in cash and cash equivalents	—			(5,506		)	19,290			—			13,784
Cash and cash equivalents at beginning of period	—			13,156			2,211			—			15,367
Cash and cash equivalents at end of period	$	—		$	7,650		$	21,501		$	—		$	29,151

17.  Selected Quarterly Financial Data (Unaudited)

The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2006 and 2005:

	2006
	First Quarter		Second Quarter			Third Quarter		Fourth Quarter
Revenues	$	192,603	$	196,056		$	201,073	$	237,605
Net income (loss) from continuing operations	2,493		(86,335		)	5,517		(33,715		)
Net income (loss)	1,660		(87,191		)	3,196		(34,330		)
Net income (loss) per common share	$	0.08	$	(2.82	)	$	0.10	$	(1.09	)

	2005
	First Quarter		Second Quarter		Third Quarter			Fourth Quarter
Revenues	$	174,510	$	178,401	$	187,628		$	193,484
Net income from continuing operations	1,048		2,193		(83,444		)	(956		)
Net income	1,256		1,167		(84,374		)	(2,208		)
Net income per common share	$	0.10	$	0.10	$	(5.64	)	$	(0.11	)

F-26

18.  Pro Forma Information (Unaudited)

Pro forma operating results assuming commencement of operations, as of January 1, 2005, of the six communities we acquired in June 2005 are as follows:

	2005
	(unaudited)
Revenues	$	742,269
Expenses	819,668
Operating loss	(77,399		)
Interest and other income	1,596
Interest expense	(4,892		)
Loss from continuing operations	(80,695		)
Loss from discontinued operations	(3,000		)
Net loss	$	(83,695	)

These unaudited pro forma operating results do not represent or are not indicative of our operating results for any future date or period.  Actual future results may be materially different from pro forma results.  Differences could arise from many factors.

F-27

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FIVE STAR QUALITY CARE, INC.
By:	/s/ Evrett W. Benton
	Evrett W. Benton
	President and Chief Executive Officer

Dated:  March 7, 2007

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

Signature	Title	Date
/s/ Evrett W. Benton	President and Chief Executive Officer	March 7, 2007
Evrett W. Benton
/s/ Bruce J. Mackey Jr.	Chief Financial Officer and Treasurer	March 7, 2007
Bruce J. Mackey Jr	(Principal Accounting Officer)
/s/ Barry M. Portnoy	Managing Director	March 7, 2007
Barry M. Portnoy
/s/ Gerard M. Martin	Managing Director	March 7, 2007
Gerard M. Martin
/s/ Bruce M. Gans	Director	March 7, 2007
Bruce M. Gans
/s/ Barbara D. Gilmore	Director	March 7, 2007
Barbara D. Gilmore
/s/ Arthur G. Koumantzelis	Director	March 7, 2007
Arthur G. Koumantzelis

EX-10.19

Exhibit 10.19

NINTH AMENDMENT TO SECOND AMENDED AND RESTATED LEASE

THIS NINTH AMENDMENT TO SECOND AMENDED AND RESTATED LEASE, is made and entered into as of November 1, 2006 by and among (i) each of the parties identified on the signature page hereof as landlord (collectively, “Landlord”), and (ii) FIVE STAR QUALITY CARE TRUST, a Maryland business trust, as tenant (“Tenant”).

W I T N E S S E T H:

WHEREAS, pursuant to the terms of that certain Second Amended and Restated Lease Agreement, dated as of November 19, 2004, as amended by that certain First Amendment of Lease, dated as of May 17, 2005, that certain Second Amendment to Second Amended and Restated Lease Agreement, dated as of June 3, 2005, that certain Third Amendment to Second Amended and Restated Lease Agreement, dated as of October 31, 2005, that certain Third Amendment to Second Amended and Restated Lease Agreement, dated as of December 30, 2005, that certain Letter Agreement, dated as of March 13, 2006, that certain Fifth Amendment to Second Amended and Restated Lease Agreement, dated as of September 1, 2006, that certain Sixth Amendment to Second Amended and Restated Lease Agreement, dated as of October 1, 2006, that certain Seventh Amendment to Second Amended and Restated Lease Agreement, dated as of October 1, 2006, and that certain Eighth Amendment to Second Amended and Restated Lease, dated as of November 1, 2006 (as so amended, the “Consolidated Lease”), 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 the Consolidated Lease), all as more particularly described in the Consolidated Lease; and

WHEREAS, Landlord and Tenant now wish to terminate the Consolidated Lease with respect to those certain premises, known as Clifton Healthcare Center and Health Center of Greater Waterbury, both as more particularly described on Exhibits A-1 and A-2 attached hereto (together, the “Terminated Premises”) and to amend the Consolidated Lease, subject to and upon the terms and conditions hereinafter provided;

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 as follows:

1.             Tenant represents and warrants that Tenant has not assigned the Consolidated Lease with respect to the Terminated Premises or sublet all or any portion of the Terminated

Premises or otherwise granted the right to occupy all or any portion of the Terminated Premises to any person or entity, other than pursuant to that certain Sublease Agreement dated as of December 31, 2001, by and between Tenant and Five Star Quality Care-CT, LLC (“Subtenant”), as amended by that certain Letter Agreement dated as of March 1, 2004, by and between Tenant and certain Affiliates of Five Star Quality Care, Inc., including Subtenant, which Sublease Agreement is being terminated by that certain Termination of Sublease Agreement of even date herewith, by and between Tenant and Subtenant.

2.             Effective as of the date hereof, the Consolidated Lease is terminated with respect to the Terminated Premises and no party shall have any further rights or liabilities thereunder with respect to the Terminated Premises, except those rights and liabilities which by their terms survive termination of the Consolidated Lease.

3.             The definition of “Minimum Rent” set forth in Section 1.69 of the Consolidated Lease is hereby amended by deleting the existing definition and inserting the following in place thereof:

“Minimum Rent. The definition “Minimum Rent” shall mean Thirty-Eight Million Eight Hundred Sixty Thousand Four Hundred Ninety-Nine Dollars ($38,860,499) per annum.

4.             Exhibit A-16 and A-17 of the Consolidated Lease are amended by deleting them in their entirety and inserting “[INTENTIONALLY DELETED]” in each place.

5.             As partially terminated and amended hereby, the Consolidated Lease is hereby ratified and confirmed.

[SIGNATURE PAGES FOLLOW]

IN WITNESS WHEREOF, Landlord and Tenant have caused this Ninth Amendment to Second Amended and Restated Lease to be duly executed, as a sealed instrument, as of the date first set forth above.

LANDLORD:
ELLICOTT CITY LAND I LLC, ELLICOTT CITY LAND II LLC, HRES2 PROPERTIES TRUST, SNH CHS PROPERTIES TRUST, SPTIHS PROPERTIES TRUST, SPT-MICHIGAN TRUST, SPTMNR PROPERTIES TRUST, SNH/LTA PROPERTIES TRUST, and SNH/LTA PROPERTIES GA LLC
By:	/s/ John R. Hoadley
	Name: John R. Hoadley
	Title: Treasurer and CFO
	of each of the foregoing entities
TENANT:
FIVE STAR QUALITY CARE TRUST
By:	/s/ Bruce J. Mackey Jr
	Name: Bruce J. Mackey Jr.
	Title: Treasurer, Chief Financial Officer
	and Assistant Secretary

The following exhibits have been omitted and will be supplementally furnished to the Securities and Exchange Commission upon request:

EXHIBIT A-1

EXHIBIT A-2

EX-10.20

Exhibit 10.20

TENTH AMENDMENT TO SECOND AMENDED AND RESTATED LEASE AGREEMENT

THIS TENTH AMENDMENT TO SECOND AMENDED AND RESTATED LEASE AGREEMENT (this “Amendment”) is made and entered into as of November 6, 2006 (to be effective as of November 5, 2006) by and among each of the parties identified on the signature page hereof as a landlord, as landlord (collectively, “Landlord”), and FIVE STAR QUALITY CARE TRUST, a Maryland business trust, as tenant (“Tenant”).

W I T N E S S E T H:

WHEREAS, pursuant to the terms of that certain Second Amended and Restated Lease Agreement, dated as of November 19, 2004, as amended by that certain First Amendment of Lease, dated as of May 17, 2005, that certain Second Amendment to Second Amended and Restated Lease Agreement, dated as of June 3, 2005, that certain Third Amendment to Second Amended and Restated Lease Agreement, dated as of October 31, 2005, that certain other Third Amendment to Second Amended and Restated Lease Agreement, dated as of December 30, 2005, that certain Letter Agreement, dated as of March 13, 2006, that certain Fifth Amendment to Second Amended and Restated Lease Agreement, dated as of September 1, 2006, that certain Sixth Amendment to Second Amended and Restated Lease Agreement, dated as of October 1, 2006, that certain Seventh Amendment to Second Amended and Restated Lease Agreement, dated as of October 1, 2006, that certain Eighth Amendment to Second Amended and Restated Lease Agreement, dated as of November 1, 2006, and that certain Ninth Amendment to Second Amended and Restated Lease dated as of November 1, 2006  (as so amended, the “Consolidated Lease”), 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 the Consolidated Lease), all as more particularly described in the Consolidated Lease; and

WHEREAS, on or about the date hereof, SNH/LTA Properties Trust has acquired certain real property and related improvements known as The Neighborhood at Somerset and located at 100 Neighborly Way, Somerset, Kentucky, as more particularly described on Exhibit A-96 attached hereto (the “Somerset Property”); and

WHEREAS, SNH/LTA Properties Trust, the other entities comprising Landlord and Tenant wish to amend the Consolidated Lease to include the Somerset 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, effective as of November 5, 2006, as follows:

1.             Definition of Minimum Rent.  The definition of the term “Minimum Rent” set forth in Section 1.69 of the Consolidated Lease is hereby deleted in its entirety and replaced with the following:

“Minimum Rent”  shall mean the sum of $39,274,507.00 per annum.

2.             Definition of Hermitage/Marsh View Properties.  The definition for the term “Hermitage/Marsh View Properties” set forth in Section 1.103 of the Consolidated Lease is hereby deleted in its entirety and replaced with the following new definition of “Hermitage/Marsh View/Somerset Properties”:

“Hermitage/Marsh View/Somerset Properties”  shall mean the Properties located on the Land described in Exhibits A-93 through A-96 attached hereto.

3.             Leased Property.  Section 2.1 of the Consolidated Lease is hereby amended by deleting subsection (a) in its entirety and replacing it with the following:

(a)           those certain tracts, pieces and parcels of land as more particularly described in Exhibits A-1 through A-96 attached hereto and made a part hereof (the “Land”).

4.             Replacement of Defined Term “Hermitage/Marsh View Properties”.  The Consolidated Lease is hereby amended by deleting each reference therein to the defined terms “Hermitage/Marsh View Property” or “Hermitage/Marsh View Properties” and replacing them with references to “Hermitage/Marsh View/Somerset Property” or “Hermitage/Marsh View/Somerset Properties” (as applicable).

6.             Exhibit A.  Exhibit A to the Consolidated Lease is hereby amended by adding Exhibit A-96 attached hereto following Exhibit A-95 to the Consolidated Lease.

7.             Ratification.  As amended hereby, the Consolidated Lease is hereby ratified and confirmed.

2

IN WITNESS WHEREOF, Landlord and Tenant have caused this Amendment to be duly executed, as a sealed instrument, as of the date first set forth above.

LANDLORD:
ELLICOTT CITY LAND I LLC, ELLICOTT CITY LAND II LLC, HRES2 PROPERTIES TRUST, SNH CHS PROPERTIES TRUST, SPTIHS PROPERTIES TRUST, SPT-MICHIGAN TRUST, SPTMNR PROPERTIES TRUST, SNH/LTA PROPERTIES TRUST and SNH/LTA PROPERTIES GA LLC
By:	/s/ John R. Hoadley
	John R. Hoadley
	Treasurer
	of each of the foregoing entities
TENANT:
FIVE STAR QUALITY CARE TRUST
By:	/s/ Bruce J. Mackey Jr
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial Officer
	and Assistant Secretary

3

The following exhibit has been omitted and will be supplementally furnished to the Securities and Exchange Commission upon request:

EXHIBIT A-96   SOMERSET PROPERTY

EX-10.21

Exhibit 10.21

ELEVENTH AMENDMENT TO SECOND AMENDED
AND RESTATED LEASE AGREEMENT

THIS ELEVENTH AMENDMENT TO SECOND AMENDED AND RESTATED LEASE AGREEMENT, is made and entered into as of December 22, 2006 by and among (i) each of the parties identified on the signature page hereof as landlord (collectively, “Landlord”), and (ii) FIVE STAR QUALITY CARE TRUST, a Maryland business trust, as tenant (“Tenant”).

W I T N E S S E T H:

WHEREAS, pursuant to the terms of that certain Second Amended and Restated Lease Agreement, dated as of November 19, 2004, as amended by that certain First Amendment of Lease, dated as of May 17, 2005, that certain Second Amendment to Second Amended and Restated Lease Agreement, dated as of June 3, 2005, that certain Third Amendment to Second Amended and Restated Lease Agreement, dated as of October 31, 2005, that certain other Third Amendment to Second Amended and Restated Lease Agreement, dated as of December 30, 2005, that certain Letter Agreement, dated as of March 13, 2006, that certain Fifth Amendment to Second Amended and Restated Lease Agreement, dated as of September 1, 2006, that certain Sixth Amendment to Second Amended and Restated Lease Agreement, dated as of October 1, 2006, that certain Seventh Amendment to Second Amended and Restated Lease Agreement, dated as of October 1, 2006, that certain Eighth Amendment to Second Amended and Restated Lease, dated as of November 1, 2006, that certain Ninth Amendment to Second Amended and Restated Lease, dated as of November 1, 2006 and that certain Tenth Amendment to Second Amended and Restated Lease Agreement, dated as of November 6, 2006 (effective as of November 5, 2006) (as so amended, the “Consolidated Lease”), 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 the Consolidated Lease), all as more particularly described in the Consolidated Lease; and

WHEREAS, Landlord and Tenant now wish to terminate the Consolidated Lease with respect to that certain premises known as Christopher East Health & Rehabilitation Center and located at 1132 E. Knapp Street, Milwaukee, Wisconsin, as more particularly described on Exhibit A attached hereto (the “Terminated Premises”) and to amend the Consolidated Lease, subject to and upon the terms and conditions hereinafter provided;

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 as follows:

1.             Tenant represents and warrants that Tenant has not assigned the Consolidated Lease with respect to the Terminated Premises or sublet all or any portion of the Terminated Premises or otherwise granted the right to occupy all or any portion of the Terminated Premises to any person or entity, other than pursuant to that certain Sublease Agreement dated as of December 31, 2001, by and between Tenant and Five Star Quality Care-WI, LLC (“Subtenant”), as amended by that certain Letter Agreement dated as of March 1, 2004, by and between Tenant and certain Affiliates of Five Star Quality Care, Inc., including Subtenant, which Sublease Agreement is being terminated with respect to the Terminated Premises pursuant to that certain Partial Termination of Sublease Agreement of even date herewith, by and between Tenant and Subtenant.

2.             Effective as of the date hereof, the Consolidated Lease is terminated with respect to the Terminated Premises and no party shall have any further rights or liabilities thereunder with respect to the Terminated Premises, except those rights and liabilities which by their terms survive termination of the Consolidated Lease.

3.             The definition of “Minimum Rent” set forth in Section 1.69 of the Consolidated Lease is hereby amended by deleting the existing definition and inserting the following in place thereof:

Minimum Rent  shall mean the sum of Thirty-Nine Million One Hundred Sixty Thousand Four Hundred Seventy-Nine Dollars ($39,160,479) per annum.

4.             Exhibit A to the Consolidated Lease is hereby amended by deleting Exhibit A-48 in its entirety and inserting “[INTENTIONALLY DELETED]” in its place.

5.             As partially terminated and amended hereby, the Consolidated Lease is hereby ratified and confirmed.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, Landlord and Tenant have caused this Eleventh Amendment to Second Amended and Restated Lease Agreement to be duly executed, as a sealed instrument, as of the date first set forth above.

LANDLORD:
ELLICOTT CITY LAND I LLC, ELLICOTT CITY LAND II LLC, HRES2 PROPERTIES TRUST, SNH CHS PROPERTIES TRUST, SPTIHS PROPERTIES TRUST, SPT-MICHIGAN TRUST, SPTMNR PROPERTIES TRUST, SNH/LTA PROPERTIES TRUST, and SNH/LTA PROPERTIES GA LLC
By:	/s/ John R. Hoadley
	Name: John R. Hoadley
	Title: Treasurer and CFO
	of each of the foregoing entities
TENANT:
FIVE STAR QUALITY CARE TRUST
By:	/s/ Bruce J. Mackey Jr
	Name: Bruce J. Mackey Jr.
	Title: Treasurer, Chief Financial Officer
	and Assistant Secretary

The following exhibit has been omitted and will be supplementally furnished to the Securities and Exchange Commission upon request:

EXHIBIT A   The Terminated Premises

EX-10.22

Exhibit 10.22

TWELFTH AMENDMENT TO SECOND AMENDED
AND RESTATED LEASE AGREEMENT

THIS TWELFTH AMENDMENT TO SECOND AMENDED AND RESTATED LEASE AGREEMENT is made and entered into as of January 1, 2007 by and among (i) each of the parties identified on the signature page hereof as a landlord, as landlord (collectively, “Landlord”), and (ii) FIVE STAR QUALITY CARE TRUST, a Maryland business trust, as tenant (“Tenant”).

W I T N E S S E T H:

WHEREAS, pursuant to the terms of that certain Second Amended and Restated Lease Agreement, dated as of November 19, 2004, as amended by that certain First Amendment of Lease, dated as of May 17, 2005, that certain Second Amendment to Second Amended and Restated Lease Agreement, dated as of June 3, 2005, that certain Third Amendment to Second Amended and Restated Lease Agreement, dated as of October 31, 2005, that certain other Third Amendment to Second Amended and Restated Lease Agreement, dated as of December 30, 2005, that certain Letter Agreement, dated as of March 13, 2006, that certain Fifth Amendment to Second Amended and Restated Lease Agreement, dated as of September 1, 2006, that certain Sixth Amendment to Second Amended and Restated Lease Agreement, dated as of October 1, 2006, that certain Seventh Amendment to Second Amended and Restated Lease Agreement, dated as of October 1, 2006, that certain Eighth Amendment to Second Amended and Restated Lease, dated as of November 1, 2006, that certain Ninth Amendment to Second Amended and Restated Lease, dated as of November 1, 2006, that certain Tenth Amendment to Second Amended and Restated Lease Agreement, dated as of November 6, 2006 (effective as of November 5, 2006), and that certain Eleventh Amendment to Second Amended and Restated Lease Agreement, dated as of December 22, 2006 (as so amended, the “Consolidated Lease”), 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 the Consolidated Lease), all as more particularly described in the Consolidated Lease; and

WHEREAS, on or about the date hereof, SNH/LTA Properties Trust has acquired certain real property and related improvements known as Walking Horse Meadows and located at 207 Uffelman Drive, Clarksville, Tennessee, as more particularly described on Exhibit A-97 attached hereto (the “Walking Horse Property”); and

WHEREAS, SNH/LTA Properties Trust, the other entities comprising Landlord and Tenant wish to amend the Consolidated Lease to include the Walking Horse 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 as follows:

1.             Definition of Minimum Rent.  The definition for the term “Minimum Rent” set forth in Section 1.69 of the Consolidated Lease is hereby deleted in its entirety and replaced with the following:

“Minimum Rent”  shall mean the sum of Thirty-Nine Million Eight Hundred Twelve Thousand Thirty-Six Dollars ($39,812,036) per annum.

2.             Definition of Hermitage/Marsh View/Somerset Properties.  The definition for the term “Hermitage/Marsh View/Somerset Properties” set forth in Section 1.103 of the Consolidated Lease is hereby deleted in its entirety and replaced with the following new definition of “Hermitage/Marsh View/Somerset/Walking Horse Properties”:

“Hermitage/Marsh View/Somerset/Walking Horse Properties”  shall mean the Properties located on the Land described in Exhibits A-93 through A-97 attached hereto.

3.             Leased Property.  Section 2.1 of the Consolidated Lease is hereby amended by deleting subsection (a) in its entirety and replacing it with the following:

(a)           those certain tracts, pieces and parcels of land as more particularly described in Exhibits A-1 through A-97 attached hereto and made a part hereof (the “Land”).

4.             Replacement of Defined Term “Hermitage/Marsh View/Somerset Properties”.  The Consolidated Lease is hereby amended by deleting each reference therein to the defined terms “Hermitage/Marsh View/Somerset Property” or “Hermitage/Marsh View/Somerset Properties” and replacing them with references to “Hermitage/Marsh View/Somerset/Walking Horse Property” or “Hermitage/Marsh View/Somerset/Walking Horse Properties” (as applicable).

2

5.             Exhibit A.  Exhibit A to the Consolidated Lease is hereby amended by adding Exhibit A-97 attached hereto following Exhibit A-96 to the Consolidated Lease.

6.             Ratification.  As amended hereby, the Consolidated Lease is hereby ratified and confirmed.

[SIGNATURE PAGE FOLLOWS]

3

IN WITNESS WHEREOF, Landlord and Tenant have caused this Twelfth Amendment to Second Amended and Restated Lease Agreement to be duly executed, as a sealed instrument, as of the date first set forth above.

LANDLORD:
ELLICOTT CITY LAND I LLC, ELLICOTT CITY LAND II LLC, HRES2 PROPERTIES TRUST, SNH CHS PROPERTIES TRUST, SPTIHS PROPERTIES TRUST, SPT-MICHIGAN TRUST, SPTMNR PROPERTIES TRUST, SNH/LTA PROPERTIES TRUST, and SNH/LTA PROPERTIES GA LLC
By:	/s/ David J. Hegarty
	David J. Hegarty
	President, Chief Operating Officer and Secretary
	of each of the foregoing entities
TENANT:
FIVE STAR QUALITY CARE TRUST
By:	/s/ Bruce J. Mackey Jr
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial Officer
	and Assistant Secretary

4

The following exhibit has been omitted and will be supplementally furnished to the Securities and Exchange Commission upon request:

EXHIBIT A-97  WALKING HORSE PROPERTY

EX-10.25

Exhibit 10.25

FIRST AMENDMENT TO SECURITY AGREEMENT

THIS FIRST AMENDMENT TO SECURITY AGREEMENT (this “First Amendment”) is entered into as of this 19th day of April, 2004, by and among (i) FIVE STAR QUALITY CARE TRUST, a Maryland business trust (the “Tenant”), and (ii) each of the other parties identified on the signature page hereof (collectively, the “Secured Parties”).

W I T N E S S E T H:

WHEREAS, HRES2 Properties Trust, SPTIHS Properties Trust, SPT-Michigan Trust and SPTMNR Properties Trust, as landlord (collectively, the “Original Secured Parties”), and the Tenant, as tenant, entered into that certain Master Lease Agreement dated as of December 31, 2001 as amended by that certain Partial Termination of Lease and Sublease dated as of June 5, 2003, by and among SPTIHS Properties Trust and the Tenant, among others (as so amended, the “Original Lease”), pursuant to which the Original Secured Parties leased to the Tenant and the Tenant leased from the Original Secured Parties certain properties as more particularly described in the Original Lease; and

WHEREAS, pursuant to that certain Security Agreement, dated as of December 31, 2001, by and among the Tenant and the Original Secured Parties (the “Security Agreement”), the Tenant granted to the Original Secured Parties a first and perfected lien and security interest in the Collateral (this and other capitalized terms used and not otherwise defined herein having the meanings ascribed to such terms in the Security Agreement) to secure the payment and performance of the Obligations; and

WHEREAS, the Tenant and the Secured Parties have entered into that certain Amended and Restated Lease Agreement dated as of March 1, 2004 (the “Amended Lease”), which Amended Lease amends and restates the Original Lease to add additional properties as more particularly described in the Amended Lease; and

WHEREAS, the Tenant and the Secured Parties wish to amend the Security Agreement to reflect the amendment and restatement of the Original Lease and to remove four (4) of the facilities from Schedule 2 to the Security Agreement, subject to and upon the terms and conditions hereinafter provided;

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, the Tenant and the Secured Parties hereto hereby agree as follows:

1.             All references in the Security Agreement to the Master Lease shall mean the Amended Lease, as the same may be amended from time to time.

2.             Schedule 2 to the Security Agreement (“The Facilities”) is hereby amended by deleting the following facilities therefrom:

VILLAGE GREEN HEALTHCARE CENTER

2932 N. 14th Street

Phoenix, Arizona 85014

GLENWOOD CARE CENTER

303 Fifth Street N.P.O. Box 601

Glenwood, Georgia 30428

HOWELL CARE CENTER

3003 West Grand River

Howell, Michigan 48843

GRANDVIEW MANOR

Broad Street and Highway 4

Campbell, Nebraska 68932

3.    As amended hereby, the Security Agreement is hereby ratified and confirmed.

[Signature page follows.]

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

TENANT:
FIVE STAR QUALITY CARE TRUST,
a Maryland business trust
By:		/s/ Rosemary Esposito
		Rosemary Esposito, R.N.
		Senior Vice President, Chief Operating Officer and Chief Clinical Officer
SECURED PARTIES:
HRES2 PROPERTIES TRUST, a Maryland real estate investment trust, SPTIHS PROPERTIES TRUST, a Maryland real estate investment trust, SPT-MICHIGAN TRUST, a Maryland business trust, SPTMNR PROPERTIES TRUST, a Maryland real estate investment trust, SNH CHS PROPERTIES TRUST, a Maryland real estate investment trust, ELLICOTT CITY LAND I, LLC, a Delaware limited liability company, and ELLICOTT CITY LAND II, LLC, a Delaware limited liability company
	By:		/s/ John R. Hoadley
			John R. Hoadley
			Treasurer of each of the foregoing entities

EX-10.37

Exhibit 10.37

PARTIAL TERMINATION AND CONFIRMATION OF GUARANTEES
AND OTHER INCIDENTAL DOCUMENTS

THIS PARTIAL TERMINATION AND CONFIRMATION OF GUARANTEES AND OTHER INCIDENTAL DOCUMENTS (this “Confirmation”) is made as of November 1, 2006 by FIVE STAR QUALITY CARE, INC., a Maryland corporation (the “Guarantor”), FIVE STAR QUALITY CARE TRUST, a Maryland business trust (the “Tenant”), FSQ, INC., a Delaware corporation (the “Tenant Pledgor”), each of the parties identified on the signature page hereof as a subtenant pledgor (collectively, the “Subtenant Pledgors”) and each of the parties identified on the signature page hereof as a subtenant (collectively, the “Subtenants”) for the benefit of each of the parties identified on the signature page hereof as a landlord (collectively, the “Landlords”).

W I T N E S S E T H :

WHEREAS, pursuant to the terms of that certain Second Amended and Restated Lease Agreement, dated as of November 19, 2004, as amended by that certain First Amendment of Lease, dated as of May 17, 2005, that certain Second Amendment to Second Amended and Restated Lease Agreement, dated as of June 3, 2005, that certain Third Amendment to Second Amended and Restated Lease Agreement, dated as of October 31, 2005, that certain Third Amendment to Second Amended and Restated Lease Agreement, dated as of December 30, 2005, that certain Letter Agreement, dated as of March 13, 2006, that certain Fifth Amendment to Second Amended and Restated Lease Agreement, dated as of September 1, 2006, that certain Sixth Amendment to Second Amended and Restated Lease Agreement, dated as of October 1, 2006, that certain Seventh Amendment to Second Amended and Restated Lease Agreement, dated as of October 1, 2006, and that certain Eighth Amendment to Second Amended and Restated Lease, dated as of November 1, 2006 (as so amended, the “Consolidated Lease”), the Landlords lease to the Tenant, and the Tenant leases from the Landlords, certain property, all as more particularly described in the Consolidated Lease; and

WHEREAS, the payment and performance obligations of the Tenant with respect to the Consolidated Lease are guaranteed by those certain Guaranty Agreements described on Exhibit A attached hereto (collectively, the “Guarantees”); and

WHEREAS, the payment and performance obligations of the Tenant with respect to the Consolidated Lease are further secured by the other Incidental Documents (this and other capitalized terms used but not otherwise defined herein shall

have the meanings ascribed to them in the Consolidated Lease); and

WHEREAS, pursuant to a Ninth Amendment to Second Amended and Restated Lease Agreement, dated as of the date hereof (the “Ninth Amendment”), the Consolidated Lease is being amended to remove certain properties, as more particularly described in the Ninth Amendment; and

WHEREAS, pursuant to the terms of that certain Termination of Sublease, dated as of the date hereof (the “Sublease Termination”) , between Tenant and Five Star Quality Care-CT, LLC (“Connecticut Subtenant”), Tenant and Connecticut Subtenant mutually agree to terminate the Sublease (as such term is defined in the Sublease Termination);

WHEREAS, in connection with, and as a condition precedent to, the execution of the Ninth Amendment by the Landlords, the Landlords have required that the parties hereto confirm that the Guarantees and the other Incidental Documents remain in full force and effect and apply to the Consolidated Lease as amended by the Ninth Amendment;

WHEREAS, on May 6, 2005, the Guarantor undertook a corporate reorganization that resulted in changes in ownership of certain of the Subtenants, among other things; and

WHEREAS, in connection with the corporate reorganization of the Guarantor and the execution of the Ninth Amendment, the parties hereto wish to amend certain of the Incidental Documents, including (i) the Security Agreement, dated as of December 31, 2001, by and among certain of the Subtenants and certain of the Landlords, as amended and confirmed from time to time (the “Subtenant Security Agreement”); (ii) the Security Agreement, dated as of December 31, 2001, by and among the Tenant and certain of the Landlords, as amended and confirmed from time to time (the “Tenant Security Agreement”); and (iii) the Second Amended and Restated Pledge of Stock and Membership Interests Agreement, dated as of May 6, 2005, made by the Subtenant Pledgors for the benefit of the Landlords, as amended and confirmed from time to time (the “Subtenant Pledge Agreement”), all subject to and upon the terms and conditions herein set forth;

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1.             Removal of Subtenant.  The Connecticut Subtenant, a party to the Subtenant Security Agreement and/or that certain Security Agreement dated as of October 25, 2002, by and among certain of the Subtenants and certain of the Landlords, as amended and confirmed from time to time, is hereby removed from the Subtenant Security Agreement.  The Connecticut Subtenant, a party to the Subtenant Guaranty (as defined in Exhibit A hereof) is hereby removed from the Subtenant Guaranty.

2.             Amendment of Subtenant Security Agreement.  The Subtenant Security Agreement is hereby amended by (i) replacing Exhibit A attached thereto with Schedule 1 attached hereto; (ii) replacing Schedule 1 attached thereto with Schedule 2 attached hereto; and (iii) replacing Schedule 2 attached thereto with Schedule 3 attached hereto.

3.             Amendment of Tenant Security Agreement.  The Tenant Security Agreement is hereby amended by replacing Schedule 2 attached thereto with Schedule 4 attached hereto.

4.             Amendment of Subtenant Pledge Agreement.  The Subtenant Pledge Agreement is hereby amended by (i) replacing Exhibit A attached thereto with Schedule 5 attached hereto; and (ii) replacing Exhibit B attached thereto with Schedule 6 attached hereto.

5.             Confirmation of Guarantees.  Each of the parties to the Guarantees hereby confirms that all references in the Guarantees to the “Master Lease” or the “Lease” shall refer to the Consolidated Lease as amended by the Ninth Amendment and the Guarantees are hereby ratified and confirmed in all respects.

6.             Confirmation of Other Incidental Documents.  Each of the parties to the Incidental Documents (other than the Guarantees) hereby confirms that all references in such Incidental Documents to the “Master Lease” or the “Lease” shall refer to the Consolidated Lease as amended by the Ninth Amendment and that such Incidental Documents, as amended by this Confirmation, are hereby ratified and confirmed in all respects.

7.             No Impairment, Etc.  The obligations, covenants, agreements and duties of the guarantors under the Guarantees shall not be impaired in any manner by the execution and delivery of the Ninth Amendment, the Guarantees, the other Incidental Documents, or any amendments, changes or modifications thereof, and in no event shall any ratification or confirmation of such Guarantees or such other Incidental Documents, or the obligations, covenants, agreements and the duties of the guarantors thereunder or of the parties under the

other Incidental Documents, including, without limitation, this Confirmation, be required in connection with any such amendment, change or modification.

[Signatures on following page.]

IN WITNESS WHEREOF, the parties hereto have caused this Confirmation to be duly executed, as a sealed instrument, as of the date first set forth above.

GUARANTOR:
FIVE STAR QUALITY CARE, INC.
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant
	Secretary
TENANT:
FIVE STAR QUALITY CARE TRUST
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial Officer
	and Assistant
	Secretary
TENANT PLEDGOR:
FSQ, INC.
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant Secretary

SUBTENANT PLEDGORS:

FSQ, INC., FIVE STAR QUALITY CARE TRUST, FVEST. JOE, INC., FIVE STAR QUALITY CARE-CA, INC., FIVE STAR QUALITY CARE-CA II, INC., FIVE STAR QUALITY CARE-CO, INC., THE HEARTLANDS RETIREMENT COMMUNITY-ELLICOTT CITY I, INC., FIVE STAR QUALITY CARE-GA, INC., FIVE STAR QUALITY CARE-IA, INC., FIVE STAR QUALITY CARE-NE, INC., FIVE STAR QUALITY CARE-WI, INC. and LIFETRUST AMERICA, INC.

By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant
	Secretary of each of the
	foregoing entities
LIFETRUST PROPERTIES, L.L.C.
By:	LifeTrust America Inc.,
	Its Sole Member
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant
	Secretary

SUBTENANTS:

FIVE STAR QUALITY CARE-AZ, LLC, FIVE STAR QUALITY CARE-CA, LLC, FIVE STAR QUALITY CARE-CA II, LLC,

FIVE STAR QUALITY CARE-COLORADO, LLC,

FIVE STAR QUALITY CARE-CT, LLC, FIVE STAR QUALITY CARE-GA, LLC, FIVE STAR QUALITY CARE-IA, LLC, FIVE STAR QUALITY CARE-KS, LLC, FIVE STAR QUALITY CARE-MD, LLC, FIVE STAR QUALITY CARE-MO, LLC, FIVE STAR QUALITY CARE-NE, LLC, FIVE STAR QUALITY CARE-NC, LLC FIVE STAR QUALITY CARE-WI, LLC, FIVE STAR QUALITY CARE-WY, LLC, FIVE STAR QUALITY CARE-VA, LLC, FIVE STAR QUALITY CARE-CA, INC., FIVE STAR QUALITY CARE-IA, INC.,

FIVE STAR QUALITY CARE-NE, INC.,

MORNINGSIDE OF GALLATIN, LLC, THE HEARTLANDS RETIREMENT COMMUNITY — ELLICOTT CITY I, INC. and

MORNINGSIDE OF BELMONT, LLC

By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant
	Secretary of each of the
	foregoing entities

MORNINGSIDE OF ANDERSON, L.P., MORNINGSIDE OF ATHENS, LIMITED PARTNERSHIP, MORNINGSIDE OF COLUMBUS, L.P., MORNINGSIDE OF DALTON, LIMITED PARTNERSHIP, MORNINGSIDE OF EVANS, LIMITED PARTNERSHIP, MORNINGSIDE OF GREENWOOD, L.P. and MORNINGSIDE OF KENTUCKY, LIMITED PARTNERSHIP

By:	LifeTrust America, Inc.,
	General Partner of each of
	the foregoing entities
	By:	/s/ Bruce J. Mackey Jr.
		Bruce J. Mackey Jr.
		Treasurer, Chief
		Financial Officer and
		Assistant Secretary

MORNINGSIDE OF BELLGRADE, RICHMOND, LLC, MORNINGSIDE OF CHARLOTTESVILLE, LLC, MORNINGSIDE OF NEWPORT NEWS, LLC and MORNINGSIDE OF SKIPWITH — RICHMOND, LLC

By:	LifeTrust America, Inc.,
	Member of each of the
	foregoing entities
	By:	/s/ Bruce J. Mackey Jr.
		Bruce J. Mackey Jr.
		Treasurer, Chief
		Financial Officer and
		Assistant Secretary

LANDLORD:

HRES2 PROPERTIES TRUST,

SPTIHS PROPERTIES TRUST,

SPT-MICHIGAN TRUST,

SPTMNR PROPERTIES TRUST,

SNH CHS PROPERTIES TRUST,

ELLICOTT CITY LAND I, LLC,

ELLICOTT CITY LAND II, LLC,

SNH/LTA PROPERTIES TRUST and

SNH/LTA PROPERTIES GA LLC

By:	/s/ John R. Hoadley
	John R. Hoadley
	Treasurer of each of the
	foregoing entities

The following exhibit and schedules have been omitted and will be supplementally furnished to the Securities and Exchange Commission upon request:

Exhibit A

Schedule 1

Schedule 2

Schedule 3

Schedule 4

Schedule 5

Schedule 6

EX-10.38

Exhibit 10.38

CONFIRMATION OF GUARANTEES AND CONFIRMATION
AND AMENDMENT OF OTHER INCIDENTAL DOCUMENTS

THIS CONFIRMATION OF GUARANTEES AND CONFIRMATION AND AMENDMENT OF OTHER INCIDENTAL DOCUMENTS (this “Confirmation”) is made as of November 6, 2006 by FIVE STAR QUALITY CARE, INC., a Maryland corporation (the “Guarantor”), FIVE STAR QUALITY CARE TRUST, a Maryland business trust (the “Tenant”), FSQ, INC., a Delaware corporation (the “Tenant Pledgor”), each of the parties identified on the signature page hereof as a subtenant pledgor (collectively, the “Subtenant Pledgors”) and each of the parties identified on the signature page hereof as a subtenant (collectively, the “Subtenants”) for the benefit of each of the parties identified on the signature page hereof as a landlord (collectively, the “Landlords”).

W I T N E S S E T H :

WHEREAS, pursuant to the terms of that certain Second Amended and Restated Lease Agreement, dated as of November 19, 2004, as amended by that certain First Amendment of Lease dated as of May 17, 2005, that certain Second Amendment to Second Amended and Restated Lease Agreement dated as of June 3, 2005, that certain Third Amendment to Second Amended and Restated Lease Agreement dated as of October 31, 2005, that certain other Third Amendment to Second Amended and Restated Lease Agreement dated as of December 30, 2005, that certain Letter Agreement dated as of March 13, 2006, that certain Fifth Amendment to Second Amended and Restated Lease Agreement dated as of September 1, 2006, that certain Sixth Amendment to Second Amended and Restated Lease Agreement dated as of October 1, 2006, that certain Seventh Amendment to Second Amended and Restated Lease Agreement dated as of October 1, 2006, that certain Eighth Amendment to Second Amended and Restated Lease Agreement dated as of November 1, 2006 and that certain Ninth Amendment to Second Amended and Restated Lease dated as of November 1, 2006 (as so amended, the “Consolidated Lease”), the Landlords lease to the Tenant, and the Tenant leases from the Landlords, certain property, all as more particularly described in the Consolidated Lease; and

WHEREAS, the payment and performance obligations of the Tenant with respect to the Consolidated Lease are guaranteed by those certain Guaranty Agreements described on Exhibit A attached hereto (collectively, the “Guarantees”); and

WHEREAS, the payment and performance obligations of the Tenant with respect to the Consolidated Lease are further secured by the other Incidental Documents (this and other capitalized

terms used but not otherwise defined herein shall have the meanings ascribed to them in the Consolidated Lease); and

WHEREAS, pursuant to a Tenth Amendment to Second Amended and Restated Lease Agreement, dated as of the date hereof (the “Tenth Amendment”), the Consolidated Lease is being amended to add certain property thereto, as more particularly described in the Tenth Amendment;

WHEREAS, the Tenant intends to enter into a sublease (the “Sublease”) with Morningside of Kentucky, Limited Partnership, a Delaware limited partnership (“Morningside-Kentucky”) to sublease the property being added to the Consolidated Lease pursuant to the Tenth Amendment to Morningside-Kentucky;

WHEREAS, in connection with, and as a condition precedent to, the execution of the Tenth Amendment by the Landlords, the Landlords have required that the parties hereto confirm that the Guarantees and the other Incidental Documents remain in full force and effect and apply to the Consolidated Lease as amended by the Tenth Amendment; and

WHEREAS, in connection with the execution of the Tenth Amendment and the Sublease, the parties hereto wish to amend certain of the Incidental Documents, including (i) the Security Agreement, dated as of December 31, 2001, by and among certain of the Subtenants and certain of the Landlords, as amended and confirmed from time to time (the “Subtenant Security Agreement”); (ii) the Security Agreement, dated as of December 31, 2001, by and among the Tenant and certain of the Landlords, as amended and confirmed from time to time (the “Tenant Security Agreement”); and (iii) the Second Amended and Restated Pledge of Stock and Membership Interests Agreement, dated as of May 6, 2005, made by the Subtenant Pledgors for the benefit of the Landlords, as amended and confirmed from time to time (the “Subtenant Pledge Agreement”), all subject to and upon the terms and conditions herein set forth;

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1.             Amendment of Subtenant Security Agreement.  The Subtenant Security Agreement is hereby amended by: (i) deleting the following paragraph 30 from Exhibit A attached thereto:

25.           Amended and Restated Sublease Agreement, dated September 1, 2006, by and between Five Star Quality Care

Trust, a Maryland business trust, and Morningside of Kentucky, Limited Partnership, a Delaware limited partnership.

(ii) inserting the following new paragraph at the end of Exhibit A attached thereto:

Second Amended and Restated Sublease Agreement, dated November 6, 2006, by and between Five Star Quality Care Trust, a Maryland business trust, and Morningside of Kentucky, Limited Partnership, a Delaware limited partnership.

and (iii) inserting the following in the appropriate order on Schedule 2 attached thereto:

KENTUCKY:	THE NEIGHBORHOOD OF	Morningside of Kentucky, Limited
	SOMERSET 100 Neighborly Way	Partnership
	Somerset, KY 42501

                2.             Amendment of Tenant Security Agreement.  The Tenant Security Agreement is hereby amended by inserting the following in the appropriate order on Schedule 2 attached thereto:

KENTUCKY:	THE NEIGHBORHOOD OF
	SOMERSET 100 Neighborly Way
	Somerset, KY 42501

                3.             Amendment of Subtenant Pledge Agreement.  The Subtenant Pledge Agreement is hereby amended by (i) deleting the following paragraph 25 from Exhibit A attached thereto:

34.           Amended and Restated Sublease Agreement, dated June 3, 2005, by and between Five Star Quality Care Trust, a Maryland business trust, as sublandlord, and Morningside of Kentucky, Limited Partnership, a Delaware limited partnership, as subtenant.

and (ii) inserting the following new paragraph at the end of Exhibit A attached thereto:

Second Amended and Restated Sublease Agreement, dated November 6, 2006, by and between Five Star Quality Care Trust, a Maryland business trust, as sublandlord, and Morningside of Kentucky, Limited Partnership, a Delaware limited partnership, as subtenant.

4.             Confirmation of Guarantees.  Each of the parties to the Guarantees hereby confirms that all references in the Guarantees to the “Master Lease” or the “Lease” shall refer to the Consolidated Lease as amended by the Tenth Amendment and the Guarantees are hereby ratified and confirmed in all respects.

5.             Confirmation of Other Incidental Documents.  Each of the parties to the Incidental Documents (other than the Guarantees) hereby confirms that all references in such Incidental Documents to the “Master Lease”, the “Lease” or the “Second Amended Lease” shall refer to the Consolidated Lease as amended by the Tenth Amendment and that such Incidental Documents, as amended by this Confirmation, are hereby ratified and confirmed in all respects.

6.             No Impairment, Etc.  The obligations, covenants, agreements and duties of the guarantors under the Guarantees shall not be impaired in any manner by the execution and delivery of the Eighth Amendment, the Guarantees, the other Incidental Documents, or any amendments, changes or modifications thereof, and in no event shall any ratification or confirmation of such Guarantees or such other Incidental Documents, or the obligations, covenants, agreements and the duties of the guarantors thereunder or of the parties under the other Incidental Documents, including, without limitation, this Confirmation, be required in connection with any such amendment, change or modification.

[Signatures on following page.]

IN WITNESS WHEREOF, the parties hereto have caused this Confirmation to be duly executed, as a sealed instrument, as of the date first set forth above.

GUARANTOR:
FIVE STAR QUALITY CARE, INC.
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant Secretary
TENANT:
FIVE STAR QUALITY CARE TRUST
By:	/s/ Bruce J. Mackey Jr
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant Secretary
TENANT PLEDGOR:
FSQ, INC.
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant Secretary

SUBTENANT PLEDGORS:
FSQ, INC., FIVE STAR QUALITY CARE TRUST, FVEST. JOE, INC., FIVE STAR QUALITY CARE-CA, INC., FIVE STAR QUALITY CARE-CA II, INC., FIVE STAR QUALITY CARE-CO, INC., THE HEARTLANDS RETIREMENT COMMUNITY-ELLICOTT CITY I, INC., FIVE STAR QUALITY CARE-GA, INC., FIVE STAR QUALITY CARE-IA, INC., FIVE STAR QUALITY CARE-NE, INC., FIVE STAR QUALITY CARE-WI, INC. and LIFETRUST AMERICA, INC.
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial Officer and Assistant Secretary of each of the foregoing entities
LIFETRUST PROPERTIES, L.L.C.
By:	LifeTrust America, Inc.,
	Its Sole Member
By:	/s/ Bruce J. Mackey Jr.
	Bruce J.Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant Secretary

SUBTENANTS:
FIVE STAR QUALITY CARE-AZ, LLC, FIVE STAR QUALITY CARE-CA, LLC, FIVE STAR QUALITY CARE-CA II, LLC,
FIVE STAR QUALITY CARE-COLORADO, LLC,
FIVE STAR QUALITY CARE-CT, LLC, FIVE STAR QUALITY CARE-FL, LLC, FIVE STAR QUALITY CARE-GA, LLC, FIVE STAR QUALITY CARE-GHV, LLC, FIVE STAR QUALITY CARE-IA, LLC, FIVE STAR QUALITY CARE-IL, LLC, FIVE STAR QUALITY CARE-KS, LLC, FIVE STAR QUALITY CARE-MD, LLC, FIVE STAR QUALITY CARE-MO, LLC, FIVE STAR QUALITY CARE-MS, LLC, FIVE STAR QUALITY CARE-NE, LLC, FIVE STAR QUALITY CARE-NC, LLC FIVE STAR QUALITY CARE-WI, LLC, FIVE STAR QUALITY CARE-WY, LLC, FIVE STAR QUALITY CARE-VA, LLC, FIVE STAR QUALITY CARE-CA, INC., FIVE STAR QUALITY CARE-IA, INC.,
FIVE STAR QUALITY CARE-NE, INC.,
MORNINGSIDE OF GALLATIN, LLC, THE HEARTLANDS RETIREMENT COMMUNITY— ELLICOTT CITY I, INC. and
MORNINGSIDE OF BELMONT, LLC
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant Secretary
	of each of the foregoing entities

MORNINGSIDE OF ANDERSON, L.P., MORNINGSIDE OF ATHENS, LIMITED PARTNERSHIP, MORNINGSIDE OF COLUMBUS, L.P., MORNINGSIDE OF DALTON, LIMITED PARTNERSHIP, MORNINGSIDE OF EVANS, LIMITED PARTNERSHIP, MORNINGSIDE OF GREENWOOD, L.P. and MORNINGSIDE OF KENTUCKY, LIMITED PARTNERSHIP
By:	LifeTrust America, Inc.
	General Partner of each of the foregoing entities
	By:	/s/ Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant
	Secretary
MORNINGSIDE OF BELLGRADE, RICHMOND, LLC, MORNINGSIDE OF CHARLOTTESVILLE, LLC, MORNINGSIDE OF NEWPORT NEWS, LLC and MORNINGSIDE OF SKIPWITH — RICHMOND, LLC
By:	LifeTrust America, Inc.,
	Member of each of the foregoing entities
	By:	/s/ Bruce J. Mackey Jr.
		Bruce J. Mackey Jr.
		Treasurer, Chief Financial
		Officer and Assistant
		Secretary

LANDLORD:
HRES2 PROPERTIES TRUST,
SPTIHS PROPERTIES TRUST,
SPT-MICHIGAN TRUST,
SPTMNR PROPERTIES TRUST,
SNH CHS PROPERTIES TRUST,
ELLICOTT CITY LAND I, LLC,
ELLICOTT CITY LAND II, LLC,
SNH/LTA PROPERTIES TRUST and
SNH/LTA PROPERTIES GA LLC
By:	/s/ John R. Hoadley
	John R. Hoadley
	Treasurer of each of the
	foregoing entities

The following exhibit has been omitted and will be supplementally furnished to the Securities and Exchange Commission upon request:

Exhibit A

EX-10.39

Exhibit 10.39

CONFIRMATION OF GUARANTEES AND CONFIRMATION AND
AMENDMENT OF OTHER INCIDENTAL DOCUMENTS

THIS CONFIRMATION OF GUARANTEES AND CONFIRMATION AND AMENDMENT OF OTHER INCIDENTAL DOCUMENTS (this “Confirmation”) is made as of December 22, 2006 by FIVE STAR QUALITY CARE, INC., a Maryland corporation (the “Guarantor”), FIVE STAR QUALITY CARE TRUST, a Maryland business trust (the “Tenant”), FSQ, INC., a Delaware corporation (the “Tenant Pledgor”), each of the parties identified on the signature page hereof as a subtenant pledgor (collectively, the “Subtenant Pledgors”) and each of the parties identified on the signature page hereof as a subtenant (collectively, the “Subtenants”) for the benefit of each of the parties identified on the signature page hereof as a landlord (collectively, the “Landlords”).

W I T N E S S E T H :

WHEREAS, pursuant to the terms of that certain Second Amended and Restated Lease Agreement, dated as of November 19, 2004, as amended by that certain First Amendment of Lease dated as of May 17, 2005, that certain Second Amendment to Second Amended and Restated Lease dated as of June 3, 2005, that certain Third Amendment to Second Amended and Restated Lease Agreement dated as of October 31, 2005, that certain other Third Amendment to Second Amended and Restated Lease Agreement dated as of December 30, 2005, that certain Letter Agreement dated as of March 13, 2006, that certain Fifth Amendment to Second Amended and Restated Lease Agreement dated as of September 1, 2006, that certain Sixth Amendment to Second Amended and Restated Lease Agreement dated as of September 30, 2006, that certain Seventh Amendment to Second Amended and Restated Lease Agreement, dated as of October 1, 2006, that certain Eighth Amendment to Second Amended and Restated Lease Agreement, dated as of November 1, 2006, that certain Ninth Amendment to Second Amended and Restated Lease, dated as of November 1, 2006 and that certain Tenth Amendment to Second Amended and Restated Lease Agreement, dated as of November 6, 2006 (effective as of November 5, 2006) (as so amended, the “Consolidated Lease”), the Landlords lease to the Tenant, and the Tenant leases from the Landlords, certain property, all as more particularly described in the Consolidated Lease; and

WHEREAS, the payment and performance obligations of the Tenant with respect to the Consolidated Lease are guaranteed by those certain Guaranty Agreements described on Exhibit A attached hereto (collectively, the “Guarantees”); and

WHEREAS, the payment and performance obligations of the Tenant with respect to the Consolidated Lease are further secured by the other Incidental Documents (this and other capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Consolidated Lease); and

WHEREAS, pursuant to an Eleventh Amendment to Second Amended and Restated Lease Agreement, dated as of the date hereof (the “Eleventh Amendment”), the Consolidated Lease is being amended to remove that certain premises known as Christopher East Health & Rehabilitation Center and located at 1132 E. Knapp Street, Milwaukee, Wisconsin (the “Terminated Premises”), as more particularly described in the Eleventh Amendment;

WHEREAS, pursuant to the terms of that certain Partial Termination of Sublease (the “Partial Termination”), dated as of the date hereof, between Tenant and Five Star Quality Care-WI, LLC (the “Wisconsin Subtenant”), Tenant and the Wisconsin Subtenant are terminating that certain Sublease Agreement, dated as of December 31, 2001, as amended from time to time, with respect to the Terminated Premises;

WHEREAS, in connection with, and as a condition precedent to, the execution of the Eleventh Amendment by the Landlords, the Landlords have required that the parties hereto confirm that the Guarantees and the other Incidental Documents remain in full force and effect and apply to the Consolidated Lease as amended by the Eleventh Amendment; and

WHEREAS, in connection with the execution of the Eleventh Amendment and the Partial Termination, the parties hereto wish to amend certain of the Incidental Documents, including (i) the Security Agreement, dated as of December 31, 2001, by and among certain of the Subtenants and certain of the Landlords, as amended and confirmed from time to time (the “Subtenant Security Agreement”); (ii) the Security Agreement, dated as of December 31, 2001, by and among the Tenant and certain of the Landlords, as amended and confirmed from time to time (the “Tenant Security Agreement”); and (iii) the Second Amended and Restated Pledge of Stock and Membership Interests Agreement, dated as of May 6, 2005, made by the Subtenant Pledgors for the benefit of the Landlords, as amended and confirmed from time to time (the “Subtenant Pledge Agreement”), all subject to and upon the terms and conditions herein set forth;

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the mutual receipt and

legal sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1.             Amendment of Subtenant Security Agreement.  The Subtenant Security Agreement is hereby amended by (i) replacing Exhibit A attached thereto with Schedule 1 attached hereto; (ii) replacing Schedule 1 attached thereto with Schedule 2 attached hereto; and (iii) replacing Schedule 2 attached thereto with Schedule 3 attached hereto.

3.             Amendment of Tenant Security Agreement.  The Tenant Security Agreement is hereby amended by replacing Schedule 2 attached thereto with Schedule 4 attached hereto.

4.             Amendment of Subtenant Pledge Agreement.  The Subtenant Pledge Agreement is hereby amended by (i) replacing Exhibit A attached thereto with Schedule 5 attached hereto; and (ii) replacing Exhibit B attached thereto with Schedule 6 attached hereto.

5.             Confirmation of Guarantees.  Each of the parties to the Guarantees hereby confirms that all references in the Guarantees to the “Master Lease” or the “Lease” shall refer to the Consolidated Lease as amended by the Eleventh Amendment and the Guarantees are hereby ratified and confirmed in all respects.

6.             Confirmation of Other Incidental Documents.  Each of the parties to the Incidental Documents (other than the Guarantees) hereby confirms that all references in such Incidental Documents to the “Master Lease”, the “Lease” or the “Second Amended Lease” shall refer to the Consolidated Lease as amended by the Eleventh Amendment and that such Incidental Documents, as amended by this Confirmation, are hereby ratified and confirmed in all respects.

7.             No Impairment, Etc.  The obligations, covenants, agreements and duties of the guarantors under the Guarantees shall not be impaired in any manner by the execution and delivery of the Eleventh Amendment, the Guarantees, the other Incidental Documents, or any amendments, changes or modifications thereof, and in no event shall any ratification or confirmation of such Guarantees or such other Incidental Documents, or the obligations, covenants, agreements and the duties of the guarantors thereunder or of the parties under the other Incidental Documents, including, without limitation, this Confirmation, be required in connection with any such amendment, change or modification.

[Signatures on following pages.]

IN WITNESS WHEREOF, the parties hereto have caused this Confirmation to be duly executed, as a sealed instrument, as of the date first set forth above.

GUARANTOR:
FIVE STAR QUALITY CARE, INC.
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial Officer and Assistant
	Secretary
TENANT:
FIVE STAR QUALITY CARE TRUST
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial Officer and Assistant
	Secretary
TENANT PLEDGOR:
FSQ, INC.
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial Officer and Assistant Secretary

SUBTENANT PLEDGORS:
FSQ, INC., FIVE STAR QUALITY CARE
TRUST, FVEST. JOE, INC., FIVE STAR
QUALITY CARE-CA, INC., FIVE STAR
QUALITY CARE-CA II, INC., FIVE
STAR QUALITY CARE-CO, INC., THE
HEARTLANDS RETIREMENT COMMUNITY-
ELLICOTT CITY I, INC., FIVE STAR
QUALITY CARE-GA, INC., FIVE STAR
QUALITY CARE-IA, INC., FIVE STAR
QUALITY CARE-NE, INC., FIVE STAR
QUALITY CARE-WI, INC. and
LIFETRUST AMERICA, INC.
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial Officer and Assistant Secretary
LIFETRUST PROPERTIES, L.L.C.
By:	LifeTrust America Inc.,
	Its Sole Member
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial Officer and Assistant Secretary

SUBTENANTS:

FIVE STAR QUALITY CARE-AZ, LLC, FIVE STAR QUALITY CARE-CA, LLC, FIVE STAR QUALITY CARE-CA II, LLC,
FIVE STAR QUALITY CARE-COLORADO, LLC,
FIVE STAR QUALITY CARE-FL, LLC, FIVE STAR QUALITY CARE-GA, LLC, FIVE STAR QUALITY CARE-GHV, LLC, FIVE STAR QUALITY CARE-IA, LLC, FIVE STAR QUALITY CARE-IL, LLC, FIVE STAR QUALITY CARE-KS, LLC,
FIVE STAR QUALITY CARE-MD, LLC, FIVE STAR QUALITY CARE-MO, LLC, FIVE STAR QUALITY CARE-MS, LLC,
FIVE STAR QUALITY CARE-NE, LLC, FIVE STAR QUALITY CARE-NC, LLC FIVE STAR QUALITY CARE-WI, LLC,
FIVE STAR QUALITY CARE-WY, LLC, FIVE STAR QUALITY CARE-VA, LLC, FIVE STAR QUALITY CARE-CA, INC.,
FIVE STAR QUALITY CARE-IA, INC.,
FIVE STAR QUALITY CARE-NE, INC.,
MORNINGSIDE OF GALLATIN, LLC, THE HEARTLANDS RETIREMENT COMMUNITY — ELLICOTT CITY I, INC. and
MORNINGSIDE OF BELMONT, LLC

By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial Officer and Assistant Secretary

MORNINGSIDE OF ANDERSON, L.P.,
MORNINGSIDE OF ATHENS, LIMITED
PARTNERSHIP, MORNINGSIDE OF
COLUMBUS, L.P., MORNINGSIDE OF
DALTON, LIMITED PARTNERSHIP,
MORNINGSIDE OF EVANS, LIMITED
PARTNERSHIP, MORNINGSIDE OF
GREENWOOD, L.P. and MORNINGSIDE OF
KENTUCKY, LIMITED PARTNERSHIP

By:	LifeTrust America, Inc.,
	General Partner of each of the foregoing entities
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial Officer and Assistant Secretary

MORNINGSIDE OF BELLGRADE,
RICHMOND, LLC, MORNINGSIDE OF
CHARLOTTESVILLE, LLC, MORNINGSIDE
OF NEWPORT NEWS, LLC and
MORNINGSIDE OF SKIPWITH -
RICHMOND, LLC

By:	LifeTrust America, Inc.,
	Member of each of the foregoing entities
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial Officer and Assistant Secretary

LANDLORD:

HRES2 PROPERTIES TRUST,
SPTIHS PROPERTIES TRUST,
SPT-MICHIGAN TRUST,
SPTMNR PROPERTIES TRUST,
SNH CHS PROPERTIES TRUST,
ELLICOTT CITY LAND I, LLC,
ELLICOTT CITY LAND II, LLC,
SNH/LTA PROPERTIES TRUST and
SNH/LTA PROPERTIES GA LLC

By:	/s/ John R. Hoadley
	John R. Hoadley Treasurer of each of the foregoing entities

The following exhibit and schedules have been omitted and will be supplementally furnished to the Securities and Exchange Commission upon request:

Exhibit A

Schedule 1
Schedule 2
Schedule 3
Schedule 4
Schedule 5
Schedule 6

EX-10.40

Exhibit 10.40

CONFIRMATION OF GUARANTEES AND CONFIRMATION
AND AMENDMENT OF OTHER INCIDENTAL DOCUMENTS

THIS CONFIRMATION OF GUARANTEES AND CONFIRMATION AND AMENDMENT OF OTHER INCIDENTAL DOCUMENTS (this “Confirmation”) is made as of January 1, 2007 by FIVE STAR QUALITY CARE, INC., a Maryland corporation (the “Guarantor”), FIVE STAR QUALITY CARE TRUST, a Maryland business trust (the “Tenant”), FSQ, INC., a Delaware corporation (the “Tenant Pledgor”), each of the parties identified on the signature page hereof as a subtenant pledgor (collectively, the “Subtenant Pledgors”) and each of the parties identified on the signature page hereof as a subtenant (collectively, the “Subtenants”) for the benefit of each of the parties identified on the signature page hereof as a landlord (collectively, the “Landlords”).

W I T N E S S E T H :

WHEREAS, pursuant to the terms of that certain Second Amended and Restated Lease Agreement, dated as of November 19, 2004, as amended by that certain First Amendment of Lease dated as of May 17, 2005, that certain Second Amendment to Second Amended and Restated Lease Agreement dated as of June 3, 2005, that certain Third Amendment to Second Amended and Restated Lease Agreement dated as of October 31, 2005, that certain other Third Amendment to Second Amended and Restated Lease Agreement dated as of December 30, 2005, that certain Letter Agreement dated as of March 13, 2006, that certain Fifth Amendment to Second Amended and Restated Lease Agreement dated as of September 1, 2006, that certain Sixth Amendment to Second Amended and Restated Lease Agreement dated as of October 1, 2006, that certain Seventh Amendment to Second Amended and Restated Lease Agreement dated as of October 1, 2006, that certain Eighth Amendment to Second Amended and Restated Lease Agreement dated as of November 1, 2006, that certain Ninth Amendment to Second Amended and Restated Lease Agreement dated as of November 1, 2006, that certain Tenth Amendment to Second Amended and Restated Lease Agreement dated as of November 6, 2006 and that certain Eleventh Amendment to Second Amended and Restated Lease Agreement dated as of December 22, 2006 (as so amended, the “Consolidated Lease”), the Landlords lease to the Tenant, and the Tenant leases from the Landlords, certain property, all as more particularly described in the Consolidated Lease; and

WHEREAS, the payment and performance obligations of the Tenant with respect to the Consolidated Lease are guaranteed by those certain Guaranty Agreements described on Exhibit A attached hereto (collectively, the “Guarantees”); and

WHEREAS, the payment and performance obligations of the Tenant with respect to the Consolidated Lease are further secured by the other Incidental Documents (this and other capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Consolidated Lease); and

WHEREAS, pursuant to a Twelfth Amendment to Second Amended and Restated Lease Agreement, dated as of the date hereof (the “Twelfth Amendment”), the Consolidated Lease is being amended to add certain property thereto, as more particularly described in the Twelfth Amendment;

WHEREAS, the Tenant intends to enter into a sublease (the “Sublease”) with Morningside of Belmont, LLC, a Delaware limited liability company (“Morningside-Belmont”) to sublease the property being added to the Consolidated Lease pursuant to the Twelfth Amendment to Morningside-Belmont;

WHEREAS, in connection with, and as a condition precedent to, the execution of the Twelfth Amendment by the Landlords, the Landlords have required that the parties hereto confirm that the Guarantees and the other Incidental Documents remain in full force and effect and apply to the Consolidated Lease as amended by the Twelfth Amendment; and

WHEREAS, in connection with the execution of the Twelfth Amendment and the Sublease, the parties hereto wish to amend certain of the Incidental Documents, including (i) the Security Agreement, dated as of December 31, 2001, by and among certain of the Subtenants and certain of the Landlords, as amended and confirmed from time to time (the “Subtenant Security Agreement”); (ii) the Security Agreement, dated as of December 31, 2001, by and among the Tenant and certain of the Landlords, as amended and confirmed from time to time (the “Tenant Security Agreement”); and (iii) the Second Amended and Restated Pledge of Stock and Membership Interests Agreement, dated as of May 6, 2005, made by the Subtenant Pledgors for the benefit of the Landlords, as amended and confirmed from time to time (the “Subtenant Pledge Agreement”), all subject to and upon the terms and conditions herein set forth;

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1.             Amendment of Subtenant Security Agreement.  The Subtenant Security Agreement is hereby amended by: (i) deleting the following paragraph 25 from Exhibit A attached thereto:

25.           Sublease Agreement, dated June 3, 2005, by and between Five Star Quality Care Trust, a Maryland business trust, and Morningside of Belmont, LLC, a Delaware limited liability company.

(ii) inserting the following new paragraph at the end of Exhibit A attached thereto:

Amended and Restated Sublease Agreement, dated January 1, 2007, by and between Five Star Quality Care Trust, a Maryland business trust, and Morningside of Belmont, LLC, a Delaware limited liability company.

and (iii) inserting the following in the appropriate order on Schedule 2 attached thereto:

TENNESSEE: WALKING HORSE MEADOWS
207 Uffelman Drive
Clarksville, TN 37043 Morningside
of Belmont,
LLC

2.             Amendment of Tenant Security Agreement.  The Tenant Security Agreement is hereby amended by inserting the following in the appropriate order on Schedule 2 attached thereto:

TENNESSEE:	WALKING HORSE MEADOWS
	207 Uffelman Drive
	Clarksville, TN 37043

3.             Amendment of Subtenant Pledge Agreement.  The Subtenant Pledge Agreement is hereby amended by (i) deleting the following paragraph 29 from Exhibit A attached thereto:

29.           Sublease Agreement, dated June 3, 2005, by and between Five Star Quality Care Trust, a Maryland business trust, as sublandlord, and Morningside of Belmont, LLC, a Delaware limited liability company, as subtenant.

and (ii) inserting the following new paragraph at the end of Exhibit A attached thereto:

Amended and Restated Sublease Agreement, dated January  1, 2007, by and between Five Star Quality Care Trust, a Maryland business trust, as sublandlord, and Morningside of Belmont, LLC, a Delaware limited liability company, as subtenant.

4.             Confirmation of Guarantees.  Each of the parties to the Guarantees hereby confirms that all references in the Guarantees

to the “Master Lease” or the “Lease” shall refer to the Consolidated Lease as amended by the Twelfth Amendment and the Guarantees are hereby ratified and confirmed in all respects.

5.             Confirmation of Other Incidental Documents.  Each of the parties to the Incidental Documents (other than the Guarantees) hereby confirms that all references in such Incidental Documents to the “Master Lease”, the “Lease” or the “Second Amended Lease” shall refer to the Consolidated Lease as amended by the Twelfth Amendment and that such Incidental Documents, as amended by this Confirmation, are hereby ratified and confirmed in all respects.

6.             No Impairment, Etc.  The obligations, covenants, agreements and duties of the guarantors under the Guarantees shall not be impaired in any manner by the execution and delivery of the Twelfth Amendment, the Guarantees, the other Incidental Documents, or any amendments, changes or modifications thereof, and in no event shall any ratification or confirmation of such Guarantees or such other Incidental Documents, or the obligations, covenants, agreements and the duties of the guarantors thereunder or of the parties under the other Incidental Documents, including, without limitation, this Confirmation, be required in connection with any such amendment, change or modification.

[Signatures on following page.]

IN WITNESS WHEREOF, the parties hereto have caused this Confirmation to be duly executed, as a sealed instrument, as of the date first set forth above.

GUARANTOR :
FIVE STAR QUALITY CARE, INC.
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant Secretary
TENANT:
FIVE STAR QUALITY CARE TRUST
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant Secretary
TENANT PLEDGOR:
FSQ, INC.
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant Secretary

SUBTENANT PLEDGORS:

FSQ, INC., FIVE STAR QUALITY CARE TRUST, FVEST. JOE, INC., FIVE STAR QUALITY CARE-CA, INC., FIVE STAR QUALITY CARE-CA II, INC., FIVE STAR QUALITY CARE-CO, INC., THE HEARTLANDS RETIREMENT COMMUNITY-ELLICOTT CITY I, INC., FIVE STAR QUALITY CARE-GA, INC., FIVE STAR QUALITY CARE-IA, INC., FIVE STAR QUALITY CARE-NE, INC., FIVE STAR QUALITY CARE-WI, INC. and LIFETRUST AMERICA, INC.

By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant Secretary
	of each of the foregoing
	entities
LIFETRUST PROPERTIES, L.L.C.
By:	LifeTrust America Inc.,
	Its Sole Member
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant Secretary

SUBTENANTS:

FIVE STAR QUALITY CARE-AZ, LLC, FIVE STAR QUALITY CARE-CA, LLC, FIVE STAR QUALITY CARE-CA II, LLC,

FIVE STAR QUALITY CARE-COLORADO, LLC, FIVE STAR QUALITY CARE-FL, LLC, FIVE STAR QUALITY CARE-GA, LLC, FIVE STAR QUALITY CARE-GHV, LLC, FIVE STAR QUALITY CARE-IA, LLC, FIVE STAR QUALITY CARE-IL, LLC, FIVE STAR QUALITY CARE-KS, LLC, FIVE STAR QUALITY CARE-MD, LLC, FIVE STAR QUALITY CARE-MO, LLC, FIVE STAR QUALITY CARE-MS, LLC, FIVE STAR QUALITY CARE-NE, LLC, FIVE STAR QUALITY CARE-NC, LLC FIVE STAR QUALITY CARE-WI, LLC, FIVE STAR QUALITY CARE-WY, LLC, FIVE STAR QUALITY CARE-VA, LLC, FIVE STAR QUALITY CARE-CA, INC., FIVE STAR QUALITY CARE-IA, INC.,

FIVE STAR QUALITY CARE-NE, INC.,

MORNINGSIDE OF GALLATIN, LLC, THE HEARTLANDS RETIREMENT COMMUNITY — ELLICOTT CITY I, INC. and

MORNINGSIDE OF BELMONT, LLC

By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer, Chief Financial
	Officer and Assistant Secretary
	of each of the foregoing
	entities

MORNINGSIDE OF ANDERSON, L.P., MORNINGSIDE OF ATHENS, LIMITED PARTNERSHIP, MORNINGSIDE OF COLUMBUS, L.P., MORNINGSIDE OF DALTON, LIMITED PARTNERSHIP, MORNINGSIDE OF EVANS, LIMITED PARTNERSHIP, MORNINGSIDE OF GREENWOOD, L.P. and MORNINGSIDE OF KENTUCKY, LIMITED PARTNERSHIP

By:	LifeTrust America, Inc.,
	General Partner of each of the
	foregoing entities
	By:	/s/ Bruce J. Mackey Jr.
		Bruce J. Mackey Jr.
		Treasurer, Chief Financial
		Officer and Assistant
		Secretary

MORNINGSIDE OF BELLGRADE, RICHMOND, LLC, MORNINGSIDE OF CHARLOTTESVILLE, LLC, MORNINGSIDE OF NEWPORT NEWS, LLC and MORNINGSIDE OF SKIPWITH — RICHMOND, LLC

By:	LifeTrust America, Inc.,
	Member of each of the foregoing
	entities
	By:	/s/ Bruce J. Mackey Jr.
		Bruce J. Mackey Jr.
		Treasurer, Chief Financial
		Officer and Assistant
		Secretary

LANDLORD:

HRES2 PROPERTIES TRUST,

SPTIHS PROPERTIES TRUST,

SPT-MICHIGAN TRUST,

SPTMNR PROPERTIES TRUST,

SNH CHS PROPERTIES TRUST,

ELLICOTT CITY LAND I, LLC,

ELLICOTT CITY LAND II, LLC,

SNH/LTA PROPERTIES TRUST and

SNH/LTA PROPERTIES GA LLC

By:	/s/ David J. Hegarty
	David J. Hegarty
	President, Chief Operating
	Officer and Secretary of each
	of the foregoing entities

The following exhibit has been omitted and will be supplementally furnished to the Securities and Exchange Commission upon request:

Exhibit A

EX-10.44

Exhibit 10.44

Senior Housing Properties Trust
400 Centre Street
Newton, MA  02458

March 13, 2006

FS Tenant Holding Company Trust
FS Tenant Pool III Trust
400 Centre Street
Newton, MA  02458
Attention Bruce J. Mackey Jr.

RE:Amended and Restated Master Lease Agreement dated as of January 11, 2002 (as amended, the “Lease”)

Dear Bruce:

The purpose of this letter is to confirm that, pursuant to Section 4.1.1(b) of the Lease, Tiffany House was sold on December 31, 2005.  The net proceeds of the sale were $5,260,424.00.  Accordingly, effective January 1, 2006, Minimum Rent payable under the Lease shall be reduced by $526,043.40 per annum.

			Very truly yours,
			/s/ John R. Hoadley
			John R. Hoadley
Acknowledged and Agreed
FS Tenant Holding Company Trust
FS Tenant Pool III Trust
By:	/s/ Bruce J. Mackey Jr.
		Bruce J. Mackey Jr.
		Treasurer of each of
		the foregoing entities

EX-10.52

Exhibit 10.52

AMENDED AND RESTATED MASTER LEASE AGREEMENT,

dated as of October 1, 2006,

by and among

HRES1 PROPERTIES TRUST,

AS LANDLORD,

AND

FS PATRIOT LLC

and

FS COMMONWEALTH LLC, JOINTLY AND SEVERALLY,

AS TENANT

ARTICLE 1	DEFINITIONS	1
1.1	“Additional Charges”	1
1.2	“Affiliated Person”	1
1.3	“Agreement”	2
1.4	“Applicable Laws”	2
1.5	“Award”	2
1.6	“Business Day”	3
1.7	“Capital Addition”	3
1.8	“Capital Expenditure”	3
1.9	“Change in Control”	3
1.10	“Claim”	3
1.11	“Code”	4
1.12	“Commencement Date”	4
1.13	“Condemnation”	4
1.14	“Condemnor”	4
1.15	“Consolidated Financials”	4
1.16	“Date of Taking”	4
1.17	“Default”	4
1.18	“Disbursement Rate”	4
1.19	“Distribution”	5
1.20	“Easement Agreement”	5
1.21	“Encumbrance”	5
1.22	“Entity”	5
1.23	“Environment”	5
1.24	“Environmental Obligation”	5
1.25	“Environmental Notice”	5
1.26	“Event of Default”	5
1.27	““Extended Term”	5
1.28	“Facility”	5
1.29	“Facility Mortgage”	6
1.30	“Facility Mortgagee”	6
1.31	“Facility Trade Names”	6
1.32	“Financial Officer’s Certificate”	6
1.33	“Fiscal Year”	6
1.34	“Five Star”	6
1.35	“Fixed Term”	6
1.36	“Fixtures”	6
1.37	“GAAP”	7
1.38	“Government Agencies”	7
1.39	“Guarantor”	7
1.40	“Guaranty”	7
1.41	“Hazardous Substances”	7
1.42	“Immediate Family”	8
1.43	“Impositions”	8
1.44	“Incidental Documents”	9
1.45	“Indebtedness”	9
1.46	“Insurance Requirements”	10
1.47	“Interest Rate”	10
1.48	“Land”	10
1.49	“Landlord”	10
1.50	“Landlord Default”	10
1.51	“Landlord Liens”	10

i

1.52	“Leased Improvements”	10
1.53	“Leased Intangible Property”	10
1.54	“Leased Property”	11
1.55	“Legal Requirements”	11
1.56	“Lien”	11
1.57	“Manager”	11
1.58	“Management Agreement”	11
1.59	“Minimum Rent”	12
1.60	“Notice”	12
1.61	“Officer’s Certificate”	12
1.62	“Overdue Rate”	12
1.63	“Parent”	12
1.64	“Permitted Encumbrances”	12
1.65	“Permitted Liens”	12
1.66	“Permitted Use”	12
1.67	“Person”	12
1.68	“Pledge Agreement”	12
1.69	“Property”	13
1.70	“Provider Agreements”	13
1.71	“Records”	13
1.72	“Regulated Medical Wastes”	13
1.73	“Rent”	13
1.74	“SEC”	13
1.75	“Security Agreement”	13
1.76	“State”	13
1.77	“Subordinated Creditor”	13
1.78	“Subordination Agreement”	13
1.79	“Subsidiary”	13
1.80	“Successor Landlord”	14
1.81	“Tenant”	14
1.82	“Tenant’s Personal Property”	14
1.83	“Term”	14
1.84	“Third Party Payor Programs”	14
1.85	“Third Party Payors”	14
1.86	“Unsuitable for Its Permitted Use”	14
1.87	“Work”	15
ARTICLE 2	LEASED PROPERTY AND TERM	15
2.1	Leased Property.	15
2.2	Condition of Leased Property.	16
2.3	Fixed Term.	17
2.4	Extended Term.	17
ARTICLE 3	RENT	18
3.1	Rent.	18
3.2	Late Payment of Rent, Etc.	21
3.3	Net Lease.	21
3.4	No Termination, Abatement, Etc.	21
3.5	Prorations, Etc.	22
ARTICLE 4	USE OF THE LEASED PROPERTY	23
4.1	Permitted Use.	23
4.2	Compliance with Legal/Insurance Requirements, Etc.	25
4.3	Compliance with Medicaid and Medicare Requirements.	25
4.4	Environmental Matters.	25

ii

ARTICLE 5	MAINTENANCE AND REPAIRS	27
5.1	Maintenance and Repair.	27
5.2	Tenant’s Personal Property.	29
5.3	Yield Up.	30
5.4	Management Agreement.	31
ARTICLE 6	IMPROVEMENTS, ETC.	31
6.1	Improvements to the Leased Property.	31
6.2	Salvage.	32
ARTICLE 7	LIENS	32
7.1	Liens.	32
7.2	Landlord’s Lien.	33
ARTICLE 8	PERMITTED CONTESTS	33
ARTICLE 9	INSURANCE AND INDEMNIFICATION	34
9.1	General Insurance Requirements.	34
9.2	Waiver of Subrogation.	35
9.3	Form Satisfactory, Etc.	35
9.4	No Separate Insurance; Self-Insurance.	36
9.5	Indemnification of Landlord.	36
ARTICLE 10	CASUALTY	37
10.1	Insurance Proceeds.	37
10.2	Damage or Destruction.	38
10.3	Damage Near End of Term.	40
10.4	Tenant’s Property.	40
10.5	Restoration of Tenant’s Property.	40
10.6	No Abatement of Rent.	40
10.7	Waiver.	41
ARTICLE 11	CONDEMNATION	41
11.1	Total Condemnation, Etc.	41
11.2	Partial Condemnation.	41
11.3	Abatement of Rent.	42
11.4	Temporary Condemnation.	42
11.5	Allocation of Award.	43
ARTICLE 12	DEFAULTS AND REMEDIES	43
12.1	Events of Default.	43
12.2	Remedies.	46
12.3	Tenant’s Waiver.	47
12.4	Application of Funds.	48
12.5	Landlord’s Right to Cure Tenant’s Default.	48
12.6	Trade Names.	48
ARTICLE 13	HOLDING OVER	49
ARTICLE 14	LANDLORD DEFAULT	49
ARTICLE 15	PURCHASE RIGHTS	50
ARTICLE 16	SUBLETTING AND ASSIGNMENT	50
16.1	Subletting and Assignment.	50
16.2	Required Sublease Provisions.	52
16.3	Permitted Sublease.	53
16.4	Sublease Limitation.	54
ARTICLE 17	ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS	54
17.1	Estoppel Certificates.	54
17.2	Financial Statements.	55

iii

17.3	Reimbursement, Licensure, Etc.	56
ARTICLE 18	LANDLORD’S RIGHT TO INSPECT	57
ARTICLE 19	EASEMENTS	57
19.1	Grant of Easements.	57
19.2	Exercise of Rights by Tenant.	58
19.3	Permitted Encumbrances.	58
ARTICLE 20	FACILITY MORTGAGES	58
20.1	Landlord May Grant Liens.	58
20.2	Subordination of Lease.	58
20.3	Notice to Mortgagee and Superior Landlord.	60
ARTICLE 21	ADDITIONAL COVENANTS OF TENANT	60
21.1	Prompt Payment of Indebtedness.	60
21.2	Conduct of Business.	61
21.3	Maintenance of Accounts and Records.	61
21.4	Notice of Litigation, Etc.	61
21.5	Indebtedness of Tenant.	62
21.6	Distributions, Payments to Affiliated Persons, Etc.	63
21.7	Prohibited Transactions.	63
21.8	Liens and Encumbrances.	63
21.9	Merger; Sale of Assets; Etc.	64
21.10	Bankruptcy Remote Entities.	64
21.11	Notice of Change of Name, Etc.	64
ARTICLE 22	ARBITRATION	64
ARTICLE 23	MISCELLANEOUS	66
23.1	Limitation on Payment of Rent.	66
23.2	No Waiver.	66
23.3	Remedies Cumulative.	66
23.4	Severability.	67
23.5	Acceptance of Surrender.	67
23.6	No Merger of Title.	67
23.7	Conveyance by Landlord.	67
23.8	Quiet Enjoyment.	67
23.9	No Recordation.	68
23.10	Notices.	68
23.11	Construction.	69
23.12	Counterparts; Headings.	69
23.13	Applicable Law, Etc.	70
23.14	Right to Make Agreement.	70
23.15	Attorneys’ Fees.	70
23.16	Nonliability of Trustees.	70

iv

AMENDED AND RESTATED MASTER LEASE AGREEMENT

THIS AMENDED AND RESTATED MASTER LEASE AGREEMENT is entered into as of October 1, 2006, by and among (i) HRES1 PROPERTIES TRUST, a Maryland real estate investment trust, as landlord (“Landlord”), and (ii) FS PATRIOT LLC and FS COMMONWEALTH LLC, each a Maryland limited liability company, jointly and severally, as tenant (“Tenant”).

W I T N E S S E T H :

WHEREAS, Landlord and Tenant are parties to that certain Master Lease Agreement, dated as of March 3, 2006 (as amended, the “Original Lease”); and

WHEREAS, Landlord and Tenant wish to amend and restate the Original Lease to make such modifications as are set forth herein.

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

ARTICLE 1

DEFINITIONS

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

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

1.2          “Affiliated Person”  shall mean, with respect to any Person, (a)  in the case of any such Person which is a partnership, any partner in such partnership, (b) in the case of

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

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

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

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

2

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

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

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

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

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

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

1.12        “Commencement Date”  shall mean October 1, 2006.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1.28        “Facility”  shall mean, with respect to any Property, the rehabilitation hospital being operated on such Property, and, specifically including, without limitation, (i) with respect to the Facility known as New England Rehabilitation Hospital, Woburn, Massachusetts, the right to operate the 198

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beds licensed at such Facility, (ii) with respect to the Facility known as Braintree Rehabilitation Hospital, the right to operate the 187 beds licensed at such Facility, and (iii) any other tangible or intangible rights associated with, or incidental to, any licenses, registrations and permits used by such hospitals in the conduct of their business and provision of patient services.

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

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

1.31        “Facility Trade Names”  shall mean, with respect to any Property, any of the names under which Tenant operates, or has operated, the Facility at such Property at any time during the Term.

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

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

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

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

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

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

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

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

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

1.41        “Hazardous Substances”  shall mean any substance:

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

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

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

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

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

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

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

(h)           without limitation, constitutes Regulated Medical Wastes.

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

1.43        “Impositions”  shall mean, collectively, all taxes (including, without limitation, all taxes imposed under the laws of any State, as such laws may be amended from time to time, and all ad valorem, sales and use, or similar taxes as the same relate to or are imposed upon Landlord, Tenant or the business conducted upon the Leased Property), assessments (including, without limitation, all assessments for public improvements or benefit, whether or not commenced or completed prior to the date hereof), ground rents (including any minimum rent under any ground lease, and any additional rent or charges thereunder), water, sewer or other rents and charges, excises, tax levies, fees (including, without limitation, license, permit, inspection, authorization and similar fees), and all other governmental charges, in each case whether general or special, ordinary or extraordinary, foreseen or unforeseen, of every character in respect of the Leased Property or the business conducted thereon by Tenant (including all interest and penalties thereon due to any failure in payment by Tenant), which at any time prior to, during or in respect of the Term hereof may be assessed or imposed on or in respect of or be a lien upon (a) Landlord’s interest in the Leased Property, (b)

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the Leased Property or any part thereof or any rent therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, or sales from, or activity conducted on, or in connection with the Leased Property or the leasing or use of the Leased Property or any part thereof by Tenant; provided, however, that nothing contained herein shall be construed to require Tenant to pay and the term “Impositions” shall not include (i) any tax based on net income imposed on Landlord, (ii) any net revenue tax of Landlord, (iii) any transfer fee (but excluding any mortgage or similar tax payable in connection with a Facility Mortgage) or other tax imposed with respect to the sale, exchange or other disposition by Landlord of the Leased Property or the proceeds thereof, (iv) any single business, gross receipts tax, transaction privilege, rent or similar taxes as the same relate to or are imposed upon Landlord, (v) any interest or penalties imposed on Landlord as a result of the failure of Landlord to file any return or report timely and in the form prescribed by law or to pay any tax or imposition, except to the extent such failure is a result of a breach by Tenant of its obligations pursuant to Section 3.1.3, (vi) any impositions imposed on Landlord that are a result of Landlord not being considered a “United States person” as defined in Section 7701(a)(30) of the Code, (vii) any impositions that are enacted or adopted by their express terms as a substitute for any tax that would not have been payable by Tenant pursuant to the terms of this Agreement or (viii) any impositions imposed as a result of a breach of covenant or representation by Landlord in any agreement governing Landlord’s conduct or operation or as a result of the negligence or willful misconduct of Landlord.

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

1.45        “Indebtedness”  shall mean (without duplication), (i) all obligations for borrowed money, (ii) the maximum amount available to be drawn under all surety bonds, letters of credit and bankers’ acceptances issued or created for the account of Tenant and, without duplication, all unreimbursed drafts drawn thereunder, (iii) all obligations to pay the deferred purchase price of property or services, excluding trade payables incurred in the ordinary course of business, but including all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by Tenant, (iv) all leases required, in accordance with GAAP, to be recorded as capital leases on Tenant’s balance sheet, (v) the principal balance outstanding and owing by Tenant under any synthetic lease, tax retention operating lease or similar off-balance

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sheet financing product, and (vi) all guaranties of or other liabilities with respect to the debt of another Person.

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

1.47        “Interest Rate”  shall mean nine percent (9%) per annum.

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

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

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

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

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

1.53        “Leased Intangible Property”  shall mean all agreements, service contracts, equipment leases, booking agreements and other arrangements or agreements affecting the ownership, repair, maintenance, management, leasing or operation of the Leased Property, or any portion thereof,  to which

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Landlord is a party; all books, records and files relating to the leasing, maintenance, management or operation of the Leased Property, or any portion thereof, belonging to Landlord; all transferable or assignable permits, certificates of occupancy, operating permits, sign permits, development rights and approvals, certificates, licenses, warranties and guarantees, rights to deposits, trade names, service marks, telephone exchange numbers identified with the Leased Property, and all other transferable intangible property, miscellaneous rights, benefits and privileges of any kind or character belonging to Landlord with respect to the Leased Property.

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

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

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

1.57        “Manager”  shall mean, with respect to any Property, the operator or manager under any Management Agreement from time to time in effect with respect to such Property, and its permitted successors and assigns.

1.58        “Management Agreement”  shall mean, with respect to any Property, any operating or management agreement from time to time entered into by Tenant with respect to such Property in accordance with the applicable provisions of this Agreement,

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together with all amendments, modifications and supplements thereto.

1.59        “Minimum Rent”  shall mean the sum of Ten Million Two Hundred Fifty Thousand Dollars ($10,250,000) per annum.

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

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

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

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

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

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

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

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

1.68        “Pledge Agreement”  shall mean the Amended and Restated Pledge Agreement, dated as of the date hereof, made by FSQ, Inc. in favor of Landlord with respect to the stock or

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other equity interests of Tenant, as amended, restated, supplemented or otherwise modified from time to time.

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

1.70        “Provider Agreements”  shall mean all participation, provider and reimbursement agreements or arrangements now or hereafter in effect for the benefit of Tenant or any Manager in connection with the operation of any Facility relating to any right of payment or other claim arising out of or in connection with Tenant’s participation in any Third Party Payor Program.

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

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

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

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

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

1.76        “State”  shall mean The Commonwealth of Massachusetts.

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

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

1.79        “Subsidiary”  shall mean, with respect to any Person, any Entity (a) in which such Person owns directly, or indirectly

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through one or more Subsidiaries, twenty percent (20%) or more of the voting or beneficial interest or (b) which such Person otherwise has the right or power to control (whether by contract, through ownership of securities or otherwise).

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

1.81        “Tenant”  shall have the meaning given such term in the preambles to this Agreement and shall also include their respective permitted successors and assigns, and, in each case, shall refer to each such Entity comprising Tenant hereunder, whether the original Entities named herein or any of their successors or assigns, jointly and severally with each and every other Entity or Entities then comprising Tenant hereunder.

1.82        “Tenant’s Personal Property”  shall mean all motor vehicles and consumable inventory and supplies, furniture, furnishings, equipment, movable walls and partitions, equipment and machinery and all other tangible personal property of Tenant and Tenant’s receivables, if any, acquired by Tenant on and after the date hereof and located at the Leased Property or used in Tenant’s business at the Leased Property and all modifications, replacements, alterations and additions to such personal property installed at the expense of Tenant, other than any items included within the definition of Fixtures.

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

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

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

1.86        “Unsuitable for Its Permitted Use”  shall mean, with respect to any Facility, a state or condition of such Facility such that (a) following any damage or destruction involving a Facility, (i) such Facility cannot be operated on a commercially practicable basis for its Permitted Use and it cannot reasonably

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

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

ARTICLE 2

LEASED PROPERTY AND TERM

2.1          Leased Property.  Upon and subject to the terms and conditions hereinafter set forth, Landlord leases to Tenant and Tenant leases from Landlord all of Landlord’s right, title and interest in and to all of the following (each of items (a) through (g) below which, as of the Commencement Date, relates to any single Facility, a “Property” and, collectively, the “Leased Property”):

(a)           those certain tracts, pieces and parcels of land, as more particularly described in Exhibits A-1 through A-2, attached hereto and made a part hereof (the “Land”);

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

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

(d)           all equipment, machinery, fixtures, and other items of property, now or hereafter permanently affixed to or incorporated into the Leased Improvements, including, without limitation, all furnaces, boilers, heaters,

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electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems and apparatus, sprinkler systems and fire and theft protection equipment, all of which, to the maximum extent permitted by law, are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereto, but specifically excluding all items included within the category of Tenant’s Personal Property (collectively, the “Fixtures”);

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

(f)            all of the Leased Intangible Property; and

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

2.2          Condition of Leased Property.  Tenant acknowledges receipt and delivery of possession of the Leased Property and Tenant accepts the Leased Property in its “as is” condition, subject to the rights of parties in possession, the existing state of title, including all covenants, conditions, restrictions, reservations, mineral leases, easements and other matters of record or that are visible or apparent on the Leased  Property, all applicable Legal Requirements, the lien of any financing instruments, mortgages and deeds of trust existing prior to the Commencement Date or permitted by the terms of this Agreement, and such other matters which would be disclosed by an inspection of the Leased Property and the record title thereto or by an accurate survey thereof.  TENANT REPRESENTS THAT IT HAS INSPECTED THE LEASED PROPERTY AND ALL OF THE FOREGOING AND HAS FOUND THE CONDITION THEREOF SATISFACTORY AND IS NOT RELYING ON ANY REPRESENTATION OR WARRANTY OF LANDLORD OR LANDLORD’S AGENTS OR EMPLOYEES WITH RESPECT THERETO AND TENANT WAIVES ANY CLAIM OR ACTION AGAINST LANDLORD IN RESPECT OF THE CONDITION OF THE LEASED PROPERTY.  LANDLORD MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR

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CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY TENANT.  To the maximum extent permitted by law, however, Landlord hereby assigns to Tenant all of Landlord’s rights to proceed against any predecessor in interest or insurer for breaches of warranties or representations or for latent defects in the Leased Property.  Landlord shall fully cooperate with Tenant in the prosecution of any such claims, in Landlord’s or Tenant’s name, all at Tenant’s sole cost and expense.  Tenant shall indemnify, defend, and hold harmless Landlord from and against any loss, cost, damage or liability (including reasonable attorneys’ fees) incurred by Landlord in connection with such cooperation.

2.3          Fixed Term.  The initial term of this Agreement (the “Fixed Term”) shall commence on the Commencement Date and shall expire on June 30, 2026.

2.4          Extended Term.  Provided that no Event of Default shall have occurred and be continuing, Tenant shall have the right to extend the Term for one renewal term of twenty (20) years (the “Extended Term”).

The Extended Term shall commence on the day succeeding the expiration of the Fixed Term.  All of the terms, covenants and provisions of this Agreement shall apply to the Extended Term, except that Tenant shall have no right to extend the Term beyond the expiration of the Extended Term.  If Tenant shall elect to exercise the aforesaid option, it shall do so by giving Landlord Notice thereof not later than June 30, 2025, it being understood and agreed that time shall be of the essence with respect to the giving of such Notice.  If Tenant shall fail to give such Notice, this Agreement shall automatically terminate at the end of the Fixed Term and Tenant shall have no further option to extend the Term of this Agreement.  If Tenant shall give such Notice, the extension of this Agreement shall be automatically effected without the execution of any additional documents; it being understood and agreed, however, that Tenant and Landlord shall execute such documents and agreements as either party shall reasonably require to evidence the same.  Notwithstanding the provisions of the foregoing sentence, if, subsequent to the giving of such Notice, an Event of Default shall occur, at Landlord’s option, the extension of this Agreement shall cease to take effect and this Agreement shall automatically terminate at the end of the Fixed Term, and Tenant shall have no further option to extend the Term of this Agreement.

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ARTICLE 3

RENT

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

3.1.1           Minimum Rent.

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

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

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

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Minimum Rent paid by Tenant for such preceding calendar month.

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

3.1.2           Intentionally Deleted.

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

(a)           Impositions.  Subject to Article 8 relating to permitted contests, Tenant shall pay, or cause to be paid, all Impositions before any fine, penalty, interest or cost (other than any opportunity cost as a result of a failure to take advantage of any discount for early payment) may be added for non-payment, such payments to be made directly to the taxing authorities where feasible, and shall promptly, upon request, furnish to Landlord copies of official receipts or other reasonably satisfactory proof evidencing such payments.  If any such Imposition may, at the option of the taxpayer, lawfully be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Tenant may exercise the option to pay the same (and any accrued interest on the unpaid balance of such Imposition) in installments and, in such event, shall pay, or cause to pay, such installments during the Term as the same become due and before any fine, penalty, premium, further interest or cost may be added thereto.  Landlord, at its expense, shall, to the extent required or permitted by Applicable Law, prepare and file, or cause to be prepared and filed, all tax returns and pay all taxes due in respect of Landlord’s net income, gross receipts, sales and use, single business, transaction privilege, rent, ad valorem, franchise taxes and taxes on its capital stock or other equity interests, and Tenant, at its expense, shall, to the extent required or permitted by Applicable Laws and regulations, prepare and file all other tax returns and reports in respect of any Imposition as may be required by Government Agencies.  Provided no Event of Default shall have occurred and be continuing, if any refund shall be due

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from any taxing authority in respect of any Imposition paid by or on behalf of Tenant, the same shall be paid over to or retained by Tenant.  Landlord and Tenant shall, upon request of the other, provide such data as is maintained by the party to whom the request is made with respect to the Leased Property as may be necessary to prepare any required returns and reports.  In the event Government Agencies classify any property covered by this Agreement as personal property, Tenant shall file, or cause to be filed, all personal property tax returns in such jurisdictions where it may legally so file.  Each party shall, to the extent it possesses the same, provide the other, upon request, with cost and depreciation records necessary for filing returns for any property so classified as personal property.  Where Landlord is legally required to file personal property tax returns for property covered by this Agreement, Landlord shall provide Tenant with copies of assessment notices in sufficient time for Tenant to file a protest.  All Impositions assessed against such personal property shall be (irrespective of whether Landlord or Tenant shall file the relevant return) paid by Tenant not later than the last date on which the same may be made without interest or penalty, subject to the provisions of Article 8.

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

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

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

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

(e)           Reimbursement for Additional Charges.  If Tenant pays or causes to be paid property taxes or similar or

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

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

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

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

3.4          No Termination, Abatement, Etc.   Except as otherwise specifically provided in this Agreement, each of Landlord and

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Tenant, to the maximum extent permitted by law, shall remain bound by this Agreement in accordance with its terms and shall not take any action without the consent of the other to modify, surrender or terminate this Agreement.  In addition, except as otherwise expressly provided in this Agreement, Tenant shall not seek, or be entitled to, any abatement, deduction, deferment or reduction of the Rent, or set-off against the Rent, nor shall the respective obligations of Landlord and Tenant be otherwise affected by reason of (a) any damage to or destruction of the Leased Property, or any portion thereof, from whatever cause or any Condemnation, (b) the lawful or unlawful prohibition of, or restriction upon, Tenant’s use of the Leased Property, or any portion thereof, or the interference with such use by any Person or by reason of eviction by paramount title; (c) any claim which Tenant may have against Landlord by reason of any default (other than a monetary default) or breach of any warranty by Landlord under this Agreement or any other agreement between Landlord and Tenant, or to which Landlord and Tenant are parties; (d) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceedings affecting Landlord or any assignee or transferee of Landlord; or (e) for any other cause whether similar or dissimilar to any of the foregoing (other than a monetary default by Landlord).  Except as otherwise specifically provided in this Agreement, Tenant hereby waives all rights arising from any occurrence whatsoever, which may now or hereafter be conferred upon it by law (a) to modify, surrender or terminate this Agreement or quit or surrender the Leased Property, or any portion thereof, or (b) which would entitle Tenant to any abatement, reduction, suspension or deferment of the Rent or other sums payable or other obligations to be performed by Tenant hereunder.  The obligations of Tenant hereunder shall be separate and independent covenants and agreements, and the Rent and all other sums payable by Tenant hereunder shall continue to be payable in all events unless the obligations to pay the same shall be terminated pursuant to the express provisions of this Agreement.

3.5          Prorations, Etc.  It is understood and agreed that (i) all items of revenue, cost and expense, rights, remedies, claims, losses, damages, liabilities and obligations with respect to the period prior to the Commencement Date shall be for the account of Landlord, (ii) Landlord shall retain its right, title and interest in and to all unpaid accounts receivable with respect to each Facility which relate to the period prior to the Commencement Date, and Tenant shall promptly turn over any such amounts collected or received by Tenant on account thereof, and (iii) in the event that Tenant shall assume

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any liability for any period prior to the Commencement Date in connection with its participation in any Third Party Payor Program, Landlord shall indemnify and hold Tenant harmless from any such liability only to the extent the same relates to the period commencing on October 26, 2004 and ending on the Commencement Date.

ARTICLE 4

USE OF THE LEASED PROPERTY

4.1          Permitted Use.

4.1.1           Permitted Use.

(a)           Tenant shall, at all times during the Term, and at any other time that Tenant shall be in possession of any Property, continuously use and operate, or cause to be used and operated, such Property as a rehabilitation hospital, clinic or professional level health or medical services facility, and any uses necessary or incidental thereto, subject to and in accordance with all applicable Legal Requirements.  Tenant shall not use (and shall not permit any Person to use) any Property, or any portion thereof, for any other use without the prior written consent of Landlord, which approval shall not be unreasonably withheld, delayed or conditioned.  No use shall be made or permitted to be made of any Property and no acts shall be done thereon which will cause the cancellation of any insurance policy covering such Property or any part thereof (unless another adequate policy is available), nor shall Tenant sell or otherwise provide to patients therein, or permit to be kept, used or sold in or about any Property any article which may be prohibited by law or by the standard form of fire insurance policies, or any other insurance policies required to be carried hereunder, or fire underwriter’s regulations.  Tenant shall, at its sole cost (except as expressly provided in Section 5.1.2(b)), comply or cause to be complied with all Insurance Requirements.  Tenant shall not take or omit to take, or permit to be taken or omitted to be taken, any action, the taking or omission of which materially impairs the value or the usefulness of any Property or any part thereof for its Permitted Use.

(b)           In the event that, in the reasonable determination of Tenant, it shall no longer be economically practical to operate any Property as currently operated,

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Tenant shall give Landlord Notice thereof, which Notice shall set forth in reasonable detail the reasons therefor.  Thereafter, Landlord and Tenant shall negotiate in good faith to agree on an alternative use for such Property; provided, however, in no event shall the Minimum Rent be reduced or abated as a result thereof.  If Landlord and Tenant fail to agree on an alternative use for such Property within sixty (60) days after commencing negotiations as aforesaid, Tenant may market such Property for sale to a third party.  If Tenant receives a bona fide offer (an “Offer”) to purchase such Property from a Person having the financial capacity to implement the terms of such Offer, Tenant shall give Landlord Notice thereof, which Notice shall include a copy of the Offer executed by such third party.  In the event that Landlord shall fail to accept or reject such Offer within thirty (30) days after receipt of such Notice, such Offer shall be deemed to be rejected by Landlord.  If Landlord shall sell the Property pursuant to such Offer, then, effective as of the date of such sale, this Agreement shall terminate with respect to such Property, and the Minimum Rent shall be reduced by an amount equal to nine percent (9%) of the net proceeds of sale received by Landlord in the case of an Additional Property.  If Landlord shall reject (or be deemed to have rejected) such Offer, then, effective as of the proposed date of such sale, this Agreement shall terminate with respect to such Property, and the Minimum Rent shall be reduced by an amount equal to nine percent (9%) of the projected net proceeds determined by reference to such Offer.

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

4.1.3       Lawful Use, Etc.  Tenant shall not, and shall not permit any Person to use or suffer or permit the use of any Property or Tenant’s Personal Property, if any, for any unlawful purpose.  Tenant shall not, and shall not permit any Person to, commit or suffer to be committed any waste on any Property, or in any Facility, nor shall Tenant cause or permit any unlawful nuisance thereon or therein.  Tenant shall not, and shall not permit any Person to, suffer nor permit any Property, or any

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portion thereof, to be used in such a manner as (i) may materially and adversely impair Landlord’s title thereto or to any portion thereof, or (ii) may reasonably allow a claim or claims for adverse usage or adverse possession by the public, as such, or of implied dedication of such Property, or any portion thereof.

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

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

4.4          Environmental Matters.

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

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

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

4.4.2           Indemnification of Landlord.  Tenant shall protect, indemnify and hold harmless Landlord and each Facility Mortgagee, their trustees, officers, agents, employees and beneficiaries, and any of their respective successors or assigns with respect to this Agreement (collectively, the “Indemnitees” and, individually, an “Indemnitee”) for, from and against any and all debts, liens, claims, causes of action, administrative orders or notices, costs, fines, penalties or expenses (including, without limitation, reasonable attorney’s fees and expenses) imposed upon, incurred by or asserted against any Indemnitee resulting from, either directly or indirectly, the

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presence in, upon or under the soil or ground water of any Property or any properties surrounding such Property of any Hazardous Substances in violation of any Applicable Law, except to the extent the same arise from the acts or omissions of Landlord or any other Indemnitee or during any period that Landlord or a Person designated by Landlord (other than Tenant) is in possession of such Property from and after the date hereof.  Tenant’s duty herein includes, but is not limited to, costs associated with personal injury or property damage claims as a result of the presence prior to the expiration or sooner termination of the Term and the surrender of such Property to Landlord in accordance with the terms of this Agreement of Hazardous Substances in, upon or under the soil or ground water of such Property in violation of any Applicable Law.  Upon Notice from Landlord and any other of the Indemnitees, Tenant shall undertake the defense, at Tenant’s sole cost and expense, of any indemnification duties set forth herein, in which event, Tenant shall not be liable for payment of any duplicative attorneys’ fees incurred by any Indemnitee.

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

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

ARTICLE 5

MAINTENANCE AND REPAIRS

5.1          Maintenance and Repair.

5.1.1           Tenant’s General Obligations.  Tenant shall keep (or cause to be kept), at Tenant’s sole cost and expense, the Leased Property and all private roadways, sidewalks and curbs appurtenant thereto (and Tenant’s Personal Property) in good order and repair, reasonable wear and tear excepted (whether or not the need for such repairs occurs as a result of Tenant’s or any Manager’s use, any prior use, the elements or the age of the Leased Property or Tenant’s Personal Property or any portion thereof), and shall promptly make or cause to be made all

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necessary and appropriate repairs and replacements thereto of every kind and nature, whether interior or exterior, structural or nonstructural, ordinary or extraordinary, foreseen or unforeseen or arising by reason of a condition existing prior to the commencement of the Term (concealed or otherwise).  All repairs shall be made in a good, workmanlike manner, consistent with industry standards for comparable Facilities in like locales, in accordance with all applicable federal, state and local statutes, ordinances, codes, rules and regulations relating to any such work.  Tenant shall not take or omit to take (or permit any Person to take or omit to take) any action, the taking or omission of which would materially and adversely impair the value or the usefulness of the Leased Property or any material part thereof for its Permitted Use.  Tenant’s obligations under this Section 5.1.1 shall be limited in the event of any casualty or Condemnation as set forth in Article 10 and Article 11 and Tenant’s obligations with respect to Hazardous Substances are as set forth in Section 4.4.

5.1.2           Landlord’s Obligations.

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

(b)           If, pursuant to the terms of this Agreement, Tenant is required to make any expenditures in connection with any repair, maintenance or renovation with respect to any Property, Tenant may, at its election, advance such funds or give Landlord Notice thereof, which Notice shall set forth, in reasonable detail, the nature of the required repair, renovation or replacement, the estimated cost thereof and such other information with respect thereto as Landlord may reasonably require.  Provided that no Event of Default shall have occurred and be continuing and Tenant

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shall otherwise comply with the applicable provisions of Article 6, Landlord shall, within ten (10) Business Days after such Notice, subject to and in accordance with the applicable provisions of Article 6, disburse such required funds to Tenant (or, if Tenant shall so elect, directly to the Manager or any other Person performing the required work) and, upon such disbursement, the Minimum Rent shall be adjusted as provided in Section 3.1.1(c).  Notwithstanding the foregoing, Landlord may elect not to disburse such required funds to Tenant; provided, however, that if Landlord shall elect not to disburse such required funds as aforesaid, Tenant’s obligation to make such required repair, renovation or replacement shall be deemed waived by Landlord, and, notwithstanding anything contained in this Agreement to the contrary, Tenant shall have no obligation to make such required repair, renovation or replacement.

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

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

5.2          Tenant’s Personal Property.  Tenant shall provide and maintain (or cause to be provided and maintained) throughout the Term all such Tenant’s Personal Property as shall be necessary in order to operate in compliance with applicable material Legal Requirements and Insurance Requirements and otherwise in accordance with customary practice in the industry for the

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Permitted Use.  If, from and after the Commencement Date, Tenant acquires an interest in any item of tangible personal property (other than motor vehicles) on, or in connection with, the Leased Property, or any portion thereof, which belongs to anyone other than Tenant, Tenant shall require the agreements permitting such use to provide that Landlord or its designee may assume Tenant’s rights and obligations under such agreement upon Landlord’s purchase of the same in accordance with the provisions of Article 15 and the assumption of management or operation of the Facility by Landlord or its designee.

5.3          Yield Up.  Upon the expiration or sooner termination of this Agreement, Tenant shall, subject to the completion of a transfer of ownership approved by the Massachusetts Department of Public Health, vacate and surrender the Leased Property to Landlord in the condition in which the Leased Property was on the Commencement Date, except as repaired, rebuilt, restored, altered or added to as permitted or required by the provisions of this Agreement, ordinary wear and tear excepted.

In addition, upon the expiration or earlier termination of this Agreement, Tenant shall, at Landlord’s reasonable cost and expense, use its best efforts to complete the transfer of ownership of the hospital business and the related hospital operations and records necessary for such operation to, and cooperate with, Landlord or Landlord’s nominee in connection with the processing of all applications for licenses, operating permits and other governmental authorizations and all contracts, including contracts with governmental or quasi-governmental entities, which may be necessary for the operation of the hospitals at the Facilities.  Until the transfer of ownership is approved by the Massachusetts Department of Public Health, it is understood that Tenant shall continue as owner and licensee of the hospital business and the related hospital operations conducted at the Facilities after the termination of this Agreement and for so long thereafter as is necessary for Landlord or Landlord’s nominee to obtain all necessary licenses, operating permits and other governmental authorizations.  If a new tenant is not licensed upon the expiration or termination of this Agreement in connection with a Default or Event of Default by Tenant, then, during such post termination period, Tenant shall pay hold over rent in accordance with Section 13.  Otherwise, during such period, Minimum Rent shall be payable in an amount equal to 75% of the Minimum Rent payable for the last month of the Term for the first six (6) months after the expiration date and 50% of such Minimum Rent thereafter.

It is expressly understood and agreed that any transfer pursuant to Section 5.3 or any other Section of this Agreement

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is not a transfer of ownership of the hospital and is not a transfer of the right, title and interest related to the licenses granted by the Massachusetts Department of Public Health to operate the Facilities or any other permit, license or certification used in the operation of the Facilities that is otherwise by its terms non-transferable.  Any change in ownership and licensee shall be subject, in all events, to the approval of each and every applicable Government Agency, including, without limitation, the Massachusetts Department of Public Health, and Applicable Law, Tenant being obligated to cooperate in and facilitate such approval process.

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

ARTICLE 6

IMPROVEMENTS, ETC.

6.1          Improvements to the Leased Property.  Tenant shall not make, construct or install (or permit to be made, constructed or installed) any Capital Additions without, in each instance, obtaining Landlord’s prior written consent, which consent shall not be unreasonably withheld, delayed or conditioned provided that (a) construction or installation of the same would not adversely affect or violate any material Legal Requirement or Insurance Requirement applicable to any Property and (b) Landlord shall have received an Officer’s Certificate certifying as to the satisfaction of the conditions set out in clause (a) above; provided, however, that no such consent shall be required in the event immediate action is required to prevent imminent harm to person or property.  Prior to commencing construction of any Capital Addition, Tenant shall submit to Landlord, in

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writing, a proposal setting forth, in reasonable detail, any such proposed improvement and shall provide to Landlord such plans and specifications, and such permits, licenses, contracts and such other information concerning the same as Landlord may reasonably request.  Landlord shall have thirty (30) days to review all materials submitted to Landlord in connection with any such proposal.  Failure of Landlord to respond to Tenant’s proposal within thirty (30) days after receipt of all information and materials requested by Landlord in connection with the proposed improvement shall be deemed to constitute approval of the same.  Without limiting the generality of the foregoing, such proposal shall indicate the approximate projected cost of constructing such proposed improvement and the use or uses to which it will be put.  No Capital Addition shall be made which would tie in or connect any Leased Improvements with any other improvements on property adjacent to any Property (and not part of the Land) including, without limitation, tie-ins of buildings or other structures or utilities.  Except as permitted herein, Tenant shall not finance the cost of any construction of such improvement by the granting of a lien on or security interest in the Leased Property or such improvement, or Tenant’s interest therein, without the prior written consent of Landlord, which consent may be withheld by Landlord in Landlord’s sole discretion.  Any such improvements shall, upon the expiration or sooner termination of this Agreement, remain or pass to and become the property of Landlord, free and clear of all encumbrances other than Permitted Encumbrances.

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

ARTICLE 7

LIENS

7.1          Liens.  Subject to Article 8, Tenant shall use its best efforts not, directly or indirectly, to create or allow to remain and shall promptly discharge (or cause to be discharged), at its expense, any lien, encumbrance, attachment, title retention agreement or claim upon the Leased Property, or any portion thereof, or Tenant’s leasehold interest therein or any attachment, levy, claim or encumbrance in respect of the Rent, other than (a) Permitted Encumbrances, (b) restrictions, liens and other encumbrances which are consented to in writing by Landlord, (c) liens for those taxes of Landlord which Tenant is not required to pay hereunder, (d) subleases permitted by Article 16, (e) liens for Impositions or for sums resulting from

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noncompliance with Legal Requirements so long as (i) the same are not yet due and payable, or (ii) are being contested in accordance with Article 8, (f) liens of mechanics, laborers, materialmen, suppliers or vendors incurred in the ordinary course of business that are not yet due and payable or are for sums that are being contested in accordance with Article 8, (g) any Facility Mortgages or other liens which are the responsibility of Landlord pursuant to the provisions of Article 20 and (h) Landlord Liens and any other voluntary liens created by Landlord.

7.2          Landlord’s Lien.  In addition to any statutory landlord’s lien and in order to secure payment of the Rent and all other sums payable hereunder by Tenant, and to secure payment of any loss, cost or damage which Landlord may suffer by reason of Tenant’s breach of this Agreement, Tenant hereby grants unto Landlord, to the maximum extent permitted by Applicable Law, a security interest in and an express contractual lien upon Tenant’s Personal Property (except motor vehicles), and Tenant’s interest in all ledger sheets, files, records, documents and instruments (including, without limitation, computer programs, tapes and related electronic data processing) relating to the operation of the Facilities (the “Records”) and all proceeds therefrom, subject to any Permitted Encumbrances; and such Tenant’s Personal Property shall not be removed from the Leased Property at any time when an Event of Default has occurred and is continuing.

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

ARTICLE 8

PERMITTED CONTESTS

Tenant shall have the right to contest the amount or validity of any Imposition, Legal Requirement, Insurance Requirement, Environmental Obligation, lien, attachment, levy, encumbrance, charge or claim (collectively, “Claims”) as to the Leased Property, by appropriate legal proceedings, conducted in good faith and with due diligence, provided that (a) the

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

ARTICLE 9

INSURANCE AND INDEMNIFICATION

9.1          General Insurance Requirements.  Tenant shall, at all times during the Term and at any other time Tenant shall be in possession of any Property, or any portion thereof, keep (or cause to be kept) such Property and all property located therein or thereon, insured against the risks and in such amounts as is against such risks and in such amounts as Landlord shall reasonably require and may be commercially reasonable.  Tenant shall prepare a proposal setting forth the insurance Tenant

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proposes to be maintained with respect to each Property during the ensuing Fiscal Year, and shall submit such proposal to Landlord on or before December 1 of the preceding year, for Landlord’s review and approval, which approval shall not be unreasonably withheld, delayed or conditioned.  In the event that Landlord shall fail to respond within thirty (30) days after receipt of such proposal, such proposal shall be deemed approved.

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

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

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

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

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

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Tenant’s Personal Property or such use, misuse, non-use, condition, management, maintenance, or repair thereof including, failure to perform obligations (other than Condemnation proceedings) to which Landlord is made a party, (c) any Impositions that are the obligations of Tenant to pay pursuant to the applicable provisions of this Agreement, and (d) any failure on the part of Tenant or anyone claiming under Tenant to perform or comply with any of the terms of this Agreement.  Tenant, at its expense, shall contest, resist and defend any such claim, action or proceeding asserted or instituted against Landlord (and shall not be responsible for any duplicative attorneys’ fees incurred by Landlord) or may compromise or otherwise dispose of the same, with Landlord’s prior written consent (which consent may not be unreasonably withheld, delayed or conditioned).  The obligations of Tenant under this Section 9.5 are in addition to the obligations set forth in Section 4.4 and shall survive the termination of this Agreement.

ARTICLE 10

CASUALTY

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

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10.2        Damage or Destruction.

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

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

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

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Tenant shall be strictly liable and solely responsible for the amount of any deductible and shall, upon any insurable loss, pay over the amount of such deductible to Landlord at the time and in the manner herein provided for payment of the applicable proceeds to Landlord.

10.2.4         Disbursement of Proceeds.  In the event Tenant is required to restore any Property pursuant to Section 10.2 and this Agreement is not terminated as to such Property pursuant to this Article 10, Tenant shall commence (or cause to be commenced) promptly and continue diligently to perform (or cause to be performed) the repair and restoration of such Property (hereinafter called the “Work”), so as to restore (or cause to be restored) the applicable Property in material compliance with all Legal Requirements and so that such Property shall be, to the extent practicable, substantially equivalent in value and general utility to its general utility and value immediately prior to such damage or destruction.  Subject to the terms hereof, Landlord shall advance the insurance proceeds and any additional amounts payable by Landlord pursuant to Section 10.2.3 or otherwise deposited with Landlord to Tenant regularly during the repair and restoration period so as to permit payment for the cost of any such restoration and repair.  Any such advances shall be made not more than monthly within ten (10) Business Days after Tenant submits to Landlord a written requisition and substantiation therefor on AIA Forms G702 and G703 (or on such other form or forms as may be reasonably acceptable to Landlord).  Landlord may, at its option, condition advancement of such insurance proceeds and other amounts on (i) the absence of any Event of Default, (ii) its approval of plans and specifications of an architect satisfactory to Landlord (which approval shall not be unreasonably withheld, delayed or conditioned), (iii) general contractors’ estimates, (iv) architect’s certificates, (v) conditional lien waivers of general contractors, if available, (vi) evidence of approval by all governmental authorities and other regulatory bodies whose approval is required, (vii), if Tenant has elected to advance deficiency funds pursuant to Section 10.2.3, Tenant depositing the amount thereof with Landlord and (viii) such other certificates as Landlord may, from time to time, reasonably require.

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

Tenant’s obligation to restore the applicable Property pursuant to this Article 10 shall be subject to the release of available insurance proceeds by the applicable Facility

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Mortgagee to Landlord or directly to Tenant and, in the event such proceeds are insufficient, Landlord electing to make such deficiency available therefor (and disbursement of such deficiency).

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

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

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

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

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

ARTICLE 11

CONDEMNATION

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

11.2        Partial Condemnation.  In the event of a Condemnation of less than the whole of any Property such that such Property is still suitable for its Permitted Use, Tenant shall, to the extent of the Award and any additional amounts disbursed by Landlord as hereinafter provided, commence (or cause to be commenced) promptly and continue diligently to restore (or cause to be restored) the untaken portion of the applicable Leased Improvements so that such Leased Improvements shall constitute a complete architectural unit of the same general character and condition (as nearly as may be possible under the circumstances) as such Leased Improvements existing immediately prior to such Condemnation, in material compliance with all Legal Requirements, subject to the provisions of this Section 11.2.  If the cost of the repair or restoration of the affected Property exceeds the amount of the Award, Tenant shall give Landlord Notice thereof which notice shall set forth in reasonable detail the nature of such deficiency and whether Tenant shall pay and assume the amount of such deficiency (Tenant having no obligation to do so, except that if Tenant shall elect to make such funds available, the same shall become an irrevocable obligation of Tenant pursuant to this Agreement).  In the event Tenant shall elect not to pay and assume the amount of such deficiency, Landlord shall have the right (but not the obligation), exercisable at Landlord’s sole election by Notice to Tenant given within sixty (60) days after Tenant’s Notice of the deficiency, to elect to make available for application to the cost of repair or restoration the amount of such deficiency; provided, however, in such event, upon any disbursement by Landlord thereof, the Minimum Rent shall be adjusted as provided in Section 3.1.1(c).  In the event that neither Landlord nor Tenant shall elect to make such deficiency available for restoration, either Landlord or Tenant may terminate this

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Agreement with respect to the affected Property and the entire Award shall be allocated as set forth in Section 11.5.

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

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

11.4        Temporary Condemnation.  In the event of any temporary Condemnation of any Property or Tenant’s interest therein, this Agreement shall continue in full force and effect and Tenant shall continue to pay (or cause to be paid), in the manner and on the terms herein specified, the full amount of the Rent. 

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Tenant shall continue to perform and observe (or cause to be performed and observed) all of the other terms and conditions of this Agreement on the part of the Tenant to be performed and observed.  Provided no Event of Default has occurred and is continuing, the entire amount of any Award made for such temporary Condemnation allocable to the Term, whether paid by way of damages, rent or otherwise, shall be paid to Tenant.  Tenant shall, promptly upon the termination of any such period of temporary Condemnation, at its sole cost and expense, restore the affected Property to the condition that existed immediately prior to such Condemnation, in material compliance with all applicable Legal Requirements, unless such period of temporary Condemnation shall extend beyond the expiration of the Term, in which event Tenant shall not be required to make such restoration.

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

ARTICLE 12

DEFAULTS AND REMEDIES

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

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

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

(c)           should Tenant default in the due observance or performance of any of the terms, covenants or agreements contained herein to be performed or observed by it (other than as specified in clauses (a) and (b) above) and should such default continue for a period of thirty (30) days after Notice thereof from Landlord to Tenant; provided,

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however, that if such default is susceptible of cure but such cure cannot be accomplished with due diligence within such period of time and if, in addition, Tenant commences to cure or cause to be cured such default within thirty (30) days after Notice thereof from Landlord and thereafter prosecutes the curing of such default with all due diligence, such period of time shall be extended to such period of time (not to exceed an additional ninety (90) days in the aggregate) as may be necessary to cure such default with all due diligence; or

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

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

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

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

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

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

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

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

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

Upon the occurrence of an Event of Default, Landlord may, in addition to any other remedies provided herein, enter upon the Leased Property, or any portion thereof, and take possession of any and all of Tenant’s Personal Property, if any, and the Records, without liability for trespass or conversion (Tenant hereby waiving any right to notice or hearing prior to such taking of possession by Landlord) and sell the same at public or private sale, after giving Tenant reasonable Notice of the time and place of any public or private sale, at which sale Landlord or its assigns may purchase all or any portion of Tenant’s

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Personal Property, if any, unless otherwise prohibited by law.  Unless otherwise provided by law and without intending to exclude any other manner of giving Tenant reasonable notice, the requirement of reasonable Notice shall be met if such Notice is given at least ten (10) days before the date of sale.  The proceeds from any such disposition, less all expenses incurred in connection with the taking of possession, holding and selling of such property (including, reasonable attorneys’ fees) shall be applied as a credit against the indebtedness which is secured by the security interest granted in Section 7.2.  Any surplus shall be paid to Tenant or as otherwise required by law and Tenant shall pay any deficiency to Landlord, as Additional Charges, upon demand.

12.2        Remedies.  None of (a) the termination of this Agreement pursuant to Section 12.1, (b) the repossession of the Leased Property, or any portion thereof, (c) the failure of Landlord to relet the Leased Property, or any portion thereof, nor (d) the reletting of all or any of portion of the Leased Property, shall relieve Tenant of its liability and obligations hereunder, all of which shall survive any such termination, repossession or reletting.  In the event of any such termination, Tenant shall forthwith pay to Landlord all Rent due and payable with respect to the Leased Property, or terminated portion thereof, through and including the date of such termination.  Thereafter, Tenant, until the end of what would have been the Term of this Agreement in the absence of such termination, and whether or not the Leased Property, or any portion thereof, shall have been relet, shall be liable to Landlord for, and shall pay to Landlord, as current damages, the Rent and other charges which would be payable hereunder for the remainder of the Term had such termination not occurred, less the net proceeds, if any, of any reletting of the Leased Property, or any portion thereof, after deducting all reasonable expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys’ fees, advertising, expenses of employees, alteration costs and expenses of preparation for such reletting.  Tenant shall pay such current damages to Landlord monthly on the days on which the Minimum Rent would have been payable hereunder if this Agreement had not been so terminated with respect to such of the Leased Property.

At any time after such termination, whether or not Landlord shall have collected any such current damages, as liquidated final damages beyond the date of such termination, at Landlord’s election, Tenant shall pay to Landlord an amount equal to the present value (as reasonably determined by Landlord) of the

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

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

12.3        Tenant’s Waiver.  IF THIS AGREEMENT IS TERMINATED PURSUANT TO SECTION 12.1 OR 12.2, TENANT WAIVES, TO THE EXTENT PERMITTED BY LAW, ANY RIGHT TO A TRIAL BY JURY IN THE EVENT OF SUMMARY PROCEEDINGS TO ENFORCE THE REMEDIES SET FORTH IN THIS

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ARTICLE 12, AND THE BENEFIT OF ANY LAWS NOW OR HEREAFTER IN FORCE EXEMPTING PROPERTY FROM LIABILITY FOR RENT OR FOR DEBT.

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

12.5        Landlord’s Right to Cure Tenant’s Default.  If an Event of Default shall have occurred and be continuing, Landlord, after written notice to Tenant (provided that no such notice shall be required if Landlord shall reasonably determine immediate action is necessary to protect person or property), without waiving or releasing any obligation of Tenant and without waiving or releasing any Event of Default, may (but shall not be obligated to), at any time thereafter, make such payment or perform such act for the account and at the expense of Tenant, and may, to the extent permitted by law, enter upon the Leased Property, or any portion thereof, for such purpose and take all such action thereon as, in Landlord’s opinion, may be necessary or appropriate therefor, including the management of any Facility by Landlord or its designee, and Tenant hereby irrevocably appoints, in the event of such election by Landlord, Landlord or its designee as manager of any such Facility and its attorney in fact for such purpose, irrevocably and coupled with an interest in the name and stead of Tenant.  All costs and expenses (including, without limitation, reasonable attorneys’ fees) incurred by Landlord in connection therewith, together with interest thereon (to the extent permitted by law) at the Overdue Rate from the date such sums are paid by Landlord until repaid, shall be paid by Tenant to Landlord, on demand.

12.6        Trade Names.  If this Agreement is terminated with respect to any Property for any reason, Landlord shall, upon the request of Tenant, cause the name of the business conducted upon such Property to be changed to a name other than a Facility Trade Name or any approximation or abbreviation thereof and sufficiently dissimilar to such name as to be unlikely to cause confusion with such name; provided, however, that Tenant shall not thereafter use a Facility Trade Name in the same market in which such Property is located in connection with any business that competes with such Property or the Facility located thereon.

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ARTICLE 13

HOLDING OVER

Any holding over by Tenant after the expiration or sooner termination of this Agreement shall be treated as a daily tenancy at sufferance at a rate equal to two (2) times the Minimum Rent and other charges herein provided (prorated on a daily basis).  Tenant shall also pay to Landlord all damages (direct or indirect) sustained by reason of any such holding over.  Otherwise, such holding over shall be on the terms and conditions set forth in this Agreement, to the extent applicable.  Nothing contained herein shall constitute the consent, express or implied, of Landlord to the holding over of Tenant after the expiration or earlier termination of this Agreement.

ARTICLE 14

LANDLORD DEFAULT

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

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

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days after Landlord’s Notice of dispute, either may submit the matter for resolution in accordance with Article 22.

ARTICLE 15

PURCHASE RIGHTS

Landlord shall have the option to purchase Tenant’s Personal Property, at the expiration or sooner termination of this Agreement, for an amount equal to the then fair market value thereof (current replacement cost as determined by agreement of the parties or, in the absence of such agreement, appraisal), subject to, and with appropriate price adjustments for, all equipment leases, conditional sale contracts, UCC-1 financing statements and other encumbrances to which such Personal Property is subject.  Upon the expiration or sooner termination of this Agreement, Tenant shall use its reasonable efforts to transfer and assign, or cause to be transferred and assigned, to Landlord or its designee, or assist Landlord or its designee in obtaining, any contracts, licenses, and certificates required for the then operation of the Leased Property.  Notwithstanding the foregoing, Tenant expressly acknowledges and agrees that nothing contained in this Article 15 shall diminish, impair or otherwise modify Landlord’s rights under the Security Agreement and that any amounts paid by Landlord in order to purchase Tenant’s Personal Property in accordance with this Article 15 shall be applied first to Tenant’s current and past due obligations under this Agreement in such order as Landlord may reasonably determine or as may be prescribed by the laws of the State and any balance shall be paid to Tenant.

ARTICLE 16

SUBLETTING AND ASSIGNMENT

16.1        Subletting and Assignment.  Except as provided in Section 16.3, Tenant shall not, without Landlord’s prior written consent (which consent may be given or withheld in Landlord’s sole and absolute discretion), assign, mortgage, pledge, hypothecate, encumber or otherwise transfer this Agreement or sublease or permit the sublease (which term shall be deemed to include the granting of concessions, licenses and the like), of the Leased Property, or any portion thereof, or suffer or permit this Agreement or the leasehold estate created hereby or any other rights arising under this Agreement to be assigned, transferred, mortgaged, pledged, hypothecated or encumbered, in whole or in part, whether voluntarily, involuntarily or by operation of law, or permit the use or operation of the Leased Property, or any portion thereof, by anyone other than Tenant,

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any Manager approved by Landlord pursuant to the applicable provisions of this Agreement or residents and patients of Tenant, or the Leased Property, or any portion thereof, to be offered or advertised for assignment or subletting.

For purposes of this Section 16.1, an assignment of this Agreement shall be deemed to include, without limitation, any direct or indirect Change in Control of either or both of the Entities comprising Tenant.

If this Agreement is assigned or if the Leased Property, or any portion, thereof is sublet (or occupied by anybody other than Tenant or any Manager, their respective employees or residents or patients of Tenant), Landlord may collect the rents from such assignee, subtenant or occupant, as the case may be, and apply the net amount collected to the Rent herein reserved, but no such collection shall be deemed a waiver of the provisions set forth in the first paragraph of this Section 16.1, the acceptance by Landlord of such assignee, subtenant or occupant, as the case may be, as a tenant, or a release of Tenant from the future performance by Tenant of its covenants, agreements or obligations contained in this Agreement.

Any assignment or transfer of Tenant’s interest under this Agreement (including any sublease which is permitted pursuant to the terms of Section 16.3 below) shall be subject to such assignee’s or transferee’s delivery to Landlord of (i) a Guaranty, which Guaranty shall be in form and substance satisfactory to Landlord in its sole discretion and which Guaranty shall constitute an Incidental Document hereunder; (ii) a pledge of the stock, partnership, membership or other ownership interests of such assignee or other transferee to secure Tenant’s obligations under this Agreement and the Incidental Documents, which pledge shall be in form and substance satisfactory to Landlord in its sole discretion and which pledge shall constitute an Incidental Document hereunder; (iii) a security agreement granting Landlord a security interest in all of such assignee’s or transferee’s right, title and interest in and to any personal property, intangibles and fixtures (other than accounts receivable) with respect to any Property which is subject to any such assignment or transfer to secure Tenant’s obligations under this Agreement and the Incidental Documents, which security agreement shall be in form and substance satisfactory to Landlord in its sole discretion and which security agreement shall constitute an Incidental Document hereunder; and (iv) in the case of a sublease, an assignment which assigns all of such subtenant’s right, title and interest in such sublease to Landlord to secure Tenant’s obligations under this Agreement and the Incidental Documents,

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which assignment shall be in form and substance satisfactory to Landlord in its sole discretion and which assignment shall constitute an Incidental Document hereunder.

No subletting or assignment shall in any way impair the continuing primary liability of Tenant hereunder (unless Landlord and Tenant expressly otherwise agree that Tenant shall be released from all obligations hereunder), and no consent to any subletting or assignment in a particular instance shall be deemed to be a waiver of the prohibition set forth in this Section 16.1.  No assignment, subletting or occupancy shall affect any Permitted Use.  Any subletting, assignment or other transfer of Tenant’s interest under this Agreement in contravention of this Section 16.1 shall be voidable at Landlord’s option.

16.2        Required Sublease Provisions.  Any sublease of all or any portion of the Leased Property entered into on or after the date hereof shall provide (a) that it is subject and subordinate to this Agreement and to the matters to which this Agreement is or shall be subject or subordinate; (b) that in the event of termination of this Agreement or reentry or dispossession of Tenant by Landlord under this Agreement, Landlord may, at its option, terminate such sublease or take over all of the right, title and interest of Tenant, as sublessor under such sublease, and such subtenant shall, at Landlord’s option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that neither Landlord nor any Facility Mortgagee, as holder of a mortgage or as Landlord under this Agreement, if such mortgagee succeeds to that position, shall (i) be liable for any act or omission of Tenant under such sublease, (ii) be subject to any credit, counterclaim, offset or defense which theretofore accrued to such subtenant against Tenant, (iii) be bound by any previous modification of such sublease not consented to in writing by Landlord or by any previous prepayment of more than one (1) month’s rent, (iv) be bound by any covenant of Tenant to undertake or complete any construction of the applicable Property, or any portion thereof, (v) be required to account for any security deposit of the subtenant other than any security deposit actually delivered to Landlord by Tenant, (vi) be bound by any obligation to make any payment to such subtenant or grant any credits, except for services, repairs, maintenance and restoration provided for under the sublease that are performed after the date of such attornment, (vii) be responsible for any monies owing by Tenant to the credit of such subtenant unless actually delivered to Landlord by Tenant, or (viii) be required to remove any Person occupying any portion of the Leased Property; and (c), in the

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event that such subtenant receives a written Notice from Landlord or any Facility Mortgagee stating that an Event of Default has occurred and is continuing, such subtenant shall thereafter be obligated to pay all rentals accruing under such sublease directly to the party giving such Notice or as such party may direct.  All rentals received from such subtenant by Landlord or the Facility Mortgagee, as the case may be, shall be credited against the amounts owing by Tenant under this Agreement and such sublease shall provide that the subtenant thereunder shall, at the request of Landlord, execute a suitable instrument in confirmation of such agreement to attorn.  An original counterpart of each such sublease and assignment and assumption, duly executed by Tenant and such subtenant or assignee, as the case may be, in form and substance reasonably satisfactory to Landlord, shall be delivered promptly to Landlord and (a) in the case of an assignment, the assignee shall assume in writing and agree to keep and perform all of the terms of this Agreement on the part of Tenant to be kept and performed and shall be, and become, jointly and severally liable with Tenant for the performance thereof and (b) in case of either an assignment or subletting, Tenant shall remain primarily liable, as principal rather than as surety, for the prompt payment of the Rent and for the performance and observance of all of the covenants and conditions to be performed by Tenant hereunder.

The provisions of this Section 16.2 shall not be deemed a waiver of the provisions set forth in the first paragraph of Section 16.1.

16.3        Permitted Sublease.  Notwithstanding the foregoing, including, without limitation, Section 16.2, but subject to the provisions of Section 16.4 and any other express conditions or limitations set forth herein, Tenant may, in each instance after Notice to Landlord, (a) sublease space at any Property for laundry, commissary or child care purposes or other concessions in furtherance of the Permitted Use, so long as such subleases will not reduce the number of units at any Facility, will not violate or affect any Legal Requirement or Insurance Requirement, and Tenant shall provide such additional insurance coverage applicable to the activities to be conducted in such subleased space as Landlord and any Facility Mortgagee may reasonably require, and (b) enter into one or more subleases with wholly owned subsidiaries of Tenant with respect to the Leased Property, or any portion thereof, provided Tenant gives Landlord Notice of the material terms and conditions thereof, and provided further that any and all such sublease are transferred and assigned to Landlord as additional Security for

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Tenant’s obligations hereunder.  Landlord and Tenant acknowledge and agree that if Tenant enters into one (1) or more subleases with wholly owned subsidiaries of Tenant with respect to any Property, or any portion thereof, in accordance with the preceding clause (b), Tenant may allocate the rent and other charges with respect to the affected Property in any reasonable manner; provided, however, that such allocation shall not affect Tenant’s (nor any Guarantor’s) liability for the Rent and other obligations of Tenant under this Agreement; and, provided, further, that Tenant shall give Landlord prompt written notice of any allocation or reallocation of the rent and other charges with respect to the affected Property and, in any event, Tenant shall give Landlord written notice of the amount of such allocations at least ten (10) Business Days prior to the date that Landlord or Senior Housing Properties Trust is required to file any tax returns in any State where such affected Lease Property is located.

16.4        Sublease Limitation.  Anything contained in this Agreement to the contrary notwithstanding, Tenant shall not sublet the Leased Property, or any portion thereof, on any basis such that the rental to be paid by any sublessee thereunder would be based, in whole or in part, on the net income or profits derived by the business activities of such sublessee, any other formula such that any portion of such sublease rental would fail to qualify as “rents from real property within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto or would otherwise disqualify Landlord for treatment as a real estate investment trust.

ARTICLE 17

ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS

17.1        Estoppel Certificates.  At any time and from time to time, but not more than a reasonable number of times per year, upon not less than ten (10) Business Days prior Notice by either party, the party receiving such Notice shall furnish to the other an Officer’s Certificate certifying that this Agreement is unmodified and in full force and effect (or that this Agreement is in full force and effect as modified and setting forth the modifications), the date to which the Rent has been paid, that no Default or an Event of Default has occurred and is continuing or, if a Default or an Event of Default shall exist, specifying in reasonable detail the nature thereof, and the steps being taken to remedy the same, and such additional information as the requesting party may reasonably request.  Any such certificate furnished pursuant to this Section 17.1 may be relied upon by the requesting party, its lenders and any prospective purchaser

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or mortgagee of the Leased Property, or any portion thereof, or the leasehold estate created hereby.

17.2        Financial Statements.  Tenant shall furnish or cause Five Star to furnish, as applicable, the following statements to Landlord:

(a)           within forty-five (45) days after each of the first three fiscal quarters of any Fiscal Year, the most recent Consolidated Financials, accompanied by the Financial Officer’s Certificate;

(b)           within ninety (90) days after the end of each Fiscal Year, the most recent Consolidated Financials and financials of Tenant for such year, certified by an independent certified public accountant reasonably satisfactory to Landlord and accompanied by a Financial Officer’s Certificate;

(c)           Intentionally Deleted;

(d)           at any time and from time to time upon not less than twenty (20) days Notice from Landlord or such additional period as may be reasonable under the circumstances, any Consolidated Financials, Tenant financials or any other audited or unaudited financial reporting information required to be filed by Landlord with any securities and exchange commission, the SEC or any successor agency, or any other governmental authority, or required pursuant to any order issued by any court, governmental authority or arbitrator in any litigation to which Landlord is a party, for purposes of compliance therewith;

(e)           promptly, after receipt or sending thereof, copies of all notices given or received by Tenant under any Management Agreement; and

(f)            promptly, upon Notice from Landlord, such other information concerning the business, financial condition and affairs of Tenant or any Guarantor as Landlord reasonably may request from time to time.

Landlord may at any time, and from time to time, provide any Facility Mortgagee with copies of any of the foregoing statements, subject to Landlord obtaining the agreement of such Facility Mortgagee to maintain such statements and the information therein as confidential.

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17.3        Reimbursement, Licensure, Etc.  Tenant covenants and agrees to furnish to Landlord, within thirty (30) days after receipt or modification thereof, copies of:

(a)           all licenses authorizing Tenant or any Manager to operate any Facility for its Primary Intended Use;

(b)           all Medicare and Medicaid certifications, together with provider agreements and all material correspondence relating thereto with respect to each Facility (excluding, however, correspondence which may be subject to any attorney client privilege);

(c)           if required under Applicable Law with respect to any Facility, a license for each individual employed as administrator with respect to such Facility;

(d)           all reports of surveys, statements of deficiencies, plans of correction, and all material correspondence relating thereto, including, without limitation, all reports and material correspondence concerning compliance with or enforcement of licensure, Medicare/Medicaid, and accreditation requirements, including physical environment and Life Safety Code survey reports (excluding, however, correspondence which may be subject to any attorney client privilege); and

(e)           with reasonable promptness, such other confirmation as to the licensure and Medicare and Medicaid participation of Tenant as Landlord may reasonably request from time to time.

17.3.2     Monthly Reports.  Tenant shall prepare and furnish to Landlord for each Property, within thirty (30) days after the end of each calendar month during the term of this Agreement, a monthly report, such report to include (i) a balance sheet and a current month and year to date income statement, showing each item of actual and projected income and expense, reflecting the operating results of the Facility located at such Property, in each case prepared in accordance with GAAP, (ii) a statement of capital expenditures prepared on a Facility by Facility basis and on a combined basis, (iii) occupancy percentages, payor mix and average rate on a Facility by Facility basis and on a combined basis, and (iv) such additional information as Landlord may from time to time reasonably require.  Each monthly report shall be accompanied by a Financial Officer’s Certificate.

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ARTICLE 18

LANDLORD’S RIGHT TO INSPECT

Tenant shall permit Landlord and its authorized representatives to inspect the Leased Property, or any portion thereof, during usual business hours upon not less than forty-eight (48) hours’ notice and to make such repairs as Landlord is permitted or required to make pursuant to the terms of this Agreement, provided that any inspection or repair by Landlord or its representatives will not unreasonably interfere with Tenant’s use and operation of the Leased Property and further provided that in the event of an emergency, as determined by Landlord in its reasonable discretion, prior Notice shall not be necessary.

ARTICLE 19

EASEMENTS

19.1        Grant of Easements.  Provided no Event of Default has occurred and is continuing, Landlord will join in granting and, if necessary, modifying or abandoning such rights-of-way, easements and other interests as may be reasonably requested by Tenant for ingress and egress, and electric, telephone, gas, water, sewer and other utilities so long as:

(a)           the instrument creating, modifying or abandoning any such easement, right-of-way or other interest is satisfactory to and approved by Landlord (which approval shall not be unreasonably withheld, delayed or conditioned);

(b)           Landlord receives an Officer’s Certificate from Tenant stating (i) that such grant, modification or abandonment is not detrimental to the proper conduct of business on such Property, (ii) the consideration, if any, being paid for such grant, modification or abandonment (which consideration shall be paid by Tenant), (iii) that such grant, modification or abandonment does not impair the use or value of such Property for the Permitted Use, and (iv) that, for as long as this Agreement shall be in effect, Tenant will perform all obligations, if any, of Landlord under any such instrument; and

(c)           Landlord receives evidence satisfactory to Landlord that the Manager has granted its consent to such grant, modification or abandonment in accordance with the

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requirements of such Manager’s Management Agreement or that such consent is not required.

19.2        Exercise of Rights by Tenant.  So long as no Event of Default has occurred and is continuing, Tenant shall have the right to exercise all rights of Landlord under the Easement Agreements and, in connection therewith, Landlord shall execute and promptly return to Tenant such documents as Tenant shall reasonably request.  Tenant shall perform all obligations of Landlord under the Easement Agreements.

19.3        Permitted Encumbrances.  Any agreements entered into in accordance with this Article 19 shall be deemed a Permitted Encumbrance.

ARTICLE 20

FACILITY MORTGAGES

20.1        Landlord May Grant Liens.  Without the consent of Tenant, Landlord may, from time to time, directly or indirectly, create or otherwise cause to exist any lien, encumbrance or title retention agreement (“Encumbrance”) upon the Leased Property, or any portion thereof, or interest therein, whether to secure any borrowing or other means of financing or refinancing.

20.2        Subordination of Lease.  This Agreement and any and all rights of Tenant hereunder are and shall be subject and subordinate to any ground or master lease, and all renewals, extensions, modifications and replacements thereof, and to all mortgages and deeds of trust, which may now or hereafter affect the Leased Property, or any portion thereof, or any improvements thereon and/or any of such leases, whether or not such mortgages or deeds of trust shall also cover other lands and/or buildings and/or leases, to each and every advance made or hereafter to be made under such mortgages and deeds of trust, and to all renewals, modifications, replacements and extensions of such leases and such mortgages and deeds of trust and all consolidations of such mortgages and deeds of trust.  This section shall be self-operative and no further instrument of subordination shall be required.  In confirmation of such subordination, Tenant shall promptly execute, acknowledge and deliver any instrument that Landlord, the lessor under any such lease or the holder of any such mortgage or the trustee or beneficiary of any deed of trust or any of their respective successors in interest may reasonably request to evidence such subordination.  Any lease to which this Agreement is, at the time referred to, subject and subordinate is herein called

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“Superior Lease” and the lessor of a Superior Lease or its successor in interest at the time referred to is herein called “Superior Landlord” and any mortgage or deed of trust to which this Agreement is, at the time referred to, subject and subordinate is herein called “Superior Mortgage” and the holder, trustee or beneficiary of a Superior Mortgage is herein called “Superior Mortgagee”.  Tenant shall have no obligations under any Superior Lease or Superior Mortgage other than those expressly set forth in this Section 20.2.

If any Superior Landlord or Superior Mortgagee or the nominee or designee of any Superior Landlord or Superior Mortgagee shall succeed to the rights of Landlord under this Agreement (any such person, “Successor Landlord”), whether through possession or foreclosure action or delivery of a new lease or deed, or otherwise, at such Successor Landlord’s request, Tenant shall attorn to and recognize the Successor Landlord as Tenant’s landlord under this Agreement and Tenant shall promptly execute and deliver any instrument that such Successor Landlord may reasonably request to evidence such attornment (provided that such instrument does not alter the terms of this Agreement), whereupon, this Agreement shall continue in full force and effect as a direct lease between the Successor Landlord and Tenant upon all of the terms, conditions and covenants as are set forth in this Agreement, except that the Successor Landlord (unless formerly the landlord under this Agreement or its nominee or designee) shall not be (a) liable in any way to Tenant for any act or omission, neglect or default on the part of any prior Landlord under this Agreement, (b) responsible for any monies owing by or on deposit with any prior Landlord to the credit of Tenant (except to the extent actually paid or delivered to the Successor Landlord), (c) subject to any counterclaim or setoff which theretofore accrued to Tenant against any prior Landlord, (d) bound by any modification of this Agreement subsequent to such Superior Lease or Mortgage, or by any previous prepayment of Rent for more than one (1) month in advance of the date due hereunder, which was not approved in writing by the Superior Landlord or the Superior Mortgagee thereto, (e) liable to Tenant beyond the Successor Landlord’s interest in the Leased Property and the rents, income, receipts, revenues, issues and profits issuing from the Leased Property, (f) responsible for the performance of any work to be done by the Landlord under this Agreement to render the Leased Property ready for occupancy by Tenant (subject to Landlord’s obligations under Section 5.1.2(b) or with respect to any insurance or Condemnation proceeds), or (g) required to remove any Person occupying the Leased Property or any part thereof, except if such person claims by, through or under the Successor Landlord. 

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Tenant agrees at any time and from time to time to execute a suitable instrument in confirmation of Tenant’s agreement to attorn, as aforesaid and Landlord agrees to provide Tenant with an instrument of nondisturbance and attornment from each such Superior Mortgagee and Superior Landlord (other than the lessors under any ground leases with respect to the Leased Property, or any portion thereof) in form and substance reasonably satisfactory to Tenant.  Notwithstanding the foregoing, any Successor Landlord shall be liable (a) to pay to Tenant any amounts owed under Section 5.1.2(b), and (b) to pay to Tenant any portions of insurance proceeds or Awards received by Landlord or the Successor Landlord required to be paid to Tenant pursuant to the terms of this Agreement, and, as a condition to any mortgage, lien or lease in respect of the Leased Property, or any portion thereof, and the subordination of this Agreement thereto, the mortgagee, lienholder or lessor, as applicable, shall expressly agree, for the benefit of Tenant, to make such payments, which agreement shall be embodied in an instrument in form reasonably satisfactory to Tenant.

20.3        Notice to Mortgagee and Superior Landlord.  Subsequent to the receipt by Tenant of Notice from Landlord as to the identity of any Facility Mortgagee or Superior Landlord under a lease with Landlord, as ground lessee, which includes the Leased Property, or any portion thereof, as part of the demised premises and which complies with Section 20.1 (which Notice shall be accompanied by a copy of the applicable mortgage or lease), no Notice from Tenant to Landlord as to a default by Landlord under this Agreement shall be effective with respect to a Facility Mortgagee or Superior Landlord unless and until a copy of the same is given to such Facility Mortgagee or Superior Landlord at the address set forth in the above described Notice, and the curing of any of Landlord’s defaults within the applicable notice and cure periods set forth in Article 14 by such Facility Mortgagee or Superior Landlord shall be treated as performance by Landlord.

ARTICLE 21

ADDITIONAL COVENANTS OF TENANT

21.1        Prompt Payment of Indebtedness.  Tenant shall (a) pay or cause to be paid when due all payments of principal of and premium and interest on Tenant’s Indebtedness for money borrowed and shall not permit or suffer any such Indebtedness to become or remain in default beyond any applicable grace or cure period, (b) pay or cause to be paid when due all lawful claims for labor and rents with respect to the Leased Property, (c) pay or cause to be paid when due all trade payables and (d) pay or cause to

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be paid when due all other of Tenant’s Indebtedness upon which it is or becomes obligated, except, in each case, other than that referred to in clause (a), to the extent payment is being contested in good faith by appropriate proceedings in accordance with Article 8 and if Tenant shall have set aside on its books adequate reserves with respect thereto in accordance with GAAP, if appropriate, or unless and until foreclosure, distraint sale or other similar proceedings shall have been commenced.

21.2        Conduct of Business.  Tenant shall not engage in any business other than the leasing and operation of the Leased Property (including any incidental or ancillary business relating thereto) and shall do or cause to be done all things necessary to preserve, renew and keep in full force and effect and in good standing its corporate existence and its rights and licenses necessary to conduct such business.

21.3        Maintenance of Accounts and Records.  Tenant shall keep true records and books of account of Tenant in which full, true and correct entries will be made of dealings and transactions in relation to the business and affairs of Tenant in accordance with GAAP.  Tenant shall apply accounting principles in the preparation of the financial statements of Tenant which, in the judgment of and the opinion of its independent public accountants, are in accordance with GAAP, where applicable, except for changes approved by such independent public accountants.  Tenant shall provide to Landlord either in a footnote to the financial statements delivered under Section 17.2 which relate to the period in which such change occurs, or in separate schedules to such financial statements, information sufficient to show the effect of any such changes on such financial statements.

21.4        Notice of Litigation, Etc.  Tenant shall give prompt Notice to Landlord of any litigation or any administrative proceeding to which it may hereafter become a party of which Tenant has notice or actual knowledge which involves a potential liability equal to or greater than Two Hundred Fifty Thousand Dollars ($250,000) or which may otherwise result in any material adverse change in the business, operations, property, prospects, results of operation or condition, financial or other, of Tenant.  Forthwith upon Tenant obtaining knowledge of any Default, Event of Default or any default or event of default under any agreement relating to Indebtedness for money borrowed in an aggregate amount exceeding, at any one time, Two Hundred Fifty Thousand Dollars ($250,000), or any event or condition that would be required to be disclosed in a current report filed by Tenant on Form 8-K or in Part II of a quarterly report on Form 10-Q if Tenant were required to file such reports under the

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Securities Exchange Act of 1934, as amended, Tenant shall furnish Notice thereof to Landlord specifying the nature and period of existence thereof and what action Tenant has taken or is taking or proposes to take with respect thereto.

21.5        Indebtedness of Tenant.  Tenant shall not create, incur, assume or guarantee, or permit to exist, or become or remain liable directly or indirectly upon, any Indebtedness except the following:

(a)           Indebtedness of Tenant to Landlord;

(b)           Indebtedness of Tenant for Impositions, to the extent that payment thereof shall not at the time be required to be made in accordance with the provisions of Article 8;

(c)           Indebtedness of Tenant in respect of judgments or awards (i) which have been in force for less than the applicable appeal period and in respect of which execution thereof shall have been stayed pending such appeal or review, or (ii) which are fully covered by insurance payable to Tenant, or (iii) which are for an amount not in excess of $250,000 in the aggregate at any one time outstanding and (x) which have been in force for not longer than the applicable appeal period, so long as execution is not levied thereunder or (y) in respect of which an appeal or proceedings for review shall at the time be prosecuted in good faith in accordance with the provisions of Article 8, and in respect of which execution thereof shall have been stayed pending such appeal or review;

(d)           Unsecured borrowings of Tenant from its Affiliated Persons which are by their terms expressly subordinate pursuant to a Subordination Agreement to the payment and performance of Tenant’s obligations under this Agreement; or

(e)           Indebtedness for purchase money financing in accordance with Section 21.8 (a) and other operating liabilities incurred in the ordinary course of Tenant’s business;

(f)            Indebtedness of Tenant as guarantor or borrower secured by Liens permitted under Section 21.8(c); or

(g)           A guaranty of Five Star’s obligations under its revolving line of credit.

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21.6        Distributions, Payments to Affiliated Persons, Etc.  Tenant shall not declare, order, pay or make, directly or indirectly, any Distributions or any payment to any Affiliated Person of Tenant (including payments in the ordinary course of business) or set apart any sum or property therefor, or agree to do so, if, at the time of such proposed action, or immediately after giving effect thereto, any Event of Default shall have occurred and be continuing.  Otherwise, as long as no Event of Default shall have occurred and be continuing, Tenant may make Distributions and payments to Affiliated Persons; provided, however, that any such payments shall at all times be subordinate to Tenant’s obligations under this Agreement.

21.7        Prohibited Transactions.  Tenant shall not permit to exist or enter into any agreement or arrangement whereby it engages in a transaction of any kind with any Affiliated Person as to Tenant or any Guarantor, except on terms and conditions which are commercially reasonable.

21.8        Liens and Encumbrances.  Except as permitted by Section 7.1 and Section 21.5, Tenant shall not create or incur or suffer to be created or incurred or to exist any Lien on this Agreement or any of Tenant’s assets, properties, rights or income, or any of its interest therein, now or at any time hereafter owned, other than:

(a)           Security interests securing the purchase price of equipment or personal property whether acquired before or after the Commencement Date; provided, however, that (i) such Lien shall at all times be confined solely to the asset in question and (ii) the aggregate principal amount of Indebtedness secured by any such Lien shall not exceed the cost of acquisition or construction of the property subject thereto;

(b)           Permitted Encumbrances;

(c)           Security interests in Accounts or Chattel Paper, in Support Obligations, General Intangibles or Deposit Accounts relating to such Accounts or Chattel Paper, in any Instruments or Investment Property evidencing or arising from such Accounts or Chattel Paper, in any documents, books, records or other information (including, without limitation, computer programs, tapes, discs, punch cards, data processing software and related property and rights) maintained with respect to any property described in this Section 21.8(c) or in any Proceeds of any of the foregoing (capitalized terms used in this Section 21.8(c) without definition being used as defined in or for purposes of

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Article 9 of the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts); and

(d)           As permitted pursuant to Section 21.5.

21.9        Merger; Sale of Assets; Etc.  Without Landlord’s prior written consent (which consent may be given or withheld in Landlord’s sole discretion), neither Entity comprising Tenant shall (i) sell, lease (as lessor or sublessor), transfer or otherwise dispose of, or abandon, all or any material portion of its assets (including capital stock or other equity interests) or business to any Person, (ii) merge into or with or consolidate with any other Entity, or (iii) sell, lease (as lessor or sublessor), transfer or otherwise dispose of, or abandon, any personal property or fixtures or any real property; provided, however, that, notwithstanding the provisions of clause (iii) preceding, Tenant may dispose of equipment or fixtures which have become inadequate, obsolete, worn-out, unsuitable, undesirable or unnecessary, provided substitute equipment or fixtures having equal or greater value and utility (but not necessarily having the same function) have been provided.

21.10      Bankruptcy Remote Entities.  At Landlord’s request, Tenant shall make such amendments, modifications or other changes to its charter documents and governing bodies (including, without limitation, Tenant’s board of directors), and take such other actions, as may from time to time be necessary to qualify Tenant as a “bankruptcy remote entity”, provided that Landlord shall reimburse Tenant for all costs and expenses reasonably incurred by Tenant in connection with the making of such amendments or modifications.

21.11      Notice of Change of Name, Etc.  Tenant shall give prompt notice to Landlord of any change in (a) the name (operating or otherwise) of Tenant or any Facility, (b) the number of beds in any bed category for which any Facility is licensed or the number of beds in any bed category available for use at any Facility (except for changes in the election made with respect to the beds for reimbursement maximization purposes), and (c) the patient and/or child care services that are offered at any Facility.

ARTICLE 22

ARBITRATION

Landlord or Tenant may elect to submit any dispute hereunder that has an amount in controversy in excess of

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$250,000 to arbitration hereunder.  Any such arbitration shall be conducted in Boston, Massachusetts in accordance with the Commercial Arbitration Rules of the American Association then pertaining and the decision of the arbitrators with respect to such dispute shall be binding, final and conclusive on the parties.

In the event Landlord or Tenant shall elect to submit any such dispute to arbitration hereunder, Landlord and Tenant shall each appoint and pay all fees of a fit and impartial person as arbitrator with at least ten (10) years’ recent professional experience in the general subject matter of the dispute.  Notice of such appointment shall be sent in writing by each party to the other, and the arbitrators so appointed, in the event of their failure to agree within thirty (30) days after the appointment of the second arbitrator upon the matter so submitted, shall appoint a third arbitrator.  If either Landlord or Tenant shall fail to appoint an arbitrator, as aforesaid, for a period of twenty (20) days after written notice from the other party to make such appointment, then the arbitrator appointed by the party having made such appointment shall appoint a second arbitrator and the two (2) so appointed shall, in the event of their failure to agree upon any decision within thirty (30) days thereafter, appoint a third arbitrator.  If such arbitrators fail to agree upon a third arbitrator within forty five (45) days after the appointment of the second arbitrator, then such third arbitrator shall be appointed by the American Arbitration Association from its qualified panel of arbitrators, and shall be a person having at least ten (10) years’ recent professional experience as to the subject matter in question.  The fees of the third arbitrator and the expenses incident to the proceedings shall be borne equally between Landlord and Tenant, unless the arbitrators decide otherwise.  The fees of respective counsel engaged by the parties, and the fees of expert witnesses and other witnesses called for the parties, shall be paid by the respective party engaging such counsel or calling or engaging such witnesses.

The decision of the arbitrators shall be rendered within thirty (30) days after appointment of the third arbitrator.  Such decision shall be in writing and in duplicate, one counterpart thereof to be delivered to Landlord and one to Tenant.  A judgment of a court of competent jurisdiction may be entered upon the award of the arbitrators in accordance with the rules and statutes applicable thereto then obtaining.

Landlord and Tenant acknowledge and agree that, to the extent any such dispute shall involve any Manager and be subject to arbitration pursuant to such Manager’s Management Agreement,

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Landlord and Tenant shall cooperate to consolidate any such arbitration hereunder and under such Management Agreement into a single proceeding.

ARTICLE 23

MISCELLANEOUS

3.1          Limitation on Payment of Rent.  All agreements between Landlord and Tenant herein are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of Rent, or otherwise, shall the Rent or any other amounts payable to Landlord under this Agreement exceed the maximum permissible under applicable law, the benefit of which may be asserted by Tenant as a defense, and if, from any circumstance whatsoever, fulfillment of any provision of this Agreement, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law, or if from any circumstances Landlord should ever receive as fulfillment of such provision such an excessive amount, then, ipso facto, the amount which would be excessive shall be applied to the reduction of the installment(s) of Minimum Rent next due and not to the payment of such excessive amount.  This provision shall control every other provision of this Agreement and any other agreements between Landlord and Tenant.

23.2        No Waiver.  No failure by Landlord or Tenant to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no acceptance of full or partial payment of Rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term.  To the maximum extent permitted by law, no waiver of any breach shall affect or alter this Agreement, which shall continue in full force and effect with respect to any other then existing or subsequent breach.

23.3        Remedies Cumulative.  To the maximum extent permitted by law, each legal, equitable or contractual right, power and remedy of Landlord or Tenant, now or hereafter provided either in this Agreement or by statute or otherwise, shall be cumulative and concurrent and shall be in addition to every other right, power and remedy and the exercise or beginning of the exercise by Landlord or Tenant (as applicable) of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by Landlord of any or all of such other rights, powers and remedies.

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23.4        Severability.  Any clause, sentence, paragraph, section or provision of this Agreement held by a court of competent jurisdiction to be invalid, illegal or ineffective shall not impair, invalidate or  nullify the remainder of this Agreement, but rather the effect thereof shall be confined to the clause, sentence, paragraph, section or provision so held to be invalid, illegal or ineffective, and this Agreement shall be construed as if such invalid, illegal or ineffective provisions had never been contained therein.

23.5        Acceptance of Surrender.  No surrender to Landlord of this Agreement or of the Leased Property or any part thereof, or of any interest therein, shall be valid or effective unless agreed to and accepted in writing by Landlord and no act by Landlord or any representative or agent of Landlord, other than such a written acceptance by Landlord, shall constitute an acceptance of any such surrender.

23.6        No Merger of Title.  It is expressly acknowledged and agreed that it is the intent of the parties that there shall be no merger of this Agreement or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly this Agreement or the leasehold estate created hereby and the fee estate or ground landlord’s interest in the Leased Property.

23.7        Conveyance by Landlord.  If Landlord or any successor owner of all or any portion of the Leased Property shall convey all or any portion of the Leased Property in accordance with the terms hereof other than as security for a debt, and the grantee or transferee of such of the Leased Property shall expressly assume all obligations of Landlord hereunder arising or accruing from and after the date of such conveyance or transfer, Landlord or such successor owner, as the case may be, shall thereupon be released from all future liabilities and obligations of Landlord under this Agreement with respect to such of the Leased Property arising or accruing from and after the date of such conveyance or other transfer and all such future liabilities and obligations shall thereupon be binding upon the new owner.

23.8        Quiet Enjoyment.  Tenant shall peaceably and quietly have, hold and enjoy the Leased Property for the Term, free of hindrance or molestation by Landlord or anyone claiming by, through or under Landlord, but subject to (a) any Encumbrance permitted under Article 20 or otherwise permitted to be created by Landlord hereunder, (b) all Permitted Encumbrances, (c) liens as to obligations of Landlord that are either not yet due or which are being contested in good faith and by proper proceedings, provided the same do not materially interfere with

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Tenant’s ability to operate any Facility and (d) liens that have been consented to in writing by Tenant.  Except as otherwise provided in this Agreement, no failure by Landlord to comply with the foregoing covenant shall give Tenant any right to cancel or terminate this Agreement or abate, reduce or make a deduction from or offset against the Rent or any other sum payable under this Agreement, or to fail to perform any other obligation of Tenant hereunder.

23.9        No Recordation.  Neither Landlord nor Tenant shall record this Agreement.

23.10      Notices.

(a)           Any and all notices, demands, consents, approvals, offers, elections and other communications required or permitted under this Agreement shall be deemed adequately given if in writing and the same shall be delivered either in hand, by telecopier with written acknowledgment of receipt, or by mail or Federal Express or similar expedited commercial carrier, addressed to the recipient of the notice, postpaid and registered or certified with return receipt requested (if by mail), or with all freight charges prepaid (if by Federal Express or similar carrier).

(b)           All notices required or permitted to be sent hereunder shall be deemed to have been given for all purposes of this Agreement upon the date of acknowledged receipt, in the case of a notice by telecopier, and, in all other cases, upon the date of receipt or refusal, except that whenever under this Agreement a notice is either received on a day which is not a Business Day or is required to be delivered on or before a specific day which is not a Business Day, the day of receipt or required delivery shall automatically be extended to the next Business Day.

(c)           All such notices shall be addressed,

if to Landlord:

c/o Senior Housing Properties Trust
400 Centre Street
Newton, Massachusetts  02458
Attn:  Mr. David J. Hegarty
[Telecopier No. (617) 796-8349]

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if to Tenant to:

c/o Five Star Quality Care, Inc.
400 Centre Street
Newton, Massachusetts  02458
Attn:  Evrett W. Benton
[Telecopier No. (617) 796-8385]

(d)           By notice given as herein provided, the parties hereto and their respective successors and assigns shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses effective upon receipt by the other parties of such notice and each shall have the right to specify as its address any other address within the United States of America.

23.11      Construction.  Anything contained in this Agreement to the contrary notwithstanding, all claims against, and liabilities of, Tenant or Landlord arising prior to any date of termination or expiration of this Agreement with respect to the Leased Property shall survive such termination or expiration.  In no event shall Landlord be liable for any consequential damages suffered by Tenant as the result of a breach of this Agreement by Landlord.  Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated except by an instrument in writing signed by the party to be charged.  All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Each term or provision of this Agreement to be performed by Tenant shall be construed as an independent covenant and condition.  Time is of the essence with respect to the provisions of this Agreement.  Except as otherwise set forth in this Agreement, any obligations of Tenant (including without limitation, any monetary, repair and indemnification obligations) and Landlord shall survive the expiration or sooner termination of this Agreement.  Each Entity comprising Tenant hereunder shall be jointly and severally liable for the payment and performance of with each and every obligation and liability of Tenant hereunder.

23.12      Counterparts; Headings.  This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but which, when taken together, shall constitute but one instrument and shall become effective as of the date hereof when copies hereof, which, when taken together, bear the signatures of each of the parties hereto shall have been signed.  Headings in this Agreement are for purposes of reference only and shall not limit or affect the meaning of the provisions hereof.

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23.13      Applicable Law, Etc.  This Agreement shall be interpreted, construed, applied and enforced in accordance with the laws of The Commonwealth of Massachusetts applicable to contracts between residents of Massachusetts which are to be performed entirely within Massachusetts, regardless of (i) where this Agreement is executed or delivered; or (ii) where any payment or other performance required by this Agreement is made or required to be made; or (iii) where any breach of any provision of this Agreement occurs, or any cause of action otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, citizenship, domicile, principal place of business, or jurisdiction of organization or domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise would apply the laws of a jurisdiction other than Massachusetts; or (vii) any combination of the foregoing.  Notwithstanding the foregoing, the laws of the State shall apply to the perfection and priority of liens upon and the disposition of any Property.

23.14      Right to Make Agreement.  Each party warrants, with respect to itself, that neither the execution of this Agreement, nor the consummation of any transaction contemplated hereby, shall violate any provision of any law, or any judgment, writ, injunction, order or decree of any court or governmental authority having jurisdiction over it; nor result in or constitute a breach or default under any indenture, contract, other commitment or restriction to which it is a party or by which it is bound; nor require any consent, vote or approval which has not been given or taken, or at the time of the transaction involved shall not have been given or taken.  Each party covenants that it has and will continue to have throughout the term of this Agreement and any extensions thereof, the full right to enter into this Agreement and perform its obligations hereunder.

23.15      Attorneys’ Fees.  If any lawsuit or arbitration or other legal proceeding arises in connection with the interpretation or enforcement of this Agreement, the prevailing party therein shall be entitled to receive from the other party the prevailing party’s costs and expenses, including reasonable attorneys’ fees incurred in connection therewith, in preparation therefor and on appeal therefrom, which amounts shall be included in any judgment therein.

23.16      Nonliability of Trustees.  THE DECLARATIONS OF TRUST ESTABLISHING CERTAIN ENTITIES COMPRISING LANDLORD, COPIES OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (COLLECTIVELY, THE “DECLARATIONS”), ARE DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDE THAT

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THE NAMES OF SUCH ENTITIES REFER TO THE TRUSTEES UNDER SUCH DECLARATIONS COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SUCH ENTITIES SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, SUCH ENTITIES.  ALL PERSONS DEALING WITH SUCH ENTITIES, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF SUCH ENTITIES FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

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

LANDLORD:
HRES1 PROPERTIES TRUST
By:	/s/ David J. Hegarty
	David J. Hegarty, President
TENANT:
FS PATRIOT LLC
By:	/s/ Evrett W. Benton
	Evrett W. Benton
	President
FS COMMONWEALTH LLC
By:	/s/ Evrett W. Benton
	Evrett W. Benton
	President

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The following exhibits have been omitted and will be supplementally furnished to the Securities and Exchange Commission upon request:

EXHIBITS A-1 through A-2

EX-10.53

Exhibit 10.53

AMENDED AND RESTATED GUARANTY AGREEMENT

THIS AMENDED AND RESTATED GUARANTY AGREEMENT (this “Agreement”) is entered into as of October 1, 2006 by FIVE STAR QUALITY CARE, INC., a Maryland corporation (the “Guarantor”), for the benefit of SENIOR HOUSING PROPERTIES TRUST, a Maryland real estate investment trust (together with its successors and assigns, “SNH”), and HRES1 PROPERTIES TRUST, a Maryland real estate investment trust (together with its successors and assigns, the “Landlord” and, together with SNH, collectively, the “Beneficiaries”).

W I T N E S S E T H :

WHEREAS, pursuant to a Master Lease Agreement, dated as of March 3, 2006 (as amended to date, the “Original Lease”), the Landlord leased to FS PATRIOT LLC and FS COMMONWEALTH LLC, each a Maryland limited liability company, jointly and severally (the “Tenant”) certain real property, together with certain related improvements and personal property, as more particularly described in the Original Lease; and

WHEREAS, the Guarantor and the Beneficiaries are parties to that certain Guaranty Agreement, dated as of March 3, 2006 (the “Original Guaranty”), executed in connection with the Original Lease; and

WHEREAS, Landlord and Tenant have entered into that certain Amended and Restated Master Lease Agreement, dated as of the date hereof (the “New Lease”), which amends and restates the Original Lease in its entirety; and

WHEREAS, the Guarantor and the Beneficiaries wish to amend and restate the Original Guaranty to clarify that the Guarantor guarantees all of the payment and performance obligations of the Tenant with respect to the New Lease;

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, the Guarantor hereby agrees as follows:

1.             Certain Terms.  Capitalized terms used and not otherwise defined in this Agreement shall have the meanings ascribed to such terms in the New Lease.  The New Lease and the Incidental Documents are herein collectively referred to as the “Transaction Documents.”

2.             Guaranteed Obligations.  For purposes of this Agreement, the term “Guaranteed Obligations” shall mean (i) the payment and performance of each and every obligation of the Tenant to the Landlord under the Transaction Documents or relating thereto, whether now existing or hereafter arising, and including, without limitation, the payment of the full amount of the Rent payable under the New Lease and (ii) the repayment to the Landlord and its Affiliated Persons of any and all amounts from time to time advanced or incurred by the Landlord or such Affiliated Persons in connection with any guaranty or other agreement provided by the Landlord or such Affiliated Persons to any Governmental Agency to facilitate the licensing of any Facility located upon the Leased Property.

3.             Representations and Covenants.  The Guarantor represents, warrants, covenants, and agrees that:

3.1  Incorporation of Representations and Warranties.  The representations and warranties of the Tenant and its Affiliated Persons set forth in the Transaction Documents are true and correct on and as of the date hereof in all material respects.

3.2  Performance of Covenants and Agreements.  The Guarantor hereby agrees to take all lawful action in its power to cause the Tenant duly and punctually to perform all of the covenants and agreements set forth in the Transaction Documents.

3.3  Validity of Agreement.  The Guarantor has duly and validly executed and delivered this Agreement; this Agreement constitutes the legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, except as the enforceability thereof may be subject to bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights generally and subject to general equitable principles, regardless of whether enforceability is considered in a proceeding at law or in equity; and the execution, delivery and performance of this Agreement have been duly authorized by all requisite action of the Guarantor and such execution, delivery and performance by the Guarantor will not result in any breach of the terms, conditions or provisions of, or conflict with or constitute a default under, or result in the creation of any lien, charge or encumbrance upon any of the property or assets of the Guarantor pursuant to the terms of, any indenture, mortgage, deed of trust, note, other evidence of indebtedness, agreement or other instrument to which it may be a party or by which it or any of its property or assets may be bound, or violate any provision of law, or any applicable order,

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writ, injunction, judgment or decree of any court or any order or other public regulation of any governmental commission, bureau or administrative agency.

3.4  Payment of Expenses.  The Guarantor agrees, as principal obligor and not as guarantor only, to pay to the Beneficiaries forthwith, upon demand, in immediately available federal funds, all costs and expenses (including reasonable attorneys’ fees and disbursements) incurred or expended by the Beneficiaries in connection with the enforcement of this Agreement, together with interest on amounts recoverable under this Agreement from the time such amounts become due until payment at the Overdue Rate.  The Guarantor’s covenants and agreements set forth in this Section 3.4 shall survive the termination of this Agreement.

3.5  Notices.  The Guarantor shall promptly give notice to the Beneficiaries of any event known to it which might reasonably result in a material adverse change in its financial condition.

3.6  Reports.  The Guarantor shall promptly provide to the Landlord each of the financial reports, certificates and other documents required of it under the Transaction Documents.

3.7  Books and Records.  The Guarantor shall at all times keep proper books of record and account in which full, true and correct entries shall be made of its transactions in accordance with generally accepted accounting principles and shall set aside on its books from its earnings for each fiscal year all such proper reserves, including reserves for depreciation, depletion, obsolescence and amortization of its properties during such fiscal year, as shall be required in accordance with generally accepted accounting principles, consistently applied, in connection with its business.  The Guarantor shall permit access by the Beneficiaries and their agents to the books and records maintained by the Guarantor during normal business hours and upon reasonable notice.  Any proprietary information obtained by Landlord with respect to the Guarantor pursuant to the provisions of this Agreement shall be treated as confidential, except that such information may be disclosed or used, subject to appropriate confidentiality safeguards, pursuant to any court order or in any litigation between the parties and except further that Landlord may disclose such information to its prospective lenders, provided that Landlord shall direct such lenders to maintain such information as confidential.

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3.8  Taxes, Etc.  The Guarantor shall pay and discharge promptly as they become due and payable all taxes, assessments and other governmental charges or levies imposed upon the Guarantor or the income of the Guarantor or upon any of the property, real, personal or mixed, of the Guarantor, or upon any part thereof, as well as all claims of any kind (including claims for labor, materials and supplies) which, if unpaid, might by law become a lien or charge upon any property and result in a material adverse change in the financial condition of the Guarantor; provided, however, that the Guarantor shall not be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings or other appropriate actions promptly initiated and diligently conducted and if the Guarantor shall have set aside on its books such reserves of the Guarantor, if any, with respect thereto as are required by generally accepted accounting principles.

3.9  Legal Existence of Guarantor. The Guarantor shall do or cause to be done all things necessary to preserve and keep in full force and effect its legal existence.

3.10  Compliance.  The Guarantor shall use reasonable business efforts to comply in all material respects with all applicable statutes, rules, regulations and orders of, and all applicable restrictions imposed by, all governmental authorities in respect of the conduct of its business and the ownership of its property (including, without limitation, applicable statutes, rules, regulations, orders and restrictions relating to environmental, safety and other similar standards or controls).

3.11  Insurance.  The Guarantor shall maintain, with financially sound and reputable insurers, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by owners of established reputation engaged in the same or similar businesses and similarly situated, in such amounts and by such methods as shall be customary for such owners and deemed adequate by the Guarantor.

3.12  No Change in Control.  The Guarantor shall not permit the occurrence of any direct or indirect Change in Control of either or both of the Entities comprising the Tenant or the Guarantor.

4.             Guarantee.  The Guarantor hereby unconditionally guarantees that the Guaranteed Obligations which are monetary obligations shall be paid in full when due and payable, whether

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upon demand, at the stated or accelerated maturity thereof pursuant to any Transaction Document, or otherwise, and that the Guaranteed Obligations which are performance obligations shall be fully performed at the times and in the manner such performance is required by the Transaction Documents.  With respect to the Guaranteed Obligations which are monetary obligations, this guarantee is a guarantee of payment and not of collectibility and is absolute and in no way conditional or contingent.  In case any part of the Guaranteed Obligations shall not have been paid when due and payable or performed at the time performance is required, the Guarantor shall, in the case of monetary obligations, within five (5) Business Days after receipt of notice from the applicable Beneficiary, pay or cause to be paid to such Beneficiary the amount thereof as is then due and payable and unpaid (including interest and other charges, if any, due thereon through the date of payment in accordance with the applicable provisions of the Transaction Documents) or, in the case of nonmonetary obligations, perform or cause to be performed such obligations in accordance with the Transaction Documents.

5.             Set-Off.  The Guarantor hereby authorizes the Landlord, at any time and without notice to set off the whole or any portion or portions of any or all sums credited by or due from the Landlord to it against amounts payable under this Agreement.  The Landlord shall promptly notify the Guarantor of any such set-off made by the Landlord and the application made by the Landlord of the proceeds thereof.

6.             Unenforceability of Guaranteed Obligations, Etc.  If the Tenant is for any reason under no legal obligation to discharge any of the Guaranteed Obligations (other than because the same have been previously discharged in accordance with the terms of the Transaction Documents), or if any other moneys included in the Guaranteed Obligations have become unrecoverable from the Tenant by operation of law or for any other reason, including, without limitation, the invalidity or irregularity in whole or in part of any Guaranteed Obligation or of any Transaction Document or any limitation on the liability of the Tenant thereunder not contemplated by the Transaction Documents or any limitation on the method or terms of payment thereunder which may now or hereafter be caused or imposed in any manner whatsoever, the guarantees contained in this Agreement shall nevertheless remain in full force and effect and shall be binding upon the Guarantor to the same extent as if the Guarantor at all times had been the principal debtor on all such Guaranteed Obligations.

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7.             Additional Guarantees.  This Agreement shall be in addition to any other guarantee or other security for the Guaranteed Obligations and it shall not be prejudiced or rendered unenforceable by the invalidity of any such other guarantee or security or by any waiver, amendment, release or modification thereof.

8.             Consents and Waivers, Etc.  The Guarantor hereby acknowledges receipt of correct and complete copies of each of the Transaction Documents, and consents to all of the terms and provisions thereof, as the same may be from time to time hereafter amended or changed in accordance with the terms and conditions thereof, and, except as otherwise provided herein, to the maximum extent permitted by applicable law, waives (a) presentment, demand for payment, and protest of nonpayment, of any principal of or interest on any of the Guaranteed Obligations, (b) notice of acceptance of this Agreement and of diligence, presentment, demand and protest, (c) notice of any default hereunder and any default, breach or nonperformance or Event of Default under any of the Guaranteed Obligations or the Transaction Documents, (d) notice of the terms, time and place of any private or public sale of any collateral held as security for the Guaranteed Obligations, (e) demand for performance or observance of, and any enforcement of any provision of, or any pursuit or exhaustion of rights or remedies against the Tenant or any other guarantor of the Guaranteed Obligations, under or pursuant to the Transaction Documents, or any agreement directly or indirectly relating thereto and any requirements of diligence or promptness on the part of the holders of the Guaranteed Obligations in connection therewith, and (f) to the extent the Guarantor lawfully may do so, any and all demands and notices of every kind and description with respect to the foregoing or which may be required to be given by any statute or rule of law and any defense of any kind which it may now or hereafter have with respect to this Agreement, or any of the Transaction Documents or the Guaranteed Obligations (other than that the same have been discharged in accordance with the Transaction Documents).

9.             No Impairment, Etc.  The obligations, covenants, agreements and duties of the Guarantor under this Agreement shall not be affected or impaired by any assignment or transfer in whole or in part of any of the Guaranteed Obligations without notice to the Guarantor, or any waiver by either Beneficiary or any holder of any of the Guaranteed Obligations or by the holders of all of the Guaranteed Obligations of the performance or observance by the Tenant or any other guarantor of any of the agreements, covenants, terms or conditions contained in the

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Guaranteed Obligations or the Transaction Documents or any indulgence in or the extension of the time for payment by the Tenant or any other guarantor of any amounts payable under or in connection with the Guaranteed Obligations or the Transaction Documents or any other instrument or agreement relating to the Guaranteed Obligations or of the time for performance by the Tenant or any other guarantor of any other obligations under or arising out of any of the foregoing or the extension or renewal thereof (except that with respect to any extension of time for payment or performance of any of the Guaranteed Obligations granted by the Landlord or any other holder of such Guaranteed Obligations to the Tenant, the Guarantor’s obligations to pay or perform such Guaranteed Obligation shall be subject to the same extension of time for performance), or the modification or amendment (whether material or otherwise) of any duty, agreement or obligation of the Tenant or any other guarantor set forth in any of the foregoing, or the voluntary or involuntary sale or other disposition of all or substantially all the assets of the Tenant or any other guarantor or insolvency, bankruptcy, or other similar proceedings affecting the Tenant or any other guarantor or any assets of the Tenant or any such other guarantor, or the release or discharge of the Tenant or any such other guarantor from the performance or observance of any agreement, covenant, term or condition contained in any of the foregoing without the consent of the holders of the Guaranteed Obligations by operation of law, or any other cause, whether similar or dissimilar to the foregoing.

10.          Reimbursement, Subrogation, Etc.  The Guarantor hereby covenants and agrees that it will not enforce or otherwise exercise any rights of reimbursement, subrogation, contribution or other similar rights against the Tenant (or any other person against whom the Landlord may proceed) with respect to the Guaranteed Obligations prior to the payment in full of all amounts owing with respect to the New Lease, and until all indebtedness of the Tenant to the Landlord shall have been paid in full, the Guarantor shall not have any right of subrogation, and the Guarantor waives any defense it may have based upon any election of remedies by the Landlord which destroys its subrogation rights or its rights to proceed against the Tenant for reimbursement, including, without limitation, any loss of rights the Guarantor may suffer by reason of any rights, powers or remedies of the Tenant in connection with any anti-deficiency laws or any other laws limiting, qualifying or discharging the indebtedness to the Landlord.  Until all obligations of the Tenant pursuant to the Transaction Documents shall have been paid and satisfied in full, the Guarantor further waives any right to enforce any remedy which the Landlord now has or may in

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the future have against the Tenant, any other guarantor or any other person and any benefit of, or any right to participate in, any security whatsoever now or in the future held by the Landlord.

11.          Defeasance.  This Agreement shall terminate at such time as the Guaranteed Obligations have been paid and performed in full and all other obligations of the Guarantor to the Beneficiaries under this Agreement have been satisfied in full; provided, however, if at any time, all or any part of any payment applied on account of the Guaranteed Obligations is or must be rescinded or returned for any reason whatsoever (including, without limitation, the insolvency, bankruptcy or reorganization of any of the Entities comprising the Tenant), this Agreement, to the extent such payment is or must be rescinded or returned, shall be deemed to have continued in existence notwithstanding any such termination.

12.          Notices.  (a)  Any and all notices, demands, consents, approvals, offers, elections and other communications required or permitted under this Agreement shall be deemed adequately given if in writing and the same shall be delivered either in hand, by telecopier with written acknowledgment of receipt, or by mail or Federal Express or similar expedited commercial carrier, addressed to the recipient of the notice, postpaid and registered or certified with return receipt requested (if by mail), or with all freight charges prepaid (if by Federal Express or similar carrier).

(b)  All notices required or permitted to be sent hereunder shall be deemed to have been given for all purposes of this Agreement upon the date of acknowledged receipt, in the case of a notice by telecopier, and, in all other cases, upon the date of receipt or refusal, except that whenever under this Agreement a notice is either received on a day which is not a Business Day or is required to be delivered on or before a specific day which is not a Business Day, the day of receipt or required delivery shall automatically be extended to the next Business Day.

(c)	All such notices shall be addressed,
if to either Beneficiary:
	Senior Housing Properties Trust
	400 Centre Street
	Newton, Massachusetts 02458
	Attn: Mr. David J. Hegarty
	[Telecopier No. (617) 796-8349]

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if to the Guarantor to:
	Five Star Quality Care, Inc.
	400 Centre Street
	Newton, Massachusetts 02458
	Attn: Mr. Evrett W. Benton
	[Telecopier No. (617) 796-8385]

(d)  By notice given as herein provided, the parties hereto and their respective successors and assigns shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses effective upon receipt by the other parties of such notice and each shall have the right to specify as its address any other address within the United States of America.

13.          Successors and Assigns.  Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party, including without limitation the holders, from time to time, of the Guaranteed Obligations; and all representations, warranties, covenants and agreements by or on behalf of the Guarantor which are contained in this Agreement shall inure to the benefit of the Landlord’s successors and assigns, including without limitation said holders, whether so expressed or not.

14.          Applicable Law.  Except as to matters regarding the internal affairs of the Beneficiaries and issues of or limitations on any personal liability of the shareholders and trustees of the Beneficiaries for obligations of the Beneficiaries, as to which the laws of the State of Maryland shall govern, this Agreement, the Transaction Documents and any other instruments executed and delivered to evidence, complete or perfect the transactions contemplated hereby and thereby shall be interpreted, construed, applied and enforced in accordance with the laws of The Commonwealth of Massachusetts applicable to contracts between residents of Massachusetts which are to be performed entirely within Massachusetts, regardless of (i) where any such instrument is executed or delivered; or (ii) where any payment or other performance required by any such instrument is made or required to be made; or (iii) where any breach of any provision of any such instrument occurs, or any cause of action otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, citizenship, domicile, principal place of business, or jurisdiction of organization or domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise would apply the laws of a jurisdiction other than The

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Commonwealth of Massachusetts; or (vii) any combination of the foregoing.

15.          Arbitration.  Either Beneficiary or the Guarantor may elect to submit to arbitration any dispute hereunder that has an amount in controversy in excess of $250,000.  Any such arbitration shall be conducted in Boston, Massachusetts in accordance with the Commercial Arbitration Rules of the American Arbitration Association then pertaining and the decision of the arbitrators with respect to such dispute shall be binding, final and conclusive on the parties.

In the event that any such dispute is submitted to arbitration hereunder, the applicable Beneficiary and the Guarantor shall each appoint and pay all fees of a fit and impartial person as arbitrator with at least ten (10) years’ recent professional experience in the general subject matter of the dispute.  Notice of such appointment shall be sent in writing by each party to the other, and the arbitrators so appointed, in the event of their failure to agree within thirty (30) days after the appointment of the second arbitrator upon the matter so submitted, shall appoint a third arbitrator.  If either the Landlord or the Guarantor shall fail to appoint an arbitrator as aforesaid for a period of twenty (20) days after written notice from the other party to make such appointment, then the arbitrator appointed by the party having made such appointment shall appoint a second arbitrator and the two (2) so appointed shall, in the event of their failure to agree upon any decision within thirty (30) days thereafter, appoint a third arbitrator.  If such arbitrators fail to agree upon a third arbitrator within forty five (45) days after the appointment of the second arbitrator, then such third arbitrator shall be appointed by the American Arbitration Association from its qualified panel of arbitrators, and shall be a person having at least ten (10) years’ recent professional experience as to the subject matter in question.  The fees of the third arbitrator and the expenses incident to the proceedings shall be borne equally between the applicable Beneficiary and the Guarantor, unless the arbitrators decide otherwise.  The fees of respective counsel engaged by the parties, and the fees of expert witnesses and other witnesses called for the parties, shall be paid by the respective party engaging such counsel or calling or engaging such witnesses.

The decision of the arbitrators shall be rendered within thirty (30) days after appointment of the third arbitrator.  Such decision shall be in writing and in duplicate, one counterpart thereof to be delivered to the applicable Beneficiary and one to the Guarantor.  A judgment of a court of

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competent jurisdiction may be entered upon the award of the arbitrators in accordance with the rules and statutes applicable thereto then obtaining.

The Landlord and the Guarantor acknowledge and agree that, to the extent any such dispute shall involve any Manager and be subject to arbitration pursuant to such Manager’s Management Agreement, the Landlord and the Guarantor shall cooperate to consolidate any such arbitration hereunder and under such Management Agreement into a single proceeding.

16.          Modification of Agreement.  No modification or waiver of any provision of this Agreement, nor any consent to any departure by the Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Beneficiaries, and such modification, waiver or consent shall be effective only in the specific instances and for the purpose for which given.  No notice to or demand on the Guarantor in any case shall entitle the Guarantor to any other or further notice or demand in the same, similar or other circumstances.  This Agreement may not be amended except by an instrument in writing executed by or on behalf of the party against whom enforcement of such amendment is sought.

17.          Waiver of Rights by the Beneficiaries.  Neither any failure nor any delay on the Beneficiaries’ part in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise or the exercise of any other right, power or privilege.

18.          Severability.  In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby, but this Agreement shall be reformed and construed and enforced to the maximum extent permitted by applicable law.

19.          Entire Contract.  This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and shall supersede and take the place of any other instruments purporting to be an agreement of the parties hereto relating to the subject matter hereof.

20.          Headings; Counterparts.  Headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof.  This Agreement may be executed in any number of counterparts, each of which shall be

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an original, but all of which together shall constitute one instrument, and in pleading or proving any provision of this Agreement, it shall not be necessary to produce more than one of such counterparts.

21.          Remedies Cumulative.  No remedy herein conferred upon the Beneficiaries is intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise.

22.          NON-LIABILITY OF TRUSTEES. THE DECLARATION OF TRUST ESTABLISHING THE BENEFICIARIES, COPIES OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE “DECLARATION”), ARE DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDE THAT THE NAMES “SNH PROPERTIES TRUST” AND “HRES1 PROPERTIES TRUST” REFER TO THE TRUSTEES UNDER THE DECLARATIONS COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF EITHER BENEFICIARY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF OR CLAIM AGAINST, SUCH BENEFICIARY.  ALL PERSONS DEALING WITH THE BENEFICIARIES, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE BENEFICIARIES FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

WITNESS the execution hereof under seal as of the date above first written.

FIVE STAR QUALITY CARE, INC.,

a Maryland corporation

/s/ Evrett W. Benton

By: Evrett W. Benton

Its: President

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EX-10.54

Exhibit 10.54

AMENDED AND RESTATED SECURITY AGREEMENT

THIS AMENDED AND RESTATED SECURITY AGREEMENT (this “Agreement”) is entered into as of October 1, 2006, by FS PATRIOT LLC and FS COMMONWEALTH LLC, each a Maryland limited liability company, jointly and severally, (the “Tenant”), and HRES1 PROPERTIES TRUST, a Maryland real estate investment trust (the “Secured Party”).

W I T N E S S E T H:

WHEREAS, pursuant to a Master Lease Agreement, dated as of March 3, 2006 (as amended to date, the “Original Lease”), the Secured Party leased to the Tenant and the Tenant leased from the Secured Party, certain premises as more particularly described in the Original Lease, subject to and upon the terms and conditions set forth in the Original Lease; and

WHEREAS, the Secured Party and the Tenant are parties to that certain Security Agreement, dated as of March 3, 2006 (the “Original Security Agreement”), executed in connection with the Original Lease; and

WHEREAS, the Secured Party and the Tenant have entered into that certain Amended and Restated Master Lease Agreement, dated as of the date hereof (the “New Lease”), which amends and restates the Original Lease in its entirety; and

WHEREAS, the Secured Party and the Tenant wish to amend and restate the Original Security Agreement to clarify that the Tenant has agreed to grant to the Secured Party a first and perfected lien and security interest in the Collateral as security for the payment and performance of each and every obligation and liability of the Tenant to the Secured Party, whether now existing or hereafter arising, under the New Lease or any other document or agreement executed and delivered pursuant thereto, including, without limitation, the payment of the Rent (this and other capitalized terms used and not otherwise defined herein having the meanings ascribed to such terms in Section 1), and the payment and performance of each and every other obligation of the Tenant to the Secured Party, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, due or to become due (collectively, the “Obligations”);

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, the parties hereto hereby agree as follows:

Section 1.  Definitions.  As used in this Agreement, the following terms shall have the meanings specified below.  Except as otherwise defined, terms defined in the Uniform Commercial Code and used herein without definition shall have the meanings given such terms in the Uniform Commercial Code.

“Affiliated Person” shall have the meaning given such term in the New Lease.

“Business Day” shall have the meaning given such term in the New Lease.

“Collateral” shall mean all of the Tenant’s right, title and interest in and under or arising out of all and any personal property, intangibles and fixtures of any type or description (other than Excluded Collateral), wherever located and now existing or hereafter arising, or which constitute or arise from the operation, maintenance or repair of the Leased Property or any portion thereof, together with any and all additions and accessions thereto and replacements, products, proceeds (including, without limitation, proceeds of insurance) and supporting obligations thereof, including, but not limited to, the following:

(a)all goods, including, without limitation, all Equipment; and

(b)all General Intangibles; and

(c)all other personal property or fixtures of any nature whatsoever which relate to the operation, maintenance or repair of the Leased Property, or any portion thereof, and all property from time to time described in any financing statement signed by the Tenant naming the Secured Party as Secured Party; and

(d)all claims, rights, powers or privileges and remedies relating to the foregoing or arising in connection therewith, including, without limitation, all Licenses and Permits which Tenant legally may grant a security interest in, rights to make determinations, to exercise any election (including, but not limited to, election of remedies) or option or to give or receive any notice, consent, waiver or approval; all liens, security, guaranties, endorsements, warranties and indemnities and all insurance, eminent domain and

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condemnation awards and claims therefor relating thereto or arising in connection therewith; all rights to property forming the subject matter of any of the foregoing, including, without limitation, rights to stoppage in transit and rights to returned or repossessed property; all writings relating to the foregoing or arising in connection therewith; and

(e)all contract rights, general intangibles and other property rights of any nature whatsoever arising out of or in connection with any of the foregoing (other than Excluded Collateral), including, without limitation, payments due or to become due, whether as repayments, reimbursements, contractual obligations, indemnities, damages or otherwise.

“Equipment” shall mean all buildings, structures, improvements, fixtures and items of machinery, equipment and other tangible personal property which constitute, arise from or relate to the operation, maintenance or repair of the Leased Property or any portion thereof, together with all repairs, replacements, improvements, substitutions, extensions or renewals thereof or additions thereto, all parts, additions and accessories incorporated therein or affixed thereto, and all “equipment” as such term is defined in the Uniform Commercial Code, and all cash and non-cash proceeds therefrom.

“Event of Default” shall have the meaning given such term in Section 6.

“Excluded Collateral” shall mean Accounts or Chattel Paper, Support Obligations, General Intangibles or Deposit Accounts relating to such Accounts or Chattel Paper, Instruments or Investment Property evidencing or arising from such Accounts or Chattel Paper, any documents, books, records or other information (including, without limitation, computer programs, tapes, discs, punch cards, data processing software and related property and rights) maintained with respect to any of the foregoing or any Proceeds of any of the foregoing.

“Facility” shall have the meaning given such term in the New Lease.

“General Intangibles” shall mean all present and future general intangibles and contract rights (other than Excluded Collateral) which constitute, arise from or relate to the operation, maintenance or repair of the Leased Property, or any portion thereof, including, but not limited to, all causes of action, corporate or business records, inventions, designs,

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patents, patent applications, trademarks, trademark registrations and applications therefor, goodwill, trade names, trade secrets, trade processes, copyrights, copyright registrations and applications therefor, franchises, customer lists, computer programs, claims under guaranties, tax refund claims, rights and claims against carriers and shippers, leases, claims under insurance policies, all rights to indemnification and all other intangible personal property of every kind and nature which constitutes, arises from or relates to the operation, maintenance or repair of the Leased Property, or any portion thereof.

“Instrument” shall have the meaning give such term in Article 9 of the Uniform Commercial Code.

“New Lease” shall have the meaning given such term in the preamble to this Agreement.

“Leased Property” shall have the meaning given such term in the New Lease.

“Legal Requirements” shall have the meaning given such term in the New Lease.

“Licenses” shall mean all certificates of need (if any), licenses, permits, rights of use, covenants or rights otherwise benefiting or permitting the use and operation of each applicable Property or any part thereof pertaining to the operation, maintenance or repair of such Property or any portion thereof.

“Obligations” shall have the meaning given such term in the preamble to this Agreement.

“Overdue Rate” shall have the meaning given to such term in the New Lease.

“Permits” shall mean all permits, approvals, consents, waivers, exemptions, variances, franchises, orders, authorizations, rights and licenses obtained or hereafter obtained from any federal, state or other governmental authority or agency relating to the operation, maintenance or repair, of each applicable Property, or any portion thereof.

“Person” shall have the meaning given such term in the New Lease.

“Property” shall have the meaning given such term in the New Lease.

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“Rent” shall have the meaning given such term in the New Lease.

“Tenant” shall have the meaning given such term in the preamble to this Agreement.

“Uniform Commercial Code” means Article 9 of the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts from time to time.

Section 2.  Security Interest.  As security for the prompt payment and performance of all the Obligations, the Tenant hereby grants, pledges, transfers and assigns to the Secured Party, its successors and assigns and all other holders from time to time of the Obligations, a continuing security interest under the Uniform Commercial Code from time to time in effect in the jurisdiction in which any of the Collateral is located in and a continuing lien upon all of the Tenant’s right, title and interest in the Collateral, together with any and all additions thereto and replacements, products and proceeds thereof, whether now existing or hereafter arising or acquired and wherever located.

Section 3.  General Representations, Warranties and Covenants.  The Tenant represents, warrants and covenants, which representations, warranties and covenants shall survive execution and delivery of this Agreement, as follows:

(a)           Each of the warranties and representations of the Tenant contained herein, in the New Lease or in any other document executed in connection herewith or therewith are true and correct on the date hereof.

(b)           Except for the lien granted to the Secured Party pursuant to this Security Agreement and any liens permitted under the New Lease, the Tenant is, and as to the Collateral acquired from time to time after the date hereof the Tenant will be, the owner of all the Collateral free from any lien, security interest, encumbrance or other right, title or interest of any Person, except for the security interest of the Secured Party therein, and the Tenant shall defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein adverse to the Secured Party.  The lien granted in this Agreement by the Tenant to the Secured Party in the Collateral is not prohibited by and does not constitute a default under any agreements or other instruments constituting a part of the Collateral, and no consent is required of any Person to effect such lien which has not been obtained.

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(c)           Except as permitted under the New Lease, there is no financing statement (or similar statement or instrument of registration under the law of any jurisdiction) now on file or registered in any public office covering any interest of any kind in the Collateral, or intended so to be, which has not been terminated, and so long as this Agreement remains in effect or any of the Obligations or any obligations of any Affiliated Person of the Tenant to the Secured Party remain unpaid, the Tenant will not execute and there will not be on file in any public office any financing statement (or similar statement or instrument of registration under the law of any jurisdiction) or  statements relating to the Collateral, except financing statements filed or to be filed in respect of and covering the security interest of the Secured Party.

(d)           The chief executive office and the principal place of business of each of the Entities comprising the Tenant are as set forth in Schedule 1 and neither of such Entities will move its chief executive office or establish any other principal place of business except to such new location as such Entity may establish in accordance with this Section 3(d). The location of each Facility comprising a portion of the Leased Property is as set forth in Schedule 2.  The originals of all documents evidencing Collateral and the only original books of account and records of each of the Entities comprising the Tenant relating thereto are, and will continue to be, kept at such chief executive office or the applicable Facility, as the case may be, or at such new location as such Entity may establish in accordance with this Section 3(d).  Neither of the Entities comprising the Tenant shall move its chief executive office or establish any other principal place of business until (i) such Entity shall have given to the Secured Party not less than ten (10) days’ prior written notice of its intention to do so, which notice shall clearly describe such new location and provide such other information in connection therewith as the Secured Party may reasonably request, and (ii) with respect to such new location, such Entity shall have taken such action, satisfactory to the Secured Party (including, without limitation, all action required by Section 5), to maintain the security interest of the Secured Party in the Collateral.

(e)           All tangible personal property owned on the date hereof by the Tenant to be used in connection with the operation or maintenance of the Leased Property, or any portion thereof, is located at each applicable Property or is in transit to such Property from the vendor thereof.  The Tenant agrees that (i) all such property held by the Tenant on the date hereof, once at each applicable Property, shall remain at such Property and (ii)

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all such property subsequently acquired by the Tenant shall immediately upon acquisition be transferred to and remain at the applicable Property.

(f)            The corporate name and organizational identification number of each of the Entities comprising the Tenant are as set forth on the signature page hereto.  The name under which each of the Facilities is operated is set forth on Schedule 2.  Neither of the Entities comprising the Tenant shall (i) change such name without providing the Secured Party with thirty (30) days’ prior written notice and making all filings and taking all such other actions as the Secured Party determines are necessary or appropriate to continue or perfect the security interest granted hereunder, (ii) change its corporate organizational number, nor (iii) conduct its business in any other name or take title to any Collateral in any other name while this Agreement remains in effect.  Except as otherwise set forth on Schedule 1, neither of the Entities comprising the Tenant has ever had any other name nor conducted business in any other name in any jurisdiction.  Each of the Entities comprising the Tenant is formed as a Maryland limited liability company.  Subject to the terms and conditions of the New Lease, neither of the Entities comprising the Tenant shall change its organizational structure or jurisdiction of formation without giving at least thirty (30) days’ prior written notice thereof to the Secured Party.

(g)           The Secured Party is authorized (but is under no obligation) to make, upon ten (10) Business Days’ notice to the Tenant (except in the case of exigent circumstances, in which circumstances upon such notice, if any, as may then be reasonably practical), any payments which in the Secured Party’s opinion are necessary to:

(i)discharge any liens which have or may take priority over the lien hereof; and

(ii)pay all premiums payable on the insurance policies referred to in the New Lease or any other document or agreement executed in connection therewith or herewith, upon the failure of the Tenant to make such payments within the time permitted therein.

The Tenant shall have no claim against the Secured Party by reason of its decision not to make any payments or perform such obligations permitted under this Section 3(g).  The Tenant shall repay to the Secured Party any sums paid by the Secured Party upon demand.  Any sums paid and expenses incurred by the Secured

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Party pursuant to this paragraph shall bear interest at the Overdue Rate.

(h)           If any of the Collateral at any time becomes evidenced by an Instrument, the Tenant shall promptly deliver such Instrument to the Secured Party, appropriately endorsed to the order of the Secured Party, to be held pursuant to this Agreement.

(i)            The Tenant shall not sell, transfer, change the registration, if any, of, dispose of, attempt to dispose of, or substantially modify or abandon the Collateral or any material part thereof, other than as permitted under the New Lease, without the prior written consent of the Secured Party.  Except as permitted under the New Lease, the Tenant shall not create, incur, assume or suffer to exist any lien upon any of the Collateral without the prior written consent of the Secured Party.

(j)            The Tenant shall not assert against the Secured Party any claim or defense which the Tenant may have against any seller of the Collateral or any part thereof or against any Person with respect to the Collateral or any part thereof.

(k)           The Tenant shall, upon demand, pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Secured Party may incur in connection with (i) the administration of this Agreement, (ii) the custody or  preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Secured Party hereunder and under such other agreements or (iv) the failure by the Tenant to perform or observe any of the provisions hereof.

(l)            The Tenant shall indemnify and hold harmless the Secured Party from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Secured Party in any way relating to or arising out of this Agreement or arising out of the Tenant’s obligations under any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or the enforcement of any of the terms hereof or of any such other documents.

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Section 4.  Special Provisions Concerning Equipment.  The Tenant shall not impair the rights of the Secured Party in the Equipment.  Regardless of the manner of the affixation of any Equipment to real property, the Equipment so attached shall at all times constitute and remain personal property.  The Tenant retains all liability and responsibility in connection with the Equipment and the liability of the Tenant to pay the Obligations shall in no way be affected or diminished by reason of the fact that such Equipment may be lost, destroyed, stolen or damaged or for any reason whatsoever have become unavailable to the Tenant.  Upon the request of the Secured Party, the Tenant shall provide to the Secured Party a current list of Equipment.

Section 5.  Financing Statements; Documentary Stamp Taxes.

(a)           The Tenant shall, at its own expense, make, execute, endorse, acknowledge, file and/or deliver to the Secured Party from time to time such lists, descriptions and designations of inventory, warehouse receipts, bills of lading, documents of title, vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, reports and other assurances or instruments and take such further steps relating to the Collateral and other property or rights covered by the security interest hereby granted, which the Secured Party reasonably deems appropriate or advisable to perfect, preserve or protect its security interest in the Collateral.  The Tenant authorizes the Secured Party to file any such financing statements without the signature of the Tenant and the Tenant will pay all applicable filing fees and related expenses.  To the extent permitted by law, a carbon, photographic or other reproduction of this Agreement or a financing statement shall be sufficient as a financing statement.

(b)           The Tenant shall procure, pay for, affix to any and all documents and cancel any documentary tax stamps required by and in accordance with, applicable law, and the Tenant shall indemnify and hold harmless the Secured Party from and against any liability  (including interest and penalties) in respect of such documentary stamp taxes.

Section 6.  Event of Default.  For purposes of this Agreement, the term “Event of Default” shall mean (a) the occurrence of an Event of Default under the New Lease or any document or agreement executed in connection therewith; (b) the failure of the Tenant to comply with any of its covenants or obligations under this Agreement and the continuance thereof for a period of ten (10) Business Days after written notice thereof; (c) any representation or warranty contained herein or made by

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the Tenant in connection herewith shall prove to have been false or misleading in any material respect when made; or (d) the occurrence of any default or event of default under any document, instrument or agreement evidencing the Obligations.

Section 7.  Remedies.

(a)           Upon the occurrence and during the continuance of an Event of Default, in addition to any rights and remedies now or hereafter granted under applicable law, under the New Lease or under any other documents or agreements entered into in connection herewith or therewith, and not by way of limitation of any such rights and remedies, the Secured Party shall have all of the rights and remedies of a secured party under the Uniform Commercial Code as enacted in any applicable jurisdiction, and the right, without notice to, or assent by, the Tenant, in the name of the Tenant or, subject to any limitations imposed by applicable Legal Requirements, in the name of the Secured Party or otherwise:

(i)with respect to the General Intangibles to ask for, demand, collect, receive, compound and give acquittance therefor or any part thereof, to extend the time of payment of, compromise or settle for cash, credit or otherwise, and upon any terms and conditions, any thereof, to exercise and enforce any rights and remedies in respect thereof, and to file any claims, commence, maintain or discontinue any actions, suits or other proceedings deemed by the Secured Party necessary or advisable for the purpose of collecting or enforcing payment and performance thereof;

(ii)to take possession of any or all of the Collateral and to use, hold, store, operate, merge and/or control the same and to exclude the Tenant and all Persons claiming under it wholly or partly therefrom, and, for that purpose, to enter, with the aid and assistance of any Person or Persons and with or without legal process, any premises where the Collateral, or any part thereof, are, or may be, placed or assembled, and to remove any such Collateral;

(iii)from time to time, at the expense of the Tenant, to make all such repairs, replacements, alterations, additions and improvements to and of the Collateral as the Secured Party may

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reasonably deem proper; to carry on the business and to exercise all rights and powers of the Tenant in respect to the Collateral, as the Secured Party shall deem best, including the right to enter into any and all such agreements with respect to the leasing, management and/or operation of the Collateral or any part thereof as the Secured Party may see fit; to collect and receive all rents, issues, profits, fees, revenues and other income of the same and every part thereof which rents, issues, profits, fees, revenues and other income may be applied to pay the expenses of holding and operating the Collateral and of conducting the business thereof, and of all maintenance, repairs, replacements, alterations, additions and improvements, and to make all payments which the Secured Party may be required or may elect to make, if any, for taxes, assessments, insurance and other charges upon the Collateral or any part thereof, and all other payments which the Secured Party may be required or authorized to make under any provision of this Agreement (including, without limitation, reasonable legal costs and attorneys’ fees);

(iv)to execute any instrument and do all other things necessary and proper to protect and preserve and realize upon the Collateral and the other rights contemplated hereby;

(v)upon notice to such effect, to require the Tenant to deliver, at the Tenant’s expense, any or all Collateral which is reasonably movable to the Secured Party at a place designated by the Secured Party, and after delivery thereof the Tenant shall have no further claim to or interest in the Collateral; and

(vi)without obligation to resort to other security, at any time and from time to time, to sell, re-sell, assign and deliver all or any of the Collateral, in one or more parcels at the same or different times, and all right, title and interest, claim and demand therein and right of redemption thereof, at public or private sale, for cash, upon credit or for future delivery, and at such price or prices and on such terms as

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the Secured Party may determine, with the amounts realized from any such sale to be applied to the Secured Obligations in the manner determined by the Secured Party.

The Tenant hereby agrees that all of the foregoing may be effected without demand, advertisement or notice (except as hereinafter provided or as may be required by law), all of which (except as hereinafter provided) are hereby expressly waived, to the maximum extent permitted by law.  The Secured Party shall not be obligated to do any of the acts hereinabove authorized and in the event that the Secured Party elects to do any such act, the Secured Party shall not be responsible to the Tenant.

(b)           Upon the occurrence and during the continuance of an Event of Default, the Secured Party may take legal proceedings for the appointment of a receiver or receivers (to which the Secured Party shall be entitled as a matter of right) to take possession of the Collateral pending the sale thereof pursuant either to the powers of sale granted by this Agreement or to a judgment, order or decree made in any judicial proceeding for the foreclosure or involving the enforcement of this Agreement.  If, after the exercise of any or all of such rights and remedies, any of the Obligations shall remain unpaid or unsatisfied, the Tenant shall remain liable for any deficiency or performance thereof, as applicable.

(c)           Upon any sale of any of the Collateral, whether made under the power of sale hereby given or under judgment, order or decree in any judicial proceeding for the foreclosure or involving the enforcement of this Agreement:

(i)the Secured Party may bid for and purchase the property being sold and, upon compliance with the terms of sale, may hold, retain and possess and dispose of such property in its own absolute right without further accountability, and may, in paying the purchase money therefor, deliver any instruments evidencing the Obligations or agree to the satisfaction of all or a portion of the Obligations in lieu of cash in payment of the amount which shall be payable thereon, and such instruments, in case the amounts so payable thereon shall be less than the amount due thereon, shall be returned to the Secured Party after being appropriately stamped to show partial payment;

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(ii)the Secured Party may make and deliver to the purchaser or purchasers a good and sufficient deed, bill of sale and instrument of assignment and transfer of the property sold;

(iii)all right, title, interest, claim and demand whatsoever, either at law or in equity or  otherwise, of the Tenant of, in and to the property so sold shall be divested; such sale shall be a perpetual bar both at law and in equity against the Tenant, its successors and assigns, and against any and all Persons claiming or who may claim the property sold or any part thereof from, through or under the Tenant, its successors or assigns;

(iv)the receipt of the Secured Party or of the officers thereof making such sale shall be a sufficient discharge to the purchaser or purchasers at such sale for his or their purchase money, and such purchaser or purchasers, and his or their assigns or personal representatives, shall not, after paying such purchase money and receiving such receipt of the Secured Party or of such officer therefor, be obliged to see to the application of such purchase money or be in any way answerable for any loss, misapplication or nonapplication thereof; and

(v)to the extent that it may lawfully do so, the Tenant agrees that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take advantage of, any appraisement, valuation, stay, extension or redemption laws, or any law permitting it to direct the order in which the Collateral or any part thereof shall be sold, now or at any time hereafter in force, which may delay, prevent or otherwise affect the performance or enforcement of this Agreement or any other document, the New Lease or any other document or agreement entered into in connection herewith or therewith, and the Tenant hereby expressly waives all benefit or advantage of any such laws and covenants that it will not hinder, delay or impede the execution of any power granted or delegated to the Secured Party in this Agreement, but will

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suffer and permit the execution of every such power as though no such laws were in force.

In the event of any sale of Collateral pursuant to this Section 7, the Secured Party shall, at least ten (10) days before such sale, give the Tenant written notice of its intention to sell, except that, if the Secured Party shall determine in its reasonable discretion that any of the Collateral threatens to decline in value, any such sale may be made upon three (3) days’ written notice to the Tenant, which time periods the Tenant hereby agrees are reasonable.

(d)  The Secured Party is hereby irrevocably appointed the true and lawful attorney-in-fact of the Tenant in its name and stead, to make all necessary deeds, bills of sale and instruments of assignment and transfer of the property sold pursuant to this Section 7 and for such other purposes as are necessary or desirable to effectuate the provisions of this Agreement, and for that purpose it may execute and deliver all necessary deeds, bills of sale and instruments of assignment and transfer, and may substitute one or more Persons with like power, the Tenant hereby ratifying and confirming all that its said attorney, or such substitute or substitutes, shall lawfully do by virtue hereof.  If so requested by the Secured Party or by any purchaser, the Tenant shall ratify and confirm any such sale or transfer by executing and delivering to the Secured Party or to such purchaser all property, deeds, bills of sale, instruments or assignment and transfer and releases as may be designated in any such request.

Section 8.  Application of Moneys.  All moneys which the Secured Party shall receive pursuant hereto shall first be applied  (to the extent thereof) to the payment of all reasonable costs and expenses incurred in connection with the administration and enforcement of, or the preservation of any rights under, this Agreement or any of without limitation, the reasonable fees and disbursements of its counsel and agents), and the balance, if any, shall be applied first to accrued and unpaid interest, charges and fees on, and then to outstanding principal of, any Obligations of the Tenant (or its affiliates) to the Secured Party, and then to any other amounts outstanding on any such Obligations and then as required by law to any other parties having an interest therein.

Section 9.  Waivers, Etc.  The Tenant, on its own behalf and on behalf of its successors and assigns, hereby waives presentment, demand, notice, protest and, except as is otherwise specifically provided herein, all other demands and notices in connection with this Agreement or the enforcement of the rights

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of the Secured Party hereunder or in connection with any Obligations or any Collateral; waives all rights to require a marshaling of assets by the Secured Party; consents to and waives notice of (i) the substitution, release or surrender of any Collateral, (ii) the addition or release of Persons primarily or secondarily liable on any Obligation or on any Collateral, (iii) the acceptance of partial payments on any Collateral and/or the settlement or compromise thereof, (iv) any requirement of diligence or promptness on the part of the Secured Party in the enforcement of any rights in respect of any Collateral or any other agreement or instrument directly or indirectly relating thereto, and (v) any enforcement of any present or future agreement or instrument relating directly or indirectly to the Collateral.  No delay or omission on the part of the Secured Party or any holder of Obligations in exercising any right hereunder shall operate as a waiver of such right or of any other right hereunder.  No waiver of any such right on any one occasion shall be construed as a bar to or waiver of any such right on any future occasion.  No course of dealing between the Tenant and the Secured Party or any holder of Obligations, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party or any holder of Obligations, any right, power or privilege hereunder or under any of the Obligations, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof, or the exercise of any other right, power or privilege.

The Tenant further waives any right it may have under the constitution of any state or commonwealth in which any of the Collateral may be located, or under the Constitution of the United States of America, to notice (except for notice specifically required hereby) or to a judicial hearing prior to the exercise of any right or remedy provided by this Agreement to the Secured Party, and waives its rights, if any, to set aside or invalidate any sale duly consummated in accordance with the foregoing  provisions hereof on the grounds (if such be the case) that the sale was consummated without a prior judicial hearing.  THE TENANT’S WAIVERS UNDER THIS SECTION 9 HAVE BEEN MADE VOLUNTARILY, INTELLIGENTLY AND KNOWINGLY AND AFTER THE TENANT HAS BEEN APPRISED AND COUNSELED BY ITS ATTORNEYS AS TO THE NATURE THEREOF AND ITS POSSIBLE ALTERNATIVE RIGHTS.

The Secured Party shall not be required to marshal any present or future security for (including without limitation this Agreement and the Collateral pledged hereunder), or guaranties of, the Obligations or any of them, or to resort to such security or guaranties in any particular order; and all of

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the rights hereunder and in respect of such securities and guaranties shall be cumulative and in addition to all other rights, however existing or arising.  To the maximum extent permitted by applicable law, the Tenant hereby agrees that it will not invoke any law relating to the marshalling of collateral which, might cause delay in or impede the enforcement of the Secured Party’s rights under this Agreement or under any other instrument evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or guaranteed, and, to the maximum extent permitted by applicable law, the Tenant hereby irrevocably waives the benefits of all such laws.

Section 10.  Further Assurances as to Collateral; Attorney-in-Fact.  From time to time hereafter, the Tenant will execute and deliver, or will cause to be executed and delivered, such additional instruments, certificates or documents (including, without limitation, financing statements, renewal statements, mortgages, collateral assignments and other security documents), and will take all such actions as the Secured Party may reasonably request, for the purposes of implementing or effectuating the provisions of this Agreement or of more fully perfecting or renewing the Secured Party’s rights with respect to the Collateral (or with respect to any additions thereto or replacements or proceeds thereof or with respect to any other property or assets hereafter acquired by the Tenant which may be deemed to be a part of the Collateral) pursuant hereto and thereto.  The Secured Party is hereby appointed the attorney-in-fact, with full power of substitution, of the Tenant for the purpose of carrying out the provisions of this Agreement and taking any action, including, without limitation, executing, delivering and filing applications, certificates, instruments and other documents and papers with governmental authorities, and executing any instruments, including without limitation financing or continuation statements, deeds to secure debt, mortgages, assignments, conveyances, assignments and transfers which are required to be taken or executed by the Tenant under this Agreement, on its behalf and in its name which appointment is coupled with an interest, is irrevocable and durable and shall survive the subsequent dissolution, disability or incapacity of the Tenant.

Section 11.  Arbitration.  The Secured Party or the Tenant may elect to submit any dispute hereunder that has an amount in controversy in excess of $250,000 to arbitration hereunder.  Any such dispute shall be resolved in accordance with the Commercial Arbitration Rules of the American Association then pertaining

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and the decision of the arbitrators with respect to such dispute shall be binding, final and conclusive on the parties.

In the event the Secured Party or the Tenant shall elect to submit any such dispute to arbitration hereunder, the Secured Party and the Tenant shall each appoint and pay all fees of a fit and impartial person as arbitrator with at least ten (10) years’ recent professional experience in the general subject matter of the dispute.  Notice of such appointment shall be sent in writing by each party to the other, and the arbitrators so appointed, in the event of their failure to agree within thirty (30) days after the appointment of the second arbitrator upon the matter so submitted, shall appoint a third arbitrator.  If either the Secured Party or the Tenant shall fail to appoint an arbitrator, as aforesaid, for a period of twenty (20) days after written notice from the other party to make such appointment, then the arbitrator appointed by the party having made such appointment shall appoint a second arbitrator and the two (2) so appointed shall, in the event of their failure to agree upon any decision within thirty (30) days thereafter, appoint a third arbitrator.  If such arbitrators fail to agree upon a third arbitrator within forty five (45) days after the appointment of the second arbitrator, then such third arbitrator shall be appointed by the American Arbitration Association from its qualified panel of arbitrators, and shall be a person having at least ten (10) years’ recent professional experience as to the subject matter in question.  The fees of the third arbitrator and the expenses incident to the proceedings shall be borne equally between the Secured Party and the Tenant, unless the arbitrators decide otherwise.  The fees of respective counsel engaged by the parties, and the fees of expert witnesses and other witnesses called for the parties, shall be paid by the respective party engaging such counsel or calling or engaging such witnesses.

The decision of the arbitrators shall be rendered within thirty (30) days after appointment of the third arbitrator.  Such decision shall be in writing and in duplicate, one counterpart thereof to be delivered to the Secured Party and one to the Tenant.  A judgment of a court of competent jurisdiction may be entered upon the award of the arbitrators in accordance with the rules and statutes applicable thereto then obtaining.

Section 12.  Miscellaneous.

(a)           The Tenant agrees that its obligations and the rights of the Secured Party hereunder and in respect of the Obligations may be enforced by specific performance hereof and thereof and by temporary, preliminary and/or final injunctive

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relief relating hereto and thereto, without necessity for proof by the Secured Party or any holder of the Obligations that it would otherwise suffer irreparable harm, and the Tenant hereby consents to the issuance of such specific and injunctive relief.

(b)           Any notice or demand upon the Tenant or the Secured Party shall be deemed to have been sufficiently given when given in accordance with the provisions of the New Lease.

(c)           None of the terms and conditions of this Agreement may be changed, waived, modified or varied in any manner whatsoever unless in writing duly signed by the Tenant and the Secured  Party.  No notice to or demand on the Tenant in any case shall entitle the Tenant to any other or further notice or demand in similar or other circumstances or constitute a waiver of any of the rights of the Secured Party to any other or further action in any circumstances without notice or demand.

(d)           The obligations of the Tenant hereunder shall remain in full force and effect without regard to, and shall not be impaired by, (i) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of any of the Entities comprising the Tenant; (ii) any exercise or non-exercise, or any waiver of, any right, remedy, power or privilege under or in respect of this Agreement, the New Lease or any document or agreement executed in connection herewith or therewith, the Obligations or any security for any of the Obligations; or (iii) any amendment to or modification of any of the New Lease or any document or agreement executed in connection herewith or therewith, the Obligations or any security for any of the Obligations; whether or not the Tenant shall have notice or knowledge of any of the foregoing.  The rights and remedies of the Secured Party herein provided for are cumulative and not exclusive of any rights or remedies which the Secured Party would otherwise have, including, without limitation, under the New Lease or any document or agreement executed in connection herewith or therewith.  This Agreement is intended as a supplement for and is not intended to supersede in any respect the New Lease or any document or agreement executed in connection herewith or therewith.  Each Entity comprising Tenant hereunder shall be jointly and severally liable for the payment and performance of each and every obligation and liability of the Tenant hereunder.

(e)           This Agreement shall be binding upon the Tenant and its successors and assigns and shall inure to the benefit of the Secured Party, and its respective successors and assigns.  All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement.

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(f)            The descriptive headings of the several sections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement.

(g)           Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibitions or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

(h)           This Agreement shall be interpreted, construed, applied and enforced in accordance with the laws of The Commonwealth of Massachusetts applicable to contracts between residents of Massachusetts which are to be performed entirely within Massachusetts, regardless of (i) where this Agreement is executed or delivered; or (ii) where any payment or other performance required by this Agreement is made or required to be made; or (iii) where any breach of any provision of this Agreement occurs, or any cause of action otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, citizenship, domicile, principle place of business, or jurisdiction of organization or domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise would apply the laws of a jurisdiction other than the Commonwealth of Massachusetts; or (vii) any combination of the foregoing.  Notwithstanding the foregoing, to the extent that matters of title, or creation, perfection and priority of the security interests created hereby, or procedural issues of foreclosures are required to be governed by the laws of the state in which the Collateral, or relevant part thereof, is located, the laws of such State shall apply.

Section 13.  Nonliability of Trustees.  THE DECLARATION OF TRUST ESTABLISHING THE SECURED PARTY, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE “DECLARATION”), IS DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME “HRES1 PROPERTIES TRUST,” REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE SECURED PARTY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF OR CLAIM AGAINST, THE SECURED PARTY.  ALL PERSONS DEALING WITH THE SECURED PARTY, IN ANY WAY,

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SHALL LOOK ONLY TO THE ASSETS OF THE SECURED PARTY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

[Remainder of page intentionally left blank.]

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

TENANT:

FS PATRIOT LLC,

a Maryland limited liability
company

/s/ Evrett W. Benton

By: Evrett W. Benton

Its: President

FS COMMONWEALTH LLC,

a Maryland limited liability company

/s/ Evrett W. Benton

By: Evrett W. Benton

Its: President

SECURED PARTY:

HRES1 PROPERTIES TRUST

a Maryland real estate investment trust

/s/ David J. Hegarty

By: David J. Hegarty

Its: President

The following schedules have been omitted and will be supplementally furnished to the Securities and Exchange Commission upon request:

Schedule 1

Schedule 2

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EX-10.55

Exhibit 10.55

AMENDED AND RESTATED PLEDGE AGREEMENT

THIS AMENDED AND RESTATED PLEDGE AGREEMENT (this “Agreement”) is entered into as of October 1, 2006 by FSQ, INC., a Delaware corporation (the “Pledgor”), for the benefit of HRES1 PROPERTIES TRUST, a Maryland real estate investment trust (together with its respective successors and assigns, the “Secured Party”).

W I T N E S S E T H:

WHEREAS, pursuant to a Master Lease Agreement, dated as of March 3, 2006 (as amended to date, the “Original Lease”), the Secured Party leased to FS PATRIOT LLC and FS COMMONWEALTH LLC, each a Maryland limited liability company, jointly and severally (the “Tenant”) certain premises as more particularly described in the Original Lease, subject to and upon the terms and conditions set forth in the Original Lease; and

WHEREAS, the Pledgor and the Secured Party are parties to that certain Pledge Agreement, dated as of March 3, 2006 (the “Original Pledge Agreement”), executed in connection with the Original Lease; and

WHEREAS, the Secured Party and the Tenant have entered into that certain Amended and Restated Master Lease Agreement, dated as of the date hereof (the “New Lease”), which amends and restates the Original Lease in its entirety; and

WHEREAS, pursuant to an Amended and Restated Guaranty Agreement, dated as of the date hereof (the “New Guaranty”), Five Star Quality Care, Inc., a Maryland corporation, being Pledgor’s parent (the “Guarantor”), guaranteed to the Secured Party the payment and performance of all of the obligations of the Tenant to the Secured Party with respect to the New Lease and other related documents, subject to and upon the terms and conditions set forth therein; and

WHEREAS, the New Lease provides that any assignment or transfer of the Tenant’s interest under the New Lease shall be subject to such assignee’s or transferee’s delivery to the Secured Party of a pledge of all of the stock, partnership, membership or other ownership interests of such assignee or other transferee, which pledge shall be in form and substance satisfactory to Landlord in its sole discretion; and

WHEREAS, the Pledgor and the Secured Party wish to amend and restate the Original Pledge Agreement in its entirety;

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, and in accordance with the provisions of the New Lease, the Pledgor hereby agrees as follows:

Section 1.  Certain Terms.  Capitalized terms used and not otherwise defined in this Agreement shall have the meanings ascribed to such terms in the New Lease.  The New Lease, the New Guaranty and the other Incidental Documents are herein collectively referred to as the “Transaction Documents”.

Section 2.  Pledge.  The Pledgor hereby pledges to the Secured Party all of the membership interests in each of the Entities comprising Tenant (the “Pledged Interests”) and all other shares of stock, shares of beneficial interest, membership interests or other ownership interests in each of the Entities comprising Tenant in which the Pledgor may have rights from time to time and any other securities or other investment property and other collateral of the Pledgor now owned or hereafter acquired which under this Agreement are required to be pledged to the Secured Party, and in each case, all certificates representing such Pledged Interests or other investment property or collateral, and all rights, options, warrants, stock or other securities or other property which may hereafter be received, receivable or distributed in respect of the Pledged Interests, together with all proceeds of the foregoing, including, without limitation, all dividends, cash, notes, securities or other property from time to time acquired, receivable or otherwise distributed in respect of, or in exchange for, the foregoing, (the Pledged Interests and any additional securities or collateral pledged hereunder, collectively, the “Pledged Collateral”), and the Pledgor hereby grants to the Secured Party a security interest in all of the Pledged Collateral and the proceeds thereof as security for the due and punctual payment and performance of the Secured Obligations (as hereinafter defined).

Pledgor’s membership interests in the Tenant are not evidenced by any certificates or other instruments.  If in the future Pledgor possesses or controls any certificates or other instruments representing the Pledged Collateral, Pledgor shall immediately and without notice deliver the same to the Secured Party together with undated stock powers endorsed in blank, as security for the payment and performance of all of the Secured Obligations.

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Section 3.  Secured Obligations.  For purposes of this Agreement, the term “Secured Obligations” shall mean the payment and performance of each and every obligation of the Tenant and the Guarantor under the Transaction Documents or relating thereto, whether now existing or hereafter arising, and including, without limitation, the payment of the full amount of the Rent payable under the New Lease.

Section 4.  Representations of the Pledgor.  Pledgor covenants that the Pledged Interests are duly and validly pledged to the Secured Party in accordance with law and Pledgor shall warrant and defend the Secured Party’s right, title and security interest in and to the Pledged Interests against the claims and demands of all persons whomsoever. Pledgor represents and warrants to the Secured Party that Pledgor has good and marketable title to all the Pledged Interests pledged by it hereunder, free and clear of all claims, mortgages, pledges, liens, security interests and other encumbrances of every nature whatsoever; that the Pledged Interests are not subject to any restriction on transfer contained in the Certificates of Formation, Limited Liability Company Agreements or any other charter documents of any of the Entities comprising the Tenant or in any agreement or instrument to which any of the Entities comprising the Tenant or Pledgor is a party or by which any of the Entities comprising the Tenant or Pledgor is bound which would prohibit or restrict the pledge of the Pledged Interests hereunder or the disposition thereof upon default hereunder; that all of the Pledged Interests have been duly and validly issued and are fully paid for and nonassessable; and that the Pledged Interests constitute all of the presently issued and outstanding shares of the membership interests of each of the Entities comprising the Tenant.

Section 5.  Covenants of the Pledgor.  Pledgor hereby covenants and agrees that it shall not sell, convey or otherwise dispose of any of the Pledged Collateral nor create, incur or permit to exist any pledge, mortgage, lien, charge, encumbrance or any security interest whatsoever with respect to any of the Pledged Collateral or the proceeds thereof, other than the liens on and security interests in the Pledged Collateral created hereby.  Pledgor further covenants and agrees that it shall not consent to or approve the admission of any new member in either of the Entities comprising the Tenant.  Pledgor further covenants and agrees that, until the Secured Obligations are paid in full, Pledgor shall not change the state of its organization or its name without providing the Secured Party with thirty (30) days’ prior written notice and making all filings and taking all such other actions as the Secured Party

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determines are necessary or appropriate to continue or perfect the security interest granted hereunder.

Section 6.  Filing of Financing Statements, Etc.  Pledgor authorizes the Secured Party to file from time to time one or more financing statements describing the Pledged Collateral. Pledgor will cooperate with the Secured Party at its request from time to time in obtaining control agreements in form and substance reasonably satisfactory to the Secured Party with respect to any collateral investment property, deposit accounts, or other Pledged Collateral as to which the Secured Party determines such agreements are necessary or appropriate to perfect the security interest granted hereunder.

Section 7.  Distributions, Etc.  Upon the dissolution, winding up, liquidation or reorganization of any Entity comprising Tenant, whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities of any Entity comprising Tenant, if any sum shall be paid or any property shall be distributed upon or with respect to any of the Pledged Collateral, such sum shall be paid over to the Secured Party, to be held as collateral security for the Secured Obligations.  If any dividend shall be declared on any of the Pledged Collateral (excluding cash dividends), or any share of beneficial interest or fraction thereof shall be issued pursuant to any split of beneficial interests involving any of the Pledged Collateral, or any distribution of capital shall be made on any of the Pledged Collateral, or any property shall be distributed upon or with respect to the Pledged Collateral pursuant to recapitalization or reclassification of the capital of any Entity comprising Tenant, the shares or other property so distributed shall be delivered to the Secured Party to be held as collateral security for the Secured Obligations.

Section 8.  Event of Default.  For purposes of this Agreement, the term “Event of Default” shall mean (a) the occurrence of an Event of Default under the Transaction Documents; (b) the failure of the Guarantor to comply with any of its covenants or obligations under the New Guaranty and the continuation thereof for a period of ten (10) Business Days after written notice thereof; (c) the failure of Pledgor to comply with any of its covenants or obligations under this Agreement and the continuation thereof for a period of ten (10) Business Days after written notice thereof; or (d) any representation or warranty contained herein or made by Pledgor in connection herewith shall prove to have been false or misleading in any material respect when made.

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Section 9.  Remedies.  (a) Upon the occurrence and during the continuance of an Event of Default, the Secured Party may cause all or any of the Pledged Collateral to be transferred into its name or into the name of its nominee or nominees, subject to the provisions of the Uniform Commercial Code or other applicable law.

(b)           Upon the occurrence and during the continuance of an Event of Default, the Secured Party shall be entitled to exercise the voting power with respect to the Pledged Collateral, to receive and retain, as collateral security for the Secured Obligations, any and all dividends or other distributions at any time and from time to time declared or made upon any of the Pledged Collateral, and to exercise any and all such rights of payment, conversion, exchange, subscription or any other rights, privileges or options pertaining to the Pledged Collateral as if it were the absolute owner thereof, including, without limitation, all such rights under the Certificates of Formation, Limited Liability Company Agreements or any other charter documents of any Entity comprising Tenant, and further including, without limitation, the right to exchange, at its discretion, any and all of the Pledged Collateral upon the merger, consolidation, reorganization, recapitalization or other readjustment of such Entity, upon the exercise of any such right, privilege or option pertaining to the Pledged Collateral, and in connection therewith, to deposit and deliver any and all of the Pledged Collateral with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Secured Party may determine.

(c)           Upon the occurrence and during the continuance of an Event of Default, the Secured Party shall have all of the rights and remedies of a secured party under the Uniform Commercial Code or other applicable law and shall have the right to sell, resell, assign and deliver all or any of the Pledged Collateral in one or more parcels at any exchange or broker’s board or at public or private sale.  The Secured Party shall give Pledgor at least ten (10) days’ prior written notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition thereof is to be made.  Any such notice shall be deemed to meet any requirement hereunder or under any applicable law (including the Uniform Commercial Code) that reasonable notification be given of the time and place of such sale or other disposition.  Such notice may be given without any demand of performance or other demand, all such demands being hereby expressly waived by the Pledgor to the extent permitted by applicable law.  All such sales shall be

5

at such commercially reasonable price or prices as the Secured Party shall deem best and either for cash or on credit or for future delivery (without assuming any responsibility for credit risk).  At any such sale or sales, the Secured Party may purchase any or all of the Pledged Collateral to be sold thereat upon such terms as the Secured Party may deem best.  Upon any such sale or sales, the Pledged Collateral so purchased shall be held by the purchaser absolutely free from any claims or rights of any kind or nature of the Pledgor, including any equity of redemption and any similar rights, all such equity of redemption and any similar rights being hereby expressly waived and released by the Pledgor to the extent permitted by applicable law.  In the event any consent, approval or authorization of any governmental agency will be necessary to effectuate any such sale or sales, the Pledgor shall execute, and hereby agrees to cause the applicable Entity comprising Tenant to execute, all such applications or other instruments as may be required.  The proceeds of any such sale or sales, together with any other additional collateral security at the time received and held hereunder, shall be received and applied:  first, to the payment of all costs and expenses of such sale, including attorneys’ fees; and second, to the payment of the Secured Obligations in such order of priority as the Secured Party shall reasonably determine; and any surplus thereafter remaining shall be paid to the Pledgor or to whomever may be legally entitled thereto (including, if applicable, any subordinated creditor of Pledgor).

Pledgor recognizes that the Secured Party may be unable to effect a public sale of all or a part of the Pledged Collateral by reason of certain prohibitions contained in the Securities Act of 1933, and may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such Pledged Collateral for their own accounts, for investment and not with a view to the distribution or resale thereof.  Pledgor agrees that private sales so made may be at prices and upon other terms less favorable to the seller than if such Pledged Collateral were sold at public sales, and that the Secured Party shall have no obligation to delay sale of any such Pledged Collateral for the period of time necessary to permit such Pledged Collateral to be registered for public sale under the Securities Act of 1933. Pledgor agrees that private sales made under the foregoing circumstances may be deemed to have been made in a commercially reasonable manner.  Nothing herein shall be deemed to require the Pledgor to effect a registration of the Pledged Collateral under the Securities Act of 1933.

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(d)           Upon the occurrence and during the continuance of any Event of Default, the Secured Party, in its discretion, may demand, sue for and/or collect any money or property at any time due, payable or receivable, to which it may be entitled hereunder, on account of or in exchange for any of the Pledged Collateral.  Upon the occurrence and during the continuance of any Event of Default, the Secured Party shall further have the right, for and in the name, place and stead of Pledgor, to execute endorsements, assignments, or other instruments of conveyance or transfer with respect to all or any of the Pledged Collateral.

(e)           The Secured Party shall not be obligated to do any of the acts hereinabove authorized and in the event that the Secured Party elects to do any such act, the Secured Party shall not be responsible to Pledgor, other than for negligence or willful misconduct.

(f)            The Secured Party shall have no obligation to marshal any assets in favor of Pledgor, or against or in payment of the Secured Obligations or any other obligation owed to the Secured Party by Pledgor or any other person.

Section 10.  Rights of Secured Party.  No course of dealing between Pledgor and the Secured Party nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder or under any of the Secured Obligations, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.  The rights and remedies herein provided and provided under any of the Secured Obligations are cumulative and are in addition to, and not exclusive of, any rights or remedies provided by law, including, without limitation, the rights and remedies of a Secured Party under the Uniform Commercial Code.

Section 11.  Assignment, Etc.  No waiver by the Secured Party or by any other holder of Secured Obligations of any default shall be effective unless in writing nor operate as a waiver of any other default or of the same default on a future occasion.  In the event of a sale or assignment by the Secured Party of its interests under the Transaction Documents, the Secured Party may assign or transfer its rights and interests under this Agreement in whole or in part to the purchaser or assignee of such interests, whereupon such purchaser or purchasers shall become vested with all of the powers and rights given to the Secured Party hereunder, and the Secured Party

7

shall thereafter be forever released and fully discharged from any liability or responsibility thereafter arising hereunder with respect to the rights and interests so assigned.

Section 12.  Duty of Secured Party.  Beyond the exercise of reasonable care to assure the safe custody of the Pledged Collateral while held hereunder, the Secured Party shall have no duty or liability to collect any sums due in respect thereof or to protect or preserve rights pertaining thereto, and shall be relieved of all responsibility for the Pledged Collateral upon surrendering the same to Pledgor.

Section 13.  Waivers, Etc.  To the extent permitted by applicable law, Pledgor, on its own behalf and on behalf of its successors and assigns, hereby waives presentment, demand, payment, notice of dishonor, protest and, except as otherwise provided herein, all other demands and notices in connection with this Agreement or the enforcement of the rights of the Secured Party hereunder or in connection with any Secured Obligations.  The Secured Party may release, supersede, exchange or modify any collateral security it may from time to time hold and release, surrender or modify the liability of any third party without giving notice hereunder to Pledgor.  The Secured Party shall be under no duty to exhaust its rights against any such collateral security or any such third party before realizing on the Pledged Collateral.  Such modifications, changes, renewals, releases or other actions shall in no way affect Pledgor’s obligations hereunder.

Pledgor further waives any right it may have under the Constitution of the Commonwealth of Massachusetts (or under the constitution of any other state in which the any of the Pledged Collateral may be located), or under the Constitution of the United States of America, to notice (except for notice specifically required hereby) or to a judicial hearing prior to the exercise of any right or remedy provided by this Agreement to the Secured Party, and waives its rights, if any, to set aside or invalidate any sale duly consummated in accordance with the foregoing provisions hereof on the grounds (if such be the case) that the sale was consummated without a prior judicial hearing. PLEDGOR’S WAIVERS UNDER THIS SECTION 13 HAVE BEEN MADE VOLUNTARILY, INTELLIGENTLY AND KNOWINGLY AND AFTER THE PLEDGOR HAS BEEN APPRISED AND COUNSELED BY ITS ATTORNEYS AS TO THE NATURE THEREOF AND ITS POSSIBLE ALTERNATIVE RIGHTS.

Section 14.  Further Assurances as to Collateral; Attorney-in-Fact.  From time to time hereafter, Pledgor shall execute and deliver, or will cause to be executed and delivered, such

8

additional instruments, certificates or documents (including, without limitation, financing statements, renewal statements, collateral assignments and other security documents), and shall take all such actions, as the Secured Party may reasonably request, for the purposes of implementing or effectuating the provisions of this Agreement or of more fully perfecting or renewing the Secured Party’s rights with respect to the Pledged Collateral (or with respect to any additions thereto or replacements or proceeds thereof or with respect to any other property or assets hereafter acquired by the Pledgor which may be deemed to be a part of the Pledged Collateral) pursuant hereto and thereto.  The Secured Party is hereby appointed the attorney-in-fact, with full power of substitution, of Pledgor for the purpose of carrying out the provisions of this Agreement and taking any action, including, without limitation, executing, delivering and filing applications, certificates, instruments and other documents and papers with governmental authorities, and executing any instruments, including without limitation, assignments, conveyances and transfers which are required to be taken or executed by Pledgor under this Agreement, on its behalf and in its name which appointment is coupled with an interest, is irrevocable and durable and shall survive the subsequent dissolution, disability or incapacity of the Pledgor.

Section 15.  Notices.  (a) Any and all notices, demands, consents, approvals, offers, elections and other communications required or permitted under this Agreement shall be deemed adequately given if in writing and the same shall be delivered either in hand, by telecopier with electronic confirmation of receipt, or by mail or Federal Express or similar expedited commercial carrier, addressed to the recipient of the notice, postpaid and registered or certified with return receipt requested (if by mail), or with all freight charges prepaid (if by Federal Express or similar carrier).

(b)           All notices required or permitted to be sent hereunder shall be deemed to have been given for all purposes of this Agreement upon the date of electronic confirmation of receipt, in the case of a notice by telecopier, and, in all other cases, upon the date of receipt or refusal, except that whenever under this Agreement a notice is either received on a day which is not a Business Day or is required to be delivered on or before a specific day which is not a Business Day, the day of receipt or required delivery shall automatically be extended to the next Business Day.

9

(c)           All such notices shall be addressed,

if to the Secured Party to:
	c/o HRES1 Properties Trust400 Centre Street
	Newton, Massachusetts 02458
	Attn: President
	[Telecopier No. (617) 796-8349]
if to Pledgor to:
	c/o FSQ, INC.
	400 Centre Street
	Newton, Massachusetts 02458
	Attn: President
	[Telecopier No. (617) 796-8385]

(d)           By notice given as herein provided, the parties hereto and their respective successors and assigns shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses effective upon receipt by the other parties of such notice and each shall have the right to specify as its address any other address within the United States of America or to such other address as the party to whom such notice is directed may have designated in writing to the other parties hereto.

Section 16.  Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, and the term “Secured Party” shall be deemed to include any other holder or holders of any of the Secured Obligations.  Where the context so permits or requires, terms defined herein in the singular number shall include the plural, and in the plural number, the singular.  This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts, each of which, when so executed and delivered, shall be an original and all of which shall together constitute one and the same agreement.

Section 17.  Reinstatement.  This Agreement shall continue to be effective, or be reinstated, as the case may be, if at any time any amount received by the Secured Party in respect of the Pledged Collateral is rescinded or must otherwise be restored or returned by the Secured Party upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of Pledgor or upon the appointment of any intervenor or conservator of, or trustee

10

or similar official for the Pledgor or any substantial part of its or property, or otherwise, all as though such payments had not been made.

Section 18.  Restrictions on Transfer.  To the extent that any restrictions imposed by the Certificates of Formation, Limited Liability Company Agreements or any other charter documents of any Entity comprising Tenant or any other document or instrument would in any way affect or impair the pledge of the Pledged Collateral hereunder or the exercise by the Secured Party of any right granted hereunder including, without limitation, the right of the Secured Party to dispose of the Pledged Collateral upon the occurrence of any Event of Default, Pledgor hereby waives such restrictions, and Pledgor hereby agrees that it will take any action which the Secured Party may reasonably request in order that the Secured Party may obtain and enjoy the full rights and benefits granted to the Secured Party by this Agreement free of any such restrictions.

Section 19.  Applicable Law.  This Agreement and any other instruments executed and delivered to evidence, complete or perfect the transactions contemplated hereby and thereby shall be interpreted, construed, applied and enforced in accordance with the laws of the Commonwealth of Massachusetts applicable to contracts between residents of Massachusetts which are to be performed entirely within Massachusetts regardless of (i) where any such instrument is executed or delivered; or (ii) where any payment or other performance required by any such instrument is made or required to be made; or (iii) where any breach of any provision of any such instrument occurs, or any cause of action otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, citizenship, domicile, principal place of business, or jurisdiction of organization or domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise would apply the laws of a jurisdiction other than the Commonwealth of Massachusetts; or (vii) any combination of the foregoing.

Section 20.  Arbitration.  The Secured Party or Pledgor may elect to submit any dispute hereunder that has an amount in controversy in excess of $250,000 to arbitration hereunder.  Any such arbitration shall be conducted in Boston, Massachusetts in accordance with the Commercial Arbitration Rules of the American Association then pertaining and the decision of the arbitrators with respect to such dispute shall be binding, final and conclusive on the parties.

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In the event the Secured Party or Pledgor shall elect to submit any such dispute to arbitration hereunder, the Secured Party and Pledgor shall each appoint and pay all fees of a fit and impartial person as arbitrator with at least ten (10) years’ recent professional experience in the general subject matter of the dispute.  Notice of such appointment shall be sent in writing by each party to the other, and the arbitrators so appointed, in the event of their failure to agree within thirty (30) days after the appointment of the second arbitrator upon the matter so submitted, shall appoint a third arbitrator.  If either the Secured Party or Pledgor shall fail to appoint an arbitrator, as aforesaid, for a period of twenty (20) days after written notice from the other party to make such appointment, then the arbitrator appointed by the party having made such appointment shall appoint a second arbitrator and the two (2) so appointed shall, in the event of their failure to agree upon any decision within thirty (30) days thereafter, appoint a third arbitrator.  If such arbitrators fail to agree upon a third arbitrator within forty five (45) days after the appointment of the second arbitrator, then such third arbitrator shall be appointed by the American Arbitration Association from its qualified panel of arbitrators, and shall be a person having at least ten (10) years’ recent professional experience as to the subject matter in question.  The fees of the third arbitrator and the expenses incident to the proceedings shall be borne equally between the Secured Party and Pledgor, unless the arbitrators decide otherwise.  The fees of respective counsel engaged by the parties, and the fees of expert witnesses and other witnesses called for the parties, shall be paid by the respective party engaging such counsel or calling or engaging such witnesses.

The decision of the arbitrators shall be rendered within thirty (30) days after appointment of the third arbitrator.  Such decision shall be in writing and in duplicate, one counterpart thereof to be delivered to the Secured Party and one to Pledgor.  A judgment of a court of competent jurisdiction may be entered upon the award of the arbitrators in accordance with the rules and statutes applicable thereto then obtaining.

The Secured Party and Pledgor acknowledge and agree that, to the extent any such dispute shall involve any Manager and be subject to arbitration pursuant to such Manager’s Management Agreement, the Secured Party and Pledgor shall cooperate to consolidate any such arbitration hereunder and under such Management Agreement into a single proceeding.

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Section 21.  Severability.  In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby, but this Agreement shall be reformed and construed and enforced to the maximum extent permitted by applicable law.

Section 22.  Entire Contract.  This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and shall supersede and take the place of any other instruments purporting to be an agreement of the parties hereto relating to the subject matter hereof.

Section 23.  Headings; Counterparts.  Headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof.  This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument, and in pleading or proving any provision of this Agreement, it shall not be necessary to produce more than one of such counterparts.

Section 24.  Nonliability of Trustees.  THE DECLARATION OF TRUST ESTABLISHING THE SECURED PARTY, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE “DECLARATION”), IS DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME “HRES1 PROPERTIES TRUST” REFERS TO THE TRUSTEES UNDER SUCH DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE SECURED PARTY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF OR CLAIM AGAINST, THE SECURED PARTY.  ALL PERSONS DEALING WITH THE SECURED PARTY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE SECURED PARTY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

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WITNESS the execution hereof under seal as of the date above first written.

PLEDGOR:

FSQ, INC.

a Delaware corporation

/s/ Evrett W. Benton

By: Evrett W. Benton

Its: President

SECURED PARTY:

HRES1 PROPERTIES TRUST,

a Maryland real estate investment trust

/s/ David J. Hegarty

By: David J. Hegarty

Its: President

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EX-12.1

Exhibit 12.1

FIVE STAR QUALITY CARE, INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(in thousands except ratios)

	Year ended December 31,
	2006			2005			2004		2003			2002
Consolidated (loss) earnings	$	(19,353	)	$	(4,772	)	$	68,732	$	48,756		$	48,004
Consolidated fixed charges	92,687			76,387			63,431		53,835			57,800
Ratio of consolidated earnings to fixed charges	N/M			N/M			1.1x		N/M			N/M
Deficiency	112,040			81,159			—		5,079			9,796
Calculation of consolidated (loss) earnings:
Consolidated (loss) income from continuing operations before income tax	$	(112,040	)	$	(81,159	)	$	5,301	$	(5,079	)	$	(9,796	)
Consolidated fixed charges	92,687			76,387			63,431		53,835			57,800
Consolidated (loss) earnings	$	(19,353	)	$	(4,772	)	$	68,732	$	48,756		$	48,004
Calculation of fixed charges:
Interest expense	$	3,983		$	3,347		$	882	$	1,164		$	198
Estimated interest component of rent expense	88,131			72,453			62,260		52,396			57,551
Amortization of debt discounts / premium	191			193			—		—			—
Amortization of capitalized deferred finance costs	382			394			289		275			51
Fixed charges	$	92,687		$	76,387		$	63,431	$	53,835		$	57,800

EX-21.1

Exhibit 21.1

Five Star Quality Care, Inc.

Subsidiaries of the Registrant

Affiliates Insurers Limited (Bermuda)

Alliance Pharmacy Services, LLC (Delaware)

CCC Boynton Beach, Inc. (Delaware)

Five Star Advertising, Inc. (Delaware)

Five Star Insurance, Inc. (Maryland)

Five Star MD Homes LLC (Delaware)

Five Star Procurement Group Trust (Maryland)

Five Star Rehabilitation and Wellness Services, LLC (Maryland)

Five Star Quality Care Trust (Maryland)

Five Star Quality Care-Ainsworth, LLC (Delaware)

Five Star Quality Care-Ashland, LLC (Delaware)

Five Star Quality Care-AZ, LLC (Delaware)

Five Star Quality Care-Blue Hill, LLC (Delaware)

Five Star Quality Care-CA II, INC. (Maryland)

Five Star Quality Care-CA II, LLC (Delaware)

Five Star Quality Care-CA, Inc. (Delaware)

Five Star Quality Care-CA, LLC (Delaware)

Five Star Quality Care-Central City, LLC (Delaware)

Five Star Quality Care-CO, Inc. (Maryland)

Five Star Quality Care-Colorado, LLC (Delaware)

Five Star Quality Care-Columbus, LLC (Delaware)

Five Star Quality Care-CT, LLC (Delaware)

Five Star Quality Care-Edgar, LLC (Delaware)

Five Star Quality Care-Exeter, LLC (Delaware)

Five Star Quality Care-Farmington, LLC (Delaware)

Five Star Quality Care-FL, LLC (Delaware)

Five Star Quality Care-GA, Inc. (Delaware)

Five Star Quality Care-GA, LLC (Delaware)

Five Star Quality Care-GHV, LLC (Maryland)

Five Star Quality Care-Grand Island, LLC (Delaware)

Five Star Quality Care-Gretna, LLC (Delaware)

Five Star Quality Care-Howell, LLC (Delaware)

Five Star Quality Care-IA, Inc. (Delaware)

Five Star Quality Care-IA, LLC (Delaware)

Five Star Quality Care-IL, LLC (Maryland)

Five Star Quality Care-KS, LLC (Delaware)

Five Star Quality Care-Lyons, LLC (Delaware)

Five Star Quality Care-MD, LLC (Delaware)

Five Star Quality Care-MI, Inc. (Delaware)

Five Star Quality Care-MI, LLC (Delaware)

Five Star Quality Care-Milford, LLC (Delaware)

Five Star Quality Care-MO, LLC (Delaware)

Five Star Quality Care-MVSP, LLC (Maryland)

Five Star Quality Care-NC, LLC (Delaware)

Five Star Quality Care-NE, Inc. (Delaware)

Five Star Quality Care-NE, LLC (Delaware)

Five Star Quality Care-Savannah, LLC (Delaware)

Five Star Quality Care-Sutherland, LLC (Delaware)

Five Star Quality Care-Utica, LLC (Delaware)

Five Star Quality Care-VA, LLC (Delaware)

Five Star Quality Care-Waverly, LLC (Delaware)

Five Star Quality Care-WI, Inc. (Delaware)

Five Star Quality Care-WI, LLC (Delaware)

Five Star Quality Care-WY, LLC (Delaware)

Five Star Seabury LLC (Delaware)

FS Commonwealth LLC (Maryland)

FS Lafayette Tenant Trust (Maryland)

FS Leisure Park Tenant Trust (Maryland)

FS Lexington Tenant Trust (Maryland)

FS Patriot LLC (Maryland)

FS Tenant Holding Company Trust (Maryland)

FS Tenant Pool I Trust (Maryland)

FS Tenant Pool II Trust (Maryland)

FS Tenant Pool III Trust (Maryland)

FS Tenant Pool IV Trust (Maryland)

FSQ Crown Villa Business Trust (Maryland)

FSQ Overland Park Place Business Trust (Maryland)

FSQ Pharmacy Holdings, LLC (Delaware)

FSQ Rio Las Palmas Business Trust (Maryland)

FSQ The Palms at Fort Myers Business Trust (Maryland)

FSQ Villa at Riverwood Business Trust (Maryland)

FSQ, Inc. (Delaware)

FSQ/LTA Holdings Inc. (Delaware)

FSQC Funding Co., LLC (Delaware)

FSQC Tellico Village LLC (Maryland)

FVEST.JOE, Inc. (Delaware)

Heartland Pharmacy Care, Inc. (Nebraska)

Heartland Promotions, Inc. (Nebraska)

LifeTrust America, Inc. (Tennessee)

LifeTrust Properties, LLC (Delaware)

LTA Management Services of Florida, LLC (Delaware)

LTA Management Services, LLC (Delaware)

Morningside Holdings of Concord, LLC (Delaware)

Morningside Holdings of Gastonia, LLC (Delaware)

Morningside Holdings of Greensboro, LLC (Delaware)

Morningside Holdings of Raleigh, LLC (Delaware)

Morningside Holdings of Williamsburg, LLC (Delaware)

Morningside of Alabama, L.P. (Delaware)

Morningside of Anderson, L.P. (Delaware)

Morningside of Athens, Limited Partnership (Delaware)

Morningside of Beaufort, LLC (Delaware)

Morningside of Bellgrade, Richmond, LLC (Delaware)

Morningside of Belmont, LLC (Delaware)

Morningside of Bowling Green, LLC (Delaware)

Morningside of Camden, LLC (Delaware)

Morningside of Charlottesville, LLC  (Delaware)

Morningside of Cleveland, LLC (Delaware)

Morningside of Columbus, L.P. (Delaware)

Morningside of Concord, LLC (Delaware)

Morningside of Conyers, LLC (Delaware)

Morningside of Cookeville, LLC (Delaware)

Morningside of Cullman, LLC (Delaware)

Morningside of Dalton, Limited Partnership (Delaware)

Morningside of Decatur, L.P. (Delaware)

Morningside of Evans, Limited Partnership (Delaware)

Morningside of Fayette, L.P. (Delaware)

Morningside of Franklin, LLC (Delaware)

Morningside of Gainesville, LLC (Delaware)

Morningside of Gallatin, LLC (Delaware)

Morningside of Gastonia, LLC (Delaware)

Morningside of Georgia, L.P. (Delaware)

Morningside of Greensboro, LLC (Delaware)

Morningside of Greenwood, L.P. (Delaware)

Morningside of Hartsville, LLC (Delaware)

Morningside of Hopkinsville, Limited Partnership (Delaware)

Morningside of Jackson, LLC  (Delaware)

Morningside of Kentucky, Limited Partnership  (Delaware)

Morningside of Knoxville, LLC  (Delaware)

Morningside of Lexington, LLC  (Delaware)

Morningside of Macon, LLC  (Delaware)

Morningside of Madison, LLC  (Delaware)

Morningside of Newport News, LLC  (Delaware)

Morningside of Orangeburg, LLC  (Delaware)

Morningside of Paducah, LLC  (Delaware)

Morningside of Paris, L.P.  (Delaware)

Morningside of Raleigh, LLC  (Delaware)

Morningside of Seneca, L.P.  (Delaware)

Morningside of Sheffield, LLC  (Delaware)

Morningside of Skipwith-Richmond, LLC  (Delaware)

Morningside of South Carolina, L.P.  (Delaware)

Morningside of Springfield, LLC  (Delaware)

Morningside of Tennessee, LLC  (Delaware)

Morningside of Williamsburg, LLC  (Delaware)

National LTC Pharmacy Services LLC (Delaware)

Orthopedic Rehabilitation Systems LLC (Maryland)

Progress Pharmacy LTD (Delaware)

Senior Living Insurance Co., Ltd (Cayman Islands)

Senior Living of Boynton Beach Limited Partnership (Delaware)

The Heartlands Retirement Community — Ellicott City I, Inc. (Maryland)

The Heartlands Retirement Community — Ellicott City II, Inc. (Maryland)

EX-23.1

Exhibit 23.1

Consent Of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statement (Forms S-3 No. 333-121910, No. 333-138926 and No. 333-138930) of Five Star Quality Care, Inc., and in the related prospectuses of our reports dated February 28, 2007, with respect to the consolidated financial statements of Five Star Quality Care, Inc.,  Five Star Quality Care, Inc. management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting of Five Star Quality Care, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2006.

/s/ Ernst & Young LLP

Boston, Massachusetts

February 28, 2007

EX-31.1

Exhibit 31.1

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

I, Evrett W. Benton, certify that:

1.I have reviewed this Annual Report on Form 10-K 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: March 7, 2007	/s/ Evrett W. Benton
	Evrett W. Benton
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

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

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

1.I have reviewed this Annual Report on Form 10-K 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: March 7, 2007	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C. Sec. 1350

(Section 906 of the Sarbanes — Oxley Act of 2002)

In connection with the filing by Five Star Quality Care, Inc. (the “Company”) of the Annual Report on Form 10-K for the year ended December 31, 2006 (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/ Evrett W. Benton

Evrett W. Benton

President and Chief Executive Officer

/s/ Bruce J. Mackey Jr.

Bruce J. Mackey Jr.

Treasurer and Chief Financial Officer

Date:       March 7, 2007