UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

FORM 10-Q

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

For the quarterly period ended September 30, 2017

OR

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

Commission File Number 1-15319

SENIOR HOUSING PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

Maryland	04-3445278
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

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

(Address of Principal Executive Offices) (Zip Code)

617-796-8350

(Registrant’s Telephone Number, Including Area Code)

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

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

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

Large accelerated filer ☒	Accelerated filer ☐
Non—accelerated filer ☐	Smaller reporting company ☐
(Do not check if a smaller reporting company)
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Number of registrant’s common shares outstanding as of November 8, 2017:237,630,409

SENIOR HOUSING PROPERTIES TRUST

FORM 10-Q

September 30, 2017

INDEX

		Page
PART I	Financial Information
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets — September 30, 2017 and December 31, 2016	1
	Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2017 and 2016	2
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2017 and 2016	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	48
	Warning Concerning Forward Looking Statements	49
	Statement Concerning Limited Liability	53
PART II	Other Information	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 5.	Other Information	54
Item 6.	Exhibits	55
	Signatures	57

References in this Quarterly Report on Form 10-Q to the Company, we, us or our include Senior Housing Properties Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

PART I. Financial Information

Item 1.  Financial Statements.

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)

	September 30,			December 31,
	2017			2016
ASSETS
Real estate properties:
Land	$	814,137		$	803,773
Buildings and improvements	7,023,311			6,926,750
	7,837,448			7,730,523
Accumulated depreciation	(1,475,360		)	(1,328,011		)
	6,362,088			6,402,512
Cash and cash equivalents	28,870			31,749
Restricted cash	14,088			3,829
Acquired real estate leases and other intangible assets, net	463,802			514,446
Other assets, net	318,893			275,218
Total assets	$	7,187,741		$	7,227,754
LIABILITIES AND EQUITY
Unsecured revolving credit facility	$	471,000		$	327,000
Unsecured term loans, net	547,253			547,058
Senior unsecured notes, net	1,724,936			1,722,758
Secured debt and capital leases, net	815,500			1,117,649
Accrued interest	32,185			18,471
Assumed real estate lease obligations, net	98,498			106,038
Other liabilities	210,814			189,375
Total liabilities	3,900,186			4,028,349
Commitments and contingencies
Equity:
Equity attributable to common shareholders:
Common shares of beneficial interest, $.01 par value: 300,000,000 shares authorized, 237,630,409 and 237,544,479 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	2,376			2,375
Additional paid in capital	4,609,029			4,533,456
Cumulative net income	1,701,495			1,618,885
Cumulative other comprehensive income	66,310			34,549
Cumulative distributions	(3,267,792		)	(2,989,860		)
Total equity attributable to common shareholders	3,111,418			3,199,405
Noncontrolling interest:
Total equity attributable to noncontrolling interest	176,137			—
Total equity	3,287,555			3,199,405
Total liabilities and equity	$	7,187,741		$	7,227,754

See accompanying notes.

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SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Revenues:
Rental income	$	168,348		$	165,503		$	501,437		$	490,922
Residents fees and services	98,331			98,480			294,816			292,803
Total revenues	266,679			263,983			796,253			783,725
Expenses:
Property operating expenses	104,714			103,347			308,565			298,776
Depreciation and amortization	66,619			72,344			209,463			214,938
General and administrative	19,883			12,107			57,889			34,931
Acquisition and certain other transaction related costs	—			824			292			1,443
Impairment of assets	—			4,578			5,082			16,930
Total expenses	191,216			193,200			581,291			567,018
Operating income	75,463			70,783			214,962			216,707
Dividend income	659			659			1,978			1,449
Interest and other income	128			89			323			330
Interest expense	(40,105		)	(43,438		)	(124,394		)	(123,837		)
Loss on early extinguishment of debt	(274		)	(84		)	(7,627		)	(90		)
Income from continuing operations before income tax expense and equity in earnings of an investee	35,871			28,009			85,242			94,559
Income tax expense	(109		)	(119		)	(300		)	(318		)
Equity in earnings of an investee	31			13			533			107
Income before gain on sale of properties	35,793			27,903			85,475			94,348
Gain on sale of properties	—			—			—			4,061
Net income	35,793			27,903			85,475			98,409
Net income attributable to noncontrolling interest	(1,379		)	—			(2,865		)	—
Net income attributable to common shareholders	$	34,414		$	27,903		$	82,610		$	98,409
Other comprehensive income:
Unrealized gain on investments in available for sale securities	7,333			16,562			26,383			56,680
Amounts reclassified from cumulative other comprehensive income to net income	—			—			5,082			—
Equity in unrealized gain of an investee	116			80			296			175
Other comprehensive income	7,449			16,642			31,761			56,855
Comprehensive income	43,242			44,545			117,236			155,264
Comprehensive income attributable to noncontrolling interest	(1,379		)	—			(2,865		)	—
Comprehensive income attributable to common shareholders	$	41,863		$	44,545		$	114,371		$	155,264
Weighted average common shares outstanding (basic)	237,421			237,347			237,404			237,329
Weighted average common shares outstanding (diluted)	237,460			237,396			237,445			237,369
Per common share amounts (basic and diluted):
Net income attributable to common shareholders	$	0.14		$	0.12		$	0.35		$	0.41

See accompanying notes.

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SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

	Nine Months Ended
	September 30,
	2017			2016
Cash flows from operating activities:
Net income	$	85,475		$	98,409
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	209,463			214,938
Amortization of debt issuance costs and debt discounts and premiums	4,050			4,272
Straight line rental income	(10,485		)	(13,598		)
Amortization of acquired real estate leases and other intangible assets	(3,963		)	(3,795		)
Loss on early extinguishment of debt	7,627			90
Impairment of assets	5,082			16,930
Gain on sale of properties	—			(4,061		)
Other non-cash adjustments	(2,829		)	(2,828		)
Equity in earnings of an investee	(533		)	(107		)
Change in assets and liabilities:
Restricted cash	(10,259		)	(170		)
Other assets	(390		)	2,990
Accrued interest	13,714			16,156
Other liabilities	27,438			13,170
Net cash provided by operating activities	324,390			342,396
Cash flows from investing activities:
Real estate acquisitions and deposits	(34,227		)	(188,523		)
Real estate improvements	(89,710		)	(72,455		)
Proceeds from sale of properties	—			29,179
Net cash used for investing activities	(123,937		)	(231,799		)
Cash flows from financing activities:
Proceeds from issuance of senior unsecured notes	—			250,000
Proceeds from borrowings on revolving credit facility	572,000			505,000
Proceeds from issuance of secured debt	—			620,000
Repayments of borrowings on revolving credit facility	(428,000		)	(1,065,000		)
Repayment of other debt	(303,964		)	(127,202		)
Loss on early extinguishment of debt settled in cash	(5,485		)	—
Payment of debt issuance costs	(6,836		)	(12,016		)
Repurchase of common shares	(341		)	(416		)
Proceeds from noncontrolling interest, net	255,813			—
Distributions to noncontrolling interest	(8,587		)	—
Distributions to shareholders	(277,932		)	(277,846		)
Net cash used for financing activities	(203,332		)	(107,480		)
(Decrease) increase in cash and cash equivalents	(2,879		)	3,117
Cash and cash equivalents at beginning of period	31,749			37,656
Cash and cash equivalents at end of period	$	28,870		$	40,773
Supplemental cash flows information:
Interest paid	$	106,629		$	103,409
Income taxes paid	$	441		$	363

See accompanying notes.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 1.  Basis of Presentation

The accompanying condensed consolidated financial statements of Senior Housing Properties Trust and its subsidiaries, or we, us, or our, are unaudited.  Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted.  We believe the disclosures made are adequate to make the information presented not misleading.  However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2016, or our Annual Report.  

In the opinion of our management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.  All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated.  Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

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

In March 2017, we entered a joint venture with a sovereign investor for one of our properties leased to medical providers, medical related business, clinics and biotech laboratory tenants, or a MOB (two buildings), located in Boston, Massachusetts. We have determined that this joint venture is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC. We concluded that we must consolidate this VIE because we are the entity with the power to direct the activities that most significantly impact the VIE’s economic performance and we have the obligation to absorb losses of, and the right to receive benefits from, the VIE that could be significant to the VIE, and therefore are the primary beneficiary of the VIE. The assets of this VIE were $1,112,959 as of September 30, 2017 and consist primarily of the net real estate owned by the joint venture. The liabilities of this VIE were $721,769 as of September 30, 2017 and consist primarily of the mortgage debts on the property. The sovereign investor's interest in this consolidated entity is reflected as noncontrolling interest in our condensed consolidated financial statements. See Note 7 for further information about this joint venture.

Note 2.  Recent Accounting Pronouncements

On January 1, 2017, we adopted FASB Accounting Standards Update, or ASU, No. 2017-01, Clarifying the Definition of a Business. This update provides additional guidance on evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or of a business. This update defines three requirements for a set of assets and activities (collectively referred to as a “set”) to be considered a business: inputs, processes and outputs. As a result of the implementation of this update, certain property acquisitions, which under previous guidance were accounted for as business combinations, are now accounted for as acquisitions of assets. In an acquisition of assets, certain acquisition costs are capitalized as opposed to expensed under previous guidance.

On January 1, 2017, we adopted FASB ASU No. 2016-09, Compensation - Stock Compensation, which identifies areas for simplification involving several aspects of accounting for share based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The adoption of ASU No. 2016-09 did not have a material impact in our condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU No. 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While ASU No. 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. In August 2015, the FASB provided for a one-year deferral of the effective date for ASU No. 2014-09, which is now effective for us beginning January 1, 2018. A substantial portion of our revenue consists of rental income from leasing arrangements, including leases with residents at properties leased to our taxable REIT subsidiaries, or TRSs, which is specifically excluded from ASU No. 2014-09. We are continuing to evaluate ASU No. 2014-09 (and related clarifying guidance issued by the FASB); however, we do

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

not expect its adoption to have a significant impact on the amount or timing of our revenue recognition in our condensed consolidated financial statements. We currently expect to adopt the standard using the modified retrospective approach.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes howentities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. This update is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted subject to certain conditions. Currently, changes in fair value of these investments are recorded through other comprehensive income. ASU No. 2016-01 states that these changes will be recorded through earnings. We are continuing to evaluate this guidance, but we expect the implementation of this guidance will affect how changes in the fair value of available for sale securities we hold are presented in our condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation anddisclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as eitherfinance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classificationwill determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is alsorequired to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a termof 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using anapproach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective forreporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No.2016-02 will have in our condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance is not expected to have a material impact in our condensed consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which clarifies how companies should present restricted cash and restricted cash equivalents. Companies will show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheets. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon the adoption of ASU No. 2016-18, we will reconcile both cash and cash equivalents and restricted cash and restricted cash equivalents, whereas under the current guidance we explain the changes during the period for cash and cash equivalents only.

In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, which clarifies which changes to the terms or conditions of a share based payment award are subject to the guidance on modification accounting under ASC 718. Entities would apply the modification accounting guidance unless the value, vesting requirements and classification of a share based payment award are the same immediately before and after a change to the terms or conditions of the award. ASU No. 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are continuing to evaluate ASU No. 2017-09; however, we do not expect its adoption to have a material impact in our condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 3.  Real Estate Properties

At September 30, 2017, we owned 435 properties (461 buildings) located in 42 states and Washington, D.C.

Acquisitions:

MOBs:

In January 2017, we acquired one MOB (one building) located in Kansas with approximately 117,000 square feet for a purchase price of approximately $15,106, including closing costs of $35.

In July 2017, we acquired one MOB (one building) located in Maryland with approximately 59,000 square feet for a purchase price of approximately $16,601, including closing costs of $383.

We funded these asset acquisitions using cash on hand and borrowings under our revolving credit facility. The allocations of the purchase prices for these acquisitions are as follows:

Date	Location	Number of Properties	Number of Buildings	Square Feet  (000’s)	Cash Paid plus Assumed Debt (1)		Land		Building and Improvements		Acquired Real Estate Leases(2)
1/17/2017	Kansas	1	1	117	$	15,106	$	1,522	$	7,246	$	6,338
7/12/2017	Maryland	1	1	59	16,601		6,138		6,526		3,937
		2	2	176	$	31,707	$	7,660	$	13,772	$	10,275

(1) Amount includes the cash we paid and various closing settlement adjustments, as well as closing costs.

(2) The weighted average amortization periods for acquired real estate leases at the time of these acquisitions was 7.8 years.

In October 2017, we acquired two MOBs (two buildings) located in Minnesota and North Carolina with a total of approximately 255,000 square feet for an aggregate purchase price of approximately $38,650, excluding closing costs.    

In August and October 2017, we entered agreements to acquire two MOBs (two buildings) located in California and Kansas with a total of approximately 302,000 square feet for an aggregate purchase price of approximately $71,100, excluding closing costs. These acquisitions are subject to conditions; accordingly, we may not acquire these properties, these acquisitions may be delayed or the terms may change.

In November 2017, we entered a transaction agreement with Five Star Senior Living Inc., or Five Star, pursuant to which we agreed to acquire six senior living communities from Five Star. The aggregate purchase price for these six senior living communities is approximately $104,000, including our assumption of $33,696 of mortgage debt securing certain of these senior living communities with a weighted average annual interest rate of 6.2% and excluding closing costs. The closings of these acquisitions are expected to occur as third party approvals are received between now and the end of the first quarter of 2018. These acquisitions are subject to conditions; accordingly, we may not acquire these senior living communities, these acquisitions may be delayed or the terms may change. See Note 10 for further information regarding this transaction.

Impairment and Held for Sale:

We periodically evaluate our assets for impairments. Impairment indicators may include declining tenant or resident occupancy, weak or declining profitability from the property, decreasing tenant cash flows or liquidity, our decision to dispose of an asset before the end of its estimated useful life, and legislative, market or industry changes that could permanently reduce the value of an asset. If indicators of impairment are present, we evaluate the carrying value of the affected asset by comparing it to the expected future undiscounted net cash flows to be generated from that asset. If the sum of these expected future net cash flows is less than the carrying value, we reduce the net carrying value of the asset to its estimated fair value. We did not record any impairment charges for our real estate properties during the nine months ended September 30, 2017. See Note 4 for further information regarding other than temporary impairment losses recorded in 2017 on our investments in available for sale securities.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 4.  Investments in Available for Sale Securities

At September 30, 2017, we owned 2,637,408 shares of class A common stock of The RMR Group Inc., or RMR Inc. We classify these shares as available for sale securities and carry them at fair value in other assets in our condensed consolidated balance sheets, with unrealized gains and losses reported as a component of shareholders’ equity. Our historical cost basis for these shares is $69,826. At September 30, 2017, our investment in RMR Inc. had a fair value of $135,431, resulting in a cumulative unrealized gain of $65,605 based on RMR Inc.’s quoted share price on The Nasdaq Stock Market LLC, or the Nasdaq, at September 30, 2017 ($51.35 per share).

At September 30, 2017, we owned 4,235,000 common shares of Five Star. We classify these shares as available for sale securities and carry them at fair value in other assets in our condensed consolidated balance sheets, with unrealized gains and losses reported as a component of shareholders’ equity. In performing our periodic evaluation of other than temporary impairment on our investment in Five Star for the second quarter of 2017, we determined that, based upon the length of time and the extent to which the market value of our Five Star investment was below the carrying value of our Five Star investment, the decline in fair value should be deemed to be other than temporary at June 30, 2017. Accordingly, we recorded a loss on impairment of $5,082 to reduce the carrying value of our Five Star investment to its estimated fair value during the second quarter of 2017. We determined the fair value using the closing price of Five Star's common shares on the Nasdaq on June 30, 2017 ($1.50 per share). At September 30, 2017, our Five Star investment had an adjusted cost basis of $6,353 and a fair value of $6,564, resulting in a cumulative unrealized gain of $211 based on Five Star's per share market price at September 30, 2017 ($1.55 per share).

See Notes 6 and 12 for further information regarding our investments in available for sale securities.

Note 5.  Indebtedness

Our principal debt obligations at September 30, 2017 were: (1) outstanding borrowings under our $1,000,000 unsecured revolving credit facility; (2) six public issuances of senior unsecured notes, including: (a) $400,000 principal amount at an annual interest rate of 3.25% due 2019, (b) $200,000 principal amount at an annual interest rate of 6.75% due 2020, (c) $300,000 principal amount at an annual interest rate of 6.75% due 2021, (d) $250,000 principal amount at an annual interest rate of 4.75% due 2024, (e) $350,000 principal amount at an annual interest rate of 5.625% due 2042 and (f) $250,000 principal amount at an annual interest rate of 6.25% due 2046; (3) our $350,000 principal amount unsecured term loan due 2020; (4) our $200,000 principal amount unsecured term loan due 2022; and (5) $806,418 aggregate principal amount of mortgages (excluding premiums, discounts and net debt issuance costs) secured by 24 of our properties (25 buildings) with maturity dates between 2018 and 2043.  The 24 mortgaged properties (25 buildings) had a carrying value (before accumulated depreciation) of $1,232,275 at September 30, 2017.  We also had two properties subject to capital leases with lease obligations totaling $10,892 at September 30, 2017; these two properties had a carrying value (before accumulated depreciation) of $36,234 at September 30, 2017, and the capital leases expire in 2026.

In April 2017, we prepaid a mortgage note secured by 17 of our properties with an outstanding principal balance of approximately $277,837 plus an aggregate premium of $5,449 plus accrued interest, a maturity date in September 2019 and an annual interest rate of 6.71%. In May 2017, we prepaid, at par plus accrued interest, a mortgage note secured by one of our properties with an outstanding principal balance of approximately $10,579, a maturity date in August 2017 and an annual interest rate of 6.15%. In June 2017, we prepaid, at par plus accrued interest, a mortgage note secured by one of our properties with an outstanding principal balance of approximately $8,807, a maturity date in August 2037 and an annual interest rate of 5.95%. We recorded loss on early extinguishment of debt of $7,353 for the nine months ended September 30, 2017 related to these prepayments.

We have a $1,000,000 revolving credit facility that is available for general business purposes, including acquisitions. Our revolving credit facility provides that we can borrow, repay and re-borrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity.  In August 2017, we amended the agreement governing our revolving credit facility. As a result of the amendment, the interest rate payable on borrowings under the facility was reduced from LIBOR plus a premium of 130 basis points per annum to LIBOR plus a premium of 120 basis points per annum, and the facility fee was reduced from 30 basis points per annum to 25 basis points per annum on the total amount of lending commitments under the facility. The interest rate premium and facility fee are each subject to adjustment based upon changes to our credit ratings. Also as a result of the amendment, the stated maturity date of the facility was extended from January 15, 2018 to January 15, 2022, and, subject to the payment of an extension fee and meeting other conditions, we have the option to extend the maturity date of the facility for an additional year. The facility also includes a feature pursuant to which in certain circumstances maximum borrowings

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

under the facility may be increased to up to $2,000,000. In connection with this amendment, in August 2017 we recorded loss on early extinguishment of debt of $149 to write off unamortized debt issuance costs.

As of September 30, 2017, the annual interest rate payable on borrowings under our revolving credit facility was 2.4%. The weighted average annual interest rates for borrowings under our revolving credit facility were 2.5% and 1.8% for the three months ended September 30, 2017 and 2016, respectively, and 2.3% and 1.7% for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, we had $471,000 outstanding and $529,000 available for borrowing, and as of November 8, 2017, we had $485,000 outstanding and $515,000 available for borrowing under our revolving credit facility. We incurred interest expense and other associated costs related to our revolving credit facility of $3,512 and $2,024 for the three months ended September 30, 2017 and 2016, respectively, and $8,538 and $9,159 for the nine months ended September 30, 2017 and 2016, respectively.

Our $350,000 term loan matures in January 2020, and is prepayable without penalty at any time. This term loan requires annual interest to be paid at the rate of LIBOR plus a premium of 140 basis points that is subject to adjustment based upon changes to our credit ratings. At September 30, 2017, the annual interest rate payable on amounts outstanding under this term loan was 2.6%.  The weighted average annual interest rate for amounts outstanding under this term loan was 2.6% and 1.9% for the three months ended September 30, 2017 and 2016, respectively, and 2.4% and 1.9% for the nine months ended September 30, 2017 and 2016, respectively. We incurred interest expense and other associated costs related to this term loan of $2,363 and $1,707 for the three months ended September 30, 2017 and 2016, respectively, and $6,419 and $4,956 for the nine months ended September 30, 2017 and 2016, respectively. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $700,000 in certain circumstances.

Our $200,000 term loan matures in September 2022, and is prepayable without penalty at any time beginning in September 2017. At September 30, 2017, the annual interest rate payable on amounts outstanding under this term loan was 2.6%. The weighted average annual interest rate for amounts outstanding under this term loan was 2.7% and 2.3% for the three months ended September 30, 2017 and 2016, respectively, and 2.7% and 2.3% for the nine months ended September 30, 2017 and 2016, respectively. We incurred interest expense and other associated costs related to this term loan of $1,404 and $1,173 for the three months ended September 30, 2017 and 2016, respectively, and $4,129 and $3,433 for the nine months ended September 30, 2017 and 2016, respectively. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $400,000 in certain circumstances. In August 2017, we amended the agreement governing this term loan. As a result of the amendment, the interest rate payable was reduced from LIBOR plus a premium of 180 basis points per annum to LIBOR plus a premium of 135 basis points per annum, subject to adjustment based upon changes to our credit ratings. In connection with this amendment, in August 2017 we recorded loss on early extinguishment of debt of $125 to write off unamortized debt issuance costs.

Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our revolving credit facility and term loan agreements, a change of control of us, as defined, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business and property manager. Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements also contain a number of covenants, including covenants that restrict our ability to incur debts, and generally require us to maintain certain financial ratios, and our revolving credit facility and term loan agreements restrict our ability to make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements at September 30, 2017.

8

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 6.  Fair Value of Assets and Liabilities

The table below presents certain of our assets measured at fair value at September 30, 2017, categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset: 

							Significant
	Total as of		Quoted Prices in Active		Significant Other		Unobservable
	September 30,		Markets for Identical		Observable Inputs		Inputs
Description	2017		Assets (Level 1)		(Level 2)		(Level 3)
Recurring Fair Value Measurements
Assets:
Investments in available for sale securities (1)	$	141,995	$	141,995	$	—	$	—

(1) Our investments in available for sale securities include our 2,637,408 shares of RMR Inc. class A common stock and our 4,235,000 Five Star common shares. The fair values of these shares are based upon quoted prices at September 30, 2017 in active markets (Level 1 inputs). See Notes 4 and 12 for further information on our investments in available for sale securities.

In addition to the assets described in the table above, our financial instruments at September 30, 2017 and December 31, 2016 included cash and cash equivalents, restricted cash, other assets, our revolving credit facility, term loans, senior unsecured notes, secured debt and capital leases and other unsecured obligations and liabilities. The fair values of these financial instruments approximated their carrying values in our condensed consolidated financial statements as of such dates, except as follows: 

	As of September 30, 2017				As of December 31, 2016
Description	Carrying Amount(1)		Estimated Fair Value		Carrying Amount(1)		Estimated Fair Value
Senior unsecured notes	$	1,724,936	$	1,823,535	$	1,722,758	$	1,755,715
Secured debt (2)	804,608		782,175		1,106,183		1,090,515
	$	2,529,544	$	2,605,710	$	2,828,941	$	2,846,230

(1) Includes unamortized debt issuance costs, premiums and discounts.

(2) We assumed certain of these secured debts in connection with our acquisitions of certain properties. We recorded the assumed mortgage debts at estimated fair value on the date of acquisition and we are amortizing the fair value adjustments, if any, to interest expense over the respective terms of the mortgage debts to adjust interest expense to the estimated market interest rates as of the date of acquisition.

We estimated the fair value of our two issuances of senior unsecured notes due 2042 and 2046 based on the closing price on the Nasdaq (a Level 1 input) as of September 30, 2017. We estimated the fair values of our four issuances of senior unsecured notes due 2019, 2020, 2021 and 2024 using an average of the bid and ask price on or about September 30, 2017 (Level 2 inputs as defined in the fair value hierarchy under GAAP).  We estimated the fair values of our secured debts by using discounted cash flows analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

Note 7. Noncontrolling Interest

In March 2017, we entered a joint venture with a sovereign investor for one of our MOBs (two buildings) located in Boston, Massachusetts. The investor contributed approximately $260,891 for a 45% equity interest in the joint venture, and we retained the remaining 55% equity interest in the joint venture. Net proceeds from this transaction were approximately $255,813, after transaction costs. We continue to effectively control this property and therefore continue to account for this property on a consolidated basis in our condensed consolidated financial statements under the VIE model.

This transaction was considered a partial sale of real estate that did not result in profit recognition under the full accrual method due to our continuing involvement in the entity. We recognized a noncontrolling interest in our condensed consolidated balance sheets of approximately $181,859 as of completion of the transaction, which was equal to 45% of the aggregate carrying value of the total equity of the property immediately prior to the transaction. The difference between the net proceeds received from this transaction and the noncontrolling interest recognized, which was approximately $73,954, has been reflected as an increase in additional paid in capital in our condensed consolidated balance sheets. The portion of the joint venture's net income and

9

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

comprehensive income not attributable to us, or $1,379 and $2,865 for the three and nine months ended September 30, 2017, respectively, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income. We made aggregate cash distributions to our joint venture partner of $5,105 and $8,587 during the three and nine months ended September 30, 2017, respectively, which are reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated balance sheets. As of September 30, 2017, this joint venture held real estate assets with an aggregate net book value of $989,432, subject to mortgage debts of $620,000.

In assessing whether we have a controlling interest in this joint venture arrangement and the requirement to consolidate the accounts of the joint venture entity, we considered the members' rights to residual gains and obligation to absorb losses, which activities most significantly impact the economic performance of the entity and which member has the power to direct those activities.

Note 8.  Shareholders’ Equity

Share Issuances and Repurchases:

On May 18, 2017, we granted 3,000 of our common shares, valued at $21.25 per share, the closing price of our common shares on the Nasdaq on that day, to each of our five Trustees as part of their annual compensation.

On June 30, 2017, we purchased 516 of our common shares, valued at $20.44 per share, the closing price of our common shares on the Nasdaq on that day, from former employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with vesting of awards of our common shares.

On September 14, 2017, we granted an aggregate of 88,100 of our common shares to our officers and certain other employees of RMR LLC, valued at $19.78 per share, the closing price of our common shares on the Nasdaq on that day.

On September 19, 2017, we purchased an aggregate of 16,654 of our common shares, valued at $19.85 per share, the closing price of our common shares on the Nasdaq on that day, from certain employees of RMR LLC, in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.

Distributions:

On February 21, 2017, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,642, that was declared on January 13, 2017 and was payable to shareholders of record on January 23, 2017. On May 18, 2017, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,642, that was declared on April 11, 2017 and was payable to shareholders of record on April 21, 2017. On August 17, 2017, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,648, that was declared on July 12, 2017 and was payable to shareholders of record on July 24, 2017. On October 12, 2017, we declared a regular quarterly distribution payable to common shareholders of record on October 23, 2017 of $0.39 per share, or approximately $92,676. We expect to pay this distribution on or about November 16, 2017.

Note 9.  Segment Reporting

As of September 30, 2017, we have four operating segments, of which three are separate reporting segments. We aggregate our triple net leased senior living communities, our managed senior living communities and our MOBs into three reporting segments, based on their similar operating and economic characteristics. The first reporting segment includes triple net leased senior living communities that provide short term and long term residential care and other services for residents and with respect to which we receive rents from the operators. The second reporting segment includes managed senior living communities that provide short term and long term residential care and other services for residents where we pay fees to the operator to manage the communities for our account. The third reporting segment includes MOBs where the tenants pay us rent. Our fourth segment includes all of our other operations, including certain properties that offer wellness, fitness and spa services to members and with respect to which we receive rents from operators, which we do not consider to be sufficiently material to constitute a separate reporting segment.

10

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

	For the Three Months Ended September 30, 2017
	Triple Net Leased Senior Living Communities			Managed Senior Living Communities			MOBs			All Other Operations			Consolidated
Revenues:
Rental income	$	67,662		$	—		$	96,116		$	4,570		$	168,348
Residents fees and services	—			98,331			—			—			98,331
Total revenues	67,662			98,331			96,116			4,570			266,679
Expenses:
Property operating expenses	—			75,556			29,158			—			104,714
Depreciation and amortization	20,629			12,691			32,351			948			66,619
General and administrative	—			—			—			19,883			19,883
Total expenses	20,629			88,247			61,509			20,831			191,216
Operating income (loss)	47,033			10,084			34,607			(16,261		)	75,463
Dividend income	—			—			—			659			659
Interest and other income	—			—			—			128			128
Interest expense	(655		)	(1,172		)	(6,172		)	(32,106		)	(40,105		)
Loss on early extinguishment of debt	—			—			—			(274		)	(274		)
Income (loss) from continuing operations before income tax expense and equity in earnings of an investee	46,378			8,912			28,435			(47,854		)	35,871
Income tax expense	—			—			—			(109		)	(109		)
Equity in earnings of an investee	—			—			—			31			31
Net income (loss)	46,378			8,912			28,435			(47,932		)	35,793
Net income attributable to noncontrolling interest	—			—			(1,379		)	—			(1,379		)
Net income (loss) attributable to common shareholders	$	46,378		$	8,912		$	27,056		$	(47,932	)	$	34,414
	As of September 30, 2017
	Triple Net Leased Senior Living Communities			Managed Senior Living Communities			MOBs			All Other Operations			Consolidated
Total assets	$	2,270,952		$	1,241,190		$	3,290,138		$	385,461		$	7,187,741

11

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

	For the Three Months Ended September 30, 2016
	Triple Net Leased Senior Living Communities			Managed Senior Living Communities			MOBs			All Other Operations			Consolidated
Revenues:
Rental income	$	66,520		$	—		$	94,404		$	4,579		$	165,503
Residents fees and services	—			98,480			—			—			98,480
Total revenues	66,520			98,480			94,404			4,579			263,983
Expenses:
Property operating expenses	47			74,763			28,537			—			103,347
Depreciation and amortization	19,727			20,747			30,922			948			72,344
General and administrative	—			—			—			12,107			12,107
Acquisition and certain other transaction related costs	—			—			—			824			824
Impairment of assets	2,191			2,394			(7		)	—			4,578
Total expenses	21,965			97,904			59,452			13,879			193,200
Operating income (loss)	44,555			576			34,952			(9,300		)	70,783
Dividend income	—			—			—			659			659
Interest and other income	—			—			—			89			89
Interest expense	(6,228		)	(2,104		)	(5,599		)	(29,507		)	(43,438		)
Loss on early extinguishment of debt	—			(84		)	—			—			(84		)
Income (loss) from continuing operations before income tax expense and equity in earnings of an investee	38,327			(1,612		)	29,353			(38,059		)	28,009
Income tax expense	—			—			—			(119		)	(119		)
Equity in earnings of an investee	—			—			—			13			13
Net income (loss)	$	38,327		$	(1,612	)	$	29,353		$	(38,165	)	$	27,903
	As of December 31, 2016
	Triple Net Leased Senior Living Communities			Managed Senior Living Communities			MOBs			All Other Operations			Consolidated
Total assets	$	2,289,045		$	1,260,032		$	3,333,141		$	345,536		$	7,227,754

12

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

	For the Nine Months Ended September 30, 2017
	Triple Net Leased Senior Living Communities			Managed Senior Living Communities			MOBs			All Other Operations			Consolidated
Revenues:
Rental income	$	202,340		$	—		$	285,413		$	13,684		$	501,437
Residents fees and services	—			294,816			—			—			294,816
Total revenues	202,340			294,816			285,413			13,684			796,253
Expenses:
Property operating expenses	—			224,585			83,980			—			308,565
Depreciation and amortization	61,434			49,295			95,890			2,844			209,463
General and administrative	—			—			—			57,889			57,889
Acquisition and certain other transaction related costs	—			—			—			292			292
Impairment of assets	—			—			—			5,082			5,082
Total expenses	61,434			273,880			179,870			66,107			581,291
Operating income (loss)	140,906			20,936			105,543			(52,423		)	214,962
Dividend income	—			—			—			1,978			1,978
Interest and other income	—			—			—			323			323
Interest expense	(8,205		)	(3,523		)	(18,742		)	(93,924		)	(124,394		)
Loss on early extinguishment of debt	(7,294		)	—			(59		)	(274		)	(7,627		)
Income (loss) from continuing operations before income tax expense and equity in earnings of an investee	125,407			17,413			86,742			(144,320		)	85,242
Income tax expense	—			—			—			(300		)	(300		)
Equity in earnings of an investee	—			—			—			533			533
Net income (loss)	125,407			17,413			86,742			(144,087		)	85,475
Net income attributable to noncontrolling interest	—			—			(2,865		)	—			(2,865		)
Net income (loss) attributable to common shareholders	$	125,407		$	17,413		$	83,877		$	(144,087	)	$	82,610
	As of September 30, 2017
	Triple Net Leased Senior Living Communities			Managed Senior Living Communities			MOBs			All Other Operations			Consolidated
Total assets	$	2,270,952		$	1,241,190		$	3,290,138		$	385,461		$	7,187,741

13

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

	For the Nine Months Ended September 30, 2016
	Triple Net Leased Senior Living Communities			Managed Senior Living Communities			MOBs			All Other Operations			Consolidated
Revenues:
Rental income	$	198,269		$	—		$	278,964		$	13,689		$	490,922
Residents fees and services	—			292,803			—			—			292,803
Total revenues	198,269			292,803			278,964			13,689			783,725
Expenses:
Property operating expenses	833			218,582			79,361			—			298,776
Depreciation and amortization	58,401			60,905			92,788			2,844			214,938
General and administrative	—			—			—			34,931			34,931
Acquisition and certain other transaction related costs	—			—			—			1,443			1,443
Impairment of assets	6,583			2,394			7,953			—			16,930
Total expenses	65,817			281,881			180,102			39,218			567,018
Operating income (loss)	132,452			10,922			98,862			(25,529		)	216,707
Dividend income	—			—			—			1,449			1,449
Interest and other income	—			—			—			330			330
Interest expense	(18,892		)	(7,332		)	(7,398		)	(90,215		)	(123,837		)
Loss on early extinguishment of debt	—			(90		)	—			—			(90		)
Income (loss) from continuing operations before income tax expense and equity in earnings of an investee	113,560			3,500			91,464			(113,965		)	94,559
Income tax expense	—			—			—			(318		)	(318		)
Equity in earnings of an investee	—			—			—			107			107
Income (loss) from before gain on sale of properties	113,560			3,500			91,464			(114,176		)	94,348
Gain on sale of properties	4,061			—			—			—			4,061
Net income (loss)	$	117,621		$	3,500		$	91,464		$	(114,176	)	$	98,409
	As of December 31, 2016
	Triple Net Leased Senior Living Communities			Managed Senior Living Communities			MOBs			All Other Operations			Consolidated
Total assets	$	2,289,045		$	1,260,032		$	3,333,141		$	345,536		$	7,227,754

Note 10. Leases and Management Agreements with Five Star

Our Senior Living Communities Leased by Five Star. We are Five Star’s largest landlord and Five Star is our largest tenant. As of September 30, 2017 and 2016, we leased 185 and 183 senior living communities to Five Star, respectively. We lease senior living communities to Five Star pursuant to five leases with Five Star. We recognized total rental income from Five Star of $51,333, and $50,417 for the three months ended September 30, 2017 and 2016, respectively, and $153,441 and $146,758 for the nine months ended September 30, 2017 and 2016, respectively. These amounts exclude percentage rent payments we received from Five Star of $1,353 and $1,367 for the three months ended September 30, 2017 and 2016, respectively, and $4,190 and $4,228 for the nine months ended September 30, 2017 and 2016, respectively. We determine actual percentage rent due under our Five Star leases annually and recognize any resulting amount as rental income at year end when all contingencies are met. As of September 30,

14

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

2017 and December 31, 2016, we had rents receivable from Five Star of $17,120 and $18,320, respectively, which amounts are included in other assets in our condensed consolidated balance sheets. Rental income from Five Star represented 19.2% and 19.3% of our total revenues for the three and nine months ended September 30, 2017, respectively, and the properties Five Star leases from us represented 27.5% of our total gross book value of real estate assets as of September 30, 2017.

Pursuant to the terms of our leases with Five Star, for the nine months ended September 30, 2017 and 2016, we funded $30,698 and $15,306, respectively, of improvements to communities leased to Five Star. As a result, the annual rent payable to us by Five Star increased by approximately $2,464 and $1,228, respectively. During the quarter ended June 30, 2017, we and Five Star agreed to amend the applicable lease for certain construction, expansion and development projects at two senior living communities we own and lease to Five Star. If and when Five Star requests that we purchase improvements related to these specific projects from them, Five Star’s annual rent payable to us will increase by an amount equal to the interest rate then applicable to our borrowings under our revolving credit facility plus 2% per annum of the amount we purchased. This amount of increased rent will apply until 12 months after a certificate of occupancy is issued with respect to the project; thereafter, Five Star’s annual rent payable to us will be revised to equal the amount determined pursuant to the capital improvement formula specified in the applicable lease.

In August 2017, we acquired a land parcel from Five Star adjacent to a senior living community located in Delaware that we lease to Five Star for $750, excluding closing costs. This land parcel was added to the applicable lease and Five Star’s annual minimum rent payable to us increased by $33 in accordance with the terms of that lease.

In June 2016, we acquired seven senior living communities from Five Star for an aggregate purchase price of $112,350, and we simultaneously leased these communities back to Five Star under a new long term lease agreement.

Our Senior Living Communities Managed by Five Star. Five Star managed 68 and 63 senior living communities for our account as of September 30, 2017 and 2016, respectively. We lease our senior living communities that are managed by Five Star and include assisted living units or skilled nursing facility, or SNF, units to our TRSs and Five Star manages these communities pursuant to long term management agreements. We incurred management fees payable to Five Star of $3,414 and $3,070 for the three months ended September 30, 2017 and 2016, respectively, and $10,531 and $8,689 for the nine months ended September 30, 2017 and 2016, respectively. These amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

In addition to management services to us, Five Star also provides certain other services to residents at some of the senior living communities it manages for us, such as rehabilitation services. At senior living communities Five Star manages for us where Five Star provides rehabilitation services on an outpatient basis, the residents, third party payers or government programs pay Five Star for those rehabilitation services. At senior living communities Five Star manages for us where Five Star provides both inpatient and outpatient rehabilitation services, we generally pay Five Star for these services and charges for these services are included in amounts charged to residents, third party payers or government programs. We incurred fees of $1,884 and $1,866 for the three months ended September 30, 2017 and 2016, respectively, and $5,713 and $5,755 for the nine months ended September 30, 2017 and 2016, respectively, for rehabilitation services Five Star provided at senior living communities it manages for us and that are payable by us; we include these amounts in property operating expenses in our condensed consolidated statement of comprehensive income.

In November 2017, we entered a transaction agreement with Five Star pursuant to which we agreed to acquire six senior living communities from Five Star. We will enter management and pooling agreements with Five Star as we acquire these communities for Five Star to manage these senior living communities for us. The aggregate purchase price for these six senior living communities is approximately $104,000, including our assumption of approximately $33,696 of mortgage debt securing certain of these senior living communities and excluding closing costs. These acquisitions are subject to conditions, including our assumption of certain applicable mortgage debt and receipt of any applicable regulatory approvals. We expect to complete these acquisitions as third party approvals are received between now and the end of the first quarter of 2018; however, the conditions to our acquisitions of these senior living communities may not be met and some or all of these acquisitions and related management and pooling arrangements may not occur, may be delayed or the terms may change.

The management agreements we and Five Star will enter in connection with our acquisitions of these senior living communities will be combined pursuant to two new pooling agreements to be entered between us and Five Star. The first new pooling agreement will combine the management agreements for five of these senior living communities. Pursuant to the terms of the management and pooling agreements to be entered for these five senior living communities, we will pay Five Star a

15

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

management fee equal to 5% of the gross revenues realized at these communities plus reimbursement for Five Star’s direct costs and expenses related to its operation of these communities, as well as an annual incentive fee equal to 20% of the annual net operating income of such communities remaining after we realize an annual minimum return equal to 7% of our invested capital for these senior living communities. The second new pooling agreement will include one management agreement for a senior living community that is subject to an ongoing construction, expansion and development project. The terms of the management and pooling agreements to be entered for this senior living community will be substantially the same as the terms of the management and pooling agreements for the other five senior living communities, except that our annual minimum return on invested capital related to the ongoing, construction and development project at this community will be an amount equal to the interest rate then applicable to borrowings under our revolving credit facility plus 2% per annum. This amount of minimum return will apply until the earlier of 12 months after a certificate of occupancy is issued with respect to the project and the third anniversary of our acquisition of this community; thereafter, the amount of annual minimum return on invested capital related to this project will be 7% of our invested capital. Also pursuant to the terms of the management and pooling agreements to be entered for these six senior living communities, we will pay Five Star a fee for its management of capital expenditure projects at these senior living communities equal to 3% of amounts funded by us. The terms of these management and pooling agreements will expire in 2041 and will be subject to automatic renewals, unless earlier terminated or timely notices of nonrenewal are delivered.

Also in November 2017, we amended our preexisting pooling agreements with Five Star, among other things, to provide that, with respect to our right to terminate all of the management agreements covered by a preexisting pooling agreement if we do not receive our annual minimum return under such agreement in each of three consecutive years, the commencement year for the measurement period for determining whether the specified annual minimum return under the applicable pooling agreement has been achieved will be 2017.

During the quarter ended June 30, 2017, we and Five Star agreed to amend the applicable management and pooling agreements for a construction, expansion and development project at a senior living community that we own and that is managed by Five Star. Our minimum return on invested capital for this specific project will increase by an amount equal to the interest rate then applicable to our borrowings under our revolving credit facility plus 2% per annum. This amount of increased minimum return will apply until 12 months after a certificate of occupancy is issued with respect to the project; thereafter, the amount of annual minimum return on invested capital will be revised to equal the amount determined pursuant to the applicable management and pooling agreements. We and Five Star also agreed that the commencement of the measurement period for determining whether the specified annual minimum return under the applicable management and pooling agreements has been achieved will be deferred until 12 months after a certificate of occupancy is issued with respect to the project.

Simultaneously with the June 2016 sale and leaseback transaction, we and Five Star terminated three of our four then existing pooling agreements and entered 10 new pooling agreements that combine our management agreements with Five Star for senior living communities that include assisted living units or SNF units. Pursuant to these management agreements and the pooling agreements, Five Star receives management fees equal to either 3% or 5% of the gross revenues realized at the applicable communities, reimbursement for its direct costs and expenses related to such communities, annual incentive fees if certain operating results at those communities are achieved and fees for its supervision of capital expenditure projects at those communities equal to 3% of amounts funded by us.

Under the pooling agreements, the calculations of Five Star's fees and of our annual minimum returns related to management agreements that include assisted living units that became effective before May 2015 and had been pooled under one of the previously existing pooling agreements are generally the same as they were under the previously existing pooling agreements. However, for certain communities, the pooling agreements reduced our annual minimum returns, and, with respect to 10 communities, reset the annual minimum returns we receive before Five Star is paid incentive fees to specified amounts. For those management agreements that include assisted living units that became effective from and after May 2015, the pooling agreements increased the management fees Five Star receives from 3% to 5% of the gross revenues realized at the applicable communities, and changed the potential annual incentive fees from 35% to 20% of the annual net operating income, or NOI, of the applicable communities remaining after we realize our requisite annual minimum returns.

Note 11. Business and Property Management Agreements with RMR LLC

We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to the property level operations of our MOBs. We also have a subsidiary level management agreement with RMR LLC related to one of our MOBs located in Boston, Massachusetts, which we entered in connection with the joint venture arrangement for that MOB. Under that agreement,

16

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

our subsidiary pays RMR LLC certain business management fees directly, which fees are credited against the business management fees payable by us to RMR LLC.

Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $17,744 and $9,609 for the three months ended September 30, 2017 and 2016, respectively, and $50,956 and $27,199 for the nine months ended September 30, 2017 and 2016, respectively. The business management fees for the three and nine months ended September 30, 2017 also include $725 and $1,512, respectively, of management fees related to our subsidiary level management agreement with RMR LLC entered in connection with our joint venture arrangement. The business management fees for the three and nine months ended September 30, 2017 included estimated annual incentive fees for 2017 of $8,022 and $22,048, respectively, based on our common share total return, as defined, as of September 30, 2017. Although we recognized estimated incentive fees in accordance with GAAP, the actual amount of annual incentive fees payable to RMR LLC for 2017, if any, will be based on our common share total return, as defined, for the three year period ending December 31, 2017, and will be payable in 2018. The net business management fees we recognized for the 2017 and 2016 periods are included in general and administrative expense in our consolidated statements of comprehensive income.

Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $2,736 and $2,961 for the three months ended September 30, 2017 and 2016, respectively, and $8,034 and $8,193 for the nine months ended September 30, 2017 and 2016, respectively. These amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf. Our property level operating expenses, including certain payroll and related costs incurred by RMR LLC, are generally incorporated into rents charged to our tenants. We reimbursed RMR LLC $2,353 and $2,482 for property management related expenses for the three months ended September 30, 2017 and 2016, respectively, and $7,116 and $6,781 for the nine months ended September 30, 2017 and 2016, respectively, which amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income. In addition, we are responsible for our share of RMR LLC's costs for providing our internal audit function. The amounts recognized as expense for internal audit costs were $72 and $34 for the three months ended September 30, 2017 and 2016, respectively, and $206 and $168 for the nine months ended September 30, 2017 and 2016, respectively, which amounts are included in general and administrative expense in our condensed consolidated statements of comprehensive income.

Note 12. Related Person Transactions

We have relationships and historical and continuing transactions with Five Star, RMR LLC, RMR Inc., Affiliates Insurance Company, or AIC, and others related to them, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also our Trustees or officers. 

Five Star.  We are currently one of Five Star’s largest stockholders. As of September 30, 2017, we owned 4,235,000 of Five Star’s common shares, or approximately 8.5% of Five Star’s outstanding common shares.  Five Star is our largest tenant and the manager of our managed senior living communities. As of September 30, 2017, our Managing Trustees, the controlling shareholders of RMR LLC's parent, beneficially owned, directly and indirectly, 36.7% of Five Star's outstanding common shares. RMR LLC provides management services to both us and Five Star. See Note 10 for further information regarding our relationships, agreements and transactions with Five Star and Note 4 for further information regarding our investment in Five Star.

Our Manager, RMR LLC. See Note 11 for further information regarding our management agreements with RMR LLC.

We have historically granted share awards to certain RMR LLC employees under our equity compensation plans. In September 2017 and 2016, we granted annual share awards of 88,100 and 79,650 of our common shares, respectively, to our officers and certain other employees of RMR LLC. In September 2017 and 2016, we purchased 16,654 and 17,667 of our common shares, respectively, at the closing price of our common shares on the Nasdaq on the date of purchase, from certain employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. We include the amounts recognized as expense for share awards to RMR LLC employees in general and administrative expenses in our condensed consolidated statements of comprehensive income.

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

RMR Inc. RMR LLC is a subsidiary of RMR Inc. and RMR Inc. is the managing member of RMR LLC. The controlling shareholder of RMR Inc., ABP Trust, is owned by our Managing Trustees. As of September 30, 2017, we owned 2,637,408 shares of class A common stock of RMR Inc.  See Note 4 for further information regarding our investment in RMR Inc.

AIC. We, ABP Trust, Five Star and four other companies to which RMR LLC provides management services currently own AIC, an Indiana insurance company, in equal amounts. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC; we also have a one year standalone insurance policy that provides coverage for our MOB (two buildings) located in Boston, Massachusetts that is owned in our joint venture arrangement, which we obtained as a part of this insurance program. We (including our consolidated joint venture) currently expect to pay aggregate annual premiums, including taxes and fees, of approximately $2,433 in connection with this insurance program for the policy year ending June 30, 2018, which amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program.

As of September 30, 2017 and December 31, 2016, our investment in AIC had a carrying value of $7,945 and $7,116, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. We recognized income related to our investment in AIC, which amounts are presented as equity in earnings of an investee in our condensed consolidated statements of comprehensive income. Our other comprehensive income includes our proportionate part of unrealized gains (losses) on securities which are owned and held for sale by AIC.

For further information about these and certain other related person relationships and transactions, please refer to our Annual Report.

Note 13.  Income Taxes

We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, and as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We do, however, lease certain managed senior living communities to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated federal corporate income tax return and are subject to federal and state income taxes.  Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state income taxes we incur despite our taxation as a REIT.  During the three months ended September 30, 2017 and 2016, we recognized income tax expense of $109 and $119, respectively, and during the nine months ended September 30, 2017 and 2016, we recognized income tax expense of $300 and $318, respectively.

Note 14. Weighted Average Common Shares

The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands): 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
Weighted average common shares for basic earnings per share	237,421	237,347	237,404	237,329
Effect of dilutive securities: unvested share awards	39	49	41	40
Weighted average common shares for diluted earnings per share	237,460	237,396	237,445	237,369

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

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and with our Annual Report.

We are a REIT organized under Maryland law. At September 30, 2017, we owned 435 properties (461 buildings) located in 42 states and Washington, D.C.  At September 30, 2017, the undepreciated carrying value of our real estate assets was $8.5 billion. For the three months ended September 30, 2017, 97% of our NOI came from properties where a majority of the revenues are paid from our residents’ and tenants’ private resources.

PORTFOLIO OVERVIEW

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

		Number of						Investment per				% of				% of
	Number of	Units or		Carrying Value		% of Total		Unit or		Q3 2017		Q3 2017		Q3 2017		Q3 2017
(As of September 30, 2017)	Properties	Square Feet		of Investment (1)		Investment		Square Foot (2)		Revenues		Revenues		NOI (3)		NOI(3)
Facility Type
Independent living (4)	68	16,452		$	2,373,413	28.0	%	$	144,263	$	88,539	33.2	%	$	45,939	28.4	%
Assisted living (4)	197	14,444		2,121,398		25.1	%	$	146,871	73,213		27.5	%	40,257		24.9	%
Skilled nursing facilities (4)	39	4,131		188,514		2.2	%	$	45,634	4,241		1.6	%	4,241		2.6	%
Subtotal senior living communities	304	35,027		4,683,325		55.3	%	$	133,706	165,993		62.3	%	90,437		55.9	%
MOBs (5)	121	11,611,203	sq. ft.	3,602,819		42.6	%	$	310	96,116		36.0	%	66,958		41.3	%
Wellness centers	10	812,000	sq. ft.	178,172		2.1	%	$	219	4,570		1.7	%	4,570		2.8	%
Total	435			$	8,464,316	100.0	%			$	266,679	100.0	%	$	161,965	100.0	%
Tenant / Operator / Managed Properties
Five Star	185	20,187		$	2,326,945	27.5	%	$	115,269	$	51,337	19.2	%	$	51,337	31.7	%
Sunrise / Marriott (6)	4	1,619		126,326		1.5	%	$	78,027	3,132		1.2	%	3,132		1.9	%
Brookdale	18	894