FIVE STAR QUALITY CARE INC (Form: 10-Q, Received: 08/01/2012 14:54:02)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2012

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

Commission File Number 001-16817

FIVE STAR QUALITY CARE, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

400 Centre Street, Newton, Massachusetts 02458

(Address of Principal Executive Offices) (Zip Code)

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

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

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

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

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

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

Number of registrant’s shares of common stock, $.01 par value, outstanding as of July 31, 2012: 47,927,432.

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FIVE STAR QUALITY CARE, INC.

FORM 10-Q

JUNE 30, 2012

I NDEX

		Page

PART I	Financial Information

Item 1.	Condensed Consolidated Financial Statements (unaudited)	1

	Condensed Consolidated Balance Sheet — June 30, 2012 and December 31, 2011	1

	Condensed Consolidated Statement of Income — Three and Six Months Ended June 30, 2012 and 2011	2

	Condensed Consolidated Statement of Comprehensive Income — Three and Six Months Ended June 30, 2012 and 2011	3

	Condensed Consolidated Statement of Cash Flows — Six Months Ended June 30, 2012 and 2011	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	32

	Warning Concerning Forward Looking Statements	33

PART II	Other Information

Item 6.	Exhibits	37

	Signatures	38

As used herein the terms “we”, “us” and “our” refer to Five Star Quality Care, Inc. and its consolidated subsidiaries unless otherwise noted.

Table of Contents

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in thousands, except per share data)

(unaudited)

	June 30, 2012			December 31, 2011
ASSETS

Current assets:
Cash and cash equivalents	$	23,635		$	28,374
Accounts receivable, net of allowance of $4,348 and $4,703 at June 30, 2012 and December 31, 2011, respectively	63,130			64,265
Investments in available for sale securities, of which $5,851 and $5,905 are restricted as of June 30, 2012 and December 31, 2011, respectively	14,993			9,114
Restricted cash	6,507			4,838
Prepaid expenses and other current assets	22,073			26,250
Assets of discontinued operations	8,401			8,675
Total current assets	138,739			141,516

Property and equipment, net	337,836			335,256
Equity investment in Affiliates Insurance Company	5,408			5,291
Restricted cash	6,313			4,092
Restricted investments in available for sale securities	11,299			13,115
Goodwill and other intangible assets	31,857			33,079
Other long term assets	50,233			51,128
	$	581,685		$	583,477
LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Revolving credit facility, secured, principally by real estate	$	37,500		$	—
Revolving credit facility, secured, principally by accounts receivable	—			—
Accounts payable	24,766			23,899
Accrued expenses	23,742			21,705
Accrued compensation and benefits	45,388			39,704
Due to related persons	15,956			18,659
Mortgage notes payable	1,060			1,027
Bridge loan from Senior Housing Properties Trust	—			38,000
Accrued real estate taxes	11,378			11,505
Security deposit liability	10,033			10,606
Other current liabilities	17,421			15,745

Liabilities of discontinued operations, of which $7,619 and $7,690 relate to mortgage notes payable at June 30, 2012 and December 31, 2011, respectively	8,491			8,481
Total current liabilities	195,735			189,331

Long term liabilities:
Mortgage notes payable	38,175			38,714
Convertible senior notes	24,872			37,282
Continuing care contracts	1,838			2,045
Accrued self insurance obligations	28,296			28,496
Other long term liabilities	6,800			7,415
Total long term liabilities	99,981			113,952

Commitments and contingencies

Shareholders’ equity:
Common stock, par value $.01; 47,927 and 47,899 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively	479			479
Additional paid in capital	353,309			352,819
Accumulated deficit	(69,575		)	(74,582		)
Cumulative other comprehensive income	1,756			1,478
Total shareholders’ equity	285,969			280,194
	$	581,685		$	583,477

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(in thousands, except per share data)

(unaudited)

	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
Revenues:
Senior living revenue	$	278,076		$	265,387		$	554,296		$	528,041
Rehabilitation hospital revenue	26,386			26,337			53,173			51,962
Institutional pharmacy revenue	17,232			19,573			35,853			38,910
Management fee revenue	1,302			25			2,390			25
Reimbursed costs incurred on behalf of managed communities	26,098			562			49,503			562
Total revenues	349,094			311,884			695,215			619,500

Operating expenses:
Senior living wages and benefits	136,618			133,079			274,992			262,840
Other senior living operating expenses	66,242			61,473			133,204			124,453
Costs incurred on behalf of managed communities	26,098			562			49,503			562
Rehabilitation hospital expenses	23,872			23,445			47,991			47,498
Institutional pharmacy expenses	17,258			18,642			36,008			37,531
Rent expense	50,297			47,841			100,524			95,340
General and administrative	15,389			14,154			30,844			27,824
Depreciation and amortization	6,709			4,616			13,025			8,921
Total operating expenses	342,483			303,812			686,091			604,969

Operating income	6,611			8,072			9,124			14,531

Interest and other income	246			331			463			649
Interest and other expense	(1,605		)	(870		)	(3,031		)	(1,371		)
Acquisition related costs	—			(1,202		)	—			(1,304		)
Equity in income of Affiliates Insurance Company	76			46			121			83
Gain on settlement	3,365			—			3,365			—
Gain on early extinguishment of debt	45			—			45			1
Gain (loss) on sale of available for sale securities reclassified from other comprehensive income	—			51			(1		)	127

Income from continuing operations before income taxes	8,738			6,428			10,086			12,716
Provision for income taxes	(3,807		)	(441		)	(4,409		)	(820		)
Income from continuing operations	4,931			5,987			5,677			11,896
Loss from discontinued operations	(293		)	(791		)	(670		)	(2,567		)

Net income	$	4,638		$	5,196		$	5,007		$	9,329

Weighted average shares outstanding - basic	47,914			37,179			47,906			36,602

Weighted average shares outstanding - diluted	49,953			40,046			47,906			39,481

Basic income per share from:
Continuing operations	$	0.10		$	0.16		$	0.12		$	0.33
Discontinued operations	(0.01		)	(0.02		)	(0.01		)	(0.07		)
Net income per share - basic	$	0.09		$	0.14		$	0.11		$	0.26

Diluted income per share from:
Continuing operations	$	0.10		$	0.16		$	0.12		$	0.32
Discontinued operations	(0.01		)	(0.02		)	(0.01		)	(0.07		)
Net income per share - diluted	$	0.09		$	0.14		$	0.11		$	0.25

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011

Net income	$	4,638		$	5,196		$	5,007		$	9,329
Other comprehensive income
Unrealized gain on investments in available for sale securities	94			322			281			803
Less: Realized (gain) loss on investments in available for sale securities reclassified and included in net income	—			(51		)	1			(127		)
Unrealized (loss) gain on equity investment in Affiliates Insurance Company	(3		)	39			(4		)	43
Other comprehensive income	91			310			278			719
Comprehensive income	$	4,729		$	5,506		$	5,285		$	10,048

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

(unaudited)

	Six months ended June 30,
	2012			2011
Cash flows from operating activities:
Net income	$	5,007		$	9,329
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	13,025			8,921
Gain on early extinguishment of debt	(45		)	(1		)
Loss from discontinued operations	670			2,567
Loss (gain) on sale of available for sale securities	1			(127		)
Equity in income of Affiliates Insurance Company	(121		)	(83		)
Stock-based compensation	490			464
Provision for losses on receivables	2,651			4,266
Changes in assets and liabilities:
Accounts receivable	(1,516		)	(2,451		)
Prepaid expenses and other assets	4,747			172
Accounts payable and accrued expenses	2,904			(789		)
Accrued compensation and benefits	5,684			9,099
Due to related persons	(2,703		)	(424		)
Other current and long term liabilities	(46		)	502
Cash provided by operating activities	30,748			31,445

Net cash used in discontinued operations	(316		)	(2,365		)

Cash flows from investing activities:
Acquisition of property and equipment	(28,478		)	(30,052		)
Acquisition of senior living communities, net of working capital assumed	—			(53,486		)
Payments from restricted cash and investment accounts, net	(3,890		)	(2,419		)
Purchase of available for sale securities	(4,554		)	—
Proceeds from disposition of property and equipment held for sale	14,093			15,322
Proceeds from sale of available for sale securities	772			1,281
Cash used in investing activities	(22,057		)	(69,354		)

Cash flows from financing activities:
Net proceeds from the issuance of common stock	—			54,350
Proceeds from borrowings on credit facilities	47,500			12,000
Repayments of borrowings on credit facilities	(10,000		)	(12,000		)
Proceeds from borrowings on bridge loan from Senior Housing Properties Trust	—			41,000
Repayments of borrowings on bridge loan from Senior Housing Properties Trust	(38,000		)	(32,000		)
Purchase and retirement of convertible senior notes	(12,038		)	(604		)
Repayments of mortgage notes payable	(576		)	(84		)
Cash (used in) provided by financing activities	(13,114		)	62,662

Change in cash and cash equivalents during the period	(4,739		)	22,388
Cash and cash equivalents at beginning of period	28,374			20,770
Cash and cash equivalents at end of period	$	23,635		$	43,158

Supplemental cash flow information:
Cash paid for interest	$	2,751		$	1,195
Cash paid for income taxes	$	1,235		$	1,042

Non-cash activities:
Issuance of common stock	$	114		$	298
Real estate acquisition	$	—		$	(19,952	)
Assumption of mortgage notes payable	$	—		$	19,952

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 1. Basis of Presentation and Organization

The accompanying condensed consolidated financial statements of Five Star Quality Care, Inc. and its subsidiaries, which we refer to as we, us or our, have been prepared without audit. Certain information and disclosures required by U.S. generally accepted accounting principles, 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 financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2011, 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 material intercompany transactions and balances have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

We operate senior living communities, including independent living communities, assisted living communities and skilled nursing facilities, or SNFs. As of June 30, 2012, we operated 247 senior living communities located in 30 states containing 27,497 living units, including 209 primarily independent and assisted living communities with 24,074 living units and 38 SNFs with 3,423 living units. As of June 30, 2012, we owned and operated 31 communities (2,954 living units), we leased and operated 191 communities (20,805 living units) and we managed 25 communities (3,738 living units). Our 247 senior living communities included 8,838 independent living apartments, 13,196 assisted living suites and 5,463 skilled nursing units. Two SNFs owned and operated by us containing 271 living units and one assisted living community leased from Senior Housing Properties Trust or its subsidiaries, or SNH, and operated by us containing 103 living units that we have classified as discontinued operations are excluded from all the preceding data in this paragraph.

We also lease and operate two rehabilitation hospitals with 321 beds that provide inpatient rehabilitation services to patients at the two hospitals and at three satellite locations. In addition, we lease and operate 13 outpatient clinics affiliated with these rehabilitation hospitals. We also own and operate five institutional pharmacies. On July 6, 2012, we entered into an agreement, or the Purchase Agreement, to sell our pharmacy business to Omnicare, Inc. and certain of its subsidiaries, or Omnicare (see Note 15).

Note 2. Property and Equipment

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

	June 30, 2012			December 31, 2011
Land	$	21,339		$	21,339
Buildings and improvements	275,714			272,384
Furniture, fixtures and equipment	104,223			97,205
	401,276			390,928
Accumulated depreciation	(63,440		)	(55,672		)
	$	337,836		$	335,256

As of June 30, 2012 and December 31, 2011, we had assets of $8,354 and $7,076, respectively, included in our property and equipment that we intend to sell to SNH for increased rent pursuant to the terms of our leases with SNH; however, we are not obligated to make these sales and SNH is not obligated to purchase the property and equipment.

Note 3. Financial Data by Segment

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

at two hospital locations and at three satellite locations and outpatient rehabilitation services at 13 affiliated outpatient clinics. We do not consider our institutional pharmacy operations to be a material, separately reportable segment of our business. Consequently, we report our institutional pharmacy revenues and expenses as separate items within our corporate and other activities. On July 6, 2012, we entered into the Purchase Agreement to sell our pharmacy business to Omnicare (see Note 15). All of our operations and assets are located in the United States, except for the operations of our captive insurance company subsidiary, which participates in our workers’ compensation, professional liability and automobile insurance programs and which operates in the Cayman Islands.

We use segment operating profit as a means to evaluate our performance and for our business decision making purposes. Segment operating profit for our two reportable segments excludes interest and other income, interest and other expense, provision for income taxes, equity in income of Affiliates Insurance Company, or AIC, gains on settlement of litigation, sales of securities, and corporate income and expenses.

Our revenues by segment and a reconciliation of segment operating profit (loss) to income (loss) from continuing operations for the three and six months ended June 30, 2012 and 2011 are as follows:

	Senior Living Communities			Rehabilitation Hospitals			Corporate and Other (1)			Total
Three months ended June 30, 2012
Segment revenues:
Senior living, rehabilitation hospital and institutional pharmacy revenues	$	278,076		$	26,386		$	17,232		$	321,694
Management fee revenue	1,302			—			—			1,302
Reimbursed costs incurred on behalf of managed communities	26,098			—			—			26,098
Total segment revenues	305,476			26,386			17,232			349,094

Segment expenses:
Operating expenses	202,860			23,872			17,258			243,990
Costs incurred on behalf of managed communities	26,098			—			—			26,098
Rent expense	47,641			2,656			—			50,297
Depreciation and amortization	5,770			53			886			6,709
Total segment expenses	282,369			26,581			18,144			327,094

Segment operating profit (loss)	23,107			(195		)	(912		)	22,000
General and administrative expenses (2)	—			—			(15,389		)	(15,389		)
Operating income (loss)	23,107			(195		)	(16,301		)	6,611
Interest and other income	19			—			227			246
Interest and other expense	(599		)	—			(1,006		)	(1,605		)
Equity in income of Affiliates Insurance Company	—			—			76			76
Gain on settlement	—			—			3,365			3,365
Gain on sale of available for sale securities	—			—			45			45
Provision for income taxes	—			—			(3,807		)	(3,807		)
Income (loss) from continuing operations	$	22,527		$	(195	)	$	(17,401	)	$	4,931

Total Assets as of June 30, 2012	$	486,428		$	15,216		$	80,041		$	581,685

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

	Senior Living Communities			Rehabilitation Hospitals		Corporate and Other (1)			Total
Three months ended June 30, 2011
Segment revenues:
Senior living, rehabilitation hospital and institutional pharmacy revenues	$	265,387		$	26,337	$	19,573		$	311,297
Management fee revenue	25			—		—			25
Reimbursed costs incurred on behalf of managed communities	562			—		—			562
Total segment revenues	265,974			26,337		19,573			311,884

Segment expenses:
Operating expenses	194,552			23,445		18,642			236,639
Costs incurred on behalf of managed communities	562			—		—			562
Rent expense	45,261			2,580		—			47,841
Depreciation and amortization	3,762			44		810			4,616
Total segment expenses	244,137			26,069		19,452			289,658

Segment operating profit	21,837			268		121			22,226
General and administrative expenses (2)	—			—		(14,154		)	(14,154		)
Operating profit (loss)	21,837			268		(14,033		)	8,072
Interest and other income	19			—		312			331
Interest and other expense	(215		)	—		(655		)	(870		)
Acquisition related costs	—			—		(1,202		)	(1,202		)
Equity in income of Affiliates Insurance Company	—			—		46			46
Gain on sale of available for sale securities	—			—		51			51
Provision for income taxes	—			—		(441		)	(441		)
Income (loss) from continuing operations	$	21,641		$	268	$	(15,922	)	$	5,987

(1) Corporate and Other includes operations that we do not consider a material, separately reportable segment of our business and income and expenses that are not attributable to a reportable specific segment.

(2) General and administrative expenses are not attributable to a specific reportable segment and include items such as corporate payroll and benefits and expenses of our home office activities.

	Senior Living Communities			Rehabilitation Hospitals			Corporate and Other (1)			Total
Six months ended June 30, 2012
Segment revenues:
Senior living, rehabilitation hospital and institutional pharmacy revenues	$	554,296		$	53,173		$	35,853		$	643,322
Management fee revenue	2,390			—			—			2,390
Reimbursed costs incurred on behalf of managed communities	49,503			—			—			49,503
Total segment revenues	606,189			53,173			35,853			695,215

Segment expenses:
Operating expenses	408,196			47,991			36,008			492,195
Costs incurred on behalf of managed communities	49,503			—			—			49,503
Rent expense	95,252			5,272			—			100,524
Depreciation and amortization	11,151			105			1,769			13,025
Total segment expenses	564,102			53,368			37,777			655,247

Segment operating profit (loss)	42,087			(195		)	(1,924		)	39,968
General and administrative expenses (2)	—			—			(30,844		)	(30,844		)
Operating income (loss)	42,087			(195		)	(32,768		)	9,124
Interest and other income	39			—			424			463
Interest and other expense	(1,206		)	—			(1,825		)	(3,031		)
Equity in income of Affiliates Insurance Company	—			—			121			121
Gain on settlement	—			—			3,365			3,365
Gain on early extinguishment of debt	—			—			45			45
Loss on sale of available for sale securities	—			—			(1		)	(1		)
Provision for income taxes	—			—			(4,409		)	(4,409		)
Income (loss) from continuing operations	$	40,920		$	(195	)	$	(35,048	)	$	5,677

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

	Senior Living Communities			Rehabilitation Hospitals			Corporate and Other (1)			Total
Six months ended June 30, 2011
Segment revenues:
Senior living, rehabilitation hospital and institutional pharmacy revenues	$	528,041		$	51,962		$	38,910		$	618,913
Management fee revenue	25			—			—			25
Reimbursed costs incurred on behalf of managed communities	562			—			—			562
Total segment revenues	528,628			51,962			38,910			619,500

Segment expenses:
Operating expenses	387,293			47,498			37,531			472,322
Costs incurred on behalf of managed communities	562			—			—			562
Rent expense	90,179			5,161			—			95,340
Depreciation and amortization	7,235			86			1,600			8,921
Total segment expenses	485,269			52,745			39,131			577,145

Segment operating profit (loss)	43,359			(783		)	(221		)	42,355
General and administrative expenses (2)	—			—			(27,824		)	(27,824		)
Operating income (loss)	43,359			(783		)	(28,045		)	14,531
Interest and other income	68			—			581			649
Interest and other expense	(214		)	—			(1,157		)	(1,371		)
Acquisition related costs	—			—			(1,304		)	(1,304		)
Equity in income of Affiliates Insurance Company	—			—			83			83
Gain on early extinguishment of debt	—			—			1			1
Gain on sale of available for sale securities	—			—			127			127
Provision for income taxes	—			—			(820		)	(820		)
Income (loss) from continuing operations	$	43,213		$	(783	)	$	(30,534	)	$	11,896

(2) General and administrative expenses are not attributable to a specific reportable segment and include items such as corporate payroll and benefits and expenses of our home office activities.

Note 4. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill and other intangible assets from January 1, 2012 to June 30, 2012 are as follows:

	Senior Living Communities (1)			Corporate and Other (2)			Total
Balance as of January 1, 2012	$	29,413		$	3,666		$	33,079

Amortization of intangibles	(1,041		)	(181		)	(1,222		)

Balance as of June 30, 2012	$	28,372		$	3,485		$	31,857

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

(1) The goodwill and other intangible assets balance in our Senior Living Communities segment relate to management agreements and trademarks we acquired in connection with a lease we entered into with SNH in 2009, goodwill and resident agreements we acquired in connection with our purchase of six senior living communities located in Indiana (See Note 8) and goodwill of $10,988 we recorded in connection with our senior living community acquisitions in previous years.

(2) Intangible assets in our Corporate and Other segment relate to customer agreements we acquired in connection with our pharmacy acquisitions.

Note 5. Income Taxes

During the fourth quarter of 2011 we evaluated the realizability of our net deferred tax assets, which include, among other things, our net operating losses, or NOL, and tax credits, and determined that it is more likely than not that we will realize the benefit of our deferred tax assets. As a result, we realized in the fourth quarter of 2011, the full amount of the valuation allowance we had previously maintained against these deferred tax assets of $52,111. For the six months ended June 30, 2012, we recognized tax expense from continuing operations of $4,409. We also recognized a tax benefit from discontinued operations of $505. Our effective income tax rate increased during the six months ended June 30, 2012 to 43.7% compared to 8.4% in the prior year period primarily because our previous rate had been reduced from the statutory rate due to the full utilization of the previously maintained valuation allowance against our NOL carry forwards. As of December 31, 2011, our federal NOL carry forward, which begins to expire in 2025 if unused, was approximately $100,710, and our tax credit carry forward, which begins to expire in 2022 if unused, was approximately $6,820. Our NOL carry forwards and tax credit carry forwards are subject to audit and adjustments by the Internal Revenue Service.

We do not currently recognize the benefit of certain deferred tax assets related to capital losses because we have not historically been able to demonstrate that it is more likely than not we will realize such benefit. As further described in Note 15, on July 6, 2012, we entered into the Purchase Agreement to sell our pharmacy business to Omnicare. If that sale is completed, we expect to recognize a capitalized gain that would be sufficient an amount to allow us to realize the benefit of these deferred tax assets as an income tax benefit in our consolidated statement of income.

Note 6. Earnings Per Share

We computed basic earnings per common share, or EPS, for the three and six months ended June 30, 2012 and 2011 using the weighted average number of shares outstanding during the periods. Diluted EPS for the periods ended June 30, 2012 and 2011 reflects additional shares of our common stock, $.01 par value per share, or our common shares, related to our convertible senior notes due in 2026, or the Notes, that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income applicable to common shareholders that would result from their assumed issuance. The weighted average shares outstanding used to calculate basic and diluted EPS include 556 and 512 unvested common shares as of June 30, 2012 and 2011, respectively, issued to our officers and others under our equity compensation plan, or our Share Award Plan. Unvested shares issued under our Share Award Plan are deemed participating securities because they participate equally in earnings with all of our other common shares.

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

	Three Months Ended June 30,
	2012							2011
	Income (loss)			Shares	Per Share			Income (loss)			Shares	Per Share
Income from continuing operations	$	4,931		47,914	$	0.10		$	5,987		37,179	$	0.16
Effect of the Notes	149			2,039				335			2,867
Diluted income from continuing operations	$	5,080		49,953	$	0.10		$	6,322		40,046	$	0.16

Diluted loss from discontinued operations	$	(293	)	49,953	$	(0.01	)	$	(791	)	40,046	$	(0.02	)

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(unaudited)

	Six Months Ended June 30,
	2012							2011
	Income (loss)			Shares	Per Share			Income (loss)			Shares	Per Share
Income from continuing operations	$	5,677		47,906	$	0.12		$	11,896		36,602	$	0.33
Effect of the Notes	—			—				668			2,879
Diluted income from continuing operations	$	5,677		47,906	$	0.12		$	12,564		39,481	$	0.32

Diluted loss from discontinued operations	$	(670	)	47,906	$	(0.01	)	$	(2,567	)	39,481	$	(0.07	)

Note 7. Fair Values of Assets and Liabilities

The information below presents the assets and liabilities that are measured at fair value on a recurring and non recurring basis at June 30, 2012, categorized by the level of inputs used in the valuation of each asset and liability.

Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)

Long lived assets held for sale (1)	$	8,354	$	—	$	8,354
Long lived assets of discontinued operations (2)	8,401		—		8,401
Cash equivalents (3)	19,636		19,636		—
Available for sale securities (4)
Equity securities
Financial services industry	6,661		6,661		—
REIT industry	498		498		—
Other	263		263		—
Total equity securities	7,422		7,422		—
Debt securities
International bond fund	2,297		2,297		—
High yield fund	2,007		2,007
Industrial bonds	7,212		7,212		—
Government bonds	5,501		5,501		—
Financial bonds	980		980		—
Other	873		873		—
Total debt securities	18,870		18,870		—
Total available for sale securities	26,292		26,292		—

Total	$	62,683	$	45,928	$	16,755

(1) Long lived assets held for sale consist of property and equipment we intend to sell to SNH for increased rent pursuant to the terms of our leases with SNH; however, we are not obligated to make these sales and SNH is not obligated to purchase the property and equipment. We have either recently acquired the assets or the assets are part of active construction projects and we expect that any sale of these assets to SNH would be for an amount equal to their recorded cost. Accordingly, the cost of these assets approximates their fair value.

(2) In September 2011, we recorded a $3,938 asset impairment charge to reduce the carrying value of two SNFs we own that we have classified as discontinued operations to their estimated fair value based upon expected sales prices less costs to sell.

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

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(unaudited)

(4) Investments in available for sale securities are reported on our balance sheet as current and long term investments in available for sale securities and are reported at fair value of $14,993 and $11,299, respectively, at June 30, 2012. We estimate the fair value of our available for sale investments by reviewing each security’s current market price, the ratings of the security, the financial condition of the issuer and our intent and ability to retain the investment during temporary market price fluctuations or until maturity. In evaluating the factors described above, we presume a decline in value to be an “other than temporary impairment” if the quoted market price of the security is below the security’s cost basis for an extended period. However, this presumption may be overcome if there is persuasive evidence indicating the value decline is temporary in nature, such as when the operating performance of the obligor is strong or if the market price of the security is historically volatile. Additionally, there may be instances in which impairment losses are recognized even if the decline in value does not fall within the criteria described above, such as if we plan to sell the security in the near term and the fair value is below our cost basis. When we believe that a change in fair value of an available for sale security is temporary, we record a corresponding credit or charge to other comprehensive income for any unrealized gains and losses. When we determine that an impairment in the fair value of an available for sale security is an “other than temporary impairment”, we record a charge to earnings.

Our investments in available for sale securities had amortized costs of $24,608 and $20,827 as of June 30, 2012 and December 31, 2011, respectively, had unrealized gains of $1,887 and $1,586 as of June 30, 2012 and December 31, 2011, respectively, and had unrealized losses of $203 and $185 as of June 30, 2012 and December 31, 2011, respectively. At June 30, 2012, 11 of the securities we hold are in a loss position that has ranged from two to 14 months. Since these securities have not been in a loss period for an extended period of time, we do not believe these securities are impaired. During the six months ended June 30, 2012, we received gross proceeds of $772 in connection with the sales of available for sale securities and recorded gross realized gains totaling $2 and gross realized losses totaling $3.

During the six months ended June 30, 2012, we did not change the type of inputs used to determine the fair value of any of our assets and liabilities that we measure at fair value. Accordingly, there were no transfers of assets or liabilities between levels of the fair value hierarchy during the six months ended June 30, 2012.

The carrying values of accounts receivable, available for sale securities, accounts payable, mortgage notes payable and the bridge loan from SNH, or the Bridge Loan (see Note 9), approximate fair value as of June 30, 2012 and December 31, 2011. The carrying value and fair value of the Notes was $24,872 and $23,970, respectively, as of June 30, 2012 and $37,282 and $33,181, respectively, as of December 31, 2011 and are categorized in level one of the fair value hierarchy in their entirety. We estimate the fair value of the Notes using quoted market data for these securities. We measured the fair value of our equity investment in AIC, which is an Indiana insurance company that we currently own in equal proportions as the other seven shareholders of that company (see Note 11), categorized in level two of the fair hierarchy in its entirety, by considering, among other things, the individual assets and liabilities held by AIC, AIC’s overall financial condition and earning trends, and the financial condition and prospects for the insurance industry generally.

Note 8. Acquisition s

In May 2011, we agreed to purchase certain assets of six senior living communities located in Indiana, or the Indiana Communities, containing 738 living units for a total purchase price, excluding closing costs, of $122,760. The Indiana Communities primarily offer independent and assisted living services, which are currently primarily paid by residents from their private resources. During 2011, we completed our acquisitions of the assets of the Indiana Communities and funded the acquisitions with proceeds of a public offering, or the Public Offering, of our common shares, proceeds of the Bridge Loan, by assuming approximately $19,260 of mortgage notes secured by three of the Indiana Communities, by assuming net working capital liabilities of the Indiana Communities and with cash on hand.

We completed the purchase accounting of the fair value of the assets acquired after we considered the results from a third party valuation report, and, as a result, made adjustments to property and equipment, goodwill and other intangible assets. The amounts previously reported as of December 31, 2011 that have been restated to reflect these adjustments, are as follows:

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(in thousands, except per share data)

(unaudited)

	As of December 31, 2011
	Preliminary Amounts Recorded		Measurement Period Adjustment			Revised Amounts Recorded
Land	$	4,715	$	(510	)	$	4,205
Building and improvements	106,240		(15,200		)	91,040
Furniture, fixtures and equipment	11,805		(2,099		)	9,706
Property and equipment	$	122,760	$	(17,809	)	$	104,951

Goodwill related to home health services	$	—	$	14,565		$	14,565

Other intangible assets related to resident agreements	$	—	$	3,244		$	3,244

For the six months ended June 30, 2011 we incurred $1,304 in acquisition related costs. These costs include transaction closing costs, professional fees (legal and accounting) and other acquisition related expenses.

Note 9. Indebtedness

We have a $35,000 revolving secured line of credit, or our Credit Agreement, that matures on March 18, 2013 when all amounts outstanding will be due. Borrowings under our Credit Agreement are available for acquisitions, working capital and general business purposes. Funds available under our Credit Agreement may be drawn, repaid and redrawn until maturity and no principal payment is due until maturity. We borrow in U.S. dollars and borrowings under our Credit Agreement bear interest at LIBOR (with a floor of 2% per annum) plus 400 basis points, or 6% as of June 30, 2012. We are the borrower under our Credit Agreement and certain of our subsidiaries guarantee our obligations under our Credit Agreement, which is secured by our and our guarantor subsidiaries’ accounts receivable and related collateral. Our Credit Agreement contains covenants requiring us to maintain certain 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. Our Credit Agreement also provides for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, including a change of control of us. As of June 30, 2012, no amounts were outstanding under our Credit Agreement. As of June 30, 2012, we believe we were in compliance with all applicable covenants under our Credit Agreement. We incurred interest expense and other associated costs related to our Credit Agreement of $287 and $216 for the three months ended June 30, 2012 and 2011, respectively, and $463 and $363 for the six months ended June 30, 2012 and 2011, respectively.

In April 2012, we entered into a new $150,000 secured revolving credit facility with a syndicate of lenders, or our New Credit Facility, which is in addition to our Credit Agreement. The maturity date of our New Credit Facility is April 13, 2015, and, subject to the payment of extension fees and meeting certain other conditions, we have options to extend the maturity date for two, one year periods. The proceeds of our New Credit Facility are available for general business purposes, including the repayment of debt.

Our New Credit Facility bears interest, at our election, at LIBOR plus 250 basis points or a base rate plus 150 basis points. Borrowings under our New Credit Facility are guaranteed by certain of our subsidiaries and secured by real estate mortgages on 15 senior living communities with 1,549 living units owned by our guarantor subsidiaries and our guarantor subsidiaries’ accounts receivable and related collateral. Funds available under our New Credit Facility may be drawn, repaid and redrawn until maturity and there are no scheduled principal payments prior to maturity. Our New Credit Facility provides for acceleration of payment of all amounts payable upon the occurrence and continuation of certain events of default, including a change of control of us. Our New Credit Facility contains a number of financial covenants which generally restrict our ability to incur debts in excess of calculated amounts, require us to maintain a minimum net worth and require us to maintain various financial ratios. As of June 30, 2012, $37,500 was outstanding under our New Credit Facility. As of June 30, 2012, we believe we were in compliance with all applicable covenants under our New Credit Facility. We incurred interest expense and other associated costs related to our New Credit Facility of $416 for the three and six months ended June 30, 2012.

In May 2011, we entered into the Bridge Loan agreement with SNH under which SNH agreed to lend us up to $80,000 to fund a part of the purchase price for our acquisitions of certain assets of the Indiana Communities. During 2011, we

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(in thousands, except per share data)

(unaudited)

completed our acquisitions of the assets of the Indiana Communities and, in connection with the acquisitions, borrowed $80,000 under the Bridge Loan. During 2011, we repaid $42,000 of this advance with proceeds from the Public Offering and cash generated by operations. In April 2012, we repaid in full the principal amount then outstanding under the Bridge Loan, resulting in termination of the Bridge Loan. We funded the repayments of the Bridge Loan with borrowings under our New Credit Facility and cash on hand. We incurred interest expense and other associated costs related to the Bridge Loan of $39 and $314 for the three and six months ended June 30, 2012.

In October 2006, we issued $126,500 principal amount of the Notes. Our net proceeds from this issuance were approximately $122,600. The Notes bear interest at a rate of 3.75% per annum and 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 the Notes, which represents an initial conversion price of $13.00 per share. The Notes are guaranteed by certain of our wholly owned subsidiaries. The Notes mature on October 15, 2026. We may prepay the Notes at any time and the holders may require that we purchase all or a portion of these Notes on each of October 15 of 2013, 2016 and 2021 at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest. 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 and other associated costs related to the Notes were $264 and $382 for the three months ended June 30, 2012 and 2011, respectively, and $631 and $736 for the six months ended June 30, 2012 and 2011, respectively. We issued the Notes pursuant to an indenture which contains various customary covenants. As of June 30, 2012, we believe we were in compliance with all applicable covenants of the indenture governing the Notes.

During the six months ended June 30, 2012, we purchased and retired $12,410 par value of the outstanding Notes and recorded a gain of $45, net of related unamortized costs, on early extinguishment of debt included in interest and other income. We funded this purchase principally with borrowings under our New Credit Facility and cash on hand. During the six months ended June 30, 2011, we purchased and retired $623 par value of the outstanding Notes and recorded a gain of $1, net of related unamortized costs, on early extinguishment of debt included in interest and other income. We funded this purchase principally with cash on hand. As a result of these purchases and other purchases we made in prior years, $24,872 in principal amount of the Notes remain outstanding. We may purchase additional outstanding principal amounts of the Notes from time to time.

At June 30, 2012, six of our senior living communities were encumbered by mortgage notes totaling $46,854: (1) two of our communities, which we have classified as discontinued operations, were encumbered by United States Department of Housing and Urban Development, or HUD, insured mortgage notes; (2) one of our communities was encumbered by a Federal National Mortgage Associate, or FNMA, mortgage note and; (3) three of our communities were encumbered by Federal Home Loan Mortgage Corporation, or FMCC, mortgage notes. These mortgages contain HUD, FNMA and FMCC standard mortgage covenants. We recorded a mortgage premium in connection with our assumption of the FNMA and FMCC mortgage notes in order to record the assumed mortgage notes at their estimated fair value. We are amortizing the mortgage premiums as a reduction of interest expense until the maturity of the respective mortgage notes. The weighted average interest rate on these notes was 6.68% as of June 30, 2012. Payments of principal and interest are due monthly until maturities at varying dates ranging from June 2023 to May 2039. We incurred mortgage interest expense, including premium amortization, of $708 and $325 for the three months ended June 30, 2012 and 2011, respectively, and $1,425 and $437 for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, we believe we were in compliance with all applicable covenants under these mortgages.

Note 10. Off Balance Sheet Arrangements

We have pledged certain of our assets, such as accounts receivable, with a carrying value as of June 30, 2012, of $22,270 arising from our operation of 56 properties owned by SNH and leased to us which secures SNH’s borrowings from its lender, FNMA. As of June 30, 2012, we had no other off balance sheet arrangements that have had or that

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(in thousands, except per share data)

(unaudited)

we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Note 11. Related Person Transactions

We were formerly a 100% owned subsidiary of SNH. In 2001, SNH distributed substantially all of our then outstanding common shares to its shareholders. SNH is our largest stockholder and, as of the date of this report, SNH owned 4,235 of our common shares, or approximately 8.8% of our outstanding common shares. One of our Managing Directors, Mr. Barry Portnoy, is also a managing trustee of SNH. Mr. Portnoy’s son, Mr. Adam Portnoy, serves as a managing trustee of SNH. SNH is our largest landlord and we manage several senior living communities for SNH. As of June 30, 2012, we leased 188 senior living communities (including one that we have classified as discontinued operations) and two rehabilitation hospitals from SNH and managed 24 senior living communities for the account of SNH.

Under our leases with SNH, we generally pay SNH rent based on minimum annual rent amounts plus percentage rent based on increases in gross revenues at certain properties. Our total minimum annual rent payable to SNH under those leases as of June 30, 2012 was $196,371, excluding percentage rent. Our total rent expense under all of our leases with SNH, net of lease inducement amortization, was $49,920 and $47,803 for the three months ended June 30, 2012 and 2011, respectively, and $99,723 and $95,531 for the six months ended June 30, 2012 and 2011, respectively. During the six months ended June 30, 2012, pursuant to the terms of our existing leases with SNH, we sold $14,093 of improvements made to properties leased from SNH, and, as a result, our annual rent payable to SNH increased by approximately $1,137.

We began managing communities for SNH’s account in June 2011 in connection with SNH’s acquisition of certain senior living communities at that time. Since that time, we have begun managing additional communities that SNH has acquired. We manage the SNH managed communities pursuant to long term management agreements. We and SNH have entered into a pooling agreement that combines our management agreements with SNH. The pooling agreement aggregates the determinations of fees and expenses of the various communities that are subject to that pooling agreement, including determination of our incentive fees and SNH’s return of its invested capital. We earned management fee revenue of $1,080 and $2,148, respectively, for the three and six months ended June 30, 2012, and $25 for the three and six months ended June 30, 2011, with respect to the communities we manage for the account of SNH. We expect that we may enter into additional management arrangements with SNH for senior living communities that SNH may acquire in the future on terms similar to those management arrangements we currently have with SNH, including, as further disclosed below, with respect to 10 senior living communities SNH is currently leasing to Sunrise Senior Living, Inc., or Sunrise. Our management of those 10 communities is subject to conditions and may not occur. Also, there can be no assurances that we will manage any additional senior living communities for SNH’s account in the future.

In May 2012, we and SNH entered into an operations transfer agreement, or the Operations Transfer Agreement, with Sunrise. Pursuant to the Operations Transfer Agreement, SNH and Sunrise agreed to accelerate the December 31, 2013 termination date of Sunrise’s leases for 10 senior living communities, or the 10 Communities, owned by SNH, and we agreed to begin to operate the 10 Communities as a manager for SNH’s account, pursuant to long term management agreements. The Operations Transfer Agreement provides that these transactions will occur when we and SNH have obtained regulatory approvals to operate the applicable 10 Communities. We expect the long term management agreements with SNH for each of the 10 Communities will be on terms substantially similar to the management agreements previously entered into between us and SNH for communities that include assisted living units and which are owned by SNH and managed by us, and may be included in our pooling agreement with SNH for managed communities.

In May 2012, we entered into a long term management agreement with SNH, on terms substantially consistent with the terms of our other management agreements that we have previously entered into with SNH for communities that include assisted living units, to manage for SNH’s account a senior living community in South Carolina with 59 assisted living units, which community we had been managing for the prior owner’s account pending SNH’s acquisition. Also, in July 2012, we entered into a long term management agreement with SNH, on terms substantially consistent with the terms of our other management agreements that we have previously entered into with SNH for communities that include assisted

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living units, to manage for SNH’s account a senior living community in South Carolina with 232 units, which community we had previously been managing for the prior owner’s account pending SNH’s acquisition.

As discussed above in Note 8 and Note 9, in May 2011, we and SNH entered into the Bridge Loan, under which SNH agreed to lend us up to $80,000 to help fund our purchase of the Indiana Communities. In April 2012, we repaid in full the then outstanding principal amount under the Bridge Loan, resulting in termination of the Bridge Loan. We incurred interest expense on the Bridge Loan of $39 and $314, respectively, for the three and six months ended June 30, 2012, and $58 for the three and six months ended June 30, 2011, which amounts are included in interest and other expense in our condensed consolidated statement of income.

Reit Management & Research LLC, or RMR, provides us with certain business management and shared services under a business management and shared services agreement, or our business management agreement. RMR also provides management services to SNH. One of our Managing Directors, Mr. Barry Portnoy, is Chairman, majority owner and an employee of RMR. Our other Managing Director, Mr. Gerard Martin, is a director of RMR. Our President and Chief Executive Officer and our Treasurer and Chief Financial Officer are officers of RMR. Mr. Barry Portnoy’s son, Mr. Adam Portnoy, is an owner, President, Chief Executive Officer and a director of RMR and serves as a managing trustee of SNH. SNH’s executive officers are officers of RMR and SNH’s president and chief operating officer is a director of RMR. Our Independent Directors also serve as independent directors or independent trustees of other public companies to which RMR provides management services. Mr. Barry Portnoy serves as a managing director or managing trustee of those companies and his son serves as a managing trustee of a majority of those companies. Pursuant to our business management agreement with RMR, we incurred expenses of $3,285 and $2,840 for the three months ended June 30, 2012 and 2011, respectively, and $6,578 and $5,647 for the six months ended June 30, 2012 and 2011, respectively. These amounts are included in general and administrative expenses in our condensed consolidated statement of income. We lease our headquarters from an affiliate of RMR for annual rent of approximately $730. We incurred rent of $183 and $268 for the three months ended June 30, 2012 and 2011, respectively, and $365 and $535 for the six months ended June 30, 2012 and 2011, respectively, which amounts include rent for an office space lease we had with an affiliate of RMR during the six months ended June 30, 2011. In connection with these leases we incurred utilities expense and real estate taxes of $172 and $32 for the three months ended June 30, 2012 and 2011, respectively, and $344 and $64 for the six months ended June 30, 2012 and 2011.

We, SNH, RMR and five other companies to which RMR provides management services each currently own 12.5% of AIC, an Indiana insurance company. One of those five other companies became a shareholder of AIC during the quarter ended June 30, 2012. All of our Directors and nearly all of the trustees and directors of the other AIC shareholders currently serve on the board of directors of AIC. RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC. Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because all of our Directors are also directors of AIC. We recognized income of $76 and $46 for the three months ended June 30, 2012 and 2011, respectively, and $121 and $83 for the six months ended June 30, 2012 and 2011, respectively, related to this investment. We and the other shareholders of AIC have purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts. This program was modified and extended in June 2012 for a one year term and we paid a premium, including taxes and fees, of $6,264 in connection with that renewal, which amount may be adjusted from time to time in response to our acquisition and disposition of properties that are included in that program. We are also currently investigating the possibilities to expand our insurance relationships with AIC to include other types of insurance. We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so. By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro-rata share of any profits of this insurance business.

For further information about these and other such relationships and related person transactions, please see elsewhere in this Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” in Part I, Item 2 and “Warning Concerning Forward Looking Statements,” and our Annual Report, our Proxy Statement for our 2012 Annual Meeting of Shareholders dated February 21, 2012, or our Proxy Statement, and our other filings with the Securities and Exchange Commission, or the SEC,

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(unaudited)

including Note 15 to our Consolidated Financial Statements included in our Annual Report, the sections captioned “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” and “Warning Concerning Forward Looking Statements” of our Annual Report and the section captioned “Related Person Transactions and Company Review of Such Transactions” and the information regarding our Directors and executive officers in our Proxy Statement. In addition, please see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise from these transactions and relationships. Our filings with the SEC, including our Annual Report and our Proxy Statement, are available at the SEC’s website at www.sec.gov. In addition, copies of certain of our agreements with these parties, including our leases, forms of management agreements and related pooling agreement and Bridge Loan agreement with SNH, our business management agreement with RMR, our headquarters lease with an affiliate of RMR and our shareholders agreement with AIC and its shareholders, are also publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website.

Note 12. Discontinued Operations

In 2011, we decided to offer for sale two SNFs we own that are located in Michigan with a total of 271 living units. While we continue to market these properties, we can provide no assurance that a sale of these SNFs will be completed.

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

We have reclassified the consolidated balance sheet and the consolidated statement of income for all periods presented to show the financial position and results of operations of the communities which have been sold or are expected to be sold as discontinued. Below is a summary of the operating results of these discontinued operations included in the financial statements for the three and six months ended June 30, 2012 and 2011:

	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
Revenues	$	5,521		$	8,227		$	11,069		$	18,914
Expenses	(5,814		)	(9,018		)	(11,739		)	(21,481		)
Net loss	$	(293	)	$	(791	)	$	(670	)	$	(2,567	)

Note 13. Unaudited Pro Forma Financial Information

The following table shows operating results attributable to the Indiana Communities we acquired during 2011 that are included in our condensed consolidated statement of operations for the three and six months ended June 30, 2012.

	Three months		Six months
Revenues	$	5,350	$	10,772
Net income	$	1,005	$	2,299

The pro forma financial information in the table below gives effect to the following transactions as if they had occurred as of January 1, 2011: (i) our acquisition of the assets of the Indiana Communities; (ii) our assumption of $19,260 of mortgage notes with respect to three of the Indiana Communities; (iii) our net borrowings of $48,000 under the Bridge Loan in connection with our acquisition of the assets of the Indiana Communities; (iv) our assumption of net working capital liabilities of the Indiana Communities; and (v) the Public Offering.

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

	Three months ended June 30, 2011		Six months ended June 30, 2011
Revenues	$	317,088	$	630,074
Income from continuing operations	6,434		12,887

Weighted average shares outstanding - basic	47,541		47,529
Weighted average shares outstanding - diluted	50,408		50,408

Earnings per share from continuing operations:
Basic	$	0.14	$	0.27
Diluted	$	0.13	$	0.27

This pro forma financial information is presented for informational purposes only and is not necessarily indicative of our consolidated operating results that would have been reported had the transactions been completed as described herein, and the pro forma financial information is not necessarily indicative of our consolidated operating results for any future period.

Note 14. Litigation Settlement

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

Note 15. Subsequent Event

On July 6, 2012, we entered into the Purchase Agreement to sell our pharmacy business to Omnicare for $30,650, plus the value of certain items of net working capital invested in our pharmacy business as of the closing of the transaction. We currently anticipate the sale of this business will result in a capital gain of approximately $23,500. Based on June 30, 2012 amounts, the net amount to us from our selling to Omnicare or retaining net working capital invested in our pharmacy business would equal approximately $9,395. In aggregate, we expect our net cash receipts resulting from this sale to be approximately $39,940, before third party transaction costs. Our pharmacy business operates in 13 states and provides institutional pharmacy services to 247 senior living communities with approximately 12,300 living units. As of June 30, 2012, the operations and assets of our pharmacy business are reported in continuing operations since our Board of Directors authorized the sale to Omnicare on July 6, 2012.

Completion of this sale is subject to various customary closing conditions, including licensing approvals. We expect this sale will be completed during the second half of 2012. The parties have certain rights to terminate the Purchase Agreement, including for material breaches that remain uncured after any applicable cure period and, subject to certain exceptions, if the closing of the transaction has not occurred within 120 days after the date of the Purchase Agreement.

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

RESULTS OF OPERATIONS

Our reportable segments consist of our senior living community business and our rehabilitation hospital business. In the senior living community segment, we operate for our own account and manage for the account of SNH independent living communities, assisted living communities and SNFs that are subject to centralized oversight and provide housing and services to elderly residents. Our rehabilitation hospital segment provides inpatient rehabilitation services to patients at two hospital locations and at three satellite locations and outpatient rehabilitation services at 13 affiliated outpatient clinics. We do not consider our institutional pharmacy operations to be a material, separately reportable segment of our business. Consequently, we report our institutional pharmacy revenues and expense as separate items within our corporate and other activities. On July 6, 2012, we entered into the Purchase Agreement to sell our pharmacy business to Omnicare. See Note 15 to our Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. All of our operations and assets are located in the United States, except for the operations of our captive insurance company subsidiary, which participates in our workers’ compensation, professional liability and automobile insurance programs and operates in the Cayman Islands.

We use segment operating profit as a means to evaluate our performance and for our business decision making purposes. Segment operating profit for our two reportable segments excludes interest and other income, interest and other expense, provision for income taxes, equity in income of AIC, gains on settlement of litigation, sales of securities, and corporate income and expenses.

Key Statistical Data For the Three Months Ended June 30, 2012 and 2011:

The following tables present a summary of our operations for the three months ended June 30, 2012 and 2011:

Senior living communities:

	Three months ended June 30,
(dollars in thousands, except average daily rate)	2012			2011			$ Change			% Change
Senior living revenue	$	278,076		$	265,387		$	12,689		4.8	%
Management fee revenue	1,302			25			1,277			5,108.3	%
Reimbursed costs incurred on behalf of managed communities	26,098			562			25,536			4,543.8	%
Total revenue	305,476			265,974			39,502			14.9	%
Senior living wages and benefits	(136,618		)	(133,079		)	(3,539		)	(2.7	%)
Other senior living operating expenses	(66,242		)	(61,473		)	(4,769		)	(7.8	%)
Costs incurred on behalf of managed communities	(26,098		)	(562		)	(25,536		)	(4,543.8	%)
Rent expense	(47,641		)	(45,261		)	(2,380		)	(5.3	%)
Depreciation and amortization expense	(5,770		)	(3,762		)	(2,008		)	(53.4	%)
Interest and other expense	(599		)	(215		)	(384		)	(178.6	%)
Interest and other income	19			19			—			—
Senior living income from continuing operations	$	22,527		$	21,641		$	886		4.1	%

Total number of communities (end of period):
Owned and leased communities	222			217			5			2.3	%
Managed communities	25			10			15			150.0	%
Number of total communities	247			227			20			8.8	%

Total number of living units (end of period):
Owned and leased living units	23,759			23,122			637			2.8	%
Managed living units	3,738			934			2,804			300.2	%
Number of total living units	27,497			24,056			3,441			14.3	%

Owned and leased communities:
Occupancy %	85.6		%	85.2		%	n/a			0.4	%
Average daily rate	$	147.89		$	150.93		$	(3.04	)	(2.0	%)
Percent of senior living revenue from Medicaid	12.9		%	12.6		%	n/a			0.3	%
Percent of senior living revenue from Medicare	12.9		%	15.4		%	n/a			(2.5	%)
Percent of senior living revenue from private and other sources	74.2		%	72.0		%	n/a			2.2	%

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

Comparable senior living communities (senior living communities that we have owned or leased and operated continuously since April 1, 2011):

	Three months ended June 30,
(dollars in thousands, except average daily rate)	2012			2011			$ Change			% Change
Senior living revenue	$	265,480		$	263,095		$	2,385		0.9	%
Senior living wages and benefits	(132,498		)	(132,215		)	(283		)	(0.2	%)
Other senior living operating expenses	(63,030		)	(60,940		)	(2,090		)	(3.4	%)
No. of communities (end of period)	209			209			n/a			—
No. of living units (end of period)	22,170			22,170			n/a			—
Occupancy %	85.2		%	85.2		%	n/a			—
Average daily rate	$	152.05		$	151.55		$	0.50		0.3	%
Percent of senior living revenue from Medicaid	13.5		%	12.7		%	n/a			0.8	%
Percent of senior living revenue from Medicare	13.5		%	15.6		%	n/a			(2.1	%)
Percent of senior living revenue from private and other sources	73.0		%	71.7		%	n/a			1.3	%

Rehabilitation hospitals:

	Three months ended June 30,
(dollars in thousands)	2012			2011			$ Change			% Change
Rehabilitation hospital revenues	$	26,386		$	26,337		$	49		0.2	%
Rehabilitation hospital expenses	(23,872		)	(23,445		)	(427		)	(1.8	%)
Rent expense	(2,656		)	(2,580		)	(76		)	(2.9	%)
Depreciation and amortization expense	(53		)	(44		)	(9		)	(20.5	%)
Rehabilitation hospital income (loss) from continuing operations	$	(195	)	$	268		$	(463	)	(172.8	%)

Corporate and Other: (1)

	Three months ended June 30,
(dollars in thousands)	2012			2011			$ Change			% Change
Institutional pharmacy revenue	$	17,232		$	19,573		$	(2,341	)	(12.0	%)
Institutional pharmacy expenses	(17,258		)	(18,642		)	1,384			7.4	%
Depreciation and amortization expense	(886		)	(810		)	(76		)	(9.4	%)
General and administrative expense (2)	(15,389		)	(14,154		)	(1,235		)	(8.7	%)
Equity in income of Affiliates Insurance Company	76			46			30			65.2	%
Gain on settlement	3,365			—			3,365			100.0	%
Gain on early extinguishment of debt	45			—			45			100.0	%
Gain on sale of available for sale securities	—			51			(51		)	(100.0	%)
Interest and other income	227			312			(85		)	(27.2	%)
Interest and other expense	(1,006		)	(655		)	(351		)	(53.6	%)
Acquisition related costs	—			(1,202		)	1,202			100.0	%
Provision for income taxes	(3,807		)	(441		)	(3,366		)	(763.3	%)
Corporate and Other loss from continuing operations	$	(17,401	)	$	(15,922	)	$	(1,479	)	(9.3	%)

(2) General and administrative expenses are not attributable to a specific reportable segment and include items such as corporate payroll and benefits and expenses of our home office activities.

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

Consolidated:

	Three months ended June 30,
(dollars in thousands)	2012			2011			$ Change			% Change
Summary of revenue:
Senior living communities	$	305,476		$	265,974		$	39,502		14.9	%
Rehabilitation hospital revenue	26,386			26,337			49			0.2	%
Corporate and other	17,232			19,573			(2,341		)	(12.0	%)
Total revenue	$	349,094		$	311,884		$	37,210		11.9	%

Summary of income (loss) from continuing operations:
Senior living communities	$	22,527		$	21,641		$	886		4.1	%
Rehabilitation hospitals	(195		)	268			(463		)	(172.8	%)
Corporate and other	(17,401		)	(15,922		)	(1,479		)	(9.3	%)
Income from continuing operations	$	4,931		$	5,987		$	(1,056	)	(17.6	%)

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Senior living communities:

Our senior living revenue increased by 4.8% for the three months ended June 30, 2012 compared to the same period in 2011 primarily due to an increase from 209 to 222 in the number of communities that we owned and leased since April 1, 2011 and a slight increase in occupancy, partially offset by a 7.6% reduction in aggregate Medicare payment rates for SNFs. Our senior living revenue at the communities that we operated continuously since April 1, 2011, or our current quarter comparable communities, increased 0.9% for the three months ended June 30, 2012 compared to the same period in 2011, primarily due to increased per diem charges to residents and an increase in Medicaid payment rates in certain states, partially offset by a 7.6% reduction in aggregate Medicare payment rates for our SNFs.

In June 2011, we began managing 10 senior living communities for SNH and for another owner pending SNH’s acquisition. Our management fee revenue and reimbursed costs incurred at these communities increased significantly during the three months ended June 30, 2012 compared to the same period in the previous year due to an increase from 10 to 25 in the number of communities we manage and because we managed these communities for the full quarter in 2012 and began managing them in June 2011.

Our senior living wages and benefits increased 2.7% for the three months ended June 30, 2012 compared to the same period in 2011 primarily due to an increase from 209 to 222 in the number of communities that we owned and leased during these periods, respectively, and to wage increases at our current quarter comparable communities. Our other senior living operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, increased by 7.8% due to an increase in the number of communities that we owned and leased from 209 to 222, plus net increased charges for purchased services and increased service provider fees at our current quarter comparable communities. Our senior living wages and benefits at our current quarter comparable communities increased by 0.2% primarily due to wage increases. Our other senior living operating expenses at our current quarter comparable communities increased by 3.4% primarily due to net increased charges for purchased services and increased service provider fees. Our senior living rent expense increased by 5.3% compared to the same period in 2011 primarily due to the addition of six communities we began to lease during the second quarter of 2011 and our payment of additional rent for senior living community capital improvements purchased by SNH since April 1, 2011.

Our senior living depreciation and amortization expense increased by 53.4% for the three months ended June 30, 2012 compared to the same period in 2011 primarily due to additional depreciation and amortization resulting from the seven owned senior living communities that we acquired in the second and third quarters of 2011 and capital expenditures (net of sales of capital improvements to SNH), including depreciation costs arising from our purchase of furniture and fixtures for our owned communities.

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

Interest and other expense attributable to our senior living communities increased by 178.6% for the three months ended June 30, 2012 compared to the same period in 2011 primarily due to our assumption of three mortgage notes in connection with our acquisition of three of the Indiana Communities during the third quarter of 2011.

Rehabilitation hospitals:

Our rehabilitation hospital revenues increased by 0.2% for the three months ended June 30, 2012 compared to the same period in 2011 primarily due to a higher number of Medicare patients being serviced and increased third party payer rates, partially offset by a decrease in occupancy.

Our rehabilitation hospital expenses increased by 1.8% for the three months ended June 30, 2012 compared to the same period in 2011 primarily due to increases in labor and benefit costs.

Our rehabilitation hospital rent expense increased by 2.9% for the three months ended June 30, 2012 compared to the same period in 2011 due to our payment of additional rent for rehabilitation hospital capital improvements purchased by SNH since April 1, 2011.

Corporate and Other:

Institutional pharmacy revenue and institutional pharmacy expenses decreased by 12.0% and 7.4%, respectively, for the three months ended June 30, 2012 compared to the same period in 2011 primarily due to a decline in customer accounts and a number of commonly dispensed name brand drugs that became available as lower priced generic drugs.

General and administrative expenses increased by 8.7% for the three months ended June 30, 2012 compared to the same period in 2011 primarily due to increased regional personnel and information technology costs resulting from our acquisitions of additional communities during 2011, legal costs associated with our agreement to sell our pharmacy business and wage increases.

Our interest and other income decreased by 27.2% for the three months ended June 30, 2012 compared to the same period in 2011 due to less investable cash and lower yields realized on our investments.

Our interest and other expense increased by 53.6% for the three months ended June 30, 2012 compared to the same period in 2011 primarily due to interest paid on the Bridge Loan and the New Credit Facility, partially offset by our purchase and retirement of $12.4 million par value of the outstanding Notes since June 30, 2011.

During the three months ended June 30, 2012, we recorded a gain of $3.4 million, net of legal fees, pursuant to the Settlement Agreement with Sunrise. See Note 14 to our Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

During the three months ended June 30, 2011, we incurred $1.2 million of acquisition related costs for completed and pending transactions.

For the three months ended June 30, 2012, we recognized tax expense from continuing operations of $3.8 million. We also recognized a tax benefit from discontinued operations of $205,000. Our effective income tax rate increased during the three months ended June 30, 2012 to 43.7% compared to 8.4% in the prior year period primarily because our previous rate had been reduced from the statutory rate due to our previous valuation allowance for our deferred tax asset relating to our NOL carry forwards which we reversed as of December 31, 2011. During the fourth quarter of 2011 we evaluated the realizability of certain of our net deferred tax assets, which include, among other things, our net operating losses and tax credits, and determined that it is more likely than not that we will realize the benefit of such deferred tax assets. As of December 31, 2011, our federal NOL carry forward, which will begin to expire in 2025 if unused, was approximately $100.7 million, and our tax credit carry forward, which will begin to expire in 2022 if unused, was approximately $6.8 million.

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

Discontinued operations:

Loss from discontinued operations for the three months ended June 30, 2012 decreased $498,000 to $293,000, compared to a loss of $791,000 for the three months ended June 30, 2011. The losses in both years are primarily due to losses we incurred at assisted living communities and SNFs that we have sold or expect to sell.

Key Statistical Data For the Six Months Ended June 30, 2012 and 2011:

The following tables present a summary of our operations for the six months ended June 30, 2012 and 2011:

Senior living communities:

	Six months ended June 30,
(dollars in thousands, except average daily rate)	2012			2011			$ Change			% Change
Senior living revenue	$	554,296		$	528,041		$	26,255		5.0	%
Management fee revenue	2,390			25			2,365			9,460.0	%
Reimbursed costs incurred on behalf of managed communities	49,503			562			48,941			8,708.4	%
Total revenue	606,189			528,628			77,561			14.7	%
Senior living wages and benefits	(274,992		)	(262,840		)	(12,152		)	(4.6	%)
Other senior living operating expenses	(133,204		)	(124,453		)	(8,751		)	(7.0	%)
Costs incurred on behalf of managed communities	(49,503		)	(562		)	(48,941		)	(8,708.4	%)
Rent expense	(95,252		)	(90,179		)	(5,073		)	(5.6	%)
Depreciation and amortization expense	(11,151		)	(7,235		)	(3,916		)	(54.1	%)
Interest and other expense	(1,206		)	(214		)	(992		)	(463.6	%)
Interest and other income	39			68			(29		)	(42.6	%)
Senior living income from continuing operations	$	40,920		$	43,213		$	(2,293	)	(5.3	%)

Total number of communities (end of period):
Owned and leased communities	222			217			5			2.3	%
Managed communities	25			10			15			150.0	%
Number of total communities	247			227			20			8.8	%

Number of living units:
owned and leased living units	23,759			23,122			637			2.8	%
Managed living units	3,738			934			2,804			300.2	%
Number of total living units	27,497			24,056			3,441			14.3	%

Owned and leased communities:
Occupancy %	85.7		%	85.4		%	n/a			0.3	%
Average daily rate	$	147.19		$	151.60		$	(4.41	)	(2.9	%)
Percent of senior living revenue from Medicaid	12.7		%	12.7		%	n/a			—
Percent of senior living revenue from Medicare	13.0		%	15.7		%	n/a			(2.7	%)
Percent of senior living revenue from private and other sources	74.3		%	71.6		%	n/a			2.7	%

Comparable senior living communities (senior living communities that we have owned or leased and operated continuously since January 1, 2011):

	Six months ended June 30,
(dollars in thousands, except average daily rate)	2012			2011			$ Change			% Change
Senior living revenue	$	529,087		$	525,749		$	3,338		0.6	%
Senior living wages and benefits	(266,641		)	(261,976		)	(4,665		)	(1.8	%)
Other senior living operating expenses	(126,827		)	(123,920		)	(2,907		)	(2.3	%)
No. of communities (end of period)	209			209			n/a			—
No. of living units (end of period)	22,170			22,170			n/a			—
Occupancy %	85.4		%	85.4		%	n/a			—
Average daily rate	$	151.34		$	151.91		$	(0.57	)	(0.4	%)
Percent of senior living revenue from Medicaid	13.2		%	12.8		%	n/a			0.4	%
Percent of senior living revenue from Medicare	13.6		%	15.8		%	n/a			(2.2	%)
Percent of senior living revenue from private and other sources	73.2		%	71.4		%	n/a			1.8	%

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

Rehabilitation hospitals:

	Six months ended June 30,
(dollars in thousands)	2012			2011			$ Change			% Change
Rehabilitation hospital revenues	$	53,173		$	51,962		$	1,211		2.3	%
Rehabilitation hospital expenses	(47,991		)	(47,498		)	(493		)	(1.0	%)
Rent expense	(5,272		)	(5,161		)	(111		)	(2.2	%)
Depreciation and amortization expense	(105		)	(86		)	(19		)	(22.1	%)
Rehabilitation hospital loss from continuing operations	$	(195	)	$	(783	)	$	588		75.1	%

Corporate and other: (1)

	Six months ended June 30,
(dollars in thousands)	2012			2011			$ Change			% Change
Institutional pharmacy revenue	$	35,853		$	38,910		$	(3,057	)	(7.9	%)
Institutional pharmacy expenses	(36,008		)	(37,531		)	1,523			4.1	%
Depreciation and amortization expense	(1,769		)	(1,600		)	(169		)	(10.6	%)
General and administrative (2)	(30,844		)	(27,824		)	(3,020		)	(10.9	%)
Equity in losses of Affiliates Insurance Company	121			83			38			45.8	%
Gain on settlement	3,365			—			3,365			100.0	%
Gain on early extinguishment of debt	45			1			44			4,400.0	%
(Loss) gain on sale of available for sale securities	(1		)	127			(128		)	(100.8	%)
Interest and other income	424			581			(157		)	(27.0	%)
Interest and other expense	(1,825		)	(1,157		)	(668		)	(57.7	%)
Acquisition related costs	—			(1,304		)	1,304			100.0	%
Provision for income taxes	(4,409		)	(820		)	(3,589		)	(437.7	%)
Corporate and Other loss from continuing operations	$	(35,048	)	$	(30,534	)	$	(4,514	)	(14.8	%)

(1) Corporate and Other includes operations that we do not consider material, separately reportable segments of our business, and income and expenses that are not attributable to a reportable specific segment.

(2) General and administrative expenses are not attributable to a specific reportable segment and include items such as corporate payroll and benefits and expenses of our home office activities.

Consolidated:

	Six months ended June 30,
(dollars in thousands)	2012			2011			$ Change			% Change
Summary of revenue:
Senior living communities	$	606,189		$	528,628		$	77,561		14.7	%
Rehabilitation hospital revenue	53,173			51,962			1,211			2.3	%
Corporate and Other	35,853			38,910			(3,057		)	(7.9	%)
Total revenue	$	695,215		$	619,500		$	75,715		12.2	%

Summary of income (loss) from continuing operations:
Senior living communities	$	40,920		$	43,213		$	(2,293	)	(5.3	%)
Rehabilitation hospitals	(195		)	(783		)	588			75.1	%
Corporate and Other	(35,048		)	(30,534		)	(4,514		)	(14.8	%)
Income from continuing operations	$	5,677		$	11,896		$	(6,219	)	(52.3	%)

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

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Senior living communities:

Our senior living revenue increased by 5.0% for the six months ended June 30, 2012 compared to the same period in 2011 primarily due to an increase from 209 to 222 in the number of communities that we owned and leased during these periods, respectively, and a slight increase in occupancy, partially offset by a 7.6% reduction in aggregate Medicare payment rates for SNFs. Our senior living revenue at the communities that we operated continuously since January 1, 2011, or our comparable communities, increased 0.6% for the six months ended June 30, 2012 compared to the same period in 2011, primarily due to an increase in Medicaid payment rates in certain states, partially offset by a 7.6% reduction in aggregate Medicare payment rates for our SNFs.

In June 2011, we began managing 10 senior living communities for SNH and for another owner pending SNH’s acquisition. Our management fee revenue and reimbursed costs incurred at these communities increased significantly during the six months ended June 30, 2012 due to an increase from 10 to 25 in the number of communities we manage and because we managed these communities for the full quarter in 2012 versus our beginning to manage them in June 2011.

Our senior living wages and benefits increased 4.6% for the six months ended June 30, 2012 compared to the same period in 2011 primarily due to an increase from 209 to 222 in the number of communities that we owned and leased during these periods, respectively, and to wage increases at our comparable communities. Our other senior living operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, increased by 7.0% due to an increase in the number of communities that we owned and leased from 209 to 222, plus net increased charges for purchased services and increased service provider fees at our comparable communities, partially offset by a decrease in our utility costs as a result of mild weather experienced throughout the U.S. during the first quarter of 2012. Our senior living wages and benefits at our comparable communities increased by 1.8% primarily due to wage increases. Our other senior living operating expenses at our comparable communities increased by 2.3% primarily due to net increased charges for purchased services and increased service provider fees, partially offset by a decrease in our utility costs as a result of mild weather experienced throughout the U.S. during the first quarter of 2012. Our senior living rent expense increased by 5.6% compared to the same period in 2011 primarily due to the addition of six communities we began to lease during the second quarter of 2011 and our payment of additional rent for senior living community capital improvements purchased by SNH since January 1, 2011.

Our senior living depreciation and amortization expense increased by 54.1% for the six months ended June 30, 2012 compared to the same period in 2011 primarily due to additional depreciation and amortization resulting from the seven owned senior living communities that we acquired in the second and third quarters of 2011 and capital expenditures (net of sales of capital improvements to SNH), including depreciation costs arising from our purchase of furniture and fixtures for our owned communities.

Interest and other expense attributable to our senior living communities increased by 463.6% for the six months ended June 30, 2012 compared to the same period in 2011 primarily due to our assumption of four mortgage notes in connection with our acquisition of four senior living communities during the second and third quarters of 2011.

Rehabilitation hospitals:

Our rehabilitation hospital revenues increased by 2.3% for the six months ended June 30, 2012 compared to the same period in 2011 primarily due to a higher number of Medicare patients being serviced and increased third party payer rates, partially offset by a decrease in occupancy.

Our rehabilitation hospital expenses increased by 1.0% for the six months ended June 30, 2012 compared to the same period in 2011 primarily due to increases in labor and benefit costs, partially offset by a decrease in our utility costs as a result of mild weather experienced throughout the U.S. during the first quarter of 2012.

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

Our rehabilitation hospital rent expense increased by 2.2% for the six months ended June 30, 2012 compared to the same period in 2011 due to our payment of additional rent for rehabilitation hospital capital improvements purchased by SNH since January 1, 2011.

Corporate and Other:

Institutional pharmacy revenue and institutional pharmacy expenses decreased by 7.9% and 4.1%, respectively, for the six months ended June 30, 2012 compared to the same period in 2011 primarily due to a decline in customer accounts and a number of commonly dispensed name brand drugs that became available as lower priced generic drugs.

General and administrative expenses increased by 10.9% for the six months ended June 30, 2012 compared to the same period in 2011 primarily due to increased regional personnel and information technology costs resulting from our acquisitions of additional communities during 2011, legal costs associated with our pharmacy sale and wage increases.

Our interest and other income decreased by 27.0% for the six months ended June 30, 2012 compared to the same period in 2011 due to less investable cash and lower yields realized on our investments.

Our interest and other expense increased by 57.7% for the six months ended June 30, 2012 compared to the same period in 2011 primarily due to interest on our outstanding balance on the Bridge Loan, partially offset by our purchase and retirement of $623,000 par value of the outstanding Notes since during the six months ended June 30, 2011.

During the six months ended June 30, 2012, we recorded a gain of $3.4 million, net of legal fees, pursuant to the Settlement Agreement with Sunrise.

During the six months ended June 30, 2011, we incurred $1.3 million of acquisition related costs for completed and pending acquisitions.

For the six months ended June 30, 2012, we recognized tax expense from continuing operations of $4.4 million. We also recognized a tax benefit from discontinued operations of $505,000. Our effective income tax rate increased during the six months ended June 30, 2012 to 43.7% compared to 8.4% in the prior year period primarily because our previous rate had been reduced from the statutory rate due to our previous valuation allowance for our deferred tax asset relating to our NOL carry forwards which we reversed as of December 31, 2011. During the fourth quarter of 2011 we evaluated the realizability of certain of our net deferred tax assets, which include, among other things, our net operating losses and tax credits, and determined that it is more likely than not that we will realize the benefit of such deferred tax assets. As of December 31, 2011, our federal NOL carry forward, which will begin to expire in 2025 if unused, was approximately $100.7 million, and our tax credit carry forward, which will begin to expire in 2022 if unused, was approximately $6.8 million.

Discontinued operations:

Loss from discontinued operations for the six months ended June 30, 2012 decreased $1.9 million to $670,000, compared to a loss of $2.6 million for the six months ended June 30, 2011. The losses in both years are primarily due to losses we incurred at assisted living communities and SNFs that we have sold or expect to sell.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2012, we had unrestricted cash and cash equivalents of $23.6 million, $35.0 million available to borrow under our Credit Agreement and $110.6 million available to borrow under our New Credit Facility.

We believe that a combination of our existing cash, cash equivalents, net cash from operations and our ability to borrow under our Credit Agreement and our New Credit Facility, as described in Note 9 to our Condensed Consolidated Financial Statements in Item 1 above, will provide us with adequate cash flow to fund our debt obligations and run our business, invest in and maintain our properties and fund future acquisitions, if any, for the next 12 months and for the foreseeable future thereafter. If, however, our occupancies decline from historic levels or if the rates we receive for our services decline, such as if government reimbursement rates are further reduced, and we are unable to generate positive cash flow for an extended period, we expect that we would explore alternatives to fund our operations. Such alternatives

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may include further reducing our costs, incurring debt under, and perhaps in addition to, our Credit Agreement and our New Credit Facility, engaging in sale leaseback transactions of our owned communities, mortgage financing our communities that are not subject to existing mortgages and issuing new equity or debt securities. We have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but this registration statement does not assure that there will be buyers for such securities. As of June 30, 2012, we had a working capital deficit of $57.0 million.

Assets and Liabilities

Our total current assets at June 30, 2012 were $138.7 million, compared to $141.5 million at December 31, 2011. At June 30, 2012, we had cash and cash equivalents of $23.6 million compared to $28.4 million at December 31, 2011. Our current liabilities were $195.7 million at June 30, 2012 compared to $189.3 million at December 31, 2011. The decrease in our cash and cash equivalents results from part of our repayment of the Bridge Loan and a portion of the outstanding Notes during 2012 with cash on hand. The increase in current liabilities results from timing of payment and accrual differences.

We had net cash flows from continuing operations of $30.7 million for the six months ended June 30, 2012 compared to $31.4 million for the same period in 2011. Acquisitions of property plant and equipment on a net basis after considering the proceeds from sales of fixed assets to SNH, were $14.4 million and $14.7 million for the six months ended June 30, 2012 and 2011, respectively.

Acquisitions

In May 2011, we agreed to purchase certain assets of the Indiana Communities containing 738 living units for a total purchase price, excluding closing costs, of $122.8 million. The Indiana Communities primarily offer independent and assisted living services, which are currently primarily paid by residents from their private resources. During 2011, we completed our acquisitions of the assets of the Indiana Communities and funded the acquisitions with proceeds of our Public Offering, proceeds of the Bridge Loan, by assuming approximately $19.3 million of mortgage notes secured by three of the Indiana Communities, by assuming net working capital liabilities of the Indiana Communities and with cash on hand. We have completed the purchase accounting of the fair value of the assets acquired after we considered the results from a third party valuation report we received and, as a result, we allocated $4.2 million to land, $100.7 million to building and equipment, $3.2 million to resident agreements and recorded $14.6 million of goodwill associated with the cash flow for additional home health services provided by the Indiana Communities.

Our Leases and Management Agreements with SNH

As of June 30, 2012, we leased 188 senior living communities (including one that we classify as discontinued operations) and two rehabilitation hospitals from SNH under four leases and we managed 24 senior living communities for the account of SNH, as well as one other senior living community for the account of the then existing owner pending SNH’s acquisition of that community which occurred in July 2012. Our total minimum annual rent payable to SNH under those leases as of June 30, 2012 was $196.4 million, excluding percentage rent. We paid approximately $1.2 million in percentage rent to SNH for the three months ended June 30, 2012 and 2011 and $2.4 million and $2.5 million in percentage rent to SNH for the six months ended June 30, 2012 and 2011, respectively. We earned management fee revenue of $1.1 million and $2.1 million, respectively, for the three and six months ended June 30, 2012, and $25,000 for the three and six months ended June 30, 2011, with respect to the communities we managed for the account of SNH during those periods.

In February 2012, SNH acquired a senior living community with 92 units located in Alabama and we entered into a long term management agreement with SNH to manage this community on terms substantially consistent with those that we have previously entered into with SNH for communities that include assisted living units, and added this agreement to our existing pooling agreement with SNH for managed communities that include assisted living units.

In May 2012, we and SNH entered into the Operations Transfer Agreement with Sunrise. Pursuant to the Operations Transfer Agreement, SNH and Sunrise agreed to accelerate the December 31, 2013 termination date of Sunrise’s leases for the 10 Communities, and we agreed to begin to operate the 10 Communities as a manager for SNH’s account, pursuant to long term management agreements. The Operations Transfer Agreement provides that these transactions will occur when we and SNH have obtained regulatory approvals to operate the applicable 10 Communities. We expect the long term management agreements with SNH for each of the 10 Communities will be on terms substantially similar to

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the management agreements previously entered into between us and SNH for communities that include assisted living units and which are owned by SNH and managed by us, and these agreements will be included in our pooling agreement with SNH for managed communities.

In May 2012, we entered into a long term management agreement with SNH, on terms substantially consistent with the terms of our other management agreements that we have previously entered into with SNH for communities that include assisted living units, to manage for SNH’s account a senior living community in South Carolina with 59 assisted living units, which community we had been managing for the prior owner’s account pending SNH’s acquisition. In July 2012, we entered into a long term management agreement with SNH, on terms substantially consistent with the terms of our other management agreements that we have previously entered into with SNH for communities that include assisted living units, to manage for SNH’s account a senior living community in South Carolina with 232 units, which community we had previously been managing for the prior owner’s account pending SNH’s acquisition.

Upon our request, SNH may purchase capital improvements made at the properties we lease from SNH and increase our rent pursuant to contractual formulas; however, SNH is not obligated to purchase these improvements from us and we are not obligated to sell them to SNH. During the six months ended June 30, 2012, SNH paid us $14.1 million for capitalized improvements at the properties leased from SNH and these purchases resulted in our annual rent increasing by approximately $1.1 million. As of June 30, 2012, we had assets of $8.4 million included in our property and equipment that we intend to sell to SNH for increased rent pursuant to the terms of our leases with SNH; however, we are not obligated to make these sales and SNH is not obligated to purchase the property and equipment.

For further information regarding our leases and management agreements with SNH , please see Note 11 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Pharmacy Sale

On July 6, 2012, we entered into the Purchase Agreement to sell our pharmacy business to Omnicare for $30.7 million, plus the value of certain items of net working capital invested in our pharmacy business as of the closing of the transaction. We currently anticipate the sale of this business will result in a capital gain of approximately $23.5 million. Based on June 30, 2012 amounts, the net amount to us from our selling to Omnicare or retaining net working capital invested in our pharmacy business would equal approximately $9.4 million. In aggregate, we expect our net cash receipts resulting from this sale to be approximately $39.9 million, before third party transaction costs. Our pharmacy business operates in 13 states and provides institutional pharmacy services to 247 senior living communities with approximately 12,300 living units.

Litigation Settlement

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

Our Revenues

Our revenues from services to residents at our senior living communities and patients of our rehabilitation hospitals and clinics, our pharmacies, sales of capital expenditures to SNH for increased rent and borrowings under our credit facilities are our primary source of cash to fund our operating expenses, including rent, principal and interest payments on our debt and capital expenditures.

During the past four years, weak economic conditions throughout the country have negatively affected our occupancy. These conditions have impacted many companies both within and outside of our industry and it is unclear when current economic conditions, especially the housing market, may materially improve. Although many of the services we provide

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are needs driven, some of those needs may be deferred during recessions; for example, relocating to a senior living community may be delayed when sales of houses are delayed.

At some of our senior living communities Medicare and Medicaid programs provide operating revenues for skilled nursing and rehabilitation services. These programs are discussed in Part I of our Annual Report under the caption “Government Regulation and Reimbursement,” and in Part 1, Item 2 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, under the caption “Our Revenues.” Medicare and Medicaid revenues were earned primarily at our SNFs, our two rehabilitation hospitals and our pharmacy operations. We derived 30.8% and 32.9% of our total revenues from these programs during the six months ended June 30, 2012 and 2011, respectively. We have entered into the Purchase Agreement to sell our pharmacy business, which is subject to conditions. See Note 15 to our Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Our net Medicare revenues from services to senior living community residents and at our rehabilitation hospitals totaled $105.5 million and $115.4 million during the six months ended June 30, 2012 and 2011, respectively. Our net Medicaid revenues from services to senior living community residents and at our rehabilitation hospitals totaled $71.2 million and $67.7 million during the six months ended June 30, 2012 and 2011, respectively. Our pharmacy revenues from Medicare and Medicaid were $16.8 million and $2.0 million, respectively, during the six months ended June 30, 2012 and $16.7 million and $2.4 million, respectively, during the six months ended June 30, 2011.

Effective October 1, 2011, the Federal Centers for Medicare and Medicaid Services, or CMS, adopted a rule that updates Medicare prospective payment rates for SNFs, which affects the 5,392 skilled nursing units we operate. As discussed in Part I of our Annual Report under the caption “Government Regulation and Reimbursement”, CMS estimates that the final rule will result in a net reduction of approximately 11.1% in aggregate Medicare payment rates for SNFs in federal fiscal year 2012. The impact on our SNF Medicare revenues in the six months ended June 30, 2012 was approximately $5.3 million. Recently CMS issued updated Medicare prospective payment rates for SNFs effective October 1, 2012, which CMS estimates will result in a net increase of approximately 1.8% in aggregate Medicare payment rates for SNFs in federal fiscal year 2013. However, we expect the net reduction to our Medicare SNF rates in federal fiscal years 2012 and 2013 to be material and adverse to our future financial results of operations.

Also effective October 1, 2011, CMS adopted a rule that updates Medicare prospective payment rates for inpatient rehabilitation facilities, or IRFs, which affects the two rehabilitation hospitals we operate. This rule includes an increase in the Medicare payment rates for IRFs that CMS estimates to be approximately 2.2% in federal fiscal year 2012. However, as discussed in Part I of our Annual Report under the caption “Government Regulation and Reimbursement”, we estimate that the increase in our rehabilitation hospitals’ Medicare payment rates may be approximately 1.0%. The rule also establishes a new quality reporting program that provides for a 2% reduction in the annual payment update beginning in 2014 for failure to report required quality data to the Secretary of Health and Human Services. Medicare revenues realized at our IRFs in the year ended December 31, 2011 and the six months ended June 30, 2012, were approximately $68.6 million and $34.7 million, respectively. Recently CMS issued updated Medicare prospective payment rates for IRFs effective October 1, 2012, which CMS estimates will result in a net increase of approximately 2.1% in aggregate Medicare payment rates for IRFs in federal fiscal year 2013. However, due to a number of factors, we estimate that the increase in our hospitals’ Medicare payment rates may be approximately 1.0%. The calculation of Medicare rate adjustments applicable at our IRFs is complex and will depend upon patient case mixes. Accordingly, we cannot predict the final impact of the Medicare rate adjustments to our IRF results at this time.

Our Medicare Part B outpatient rehabilitation therapy revenue rates are based, in part, upon the Medicare Physician Fee Schedule that was scheduled to be reduced by approximately 27% on February 29, 2012. Congress recently extended a delay on this reduction until the end of 2012, but the reduction, now scheduled for 2013, would be more than 27%. If and when this rate reduction takes effect, it may be material and adverse to our future financial results of operations. Also, Congress recently extended the process to allow medically necessary exceptions to annual caps on Medicare payments for outpatient rehabilitation services to individual patients through the end of 2012. We cannot predict whether the exception process will be extended beyond that date, but any failure to do so may have a material adverse impact upon our revenues and earnings.

The U.S. Supreme Court recently upheld two major provisions of the Patient Protection and Affordable Care Act, or PPACA, which is discussed in Part I of our Annual Report under the caption “Government Regulation and Reimbursement”. These two provisions are the individual mandate and the Medicaid expansion, which required states to expand their Medicaid programs by 2014 to cover all individuals under the age of 65 with incomes not exceeding 133% of the federal poverty line. In upholding the Medicaid expansion, the Supreme Court found that it violated the U.S. Constitution as drafted, but remedied the violation by modifying the expansion to preclude the Secretary of the U.S. Department of Health and Human Services from withholding existing federal Medicaid funds from states that fail to comply with the Medicaid expansion, instead allowing the Secretary only to deny new Medicaid expansion funding. As

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a result of the Court’s ruling, some states may choose not to participate in the Medicaid expansion or may delay their participation.

Some of the states in which we operate either have not raised Medicaid rates by amounts sufficient to offset increasing costs or have frozen or reduced, or are expected to freeze or reduce, Medicaid rates. Also, effective June 30, 2011, Congress ended certain temporary increases in federal payments to states for Medicaid programs which had been in effect since October 1, 2008. We expect the ending of these temporary federal payments, combined with the anticipated slow recovery of state tax revenues, to result in continued difficult state fiscal conditions. As a result, some state budget deficits likely will increase, and certain states may reduce Medicaid payments to healthcare services providers like us as part of an effort to balance their budgets.

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

Debt Financings and Covenants

We have a $35.0 million Credit Agreement that matures on March 18, 2013 when all amounts outstanding will be due. Borrowings under our Credit Agreement are available for acquisitions, working capital and general business purposes. Funds available under our Credit Agreement may be drawn, repaid and redrawn until maturity and no principal payment is due until maturity. We borrow in U.S. dollars and borrowings under our Credit Agreement bear interest at LIBOR (with a floor of 2% per annum) plus 400 basis points, or 6% as of June 30, 2012. We are the borrower under our Credit Agreement and certain of our subsidiaries guarantee our obligations under our Credit Agreement, which is secured by our and our guarantor subsidiaries’ accounts receivable and related collateral. Our Credit Agreement contains covenants requiring us to maintain certain 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. Our Credit Agreement also provides for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, including a change of control of us. As of June 30, 2012, no amounts were outstanding under our Credit Agreement. As of June 30, 2012, we believe we were in compliance with all applicable covenants under our Credit Agreement.

In May 2011, we entered into the Bridge Loan agreement with SNH under which SNH agreed to lend us up to $80.0 million to fund part of the purchase price for our acquisitions of certain assets of the Indiana Communities. During 2011, we completed our acquisitions of the assets of the Indiana Communities and, in connection with the acquisitions, borrowed $80.0 million under the Bridge Loan. We subsequently repaid $42.0 million of this advance with proceeds from the Public Offering and cash generated by operations. In April 2012, we repaid in full the then principal amount outstanding under the Bridge Loan, resulting in termination of the Bridge Loan.

In April 2012, we entered into our $150.0 million New Credit Facility. The maturity date of our New Credit Facility is April 13, 2015, and, subject to the payment of extension fees and meeting certain other conditions, we have options to extend the maturity date for two, one year periods. The proceeds of our New Credit Facility are available for general business purposes, including the repayment of debt. Our New Credit Facility bears interest, at our election, at LIBOR plus 250 basis points or a base rate plus 150 basis points. Borrowings under our New Credit Facility are guaranteed by certain of our subsidiaries and secured by real estate mortgages on 15 senior living communities with 1,549 living units owned by our guarantor subsidiaries and our guarantor subsidiaries’ accounts receivable and related collateral. Funds available under our New Credit Facility may be drawn, repaid and redrawn until maturity and there are no scheduled principal payments prior to maturity. Our New Credit Facility provides for acceleration of payment of all amounts payable upon the occurrence and continuation of certain events of default, including a change of control of us. Our New Credit Facility contains a number of financial covenants which generally restrict our ability to incur debts in excess of calculated amounts, require us to maintain a minimum net worth and require us to maintain various financial ratios. As of June 30, 2012, $37.5 million was outstanding under our New Credit Facility. As of June 30, 2012, we believe we were in compliance with all applicable covenants under our New Credit Facility.

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There have been recent governmental inquiries regarding the setting of LIBOR, which may result in changes to that process that could have the general effect of increasing LIBOR. Increases in LIBOR would increase the amount of interest we pay under our Credit Agreement and our New Credit Facility.

In October 2006, we issued $126.5 million principal amount of the Notes. Our net proceeds from this issuance were approximately $122.6 million. The Notes bear interest at a rate of 3.75% per annum and are convertible into our common shares at any time. The initial conversion rate, which is subject to adjustment, is 76.9231 common shares per $1,000 principal amount of the Notes, which represents an initial conversion price of $13.00 per share. The Notes are guaranteed by certain of our wholly owned subsidiaries. The Notes mature on October 15, 2026. We may prepay the Notes at any time and the holders may require that we purchase all or a portion of these Notes on each of October 15 of 2013, 2016 and 2021 at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest. 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. We issued the Notes pursuant to an indenture which contains various customary covenants. As of June 30, 2012, we believe we were in compliance with all applicable covenants of the indenture governing the Notes.

During the six months ended June 30, 2012, we purchased and retired $12.4 million par value of the outstanding Notes and recorded a gain of $45,000, net of related unamortized costs, on early extinguishment of debt included in interest and other income. We funded this purchase principally with borrowings under our New Credit Facility and cash on hand. During the six months ended June 30, 2011, we purchased and retired $623,000 par value of the outstanding Notes and recorded a gain of $1,000, net of related unamortized costs, on early extinguishment of debt included in interest and other income. We funded this purchase principally with cash on hand. As a result of these purchases and other purchases we made in prior years, $24.9 million in principal amount of the Notes remain outstanding. We may purchase additional outstanding principal amounts of the Notes from time to time.

At June 30, 2012, six of our senior living communities were encumbered by mortgage notes totaling $46.9 million: (1) two of our communities, which we have classified as discontinued operations, were encumbered by HUD insured mortgage notes; (2) one of our communities was encumbered by a FNMA mortgage note and; (3) three of our communities were encumbered by FMCC mortgage notes. These mortgages contain HUD, FNMA and FMCC standard mortgage covenants. The weighted average interest rate on these notes was 6.68% as of June 30, 2012. Payments of principal and interest are due monthly until maturities at varying dates ranging from June 2023 to May 2039. As of June 30, 2012, we believe we were in compliance with all applicable covenants under these mortgages.

Off Balance Sheet Arrangements

We have pledged certain of our assets, such as accounts receivable, with a carrying value , as of June 30, 2012, of $22.3 million arising from our operation of 56 properties owned by SNH and leased to us which secures SNH’s borrowings from its lender, FNMA. As of June 30, 2012, we had no other off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Related Person Transactions

We have relationships and historical and continuing transactions with our Directors, our executive officers, SNH, RMR and AIC and other companies to which RMR provides management services and others affiliated with or related to them. For example: we have or had relationships with other companies to which RMR provides management services and which have trustees, directors and officers who are also directors or officers of ours or RMR, including SNH, which is our former parent, our largest landlord and our largest stockholder; and AIC, an Indiana insurance company, of which we, SNH, RMR and five other companies to which RMR provides management services each currently own 12.5%, and with respect to which we and the other shareholders of AIC have property insurance in place providing $500.0 million of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts. Also, as a further example, RMR assists us with various aspects of our business pursuant to a business management agreement. For further information about these and other such relationships and related person

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transactions, please see Note 11 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. In addition, for more information about these transactions and relationships, please see elsewhere in this Quarterly Report on Form 10-Q, including “Warning Concerning Forward Looking Statements,” and our Annual Report, our Proxy Statement and our other filings with the SEC, including Note 15 to our Consolidated Financial Statements included in our Annual Report, the sections captioned “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” and “Warning Concerning Forward Looking Statements” of our Annual Report and the section captioned “Related Person Transactions and Company Review of Such Transactions” and the information regarding our Directors and executive officers in our Proxy Statement. In addition, please see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise from these transactions and relationships. Our filings with the SEC, including our Annual Report and our Proxy Statement, are available at the SEC’s website at www.sec.gov. In addition, copies of certain of our agreements with these parties, including our leases, forms of management agreements and related pooling agreement and Bridge Loan agreement with SNH, our business management agreement with RMR, our headquarters lease with an affiliate of RMR and our shareholders agreement with AIC and its shareholders, are also publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website.

We believe that our agreements with SNH, RMR and AIC are on commercially reasonable terms. We also believe that our relationships with SNH, RMR and AIC and their affiliated and related persons and entities benefit us, and, in fact, provide us with competitive advantages in operating and growing our business.

Seasonality

Our senior living business is subject to modest effects of seasonality. During the calendar fourth quarter holiday periods, nursing home and assisted living residents are sometimes discharged to join family celebrations and relocations and admission decisions are often deferred. The first quarter of each calendar year usually coincides with increased illness among nursing home and assisted living residents which can result in 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 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates has not materially changed from December 31, 2011. 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 affect the fair value of our fixed rate debt; 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% of current interest rates and other credit market considerations remained unchanged, the aggregate market value of our $46.9 million aggregate principal amount of outstanding mortgage debt and $24.9 million aggregate principal amount of the outstanding Notes on June 30, 2012 would decline by approximately $3.2 million; and, similarly, if prevailing interest rates were to decline by 10% of current interest rates and other credit market considerations remained unchanged, the aggregate market value of our $46.9 million aggregate principal amount of outstanding mortgage debt and $24.9 million aggregate principal amount of the outstanding Notes on June 30, 2012, would increase by approximately $3.4 million.

Our Credit Agreement bears interest at floating rates and matures on March 18, 2013. As of June 30, 2012, no amounts were outstanding under our Credit Agreement. We borrow in U.S. dollars and borrowings under our Credit Agreement bear interest at LIBOR (with a floor of 2% per annum) plus 400 basis points. Accordingly, we are vulnerable to changes in U.S. dollar based short term interest rates, specifically LIBOR. A change in interest rates, all other credit market conditions remaining unchanged, would not affect the value of our Credit Agreement but could affect our operating results. For example, if the maximum amount of $35.0 million were drawn under our Credit Agreement and interest rates above the floor or minimum rate decreased or increased by 1% per annum, our annual interest expense would decrease or increase by $350,000, or $0.01 per share, based on our outstanding common shares. If interest rates were to change gradually over time, the impact would occur over time.

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Our New Credit Facility bears interest at floating rates and matures on April 13, 2015. As of June 30, 2012, $37.5 million was outstanding under our New Credit Facility. We borrow in U.S. dollars and borrowings under our New Credit Facility bear interest, at our election, at LIBOR plus 250 basis points or a base rate plus 150 basis points. Accordingly, we are vulnerable to changes in U.S. dollar based short term interest rates. A change in interest rates, all other credit market conditions remaining unchanged, would not affect the value of our New Credit Facility but could affect our operating results. For example, if the amount outstanding as of June 30, 2012 under our New Credit Facility were to remain unchanged and interest rates increased by 1% our annual interest expense would increase by $375,000. Moreover, as a further example, if the maximum amount of $150.0 million were drawn under our New Credit Facility and interest rates decreased or increased by 1% per annum, our annual interest expense would decrease or increase by $1.5 million, or $0.03 per share, based on our 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 additional debt to fund acquisitions or otherwise.

Item 4. Controls and Procedures

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our 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 June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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WARNING CONCERNING FORWARD LOOKING STATEMENTS

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

· OUR ABILITY TO OPERATE OUR SENIOR LIVING COMMUNITIES AND REHABILITATION HOSPITALS PROFITABLY,

· OUR ABILITY TO COMPLETE THE SALE OF OUR PHARMACY BUSINESS AS CONTEMPLATED,

· OUR ABILITY TO MEET OUR DEBT OBLIGATIONS,

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

· OUR ABILITY TO MANAGE EFFECTIVELY THOSE SENIOR LIVING COMMUNITIES THAT WE MANAGE ON BEHALF OF THIRD PARTIES,

· OUR ABILITY TO MAINTAIN OUR COMMERCIAL ARRANGEMENTS AND RELATIONSHIPS, INCLUDING WITH SNH AND RMR,

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

· OTHER MATTERS.

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

· CHANGES IN MEDICARE AND MEDICAID POLICIES WHICH COULD RESULT IN REDUCED RATES OF PAYMENT OR A FAILURE OF THESE RATES TO COVER OUR COSTS,

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

· COMPETITION WITHIN THE SENIOR LIVING INDUSTRY AND OUR OTHER BUSINESSES,

· INCREASES IN INSURANCE AND TORT LIABILITY COSTS,

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

· COMPLIANCE WITH, AND CHANGES TO FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS THAT COULD AFFECT OUR SERVICES OR IMPOSE REQUIREMENTS, COSTS AND ADMINISTRATIVE BURDENS THAT REDUCE OUR ABILITY TO PROFITABLY OPERATE OUR BUSINESS.

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FOR EXAMPLE:

· THE VARIOUS GOVERNMENTS WHICH PAY US FOR THE GOODS AND SERVICES WE PROVIDE TO OUR RESIDENTS AND PATIENTS WHO ARE ELIGIBLE FOR MEDICARE AND MEDICAID ARE CURRENTLY EXPERIENCING SEVERE BUDGET SHORTFALLS AND MAY LOWER THE MEDICARE AND MEDICAID RATES THEY PAY US. BECAUSE WE OFTEN CANNOT ETHICALLY LOWER THE QUALITY OF THE SERVICES WE PROVIDE TO MATCH THE AVAILABLE MEDICARE AND MEDICAID RATES, WE MAY EXPERIENCE LOSSES AND SUCH LOSSES MAY BE MATERIAL,

· THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE EXPECT THAT WE MAY ENTER INTO ADDITIONAL MANAGEMENT ARRANGEMENTS WITH SNH SIMILAR TO THOSE CURRENTLY IN EFFECT FOR US TO MANAGE ADDITIONAL SENIOR LIVING COMMUNITIES SNH MAY ACQUIRE IN THE FUTURE. HOWEVER, THERE CAN BE NO ASSURANCE THAT SNH WILL ACQUIRE OTHER COMMUNITIES OR THAT WE AND SNH WILL ENTER INTO ANY ADDITIONAL MANAGEMENT ARRANGEMENTS,

· THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE WILL BEGIN MANAGING 10 SENIOR LIVING COMMUNITIES OWNED BY SNH AND CURRENTLY LEASED TO SUNRISE AFTER ALL APPROPRIATE REGULATORY APPROVALS ARE OBTAINED. THE TRANSFER OF OPERATING CONTROL OF EACH OF THESE 10 COMMUNITIES IS SUBJECT TO REGULATORY APPROVALS IN THE STATE WHERE EACH COMMUNITY IS LOCATED AS WELL AS CERTAIN APPROVALS FROM THIRD PARTY PAYORS AT CERTAIN COMMUNITIES. WE CANNOT CONTROL THE RESULTS OR TIMING OF THESE APPROVAL PROCESSES. ACCORDINGLY, SOME OF THESE APPROVALS MAY BE DELAYED OR NOT OCCUR AND OUR BEGINNING TO MANAGE THESE COMMUNITIES MAY BE DELAYED OR MAY NOT OCCUR,

· THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE HAVE ENTERED INTO A PURCHASE AGREEMENT TO SELL OUR PHARMACY BUSINESS FOR $30.7 MILLION TO OMNICARE AND WE EXPECT THIS SALE TO CLOSE DURING THE SECOND HALF OF 2012. THIS SALE IS SUBJECT TO VARIOUS CLOSING CONDITIONS, INCLUDING OMNICARE’S OBTAINING LICENSING TO OPERATE THE PHARMACY BUSINESS. SOME OF THESE CONDITIONS MAY NOT BE MET, THE SALE MAY NOT OCCUR OR THE SALE MAY BE DELAYED. ALSO, AS A RESULT OF FAILURE OF CERTAIN CONDITIONS, THE FINAL SALE PRICE MAY BE REDUCED, INCLUDING A SPECIFIED REDUCTION OF UP TO APPROXIMATELY $2.5 MILLION IF CERTAIN THIRD PARTY CONSENTS ARE NOT OBTAINED PRIOR TO CLOSING; ANY REDUCTION OF THE SALE PRICE WOULD REDUCE THE AMOUNT OF OUR EXPECTED CASH PROCEEDS AND GAIN FROM THIS SALE,

· THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT THE PURCHASE AGREEMENT PROVIDES THAT WE WILL SELL TO OMNICARE, OR RETAIN, CERTAIN ITEMS OF NET WORKING CAPITAL INVESTED IN OUR PHARMACY BUSINESS AS OF THE CLOSING, WHICH BASED ON JUNE 30, 2012 AMOUNTS WOULD EQUAL APPROXIMATELY $9.4 MILLION. THE ACTUAL AMOUNT OF NET WORKING CAPITAL WHICH WE MAY SELL, OR RETAIN, UPON THE SALE OF OUR PHARMACY BUSINESS WILL DEPEND ON MANY FACTORS, INCLUDING THE FINANCIAL RESULTS OF OPERATIONS OF OUR PHARMACY BUSINESS BEFORE CLOSING. ACCORDINGLY, THE AMOUNT OF NET WORKING CAPITAL THAT MAY BE SOLD OR RETAINED BY US IS NOT ASSURED AND MAY BE LESS THAN $9.4 MILLION, IN WHICH CASE THE AMOUNT OF OUR EXPECTED GAIN FROM THIS SALE WOULD BE REDUCED,

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

· THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE HAD $23.6 MILLION OF CASH AND CASH EQUIVALENTS AT JUNE 30, 2012, THAT THERE WERE NO AMOUNTS OUTSTANDING UNDER OUR CREDIT AGREEMENT AT THAT DATE, THAT WE MAY BORROW ADDITIONAL AMOUNTS UNDER OUR NEW CREDIT FACILITY AND THAT WE HAVE IN THE PAST SOLD

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IMPROVEMENTS TO SNH AND INTEND TO REQUEST TO SELL ADDITIONAL IMPROVEMENTS TO SNH FOR INCREASED RENT PURSUANT TO OUR LEASES WITH SNH; ALL OF WHICH MAY IMPLY THAT WE HAVE ABUNDANT CASH LIQUIDITY. HOWEVER, OUR OPERATIONS AND BUSINESS REQUIRE SIGNIFICANT AMOUNTS OF WORKING CASH AND REQUIRE US TO MAKE SIGNIFICANT CAPITAL EXPENDITURES TO MAINTAIN OUR COMPETITIVENESS. ACCORDINGLY, WE MAY NOT HAVE SUFFICIENT CASH LIQUIDITY,

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

· WE INTEND TO OPERATE OUR REHABILITATION HOSPITALS PROFITABLY. HOWEVER, WE HAVE HISTORICALLY EXPERIENCED LOSSES FROM OUR REHABILITATION HOSPITALS AND WE MAY BE UNABLE TO OPERATE OUR REHABILITATION HOSPITALS PROFITABLY,

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

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

· THE AMOUNT OF AVAILABLE BORROWINGS UNDER OUR NEW CREDIT FACILITY AND CREDIT AGREEMENT ARE SUBJECT TO OUR HAVING QUALIFIED COLLATERAL, WHICH IS PRIMARILY BASED ON THE VALUE OF THE PROPERTIES SECURING OUR NEW CREDIT FACILITY AND THE VALUE OF OUR ACCOUNTS RECEIVABLES AND INVENTORY SECURING OUR CREDIT AGREEMENT. ACCORDINGLY, THE AVAILABILITY OF BORROWINGS UNDER OUR NEW CREDIT FACILITY AND OUR CREDIT AGREEMENT AT ANY TIME MAY BE LESS THAN $150.0 MILLION AND $35.0 MILLION, RESPECTIVELY,

· THIS QUARTERLY REPORT ON FORM 10-Q DISCUSSES THE INTEREST TO BE PAID ON DRAWINGS UNDER OUR CREDIT AGREEMENT AND UNDER OUR NEW CREDIT FACILITY. HOWEVER, ACTUAL ANNUAL COSTS UNDER OUR CREDIT AGREEMENT AND UNDER OUR NEW CREDIT FACILITY WILL BE HIGHER THAN THE INTEREST RATES DESCRIBED HEREIN BECAUSE OF OTHER CUSTOMARY FEES AND EXPENSES ASSOCIATED WITH OUR CREDIT AGREEMENT AND OUR NEW CREDIT FACILITY,

· THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE MAY PURCHASE ADDITIONAL OUTSTANDING PRINCIPAL AMOUNTS OF THE NOTES FROM TIME TO TIME. HOWEVER, THERE CAN BE NO ASSURANCE WE WILL DO SO,

· THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE CONTINUE TO MARKET FOR SALE TWO SNFs THAT WE OWN LOCATED IN MICHIGAN AND THAT WE AND SNH ARE IN THE PROCESS OF SELLING AN ASSISTED LIVING COMMUNITY IN PENNSYLVANIA THAT WE LEASE FROM SNH. WE AND SNH MAY NOT BE ABLE TO SELL THESE PROPERTIES ON TERMS ACCEPTABLE TO US OR OTHERWISE, AND

· THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE BELIEVE THAT OUR RELATIONSHIPS WITH SNH, RMR AND AIC AND THEIR AFFILIATED AND RELATED PERSONS AND ENTITIES MAY BENEFIT US AND PROVIDE US WITH ADVANTAGES IN OPERATING AND GROWING OUR BUSINESS. IN FACT, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY NOT MATERIALIZE .

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

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

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

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

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Part II. Other Information

Item 6. Exhibits

3.1	Composite Copy of Articles of Amendment and Restatement of Five Star Quality Care, Inc., dated as of December 5, 2001, as amended to date. (Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.)

3.2	Articles Supplementary, as corrected by Certificate of Correction, dated as of March 19, 2004. (Incorporated by reference to our Form 8-A dated March 19, 2004 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, respectively.)

3.3	Amended and Restated Bylaws of Five Star Quality Care, Inc., adopted February 14, 2012. (Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2011.)

4.1	Form of Common Share Certificate. (Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.)

4.2	Rights Agreement, dated as of March 10, 2004, between Five Star Quality Care, Inc. and EquiServe Trust Company, N.A. (Incorporated by reference to our Current Report on Form 8-K dated March 10, 2004.)

4.3	Appointment of Successor Rights Agent, dated as of December 13, 2004, between Five Star Quality Care, Inc. and Wells Fargo Bank, National Association. (Incorporated by reference to our Current Report on Form 8-K dated December 13, 2004.)

10.1	Amended and Restated Shareholders Agreement, dated May 21, 2012, by and among Affiliates Insurance Company, Five Star Quality Care, Inc., Hospitality Properties Trust, CommonWealth REIT, Senior Housing Properties Trust, TravelCenters of America LLC, Reit Management & Research LLC, Government Properties Income Trust and Select Income REIT. ( Filed herewith. )

10.2	Representative Form of Accession Agreement, dated as of December 1, 2011, by SNH CALI Tenant LLC in favor of FVE Managers, Inc. ( Filed herewith. )

10.3	Summary of Director Compensation. (Incorporated by reference to our Current Report on Form 8-K dated May 15, 2012.)

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. )

99.1	Amended and Restated Reimbursement Agreement, dated May 1, 2012, among Reit Management & Research LLC, TravelCenters of America LLC and Five Star Quality Care, Inc. ( Filed herewith .)

101.1	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheet, (ii) the Condensed Consolidated Statement of Income, (iii) the Condensed Consolidated Statement of Comprehensive Income, (iv) the Condensed Consolidated Statement of Cash Flows, and (v) related notes to these financial statements, tagged as blocks of text. ( Furnished herewith. )

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SIGNATURES

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

	FIVE STAR QUALITY CARE, INC.


	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	President and Chief Executive Officer
	Dated: August 1, 2012

	/s/ Paul V. Hoagland

	Paul V. Hoagland
	Treasurer and Chief Financial Officer
	(Principal Financial and Accounting Officer)
	Dated: August 1, 2012

Exhibit 10.1

AMENDED AND RESTATED

SHAREHOLDERS AGREEMENT

by and among

AFFILIATES INSURANCE COMPANY,

FIVE STAR QUALITY CARE, INC.,

HOSPITALITY PROPERTIES TRUST,

COMMONWEALTH REIT,

SENIOR HOUSING PROPERTIES TRUST,

TRAVELCENTERS OF AMERICA LLC,

REIT MANAGEMENT & RESEARCH LLC,

GOVERNMENT PROPERTIES INCOME TRUST

and

SELECT INCOME REIT

May 21, 2012

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		Page

ARTICLE I

INVESTMENT IN THE COMPANY; FORMATION AND LICENSING EXPENSES

1.1	Share Issuances to Current Shareholders	2
1.2	Share Issuance to SIR	2
1.3	Future Share Issuances	2
1.4	Formation and Licensing Expenses	2

ARTICLE II

BOARD COMPOSITION

2.1	Board Composition	2

ARTICLE III

TRANSFER OF SHARES;
PREEMPTIVE RIGHTS; CALL RIGHTS

3.1	Transfer of Shares; No Pledging of Shares	4
3.2	Preemptive Rights	4
3.3	Change of Control Call Option	7
3.4	Permitted New Issuance of Shares	10

ARTICLE IV

SPECIAL SHAREHOLDER APPROVAL REQUIREMENTS.

4.1	Special Shareholder Approval Requirements	10

ARTICLE V

OTHER COVENANTS AND AGREEMENTS

5.1	Organizational Documents	10
5.2	Reports and Information Access	11
5.3	Compliance with Laws	11
5.4	Cooperation; Further Assurances	11
5.5	Confidentiality	12
5.6	Required Regulatory Approvals	12
5.7	REIT Matters	12

ARTICLE VI

REPRESENTATIONS AND WARRANTIES

6.1	The Company	13
6.2	The Shareholders	14

ARTICLE VII

TERMINATION

7.1	Termination	16

ARTICLE VIII

MISCELLANEOUS

8.1	Notices	16
8.2	Successors and Assigns; Third Party Beneficiaries	18
8.3	Amendment and Waiver	19
8.4	Counterparts	19
8.5	Headings	19
8.6	Governing Law	19
8.7	Dispute Resolution	19
8.8	Interpretation and Construction	21
8.9	Severability	22
8.10	Entire Agreement	22
8.11	Non-liability of Trustees and Directors	22

AMENDED AND RESTATED

SHAREHOLDERS AGREEMENT

AFFILIATES INSURANCE COMPANY

This Amended and Restated Shareholders Agreement (this “ Agreement ”), dated May 21, 2012, by and among Affiliates Insurance Company, an Indiana insurance corporation (the “ Company ”), Five Star Quality Care, Inc., a Maryland corporation (“ FVE ”), Hospitality Properties Trust, a Maryland real estate investment trust (“ HPT ”), CommonWealth REIT, a Maryland real estate investment trust (“ CWH ”), Senior Housing Properties Trust, a Maryland real estate investment trust (“ SNH ”), TravelCenters of America LLC, a Delaware limited liability company (“ TA ”), Reit Management & Research LLC, a Delaware limited liability company (“ RMR ”), and Government Properties Income Trust, a Maryland real estate investment trust (“ GOV ”, and together with FVE, HPT, CWH, SNH, TA and RMR, the “ Current Shareholders ”), and Select Income REIT, a Maryland real estate investment trust (“ SIR ”, and together with the Current Shareholders, the “ Shareholders ”), amends and restates the Amended and Restated Shareholders Agreement (the “ Shareholders Agreement ”), dated December 16, 2009, by and among the Company and the Current Shareholders, effective as of the date first set forth above.

RECITALS

WHEREAS, the Company has been formed and licensed as an insurance corporation domiciled in the State of Indiana;

WHEREAS, the Current Shareholders previously made the capital contributions to the Company contemplated by Section 1.1 of this Agreement;

WHEREAS, in connection with the purchase by SIR from the Company of 20,000 shares of common stock, par value of $10.00 per share, of the Company (the “ Shares ”) pursuant to a Subscription Agreement (the “ SIR Subscription Agreement ”) to be entered into by the Company and SIR, concurrently with the execution and delivery of this Agreement, the Company, the Current Shareholders and SIR desire to enter into this Agreement to, among other things, add SIR as a Shareholder hereunder; and

WHEREAS, the Shareholders and the Company desire to enter into this Agreement in order to set forth certain agreements and understandings relating to the business and governance of the Company, the Shares held by the Shareholders and certain other matters.

NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

ARTICLE I

INVESTMENT IN THE COMPANY; FORMATION AND LICENSING EXPENSES

1.1 Share Issuances to Current Shareholders . The Company previously issued and sold to each of the Current Shareholders, and each of the Current Shareholders purchased from the Company, 20,000 Shares.

1.2 Share Issuance to SIR . As described in the recitals, concurrently with the execution and delivery of this Agreement, SIR is purchasing 20,000 Shares from the Company pursuant to the SIR Subscription Agreement and, upon such purchase, SIR shall then become a Shareholder effective as of such purchase.

1.3 Future Share Issuances . No Shareholder shall be obligated to purchase additional Shares or any other securities of the Company and any future proposed issuance and sale of Shares or any other securities of the Company shall be subject to Section 3.2, except to the extent otherwise provided under this Agreement; provided, however, that the parties hereto acknowledge that the Company may need to seek additional capital in the future and that it is the intention of the Shareholders that they each may, but shall not be obligated to, contribute to the Company up to an additional $5 million of capital during the period between February 27, 2011 and February 27, 2014.

1.4 Formation and Licensing Expenses . The Company shall pay for all costs, fees and expenses in connection with the formation and licensing of the Company as an Indiana insurance company. The Current Shareholders shall reimburse the Company for such amounts paid by the Company prior to the date hereof in equal proportion. The Shareholders shall reimburse the Company for such amounts paid by the Company on or after the date hereof in equal proportion.

ARTICLE II

BOARD COMPOSITION

2.1 Board Composition .

(a) For as long as the Shareholders collectively own a majority of the issued and outstanding Shares, the board of directors of the Company (the “ Board ”) shall consist of not less than five nor more than seventeen members, with the actual number determined in accordance with the Bylaws of the Company, as in effect from time to time, and subject in all instances to this Section 2.1. As of the date of this Agreement, the Board shall consist of fourteen members. For so long as required by applicable Indiana law, at least one member of the

Board shall be an Indiana resident. Except as otherwise provided in Section 2.1(c), no Shareholder having a right to designate any director pursuant to this Article II shall be required to designate an Indiana resident as a director pursuant to such right; provided, however, that this sentence shall in no way limit the application of the immediately preceding sentence.

(b) For so long as a Shareholder (other than RMR) owns not less than 10% of the issued and outstanding Shares, such Shareholder shall have the right to designate two directors for election to the Board.

(c) For so long as RMR owns not less than 10% of the issued and outstanding Shares, RMR shall have the right to designate three directors for election to the Board. For so long as RMR has the right to designate directors pursuant to the immediately preceding sentence, Indiana law requires the Board to include an Indiana resident as a director of the Company and no other Shareholder designates an Indiana resident as a director of the Company, RMR shall designate at least one Indiana resident to be a director.

(d) Each Shareholder will vote, execute and deliver written consents and take all other necessary action (including, if necessary, causing the Company to call a special meeting of shareholders of the Company) in favor of the election of each director designated by a Shareholder in accordance with this Article II and otherwise to ensure that the composition of the Board is at all times as set forth in this Article II. Each Shareholder agrees that it will not vote any of its Shares in favor of removal of any director designated by another Shareholder unless such other Shareholder shall have consented to such removal in writing. Each Shareholder agrees to cause to be called, if necessary, a special meeting of shareholders of the Company and to vote all the Shares owned by such Shareholder for, or to take all actions in lieu of any such meeting necessary to cause, the removal of any director designated by such Shareholder if the Shareholder entitled to designate such director requests in writing, signed by such Shareholder, such director’s removal for any reason or no reason.

(e) If, as a result of death, disability, retirement, resignation, removal or otherwise, there shall exist or occur any vacancy with respect to any director previously designated by a Shareholder in accordance with such Shareholder’s right under this Article II to so designate such director, such Shareholder shall have the right to designate a replacement director. Upon such designation, the Shareholders shall promptly take all action necessary to ensure the election of such replacement director to fill the unexpired term of the director whom such new director is replacing, including, if necessary, calling a special meeting of shareholders of the Company and voting their Shares, or executing any written consent in lieu thereof, in favor of the election of such director.

ARTICLE III

TRANSFER OF SHARES;
PREEMPTIVE RIGHTS; CALL RIGHTS

3.1 Transfer of Shares; No Pledging of Shares .

(a) The Shareholders may not, directly or indirectly, transfer any Shares, except that a Shareholder may transfer Shares owned by it to a wholly owned subsidiary of such Shareholder, to another Shareholder or to a wholly owned subsidiary of another Shareholder. Any purported transfer of Shares in contravention of this Section 3.1 shall be null and void and of no force or effect.

(b) The Shareholders may not pledge their Shares (other than pledges arising from the operation of law and not as a result of the Shareholder’s express granting of a pledge); provided, however, that any pledge or other lien, charge or encumbrance which may arise by application of the terms of any agreement, contract, license, permit or instrument existing, for any of the Shareholders (an “ Existing Pledge ”), on a Shareholder’s Shares shall not be a violation of this Section 3.1(b); and provided further, however, any transfer which results from exercise of rights under a permitted lien, charge or encumbrance shall be subject to the call rights of the Company and the other Shareholders set forth in Section 3.3 to the fullest extent permitted by applicable law and existing contracts as if such a transfer constitutes a “Change of Control”. Any Shareholder whose Shares would be subject to an Existing Pledge shall use best efforts to cause the pledgee under an Existing Pledge, prior to any exercise by the pledgee of its rights on the Shareholder’s Shares, to take all actions under applicable law which are required to be taken prior to any such exercise, including obtaining any necessary approvals from the Indiana Department of Insurance and Indiana Insurance Commissioner.

3.2 Preemptive Rights .

(a) If, at any time after the date hereof, the Company wishes to issue any capital stock of the Company or any other securities convertible into or exchangeable or exercisable for capital stock of the Company (collectively, “ New Securities ”) to any person or entity (the “ Subject Purchaser ”), then the Company shall first offer the Appropriate Percentage (as defined herein) of the New Securities (the “ Allocated Shares ”) to each Shareholder (each, a “ Preemptive Rightholder ” and collectively, the “ Preemptive Rightholders ”) by sending written notice (the “ New Issuance Notice ”) to each of the Preemptive Rightholders, which New Issuance Notice shall state the terms of such proposed issuance, including the number of New Securities proposed to be issued and the proposed purchase price per security of the New Securities (the “ Proposed Price ”). Upon delivery of the New Issuance Notice, such offer shall be irrevocable unless and until the Company shall have terminated the contemplated issuance of New Securities in its entirety at which time the rights set forth herein shall be applicable to any proposed issuance subsequent to any such termination. For purposes of this Section 3.2, “ Appropriate Percentage ” shall mean that percentage of the New Securities determined by dividing (i) the total

number of Shares then owned by a Preemptive Rightholder by (ii) the total number of Shares owned by all the Preemptive Rightholders.

(b) For a period of 20 days after the giving of the New Issuance Notice pursuant to Section 3.2(a) (the “ Initial Preemptive Subscription Period ”), each of the Preemptive Rightholders shall have the right to purchase, in whole or in part, the Allocated Shares offered to such Preemptive Rightholder as determined pursuant to Section 3.2(a) at a purchase price equal to the Proposed Price and upon the terms and conditions set forth in the New Issuance Notice.

(c) The right of each Preemptive Rightholder to purchase the New Securities so offered under Section 3.2(b) shall be exercisable by delivering written notice of the exercise thereof, prior to the expiration of the Initial Preemptive Subscription Period, to the Company, which notice shall state the amount of New Securities that such Preemptive Rightholder elects to purchase pursuant to Section 3.2(a). The failure of a Preemptive Rightholder to respond prior to the expiration of the Initial Preemptive Subscription Period shall be deemed to be a waiver of such Preemptive Rightholder’s rights under this Agreement solely with respect to its right to purchase the New Securities referenced in the New Issuance Notice; provided that each Preemptive Rightholder may waive its rights under Section 3.2(b) prior to the expiration of the Initial Preemptive Subscription Period by giving written notice of such waiver to the Company.

(d) If as of the expiration of the Initial Preemptive Subscription Period, some but not all of the Preemptive Rightholders have exercised their right to purchase the full amount of New Securities to which they are entitled to purchase pursuant to Sections 3.2(b) and (c) (any such Preemptive Rightholder which has exercised in full its rights to purchase such New Securities, a “ Fully Exercising Preemptive Rightholder ”), the Fully Exercising Preemptive Rightholders shall have the right to purchase, in whole or in part, their Oversubscription Appropriate Percentage (as defined herein) of the New Securities which the Preemptive Rightholders did not exercise their right to purchase pursuant to Sections 3.2(b) and (c) (the “ Undersubscribed Shares ”) at a purchase price equal to the Proposed Price and upon the terms and conditions set forth in the New Issuance Notice. The right of the Fully Exercising Preemptive Rightholders to purchase the Undersubscribed Shares may be exercised for a period of ten days following the earlier of the expiration of the Initial Preemptive Subscription Period or the date on which notice is given by the Company to such Fully Exercising Preemptive Rightholders that all the Preemptive Rightholders have either exercised their right to purchase the New Securities pursuant to Sections 3.2(b) and (c) or waived their rights to purchase any of such New Securities pursuant to Section 3.2(c) (the “ Oversubscription Period ”). For purposes of this Section 3.2, “ Oversubscription Appropriate Percentage ” shall mean that percentage of the Undersubscribed Shares determined by dividing (i) the total number of Shares then owned by a Fully Exercising Preemptive Rightholder by (ii) the total number of Shares owned by all the Fully Exercising Preemptive Rightholders.

(e) The right of each Fully Exercising Preemptive Rightholder to purchase Undersubscribed Shares pursuant to Section 3.2(d) shall be exercisable by delivering written notice of the exercise thereof, prior to the expiration of the Oversubscription Period, to the Company, which notice shall state the amount of Undersubscribed Shares that such Fully Exercising Preemptive Rightholder elects to purchase pursuant to Section 3.2(d). The failure of

a Fully Exercising Preemptive Rightholder to respond prior to the expiration of the Oversubscription Period shall be deemed to be a waiver of such Fully Exercising Preemptive Rightholder’s rights under this Agreement solely with respect to its right to purchase the Undersubscribed Shares included in the New Securities referenced in the New Issuance Notice; provided that each Fully Exercising Preemptive Rightholder may waive its rights under Section 3.2(d) prior to the expiration of the Oversubscription Period by giving written notice of such waiver to the Company.

(f) The closing of the purchase of New Securities subscribed for by the Preemptive Rightholders, including the Fully Exercising Preemptive Rightholders, pursuant to this Section 3.2 shall be held at such time and place as the parties to the transaction may reasonably agree. At such closing, the New Securities subscribed for shall be issued by the Company free and clear of all liens, charges or encumbrances (other than those arising hereunder and those attributable to actions by the purchasers thereof). Each Preemptive Rightholder, including each Fully Exercising Preemptive Rightholder, purchasing the New Securities shall deliver at the closing payment in full in immediately available funds for the New Securities purchased by it. At such closing, all of the parties to the transaction shall execute such additional documents as are otherwise necessary, appropriate or customary for similar financing transactions. If any Preemptive Rightholder, including any Fully Exercising Preemptive Rightholder, fails to purchase any New Securities for which it exercised its right to purchase pursuant to Sections 3.2(b) and (c) or 3.2(d) and (e), such New Securities may be purchased by the Fully Exercising Preemptive Rightholders which did purchase all the New Securities for which they exercised their rights to purchase pursuant to Sections 3.2(b), (c), (d) and (e) in the same manner provided in this Section 3.2 with respect to Undersubscribed Shares and the resulting Oversubscription Period with respect to such right to purchase shall be an “Oversubscription Period” for all instances such term is used in this Section 3.2. Notwithstanding the preceding sentence, the obligations and liability of any Preemptive Rightholder, including any Fully Exercising Preemptive Rightholder, which fails to purchase any New Securities for which it exercised its right to purchase pursuant to Sections 3.2(b) and (c) or 3.2(d) and (e) shall not be relieved as a result of any Fully Exercising Preemptive Rightholder’s right to purchase, or any actual purchase by any Fully Exercising Preemptive Rightholder of, any such New Securities.

(g) Following the expiration of the later of the Initial Preemptive Subscription Period and, if applicable, the Oversubscription Period, if the Preemptive Rightholders, including any Fully Exercising Preemptive Rightholders, did not exercise their right to purchase any of the New Securities, including the Undersubscribed Shares, which were originally the subject of the New Issuance Notice, then the Company may sell the remaining New Securities to the Subject Purchaser on terms and conditions that are no more favorable to the Subject Purchaser than those set forth in the New Issuance Notice; provided, however, that such sale is bona fide and made pursuant to a contract entered into between the Company and the Subject Purchaser and that such sale is consummated by not later than 90 days following the earlier to occur of (i) receipt by the Company of written waivers pursuant to Section 3.2(c) from all the Preemptive Rightholders of their rights to purchase the Appropriate Percentage of New Securities and, if applicable, written waivers pursuant to Section 3.2(e) from all the Fully Exercising Preemptive Rightholders of their rights to purchase the Oversubscription Appropriate Percentage of New Securities, and (ii) the expiration of the Oversubscription Period, if

applicable, and if not applicable, the expiration of the Initial Preemptive Subscription Period. If the sale of any of the New Securities is not consummated by the expiration of such 90 day period, then the preemptive rights afforded to the Shareholders under this Section 3.2 shall again become effective, and no issuance and sale of New Securities may be made thereafter by the Company without again offering the same in accordance with this Section 3.2.

3.3 Change of Control Call Option .

(a) By not later than five days following a Change of Control (as defined herein or in Section 3.1(b)) of any Shareholder, such Shareholder shall give the Company and each other Shareholder notice of such Change of Control and shall disclose the number of Shares and any other securities of the Company which were owned by the Shareholder as of immediately prior to such Change of Control of such Shareholder (the “ Change of Control Securities ”). If the Shareholder fails to give the notice required by the preceding sentence by the time required thereby, and another Shareholder or the Company is or becomes aware that such Shareholder underwent a Change of Control, then (i) if it is a Shareholder that is or becomes aware of such Change of Control, that Shareholder shall reasonably promptly inform the Company of such Change of Control and upon the Company being of the reasonable belief that such a Change of Control has occurred, the Company shall reasonably promptly provide the notice to the Shareholders that such Shareholder which underwent the Change of Control failed to provide, or (ii) if it is the Company that is or becomes aware of such Change of Control, the Company shall reasonably promptly provide the notice that such Shareholder which underwent the Change of Control failed to provide. Any liability of a Shareholder which undergoes a Change of Control for failure to give the notice required by the first sentence of this Section 3.3(a) shall not be relieved as a result of the Company or any other Shareholder being obligated to give, or giving, the notice required by the second sentence of this Section 3.3(a).

(b) For a period of 20 days following the receipt of a notice given pursuant to Section 3.3(a), the Company shall have the right to purchase from such Shareholder (or its successor, as applicable), in whole or in part, the Change of Control Securities. The purchase price for the Change of Control Securities shall be the book value, as determined in accordance with the statutory accounting principles applicable to the Company, of the Change of Control Securities as of the time such Shareholder underwent the Change of Control (the “ Call Option Purchase Price ”). To exercise its right to purchase the Change of Control Securities, the Company shall deliver written notice of such exercise to the Shareholder which underwent the Change of Control and the other Shareholders prior to the expiration of such 20 day call exercise period. The closing for any such exercised call option shall occur on the fifth business day (or such longer period as may be required by applicable law or in order to obtain applicable regulatory approval) following receipt of the Company’s notice of exercise of its call option by the Shareholder which underwent the Change of Control, or on such other date as may be agreed by the Company and such Shareholder. At its option, the Company may pay in cash the entire amount of the Call Option Purchase Price at such closing or it may elect to defer any amount of the Call Option Purchase Price. Any amounts so deferred shall bear interest at the Deferred Interest Rate (as defined herein). The Company may pay any such deferred amounts and accrued interest thereon at any time and from time to time; provided, however, that all such deferred

amounts and accrued but unpaid interest, shall be due and payable on the fifth anniversary of the closing of the applicable call option exercise.

(c) Shareholders other than the Shareholder which underwent the Change of Control shall have the right to purchase, in whole or in part, any Change of Control Securities not elected to be purchased by the Company pursuant to Section 3.3(b) at a price equal to the Call Option Purchase Price. To exercise its right to purchase the Change of Control Securities, the applicable Shareholder shall deliver written notice of such exercise to the Shareholder which underwent the Change of Control, the Company and the other Shareholders by not later than the 20 days following the earlier of (i) the expiration of the 20 day period during which the Company has the right to exercise its call option for the Change of Control Securities pursuant to Section 3.3(b) and (ii) the date the Company waives its right to purchase such Change of Control Securities and has given notice of the same to all the Shareholders (such deadline for exercising a right to purchase Change of Control Securities referred to as the “ Call Option Exercise Deadline ”). The notice of exercise shall indicate the number of Change of Control Securities that the Shareholder seeks to purchase. If the aggregate number of Change of Control Securities sought to be purchased by the exercising Shareholders (determined by adding all the eligible securities each Shareholder states it seeks to purchase in its notice of exercise) exceeds the actual number of Change of Control Securities eligible for purchase, the number of Change of Control Securities which may be purchased by a particular applicable Shareholder shall be reduced by an amount equal to the product of the aggregate number of such excess Change of Control Securities sought to be purchased by all the exercising Shareholders multiplied by the quotient of (x) the number of Shares owned by all eligible Shareholders which are exercising their call option rights minus the number of Shares owned by the particular applicable exercising Shareholder divided by (y) the number of Shares owned by all eligible Shareholders which are exercising their call option rights, with any such result rounded up or down to the nearest whole share as reasonably determined by the Company. The closing of any such exercised call option shall occur on the fifth business day (or such longer period as may be required by applicable law or in order to obtain applicable regulatory approval) following the Call Option Exercise Deadline, or on such other date as may be agreed by the exercising Shareholder, the Company and the Shareholder which underwent the Change of Control. At its option, the exercising Shareholder may pay in cash the entire amount of the Call Option Purchase Price at such closing or it may elect to defer any amount of the Call Option Purchase Price. Any amounts so deferred shall bear interest at the Deferred Interest Rate. The exercising Shareholder may pay any such deferred amounts and accrued interest thereon at any time and from time to time; provided, however, that all such deferred amounts and accrued but unpaid interest, shall be due and payable on the fifth anniversary of the closing of the applicable call option exercise.

(d) Definitions . For purposes of this Section 3.3, the following terms have the meanings set forth below:

(i) “ Change of Control ” means (A) the acquisition by any person or entity, or two or more persons or entities acting in concert, of beneficial ownership (such term, for purposes of this Section 3.3(d)(i), having the meaning provided such term in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of 9.8% or more, or rights, options or warrants to acquire 9.8% or more, or any combination

thereof, of the outstanding shares of voting stock or other voting interests of the Shareholder, including voting proxies for such shares, or the power to direct the management and policies of the Shareholder, directly or indirectly, excluding with respect to RMR, any person or entity, or two or more persons or entities acting in concert, beneficially owning 9.8% or more of RMR’s outstanding voting interests as of the date of this Agreement, and excluding with respect to FVE, persons or entities that have rights to acquire 9.8% or more of FVE’s shares of common stock by virtue of their holding convertible notes of FVE outstanding as of the date of this Agreement, (B) the merger or consolidation of the Shareholder with or into any other person or entity (other than the merger or consolidation of any person or entity into the Shareholder that does not result in a Change of Control of the Shareholder under clauses (A), (C), (D) or (E) of this definition), (C) any one or more sales or conveyances to any person or entity of all or any material portion of the assets (including capital stock or other equity interests) or business of the Shareholder, (D) the cessation, for any reason, of the individuals who at the beginning of any 38 consecutive month period constituted the board of directors (or analogous governing body) of the Shareholder (together with any new directors (or analogous position) whose election by such board or whose nomination for election by the shareholders of the Shareholder was approved by a vote of a majority of the directors (or analogous position) then still in office who were either directors (or analogous position) 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 (or analogous governing body) of the Shareholder then in office or (E) in respect of a Shareholder other than RMR, the termination (including by means of nonrenewal) of the Shareholder’s management agreement with RMR by such Shareholder or, in response to a breach of such agreement by such Shareholder, by RMR; provided, however, a Change of Control shall not include: (1) the acquisition by any person or entity, or two or more persons or entities acting in concert, of beneficial ownership of 9.8% or more of the outstanding shares of voting stock or other voting interests of a Shareholder if such acquisition is approved by the governing board of such Shareholder in accordance with the organizational documents of such Shareholder and if such acquisition is otherwise in compliance with applicable law; (2) the merger or consolidation of a Shareholder with one or more other Shareholders or wholly owned subsidiaries of any such Shareholders; or (3) a Change of Control which is approved by Shareholders owning 75% of the Shares owned by all Shareholders.

(ii) “ Deferred Interest Rate ” means the London Interbank Offered Rate (rounded upward, if necessary, to the nearest 1/100 th of 1%) appearing on Reuters Screen LIBO Page (or any successor page) as the London interbank offered rate for three month deposits in U.S. dollars at approximately 11:00 a.m. (London time) two days prior to applicable closing date (provided that if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates), plus 100 basis points, and this rate shall be adjusted in three month intervals thereafter, in accordance with the foregoing, with such adjustment date being treated as an “applicable closing date” for purposes of determining the adjusted rate in accordance with the foregoing, for so long as any deferred amount pursuant to Sections 3.2(b) or 3.2(c) may be unpaid.

3.4 Permitted New Issuance of Shares . The prohibition on transfer of Shares, the preemptive rights and the change of control call options created by Sections 3.1, 3.2 and 3.3 of this Article III shall not apply to any sale of Shares by the Company, or by any Shareholder or Shareholders, if the Shares are sold to an entity which is managed by RMR that purchases insurance from the Company, provided that any such sale does not reduce the ownership of any Shareholder to less than ten percent (10%) of the Company’s outstanding voting Shares. The prohibition on the preemptive rights and the change of control call options created by Sections 3.2 and 3.3, respectively, of this Article III shall not apply to the 20,000 Shares issued and sold by the Company to each of GOV and SIR, and each of the Shareholders waive any rights they may have or have had under Sections 3.2 and 3.3 of this Article III with respect to such transactions.

ARTICLE IV

SPECIAL SHAREHOLDER APPROVAL REQUIREMENTS .

4.1 Special Shareholder Approval Requirements . For so long as the Shareholders beneficially own a majority of the Company’s issued and outstanding Shares, no action by the Company shall be taken with respect to any of the following matters without the prior affirmative approval of Shareholders owning 75% of the Shares owned by all the Shareholders:

(a) any amendment to the articles of incorporation or bylaws of the Company;

(b) any merger of the Company;

(d) any reorganization or recapitalization of the Company; or

(e) any liquidation or dissolution of the Company.

If applicable law permits any of the foregoing actions to be taken by the Company without a shareholders vote, the vote of all directors of the Company designated by a Shareholder shall be considered the vote of the Shareholder for purposes of any such action.

ARTICLE V

OTHER COVENANTS AND AGREEMENTS

5.1 Organizational Documents . Subject to applicable law, each Shareholder shall vote its Shares or execute any consents necessary, and each Shareholder and the Company shall take all other actions necessary, to ensure that the Company’s organizational documents facilitate, and do not at any time conflict with any provision of, this Agreement or any applicable law, and to ensure that the provisions hereof are implemented notwithstanding any inconsistent

provision in the Company’s organizational documents. The parties hereto agree to amend, if necessary, the Company’s organizational documents to conform to the provisions set forth in this Agreement, to the extent permitted by applicable law. In the event of any actual or apparent inconsistency between this Agreement and the organizational documents, then, as among the Shareholders, to the extent permitted by applicable law, this Agreement shall control.

5.2 Reports and Information Access . For so long as a Shareholder owns not less than 10% of all the issued and outstanding Shares, the Company shall provide periodically, through the director(s) designated by such Shareholder under Section 2.1, to the Shareholder financial information regarding the Company and its operations and the Company shall permit the Shareholder and its representatives reasonable access to the financial reports and records of the Company so that the Shareholder may comply with its financial reporting and tax reporting obligations and procedures, and disclosure obligations under the federal securities laws and other applicable laws.

5.3 Compliance with Laws . The Company shall comply in all material respects with all applicable laws governing its business and operations. Except as provided in Section 5.7, if a Shareholder, by virtue of such Shareholder’s ownership interest in the Company or actions taken by the Shareholder affecting the Company, triggers the application of any requirement or regulation of any federal, state, municipal or other governmental or regulatory body on the Company or any subsidiary of the Company or any of their respective businesses, assets or operations, including any obligations to make any filing with or otherwise notifying or obtaining the consent, approval or other action of any federal, state, municipal or other governmental or regulatory body, such Shareholder shall promptly take all actions necessary and fully cooperate with the Company to ensure that such requirements or regulations are satisfied without restricting, imposing additional obligations on or in any way limiting the business, assets, operations or prospects of the Company or any subsidiary of the Company. Each Shareholder shall use best efforts to cause its shareholders, directors (or analogous position), nominees for director (or analogous position), officers, employees and agents to comply with any applicable laws impacting the Company or any of its subsidiaries or their respective businesses, assets or operations.

5.4 Cooperation; Further Assurances .

(a) The Shareholders shall cooperate with each other and the Company in furtherance of the Company’s underwriting of insurance policies and coverage with respect to the Shareholders and their respective businesses, assets and properties as well as in furtherance of the development and execution of the Company’s business as an insurer. The Shareholders intend to transition (but shall not be obligated to do so) their applicable insurance policies and coverage to the Company so that the Company or its third party agents or contracting parties shall become the underwriters of such current and future policies and coverage.

(b) Each of the parties shall execute such documents and perform such further acts (including obtaining any consents, exemptions, authorizations or other actions by, or giving any notices to, or making any filings with, any governmental authority) as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement or

the transactions contemplated hereby, including in connection with any subsequent exercise by a party of a right afforded hereunder to such party.

5.5 Confidentiality . Except as may be required by applicable law or the rules of any national securities exchange upon which a party’s shares are listed for trading, none of the parties hereto shall make any disclosure concerning this Agreement, the transactions contemplated hereby or the business, operations and financial affairs of the Company without prior approval by the other parties hereto; provided, however, that nothing in this Agreement shall restrict any of the parties from disclosing information (a) that is already publicly available, (b) that was known to such party on a non-confidential basis prior to any relevant disclosure, (c) that may be required or appropriate in response to any summons or subpoena or in connection with any litigation, provided that such party will use reasonable efforts to notify the other party in advance of such disclosure so as to permit the other party to seek a protective order or otherwise contest such disclosure, and such party will use reasonable efforts to cooperate, at the expense of the other party, with the other party in pursuing any such protective order, (d) to the extent that such party reasonably believes it appropriate in order to protect its investment in its Shares in order to comply with any applicable law, (e) to such party’s officers, directors, trustees, advisors, employees, auditors or counsel or (f) as warranted pursuant to the parties’ disclosure obligations under federal securities laws.

5.6 Required Regulatory Approvals . Certain transactions required, permitted or otherwise contemplated by this Agreement may under certain circumstances require prior filings with and approvals, or non-disapprovals, from the Indiana Department of Insurance or the Indiana Insurance Commissioner. Such transactions include: (a) issuance or purchase of any additional capital stock of the Company or other securities convertible into or exchangeable or exercisable for capital stock of the Company pursuant to Sections 1.2 or 3.4; (b) transfer of Shares to a wholly owned subsidiary of a Shareholder, to another Shareholder or to a wholly owned subsidiary of another Shareholder pursuant to Sections 3.1(a) or 3.4; (c) exercise of preemptive rights by a Shareholder pursuant to Section 3.2; and (d) exercise of call rights by the Company or a Shareholder pursuant to Section 3.3 (including pursuant to the two provisos in Section 3.1(b)). Notwithstanding anything to the contrary contained in this Agreement, any such transactions requiring filings with and approvals, or non-disapprovals, from the Indiana Department of Insurance or the Indiana Insurance Commissioner shall not, to the extent within the control of a party hereto, be entered into or consummated unless and until the required filings have been made and the required approvals (or non-disapprovals) have been obtained, and to the extent not within the control of an applicable party hereto, such party shall use best efforts to cause such transactions not to be entered into or consummated unless and until the required filings have been made and the required approvals (or non-disapprovals) have been obtained.

5.7 REIT Matters . At the request of any Shareholder that intends (for itself or for any of its affiliates) to qualify and be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the “ Code ”), the Company shall (a) join with such Shareholder (or, as applicable, such Shareholder’s affiliate) in making a “taxable REIT subsidiary” election under Section 856(l) of the Code and (b) otherwise reasonably cooperate with any request of such Shareholder (or its affiliate) pertaining to such real estate investment trust status or taxation under the Code.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES

6.1 The Company . The Company represents and warrants to each Shareholder, as of the date of this Agreement (unless any such representation or warranty speaks as of another date, in which case, as of such date), as follows:

(a) Organization, Existence, Good Standing and Power . The Company is an Indiana insurance corporation duly organized, validly existing and in good standing under the laws of the State of Indiana and has the power and authority to execute, deliver and perform its obligations under this Agreement.

(b) Capitalization; Subsidiaries .

(i) As of immediately prior to the execution and delivery of this Agreement, there are no securities of the Company issued and outstanding, except for the Shares previously issued pursuant to Section 1.1. Except as provided and contemplated by this Agreement, as of the date of this Agreement, the Company has no commitment or arrangement to issue securities of the Company to any person or entity.

(ii) As of the date of this Agreement, the Company has no subsidiaries.

(c) Valid Issuance of Shares . The Shares being purchased by the Shareholders hereunder, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable law.

(d) Binding Effect . This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligations of the Company, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by equitable principles relating to enforceability (regardless of whether considered in a proceeding at law or in equity).

(e) No Contravention . The execution and delivery of this Agreement by the Company and the performance of its obligations hereunder and the consummation by the Company of the transactions contemplated by this Agreement and compliance by the Company with the provisions of this Agreement (i) have been duly authorized by all necessary company action, (ii) do not contravene the terms of the Company’s organizational documents, (iii) do not materially violate, conflict with or result in any breach or contravention of, or the creation of any material lien, charge or encumbrance under, any material agreement, contract, license, permit or instrument to which the Company is a party or by which the Company or any of its assets or

properties are bound and (iv) do not materially violate any law, statute, regulation, order or decree applicable to, or binding upon, the Company or any of its assets or properties.

(f) Consents . No approval, consent, compliance, exemption, authorization or other action by, or notice to, or filing with, any local, state or federal governmental authority or any other person or entity (individually and collectively, a “ Consent ”), not already obtained or made, and no lapse of a waiting period under any applicable law, statute, regulation, order or decree, is necessary or required in connection with the execution, delivery or performance by the Company of this Agreement or the transactions contemplated hereby; provided, however, that the foregoing representation and warranty shall not apply to any Consent which may be required in the future as a result of the application of the rights and obligations provided for hereunder or the conducting of the Company’s business.

(g) Compliance with Laws . The Company is in compliance in all material respects with all applicable laws, statutes, regulations, orders or decrees applicable to, or binding upon, the Company or any of its assets or properties.

(h) Offering . Subject to the accuracy of the Shareholder’s representations and warranties set forth in Sections 6.2(f) through 6.2(i), the offer, sale and issuance of the Shares to be issued in conformity with the terms of this Agreement constitute transactions which are exempt from the registration requirements of the Securities Act of 1933, as amended (the “ Securities Act ”), and from all applicable state registration or qualification requirements. Neither the Company nor any person or entity acting on its behalf will take any action that would cause the loss of such exemption.

(i) No Integration . The Company has not, directly or through any agent, sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the Shares sold pursuant to this Agreement in a manner that would require the registration of the Shares under the Securities Act.

6.2 The Shareholders . Each Shareholder represents and warrants to the Company and the other Shareholders, as of the date of this Agreement, as follows:

(a) Organization, Existence, Good Standing and Power . The Shareholder (i) is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation; (ii) has all requisite power and authority to conduct the business in which it is currently engaged; and (iii) has the power and authority to execute, deliver and perform its obligations under this Agreement.

(b) Binding Effect . This Agreement has been duly executed and delivered by the Shareholder and constitutes the legal, valid and binding obligations of the Shareholder, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by equitable principles relating to enforceability (regardless of whether considered in a proceeding at law or in equity).

(c) No Contravention . The execution and delivery of this Agreement by the Shareholder and the performance of its obligations hereunder and the consummation by the Shareholder of the transactions contemplated by this Agreement and compliance by the Shareholder with the provisions of this Agreement (i) have been duly authorized by all necessary company action, (ii) do not contravene the terms of the Shareholder’s organizational documents, (iii) do not materially violate, conflict with or result in any breach or contravention of, or, except with respect to any Existing Pledge which the Shareholder or any of its assets or properties may be subject, the creation of any material lien, charge or encumbrance under, any material agreement, contract, license, permit or instrument to which the Shareholder is a party or by which the Shareholder or any of its assets or properties are bound and (iv) do not materially violate any law, statute, regulation, order or decree applicable to, or binding upon, the Shareholder or any of its assets or properties.

(d) Consents . No Consent, not already obtained or made, and no lapse of a waiting period under any applicable law, statute, regulation, order or decree, is necessary or required in connection with the execution, delivery or performance by the Shareholder of this Agreement or the transactions contemplated hereby; provided, however, that the foregoing representation and warranty shall not apply to any Consent which may be required in the future as a result of the application of the rights and obligations provided for hereunder or the conducting of the Company’s business.

(e) Compliance with Laws . The Shareholder is in compliance in all material respects with all applicable laws, statutes, regulations, orders or decrees applicable to, or binding upon, the Shareholder or any of its assets or properties.

(f) Purchase Entirely for Own Account . The Shares are being acquired for investment for the Shareholder’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and the Shareholder has no present intention of selling, granting any participation with respect to or otherwise distributing the Shares. Except as provided by this Agreement, the Shareholder does not have any contract, undertaking, agreement or arrangement with any person or entity to sell or transfer to any person or entity, or grant participation rights to any person or entity with respect to, any of the Shares.

(g) Disclosure of Information . The Shareholder has received all the information from the Company and its management that the Shareholder considers necessary or appropriate for deciding whether to purchase the Shares hereunder. The Shareholder further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the Company, its financial condition, results of operations and prospects and the terms and conditions of the offering of the Shares sufficient to enable it to evaluate its investment.

(h) Investment Experience and Accredited Investor Status . The Shareholder is an “accredited investor” (as defined in Regulation D under the Securities Act). The Shareholder has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Shares to be purchased hereunder.

(i) Restricted Securities . The Shareholder understands that the Shares, when issued, shall be “restricted securities” under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws the Shares may be resold without registration under the Securities Act only in certain limited circumstances.

ARTICLE VII

TERMINATION

7.1 Termination . This Agreement shall remain in full force and effect until the sooner of: (a) its termination pursuant to the next succeeding sentence of this Section 7.1 or (b) the dissolution of the Company; provided, however, that the dissolution of the Company, the merger of the Company with, or the transfer of all or substantially all the assets of the Company to, another entity which continues substantially all of the Company’s business shall not of itself terminate this Agreement. This Agreement may be terminated at any time by the Shareholders owning at least 75% of the issued and outstanding Shares owned by all Shareholders. Section 5.5 and Article VIII shall survive any termination or expiration of this Agreement.

ARTICLE VIII

MISCELLANEOUS

8.1 Notices . Any notices or other communications required or permitted under, or otherwise in connection with, this Agreement shall be in writing and shall be deemed to have been duly given when delivered in person, upon confirmation of receipt when transmitted by facsimile transmission, on the next business day if transmitted by a nationally recognized overnight courier or on the third business day following mailing by first class mail, postage prepaid, in each case as follows (or at such other United States address or facsimile number for a party as shall be specified by like notice):

Notices to the Company:

Affiliates Insurance Company
101 West Washington Street, Suite 1100
Indianapolis, Indiana 46204
Attention: President/Vice President
Facsimile No.: (317) 632-2883

with a copy to:

Affiliates Insurance Company
Two Newton Place

255 Washington Street

Suite 300
Newton, Massachusetts 02458
Attention: President/Vice President
Facsimile No.: (617) 928-1305

Notices to FVE:

Five Star Quality Care, Inc.
400 Centre Street
Newton, Massachusetts 02458
Attention: President
Facsimile No.: (617) 796-8385

Notices to HPT:

Hospitality Properties Trust
Two Newton Place

255 Washington Street

Suite 300
Newton, Massachusetts 02458
Attention: President
Facsimile No.: (617) 969-5730

Notices to CWH:

CommonWealth REIT

Two Newton Place

255 Washington Street

Suite 300
Newton, Massachusetts 02458
Attention: President
Facsimile No.: (617) 332-2261

Notices to SNH:

Senior Housing Properties Trust

Two Newton Place

255 Washington Street

Suite 300
Newton, Massachusetts 02458
Attention: President
Facsimile No.: (617) 796-8349

Notices to TA:

TravelCenters of America LLC

24601 Center Ridge Road, Suite 200
Westlake, Ohio 44145
Attention: President
Facsimile No.: (440) 808-3301

Notices to RMR:

Reit Management & Research LLC

Two Newton Place

255 Washington Street

Suite 300
Newton, Massachusetts 02458
Attention: President
Facsimile No.: (617) 928-1305

Notices to GOV:

Government Properties Income Trust
Two Newton Place

255 Washington Street

Suite 300
Newton, Massachusetts 02458
Attention: President
Facsimile No.: (617) 219-1441

and

Notices to SIR:

Select Income REIT

Two Newton Place

255 Washington Street

Suite 300
Newton, Massachusetts 02458
Attention: President
Facsimile No.: (617) 796-8335

8.2 Successors and Assigns; Third Party Beneficiaries . This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. Except as permitted by Section 3.1 and Section 3.4, no party may assign this Agreement or its rights hereunder or delegate its duties hereunder without the written consent of the other parties. Except as otherwise provided in Section 8.7, no person or entity other than the parties

hereto and their successors and permitted assigns is intended to be a beneficiary of this Agreement.

8.3 Amendment and Waiver .

(a) No failure or delay on the part of any party in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to each party at law, in equity or otherwise. Any party hereto may waive in whole or in part any right afforded to such party hereunder.

(b) Any amendment, supplement or modification of or to any provision of this Agreement, shall be effective upon the written agreement of the Company and the Shareholders owning not less than 75% of all Shares owned by the Shareholders; provided, however, that any amendment, supplement or modification of Article I or Article II shall require the approval of any Shareholder which may be adversely affected by any such amendment, supplement or modification.

8.4 Counterparts . This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

8.5 Headings . The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

8.6 Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Indiana without regard to the conflicts of laws rules thereof, which would require the application of the laws of another jurisdiction.

8.7 Dispute Resolution .

(a) Any disputes, claims or controversies between the parties (i) arising out of or relating to this Agreement, the Company, its business, assets or operations or any insurance policies or coverage underwritten by the Company or any of its third party agents in furtherance of the Company’s insurance business or (ii) brought by or on behalf of any shareholder of the Company (which, for purposes of this Section 8.7, shall mean any shareholder of record or any beneficial owner of shares of the Company, or any former shareholder of record or beneficial owner of shares of the Company), either on his, her or its own behalf, on behalf of the Company or on behalf of any series or class of shares of the Company or shareholders of the Company against the Company or any director, officer, manager (including RMR or its successor), agent or employee of the Company, including disputes, claims or controversies relating to the meaning, interpretation, effect, validity, performance or enforcement of this Agreement or the articles of incorporation or bylaws of the Company (all of which are referred to as “ Disputes ”), or relating in any way to such a Dispute or Disputes shall, on the demand of any party to such Dispute, be resolved through binding and final arbitration in accordance with the

Commercial Arbitration Rules (the “ Rules ”) of the American Arbitration Association (“ AAA ”) then in effect, except as those Rules may be modified in this Section 8.7. For the avoidance of doubt, and not as a limitation, Disputes are intended to include derivative actions against directors, officers or managers of the Company and class actions by a shareholder against those individuals or entities and the Company. For the avoidance of doubt, a Dispute shall include a Dispute made derivatively on behalf of one party against another party.

(b) There shall be three arbitrators. If there are only two parties to the Dispute, each party shall select one arbitrator within 15 days after receipt by respondent of a copy of the demand for arbitration. Such arbitrators may be affiliated or interested persons of such parties. If either party fails to timely select an arbitrator, the other party to the Dispute shall select the second arbitrator who shall be neutral and impartial and shall not be affiliated with or an interested person of either party. If there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand, shall each select, by the vote of a majority of the claimants or the respondents, as the case may be, one arbitrator. Such arbitrators may be affiliated or interested persons of the claimants or the respondents, as the case may be. If either all claimants or all respondents fail to timely select an arbitrator then such arbitrator (who shall be neutral, impartial and unaffiliated with any party) shall be appointed by the parties who have appointed the first arbitrator. The two arbitrators so appointed shall jointly appoint the third and presiding arbitrator (who shall be neutral, impartial and unaffiliated with any party) within 15 days of the appointment of the second arbitrator. If the third arbitrator has not been appointed within the time limit specified herein, then the AAA shall provide a list of proposed arbitrators in accordance with the Rules, and the arbitrator shall be appointed by the AAA in accordance with a listing, striking and ranking procedure, with each party having a limited number of strikes, excluding strikes for cause.

(d) There shall be only limited documentary discovery of documents directly related to the issues in dispute, as may be ordered by the arbitrators.

(e) In rendering an award or decision (the “ Award ”), the arbitrators shall be required to follow the laws of the State of Indiana. Any arbitration proceedings or Award rendered hereunder and the validity, effect and interpretation of this arbitration agreement shall be governed by the Federal Arbitration Act, 9 U.S.C. §1 et seq. The Award shall be in writing and may, but shall not be required to, briefly state the findings of fact and conclusions of law on which it is based.

(f) Except to the extent otherwise agreed by the parties, each party involved in a Dispute shall bear its own costs and expenses (including attorneys’ fees), and the arbitrators shall not render an award that would include shifting of any such costs or expenses (including attorneys’ fees) or, in a derivative case or class action, award any portion of the Company’s award to the claimant or the claimant’s attorneys. Each party (or, if there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand, respectively) shall bear the costs and expenses of its (or their) selected arbitrator and the parties (or, if there are more than two parties to the Dispute, all claimants, on the one hand, and

all respondents, on the other hand) shall equally bear the costs and expenses of the third appointed arbitrator.

(g) An Award shall be final and binding upon the parties thereto and shall be the sole and exclusive remedy between such parties relating to the Dispute, including any claims, counterclaims, issues or accounting presented to the arbitrators. Judgment upon the Award may be entered in any court having jurisdiction. To the fullest extent permitted by law, no application or appeal to any court of competent jurisdiction may be made in connection with any question of law arising in the course of arbitration or with respect to any award made except for actions relating to enforcement of this agreement to arbitrate or any arbitral award issued hereunder and except for actions seeking interim or other provisional relief in aid of arbitration proceedings in any court of competent jurisdiction.

(h) Any monetary award shall be made and payable in U.S. dollars free of any tax, deduction or offset. Each party against which the Award assesses a monetary obligation shall pay that obligation on or before the 30 th day following the date of the Award or such other date as the Award may provide.

(i) This Section 8.7 is intended to benefit and be enforceable by the shareholders, directors, officers, managers (including RMR or its successor), agents or employees of the Company and the Company and shall be binding on the shareholders of the Company and the Company, as applicable, and shall be in addition to, and not in substitution for, any other rights to indemnification or contribution that such individuals or entities may have by contract or otherwise.

8.8 Interpretation and Construction .

(a) The words “hereof”, “herein”, “hereby” and “hereunder” and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement.

(b) Unless the context otherwise requires, references to sections, subsections or Articles refer to sections, subsections or Articles of this Agreement.

(d) The words “include” and “including” and words of similar import shall be deemed to be followed by the words “without limitation”.

(e) Words importing gender include both genders.

(f) Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and references to all attachments thereto and instruments

incorporated therein. In addition, references to any statute are to that statute and to the rules and regulations promulgated thereunder.

(g) The parties hereto have participated jointly in the negotiation and drafting of this Agreement and, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as jointly drafted by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement.

8.9 Severability . If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof.

8.10 Entire Agreement . This Agreement and the SIR Subscription Agreement constitute the entire agreement, and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement.

8.11 Non-liability of Trustees and Directors .

(a) COPIES OF THE DECLARATIONS OF TRUST OF HPT, CWH, SNH, GOV AND SIR, AS IN EFFECT ON THE DATE HEREOF, TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS THERETO, IF ANY, ARE DULY FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND. THE DECLARATIONS OF TRUST, AS AMENDED AND SUPPLEMENTED, OF HPT, CWH, SNH, GOV AND SIR, PROVIDE THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HPT, CWH, SNH, GOV AND SIR, AS APPLICABLE, SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, HPT, CWH, SNH, GOV AND SIR. ALL PERSONS DEALING WITH HPT, CWH, SNH, GOV AND SIR IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HPT, CWH, SNH, GOV AND SIR, AS APPLICABLE, FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

(b) A COPY OF THE ARTICLES OF INCORPORATION, AS IN EFFECT ON THE DATE HEREOF, OF FVE, TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS THERETO, IS DULY FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND. NO DIRECTOR, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF FVE SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, FVE. ALL PERSONS DEALING WITH FVE, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF FVE FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

(c) A COPY OF THE LIMITED LIABILITY COMPANY AGREEMENT, AS IN EFFECT ON THE DATE HEREOF, OF TA, TOGETHER WITH ALL AMENDMENTS THERETO, IS AVAILABLE TO A SHAREHOLDER PARTY HERETO UPON WRITTEN REQUEST MADE TO TA. NO DIRECTOR, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF TA SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, TA. ALL PERSONS DEALING WITH TA, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF TA FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

[The Remainder of This Page Intentionally Left Blank]

IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this Amended and Restated Shareholders Agreement on the date first written above.

AFFILIATES INSURANCE COMPANY


By:	/s/ Jennifer B. Clark
	Name:	Jennifer B. Clark
	Title:	President

FIVE STAR QUALITY CARE, INC.


By:	/s/ Bruce J. Mackey Jr.
	Name:	Bruce J. Mackey Jr.
	Title:	President and Chief Executive Officer

HOSPITALITY PROPERTIES TRUST


By:	/s/ John G. Murray
	Name:	John G. Murray
	Title:	President and Chief Operating Officer

COMMONWEALTH REIT


By:	/s/ John C. Popeo
	Name:	John C. Popeo
	Title:	Treasurer and Chief Financial Officer

SENIOR HOUSING PROPERTIES TRUST


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

TRAVELCENTERS OF AMERICA LLC


By:	/s/ Thomas M. O’Brien
	Name:	Thomas M. O’Brien
	Title:	President and Chief Executive Officer

REIT MANAGEMENT & RESEARCH LLC


By:	/s/ Adam D. Portnoy
	Name:	Adam D. Portnoy
	Title:	President

GOVERNMENT PROPERTIES INCOME TRUST


By:	/s/ Mark L. Kleifges
	Name:	Mark L. Kleifges
	Title:	Treasurer and Chief Financial Officer

SELECT INCOME REIT


By:	/s/ David M. Blackman
	Name:	David M. Blackman
	Title:	President and Chief Operating Officer

Exhibit 10.2

ACCESSION AGREEMENT

THIS ACCESSION AGREEMENT, dated as of December 1, 2011, is entered into by SNH CALI TENANT LLC, a Delaware limited liability company (the “ Company ”).

RECITALS :

The Company has entered into a Management Agreement (the “ Management Agreement ”) with FVE Managers, Inc., a Maryland corporation (“ Manager ”), dated as of December 1, 2011, with respect to the assisted living facility known as Tiffany Court and located at 1866 San Miguel Drive, Walnut Creek, California (“ Tiffany Court ”).

Manager and certain affiliates of the Company are parties to that certain Pooling Agreement, dated as of May 12, 2011, by and among the Manager and the parties listed on Schedule A thereto (the “ Pooling Agreement ”). Capitalized terms used in this Accession Agreement without definition shall have the meanings given to such terms in the Pooling Agreement.

The Company desires to become a party to the Pooling Agreement with respect to Tiffany Court.

NOW, THEREFORE:

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

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

	COMPANY:

	SNH CALI TENANT LLC,
	a Delaware limited liability company


	By:	/s/ Richard A. Doyle
		Richard A. Doyle
		President

ACCEPTED:

FVE MANAGERS, INC.,
a Maryland corporation


By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	President

Schedule to Exhibit 10.4

There are 11 accession agreements to the Pooling Agreement with FVE Managers, Inc., a representative form of which is filed herewith. The other 10 accession agreements, with the respective parties and applicable to the respective communities listed below, are substantially identical in all material respects to the representative form of accession agreement filed herewith.

Entity	Facility	Date

SNH BRFL Tenant LLC	22601 Camino Del Mar, Boca Raton, Florida 33433	December 15, 2011

SNH CCMD Tenant LLC	8100 Connecticut Avenue, Chevy Chase, Maryland 20815	December 15, 2011

SNH PLFL Tenant LLC	8500 West Sunrise Boulevard, Plantation, Florida 33322	December 15, 2011

SNH Teaneck Tenant LLC	655 Pomander Walk, Teaneck, New Jersey 07666	December 15, 2011

SNH SE Tenant TRS, Inc.	1371 South Ocean Boulevard, Pompano Beach, Florida 33062	December 15, 2011

SNH SE Tenant TRS, Inc.	2480 North Park Road, Hollywood, Florida 33021	December 15, 2011

SNH SE Tenant TRS, Inc.	3201 Plumas Street, Reno, Nevada 89509	December 15, 2011

SNH SE Tenant TRS, Inc.	200 Terrace Lane, Priceville, Alabama 35603	February 1, 2012

SNH SE Daniel Island Tenant LLC	320 Seven Farms Drive, Charleston, South Carolina 29492	May 29, 2012

SNH SE SG Tenant LLC	1010 Lake Hunter Circle, Mount Pleasant, South Carolina 29464 937 Bowman Road, Mount Pleasant, South Carolina 29464	July 1, 2012

Exhibit 31.1

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

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

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

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

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

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

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

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

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

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

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

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

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

Date: August 1, 2012	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	President and Chief Executive Officer

Exhibit 31.2

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

I, Paul V. Hoagland, certify that:

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

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: August 1, 2012	/s/ Paul V. Hoagland
	Paul V. Hoagland
	Treasurer and Chief Financial Officer

Exhibit 32.1

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

In connection with the filing by Five Star Quality Care, Inc. (the “Company”) of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (the “Report”), each of the undersigned hereby certifies, to the best of his knowledge:

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

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

	/s/ Bruce J. Mackey Jr.

	Bruce J. Mackey Jr.
	President and Chief Executive Officer

	/s/ Paul V. Hoagland

	Paul V. Hoagland
	Treasurer and Chief Financial Officer


Date: August 1, 2012

Exhibit 99.1

AMENDED AND RESTATED REIMBURSEMENT AGREEMENT

AMENDED AND RESTATED REIMBURSEMENT AGREEMENT (this “Agreement”), dated May 1, 2012, among Reit Management & Research LLC (“RMR”), TravelCenters of America LLC (“TA”) and Five Star Quality Care, Inc. (“FVE”).

RECITAL

RMR provides management and administrative services to TA pursuant to an Amended and Restated Business Management and Shared Services Agreement dated January 25, 2010, and to FVE pursuant to an Amended and Restated Business Management and Shared Services Agreement dated January 4, 2010, as amended, including, with respect to telecommunications services, the negotiation of contracts with third party vendors and suppliers.

RMR and AT&T Corp. (“AT&T”) are parties to a Master Agreement No.: 0789 dated December 16, 2003 and the schedules, exhibits, addenda and service order attachments related thereto (collectively, as amended from time to time, the “AT&T Agreement”). Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the AT&T Agreement.

Under the AT&T Agreement, RMR secured more favorable pricing for services than is generally available from AT&T, but is responsible for meeting minimum revenue commitments, which AT&T agreed to make available to TA and FVE, as affiliates of RMR.

RMR entered into the AT&T Agreement in reliance on TA and FVE having agreed to be responsible for portions of any unsatisfied minimums related to the provision of services to them under the AT&T Agreement as set forth in a Reimbursement Agreement dated October 17, 2008 (“Reimbursement Agreement”).

RMR and AT&T entered amendments to the AT&T Agreement dated September 9, 2011, and April 23, 2012, and desire to amend and restate the Reimbursement Agreement to reflect their understanding and agreement as to the obligations of each with respect to the increased minimum revenue commitments (MARC/MAC”) resulting from the provision of services to TA and RMR under the AT&T Agreement as so amended and upon any termination of the AT&T Agreement.

NOW, THEREFORE, in consideration of the premises and the mutual undertakings in this Agreement, the parties hereto agree:

1. Usage and Payment . (a) Effective September 9, 2011, RMR will be responsible for a MARC/MRC with respect to voice and data telecommunications services under the AT&T Agreement in the amount of $3,000,000 annually. Based upon their historical usage of voice and data telecommunications services, the parties agree that for the period beginning September 9, 2011 and ending September 8, 2012, TA will be responsible for satisfaction of 53.21%, FVE will be responsible for 35.90% and RMR will be responsible for 10.89% (in each case, the “voice and data Pro-Rata Percentage”) of the MARC/MRC for voice and data telecommunications services during such period. The voice and data Pro-Rata Percentages will be readjusted on September 8, 2012, and each September 8 thereafter, based on charges for actual usage of telecommunications

services for the preceding twelve months ended immediately prior thereto, with each party being responsible for the voice and data Pro-Rata Percentage obtained by multiplying 100 by the decimal resulting from dividing the aggregate charges for actual usage of voice and data telecommunications services of TA, FVE or RMR, as the case may be, by the aggregate charges for actual usage of voice and data telecommunications services of all the parties for the relevant twelve months ended. (b) Effective April 23, 2012, RMR will be responsible for a MARC/MRC with respect to wireless telecommunications services under the AT&T Agreement in the amount of $2,900,000 annually. Based upon their historical usage of wireless telecommunications services, the parties agree that for the period beginning April 23, 2012 and ending April 22, 2013, TA will be responsible for satisfaction of 30%, FVE will be responsible for 43% and RMR will be responsible for 27% (in each case, the “wireless Pro-Rata Percentage”) of the MARC/MRC for wireless telecommunications services during such period. The wireless Pro-Rata Percentages will be readjusted on April 22, 2013, and on each April 22 thereafter, based on charges for actual usage of telecommunications services for the preceding twelve months ended immediately prior thereto, with each party being responsible for the wireless Pro-Rata Percentage obtained by multiplying 100 by the decimal resulting from dividing the aggregate charges for actual usage of wireless telecommunications services of TA, FVE or RMR, as the case may be, by the aggregate charges for actual usage of wireless telecommunications services of all the parties for the relevant twelve months ended. (c) It is expected that each of RMR, TA and FVE will be separately invoiced by AT&T for its actual usage of each of voice and data and wireless telecommunications services and each agrees to be responsible for timely payment. If for any reason either TA or FVE does not timely pay AT&T or is not separately invoiced, TA and/or FVE, as the case may be, will promptly reimburse RMR for any payment to AT&T made on their behalf, promptly on demand. If there is a material reduction in a party’s voice and data Pro-Rata Percentage or wireless Pro-Rata Percentage as a result of its purchasing telecommunications services from a carrier other than AT&T, the party whose voice and data Pro-Rata Percentage or wireless Pro-Rata Percentage is reduced will cooperate with the other parties in making an equitable adjustment.

2. Reimbursement . If a MARC/MRC for any year of the Attachment Term (or any shorter period) is not satisfied, RMR will be billed a Shortfall Charge by AT&T equal to the difference between the applicable MARC/MRC and the total of the actual MARC/MRC-Eligible Charges for such year or period. If the MARC/MRC-Eligible Charges of either of TA or FVE fall below their respective Pro-Rata Percentage (as adjusted) at any time, TA or FVE, as the case may be, will be solely responsible for the Shortfall Charge attributable thereto and will reimburse RMR an amount equal to Shortfall Charge attributable thereto, promptly on demand.

3. Termination for Convenience by RMR . If the AT&T Agreement is terminated by RMR for its convenience, which will only be done with the agreement of TA and FVE, each of TA and FVE will reimburse RMR an amount of the Termination Charge and any other amounts due AT&T under the AT&T Agreement equitably determined by the parties and based upon the respective voice and data Pro-Rata Percentages and wireless Pro-Rata Percentages, promptly on demand.

4. Severability. Any provision of this Agreement which is unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such unenforceability

without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

5. Governing Law. This Agreement shall be construed in accordance with and governed by the internal laws of the Commonwealth of Massachusetts (without giving effect to any conflicts or choice of laws provisions that would cause the application of the domestic substantive laws of any other jurisdiction).

6. Arbitration .

(a) Disputes . Any disputes, claims or controversies between the parties (i) arising out of or relating to this Agreement, or (ii) brought by or on behalf of any shareholder of any party or a direct or indirect parent of a party (which, for purposes of this Section 6, shall mean any shareholder of record or any beneficial owner of shares of any party, or any former shareholder of record or beneficial owner of shares of any party), either on his, her or its own behalf, on behalf of any party or on behalf of any series or class of shares of any party or shareholders of any party against any party or any member, trustee, officer, manager (including RMR or its successor), agent or employee of any party, including disputes, claims or controversies relating to the meaning, interpretation, effect, validity, performance or enforcement of this Agreement, including this arbitration provision, or the declarations of trust, limited liability company agreements or bylaws of any party hereto (all of which are referred to as “Disputes”), or relating in any way to such a Dispute or Disputes shall, on the demand of any party to such Dispute be resolved through binding and final arbitration in accordance with the Commercial Arbitration Rules (the “Rules”) of the American Arbitration Association (“ AAA ”) then in effect, except as those Rules may be modified in this Section 6. For the avoidance of doubt, and not as a limitation, Disputes are intended to include derivative actions against trustees, officers or managers of any party and class actions by a shareholder against those individuals or entities and any party. For the avoidance of doubt, a Dispute shall include a Dispute made derivatively on behalf of one party against another party. For purposes of this Section 6, the term “party” shall include any direct or indirect parent of a party.

(b) Selection of Arbitrators . There shall be three arbitrators. If there are only two parties to the Dispute, each party shall select one arbitrator within 15 days after receipt of a demand for arbitration. Such arbitrators may be affiliated or interested persons of such parties. If there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand, shall each select, by the vote of a majority of the claimants or the respondents, as the case may be, one arbitrator within 15 days after receipt of a demand for arbitration. Such arbitrators may be affiliated or interested persons of the claimants or the respondents, as the case may be. If either a claimant (or all claimants) or a respondent (or all respondents) fail to timely select an arbitrator then the party (or parties) who has selected an arbitrator may request the AAA to provide a list of three proposed arbitrators in accordance with the Rules (each of whom shall be neutral, impartial and unaffiliated with any party) and the party (or parties) that failed to timely appoint an arbitrator shall have ten days from the date the AAA provides such list to select one of the three arbitrators proposed by AAA. If such party (or parties) fail to select such arbitrator by such time, the party (or parties) who have appointed the first arbitrator shall then have ten days to select one of the three arbitrators proposed by AAA to be the second arbitrator; and, if he/they should fail to select such arbitrator by such time, the

AAA shall select, within 15 days thereafter, one of the three arbitrators it had proposed as the second arbitrator. The two arbitrators so appointed shall jointly appoint the third and presiding arbitrator (who shall be neutral, impartial and unaffiliated with any party) within 15 days of the appointment of the second arbitrator. If the third arbitrator has not been appointed within the time limit specified herein, then the AAA shall provide a list of proposed arbitrators in accordance with the Rules, and the arbitrator shall be appointed by the AAA in accordance with a listing, striking and ranking procedure, with each party having a limited number of strikes, excluding strikes for cause.

(c) Location of Arbitration . The place of Arbitration shall be Boston, Massachusetts unless otherwise agreed by the parties.

(d) Scope of Discovery . There shall be only limited documentary discovery of documents directly related to the issues in dispute, as may be ordered by the arbitrators.

(e) Arbitration Award . In rendering an award or decision (the “Arbitration Award”), the arbitrators shall be required to follow the laws of the State of New York. Any arbitration proceedings or Arbitration Award rendered hereunder and the validity, effect and interpretation of this Section 6 shall be governed by the Federal Arbitration Act, 9 U.S.C. §1 et seq. The Arbitration Award shall be in writing and may, but shall not be required to, briefly state the findings of fact and conclusions of law on which it is based.

(f) Costs . Except to the extent expressly provided by this Agreement or as otherwise agreed between the parties, each party involved in a Dispute shall bear its own costs and expenses (including attorneys’ fees), and the arbitrators shall not render an award that would include shifting of any such costs or expenses (including attorneys’ fees) or, in a derivative case or class action, award any portion of a party’s award to the claimant or the claimant’s attorneys. Each party (or, if there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand, respectively) shall bear the costs and expenses of its (or their) selected arbitrator and the parties (or, if there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand) shall equally bear the costs and expenses of the third appointed arbitrator.

(g) Final Judgment . An Arbitration Award shall be final and binding upon the parties thereto and shall be the sole and exclusive remedy between such parties relating to the Dispute, including any claims, counterclaims, issues or accounting presented to the arbitrators. Judgment upon the Arbitration Award may be entered in any court having jurisdiction. To the fullest extent permitted by law, no application or appeal to any court of competent jurisdiction may be made in connection with any question of law arising in the course of arbitration or with respect to any award made except for actions relating to enforcement of this agreement to arbitrate or any arbitral award issued hereunder and except for actions seeking interim or other provisional relief in aid of arbitration proceedings in any court of competent jurisdiction.

(h) Payment . Any monetary award shall be made and payable in U.S. dollars free of any tax, deduction or offset. Each party against which the Arbitration Award assesses a monetary obligation shall pay that obligation on or before the 30 th day following the date of the Arbitration Award or such other date as the Arbitration Award may provide.

(i) Beneficiaries . This Section 6 is intended to benefit and be enforceable by the shareholders, members, direct and indirect parents, trustees, directors, officers, managers (including RMR or its successor), agents or employees of any party and the parties and shall be binding on the shareholders of any party and the parties, as applicable, and shall be in addition to, and not in substitution for, any other rights to indemnification or contribution that such individuals or entities may have by contract or otherwise.

7. Assignability; Successors and Assigns. No party hereto may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the express prior written consent of the other parties.

8. Complete Agreement. The parties acknowledge that this Agreement constitutes the complete agreement among the parties with respect to the subject matter hereof, and supersedes any previous agreements between them with respect thereto.

9. Amendments. No provisions of this Agreement shall be deemed waived, amended, supplemented or modified by either party, unless such waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the party against whom such waiver, amendment, supplement or modification it is sought to be enforced.

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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written.

	Reit Management & Research LLC


	By:	/s/ John C. Popeo
	Name:	John C. Popeo
	Title:	Treasurer and Chief Financial Officer

	TravelCenters of America LLC


	By:	/s/ Thomas O’Brien
	Name:	Thomas O’Brien
	Title:	President and Chief Executive Officer

	Five Star Quality Care, Inc.


	By:	/s/ Bruce J. Mackey Jr.
	Name:	Bruce J. Mackey Jr.
	Title:	President and Chief Executive Officer

[Signature Page to Amended and Restated Reimbursement Agreement]