FIVE STAR QUALITY CARE INC (Form: 10-Q, Received: 10/30/2012 17:02:30)

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 September 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 October 29, 2012: 47,924,472.

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FIVE STAR QUALITY CARE, INC.

FORM 10-Q

SEPTEMBER 30, 2012

IND EX

		Page
PART I	Financial Information

Item 1.	Condensed Consolidated Financial Statements (unaudited)	1

	Condensed Consolidated Balance Sheets — September 30, 2012 and December 31, 2011	1

	Condensed Consolidated Statements of Income — Three and Nine Months Ended September 30, 2012 and 2011	2

	Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2012 and 2011	3

	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 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	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

	Warning Concerning Forward Looking Statements	32

PART II	Other Information

Item 5.	Other Information	35

Item 6.	Exhibits	36

	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.

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Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

	September 30, 2012			December 31, 2011
ASSETS

Current assets:
Cash and cash equivalents	$	14,295		$	28,374
Accounts receivable, net of allowance of $3,475 and $3,957 at September 30, 2012 and December 31, 2011, respectively	54,880			56,509
Investments in available for sale securities, of which $5,200 and $5,905 are restricted as of September 30, 2012 and December 31, 2011, respectively	14,942			9,114
Restricted cash	5,904			4,838
Prepaid expenses and other current assets	25,441			20,395
Assets of discontinued operations	13,003			29,022
Total current assets	128,465			148,252

Property and equipment, net	336,889			332,185
Equity investment in Affiliates Insurance Company	5,558			5,291
Restricted cash	9,262			4,092
Restricted investments in available for sale securities	11,904			13,115
Goodwill and other intangible assets	28,081			29,414
Other long term assets	43,347			51,128
	$	563,506		$	583,477
LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Revolving credit facility, secured, principally by real estate	$	—		$	—
Revolving credit facility, secured, principally by accounts receivable	—			—
Accounts payable	24,500			22,736
Accrued expenses	20,840			21,698
Accrued compensation and benefits	48,118			38,975
Due to related persons	12,791			18,659
Mortgage notes payable	1,076			1,027
Bridge loan from Senior Housing Properties Trust	—			38,000
Accrued real estate taxes	14,909			11,466
Security deposit liability	9,948			10,606
Other current liabilities	16,958			15,745

Liabilities of discontinued operations, of which $7,583 and $7,690 relate to mortgage notes payable at September 30, 2012 and December 31, 2011, respectively	8,764			10,419
Total current liabilities	157,904			189,331

Long term liabilities:
Mortgage notes payable	37,900			38,714
Convertible senior notes	24,872			37,282
Continuing care contracts	1,820			2,045
Accrued self insurance obligations	31,868			28,496
Other long term liabilities	6,415			7,415
Total long term liabilities	102,875			113,952

Commitments and contingencies

Shareholders’ equity:
Common stock, par value $.01; 47,924,472 and 47,899,312 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively	479			479
Additional paid in capital	353,468			352,819
Accumulated deficit	(53,136		)	(74,582		)
Cumulative other comprehensive income	1,916			1,478
Total shareholders’ equity	302,727			280,194
	$	563,506		$	583,477

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Revenues:
Senior living revenue	$	277,568		$	275,605		$	831,864		$	803,647
Rehabilitation hospital revenue	26,328			26,273			79,501			78,235
Management fee revenue	1,277			359			3,666			383
Reimbursed costs incurred on behalf of managed communities	27,247			8,324			76,750			8,887
Total revenues	332,420			310,561			991,781			891,152

Operating expenses:
Senior living wages and benefits	137,816			136,135			412,808			398,975
Other senior living operating expenses	66,858			68,669			200,062			193,123
Costs incurred on behalf of managed communities	27,247			8,324			76,750			8,887
Rehabilitation hospital expenses	23,734			23,300			71,725			70,798
Rent expense	50,523			50,138			151,043			145,474
General and administrative	14,602			14,418			45,445			42,242
Depreciation and amortization	6,324			5,497			18,631			13,705
Total operating expenses	327,104			306,481			976,464			873,204

Operating income	5,316			4,080			15,317			17,948

Interest and other income	199			355			638			975
Interest and other expense	(1,762		)	(1,034		)	(4,793		)	(2,405		)
Acquisition related costs	(100		)	(226		)	(100		)	(1,530		)
Equity in earnings of Affiliates Insurance Company	115			28			236			111
Gain on settlement	—			—			3,365			—
Gain on early extinguishment of debt	—			—			45			1
Gain on sale of available for sale securities reclassified from other comprehensive income	63			529			62			656

Income from continuing operations before income taxes	3,831			3,732			14,770			15,756
Provision for income taxes	(426		)	(186		)	(4,835		)	(1,006		)
Income from continuing operations	3,405			3,546			9,935			14,750
Income (loss) from discontinued operations	13,034			(4,074		)	11,511			(5,950		)

Net income (loss)	$	16,439		$	(528	)	$	21,446		$	8,800

Weighted average shares outstanding - basic	47,927			47,557			47,913			40,294

Weighted average shares outstanding - diluted	50,388			47,557			47,913			43,169

Basic income (loss) per share from:
Continuing operations	$	0.07		$	0.08		$	0.21		$	0.37
Discontinued operations	0.27			(0.09		)	0.24			(0.15		)
Net income (loss) per share — basic	$	0.34		$	(0.01	)	$	0.45		$	0.22

Diluted income (loss) per share from:
Continuing operations	$	0.07		$	0.08		$	0.21		$	0.36
Discontinued operations	0.26			(0.09		)	0.24			(0.14		)
Net income (loss) per share - diluted	$	0.33		$	(0.01	)	$	0.45		$	0.22

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011

Net income (loss)	$	16,439		$	(528	)	$	21,446		$	8,800
Other comprehensive income (loss):
Unrealized gain (loss) on investments in available for sale securities	188			(906		)	469			(103		)
Less: Realized gain on investments in available for sale securities reclassified and included in net income	(63		)	(529		)	(62		)	(656		)
Unrealized gains on equity investment in Affiliates Insurance Company	35			15			31			58
Other comprehensive income (loss)	160			(1,420		)	438			(701		)
Comprehensive income (loss)	$	16,599		$	(1,948	)	$	21,884		$	8,099

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine months ended September 30,
	2012			2011
Cash flows from operating activities:
Net income	$	21,446		$	8,800
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	18,631			13,705
Gain on early extinguishment of debt	(45		)	(1		)
(Gain) loss from discontinued operations	(11,511		)	5,950
Gain on sale of available for sale securities	(62		)	(656		)
Equity in earnings of Affiliates Insurance Company	(236		)	(111		)
Stock-based compensation	649			949
Provision for losses on receivables	3,949			5,178
Changes in assets and liabilities:
Accounts receivable	(2,320		)	(2,118		)
Prepaid expenses and other assets	2,408			(2,735		)
Accounts payable and accrued expenses	906			7,028
Accrued compensation and benefits	9,143			6,096
Due to related persons	(5,868		)	(1,535		)
Other current and long term liabilities	6,145			5,407
Cash provided by operating activities	43,235			45,957

Net cash (used in) provided by discontinued operations	(8,317		)	652

Cash flows from investing activities:
Acquisition of property and equipment	(40,251		)	(44,562		)
Acquisition of senior living communities, net of working capital assumed	—			(107,165		)
Payments from restricted cash and investment accounts, net	(6,236		)	(3,117		)
Purchase of available for sale securities	(5,076		)	—
Proceeds from sale of pharmacy business	34,298			—
Proceeds from disposition of property and equipment held for sale	18,249			25,877
Proceeds from sale of available for sale securities	928			2,504
Cash provided by (used in) investing activities	1,912			(126,463		)

Cash flows from financing activities:
Net proceeds from the issuance of common stock	—			53,953
Proceeds from borrowings on credit facilities	47,500			12,000
Repayments of borrowings on credit facilities	(47,500		)	(12,000		)
Proceeds from borrowings on bridge loan from Senior Housing Properties Trust	—			80,000
Repayments of borrowings on bridge loan from Senior Housing Properties Trust	(38,000		)	(32,000		)
Purchase and retirement of convertible senior notes	(12,038		)	(623		)
Repayments of mortgage notes payable	(871		)	(300		)
Cash (used in) provided by financing activities	(50,909		)	101,030

Change in cash and cash equivalents during the period	(14,079		)	21,176
Cash and cash equivalents at beginning of period	28,374			20,770
Cash and cash equivalents at end of period	$	14,295		$	41,946

Supplemental cash flow information:
Cash paid for interest	$	3,711		$	1,454
Cash paid for income taxes	$	1,552		$	1,257

Non-cash activities:
Issuance of common stock	$	114		$	298
Real estate acquisition	$	—		$	(40,289	)
Assumption of mortgage notes payable	$	—		$	40,289

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 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. Reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to the current year’s presentation.

We operate senior living communities, including independent living communities, assisted living communities and skilled nursing facilities, or SNFs. As of September 30, 2012, we operated 252 senior living communities located in 30 states containing 28,262 living units, including 214 primarily independent and assisted living communities with 24,839 living units and 38 SNFs with 3,423 living units. As of September 30, 2012, we owned and operated 31 communities (2,952 living units), we leased and operated 191 communities (20,812 living units) and we managed 30 communities (4,498 living units). Our 252 senior living communities included 9,160 independent living apartments, 13,579 assisted living suites and 5,523 skilled nursing units. We have classified as discontinued operations 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, and have excluded such SNFs and assisted living community 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.

Note 2. Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board issued an accounting standards update 2012-01, Health Care Entities (Topic 954), Continuing Care Retirement Communities — Refundable Advance Fees, or ASU 2012-01. ASU 2012-01 affects continuing care retirement communities, or CCRCs, that have resident contracts that provide for a payment of a refundable advance fee upon reoccupancy of that unit by a subsequent resident. The amendments in ASU 2012-01 clarify that an entity should classify an advance fee as deferred revenue when a CCRC has a resident contract that provides for payment of the refundable advance fee upon reoccupancy by a subsequent resident, which is limited to the proceeds of reoccupancy. Refundable advance fees that are contingent upon reoccupancy by a subsequent resident but are not limited to the proceeds of reoccupancy should be accounted for as a liability. ASU 2012-01 is effective for fiscal periods beginning after December 15, 2012 and we are currently evaluating its impact on our condensed consolidated financial statements.

Note 3. Property and Equipment

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

	September 30, 2012			December 31, 2011
Land	$	21,901		$	21,234
Buildings and improvements	278,760			271,311
Furniture, fixtures and equipment	101,395			91,493
	402,056			384,038
Accumulated depreciation	(65,167		)	(51,853		)
	$	336,889		$	332,185

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

As of December 31, 2011, we had assets of $7,076 included in our property and equipment that we subsequently sold during the nine months ended September 30, 2012 to SNH for increased rent pursuant to the terms of our leases with SNH. As of September 30, 2012, we had $11,772 of assets included in our property and equipment that we currently expect to request that SNH purchase from us for an increase in future rent; however, we are not obligated to make these sales and SNH is not obligated to purchase such assets.

Note 4. Financial Data by Segment

We have one reportable segment which consists of our senior living community 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. We do not consider our rehabilitation hospital operations to be a material, separately reportable segment of our business. Consequently, we report our rehabilitation hospital operations within our corporate and other activities. All of our operations and assets are located in the United States, except for the operations of our captive insurance company subsidiary, which participates in our workers’ compensation, professional liability and automobile insurance programs and which is organized in the Cayman Islands.

We use segment operating profit as a means to evaluate our performance and for our business decision making purposes. Segment operating profit for our one reportable segment excludes certain interest and other income, certain interest and other expense, provision for income taxes, equity in earnings of Affiliates Insurance Company, or AIC, gain 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 nine months ended September 30, 2012 and 2011 are as follows:

	Senior Living Communities			Corporate and Other (1)			Total
Three months ended September 30, 2012
Segment revenues:
Senior living and rehabilitation hospital	$	277,568		$	26,328		$	303,896
Management fee revenue	1,277			—			1,277
Reimbursed costs incurred on behalf of managed communities	27,247			—			27,247
Total segment revenues	306,092			26,328			332,420

Segment expenses:
Operating expenses	204,674			23,734			228,408
Costs incurred on behalf of managed communities	27,247			—			27,247
Rent expense	47,844			2,679			50,523
Depreciation and amortization	5,741			583			6,324
Total segment expenses	285,506			26,996			312,502

Segment operating profit (loss)	20,586			(668		)	19,918
General and administrative expenses (2)	—			(14,602		)	(14,602		)
Operating income (loss)	20,586			(15,270		)	5,316
Interest and other income	22			177			199
Interest and other expense	(601		)	(1,161		)	(1,762		)
Acquisition related costs	—			(100		)	(100		)
Equity in earnings of Affiliates Insurance Company	—			115			115
Gain on sale of available for sale securities	—			63			63
Provision for income taxes	—			(426		)	(426		)
Income (loss) from continuing operations	$	20,007		$	(16,602	)	$	3,405

Total Assets as of September 30, 2012	$	447,455		$	116,051		$	563,506

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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			Corporate and Other (1)			Total
Three months ended September 30, 2011
Segment revenues:
Senior living and rehabilitation hospital	$	275,605		$	26,273		$	301,878
Management fee revenue	359			—			359
Reimbursed costs incurred on behalf of managed communities	8,324			—			8,324
Total segment revenues	284,288			26,273			310,561

Segment expenses:
Operating expenses	204,804			23,300			228,104
Costs incurred on behalf of managed communities	8,324			—			8,324
Rent expense	47,541			2,597			50,138
Depreciation and amortization	4,923			574			5,497
Total segment expenses	265,592			26,471			292,063

Segment operating profit (loss)	18,696			(198		)	18,498
General and administrative expenses (2)	—			(14,418		)	(14,418		)
Operating profit (loss)	18,696			(14,616		)	4,080
Interest and other income	19			336			355
Interest and other expense	(294		)	(740		)	(1,034		)
Acquisition related costs	—			(226		)	(226		)
Equity in earnings of Affiliates Insurance Company	—			28			28
Gain on sale of available for sale securities	—			529			529
Provision for income taxes	—			(186		)	(186		)
Income (loss) from continuing operations	$	18,421		$	(14,875	)	$	3,546

(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 specific reportable 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.

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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			Corporate and Other (1)			Total
Nine months ended September 30, 2012
Segment revenues:
Senior living and rehabilitation hospital	$	831,864		$	79,501		$	911,365
Management fee revenue	3,666			—			3,666
Reimbursed costs incurred on behalf of managed communities	76,750			—			76,750
Total segment revenues	912,280			79,501			991,781

Segment expenses:
Operating expenses	612,870			71,725			684,595
Costs incurred on behalf of managed communities	76,750			—			76,750
Rent expense	143,092			7,951			151,043
Depreciation and amortization	16,893			1,738			18,631
Total segment expenses	849,605			81,414			931,019

Segment operating profit (loss)	62,675			(1,913		)	60,762
General and administrative expenses (2)	—			(45,445		)	(45,445		)
Operating income (loss)	62,675			(47,358		)	15,317
Interest and other income	61			577			638
Interest and other expense	(1,807		)	(2,986		)	(4,793		)
Acquisition related costs	—			(100		)	(100		)
Equity in earnings of Affiliates Insurance Company	—			236			236
Gain on settlement	—			3,365			3,365
Gain on early extinguishment of debt	—			45			45
Gain on sale of available for sale securities	—			62			62
Provision for income taxes	—			(4,835		)	(4,835		)
Income (loss) from continuing operations	$	60,929		$	(50,994	)	$	9,935

	Senior Living Communities			Corporate and Other (1)			Total
Nine months ended September 30, 2011
Segment revenues:
Senior living, rehabilitation hospital and institutional pharmacy revenues	$	803,647		$	78,235		$	881,882
Management fee revenue	383			—			383
Reimbursed costs incurred on behalf of managed communities	8,887			—			8,887
Total segment revenues	812,917			78,235			891,152

Segment expenses:
Operating expenses	592,098			70,798			662,896
Costs incurred on behalf of managed communities	8,887			—			8,887
Rent expense	137,716			7,758			145,474
Depreciation and amortization	12,159			1,546			13,705
Total segment expenses	750,860			80,102			830,962

Segment operating profit (loss)	62,057			(1,867		)	60,190
General and administrative expenses (2)	—			(42,242		)	(42,242		)
Operating income (loss)	62,057			(44,109		)	17,948
Interest and other income	100			875			975
Interest and other expense	(509		)	(1,896		)	(2,405		)
Acquisition related costs	—			(1,530		)	(1,530		)
Equity in earnings of Affiliates Insurance Company	—			111			111
Gain on early extinguishment of debt	—			1			1
Gain on sale of available for sale securities	—			656			656
Provision for income taxes	—			(1,006		)	(1,006		)
Income (loss) from continuing operations	$	61,648		$	(46,898	)	$	14,750

(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 specific reportable 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.

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 5. Goodwill and Other Intangible Assets

The goodwill and other intangible assets balance are attributable to our Senior Living Communities segment and 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 in 2011 (See Note 9) and goodwill we recorded in connection with our other senior living community acquisitions in previous years. The changes in the carrying amount of goodwill and other intangible assets from January 1, 2012 to September 30, 2012 are as follows:

	Total
Balance as of January 1, 2012	$	29,414

Amortization of intangibles	(1,333		)

Balance as of September 30, 2012	$	28,081

Note 6. Income Taxes

During the fourth quarter of 2011, we evaluated the realizability of our 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, and 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 nine months ended September 30, 2012, we recognized tax expense from continuing operations of $4,835. We also recognized tax expense from discontinued operations of $7,135. Our effective income tax rate increased during the nine months ended September 30, 2012 to 32.7% 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 $97,822, and our tax credit carry forward, which begins to expire in 2022 if unused, was approximately $8,787. Our NOL carry forwards and tax credit carry forwards are subject to audit and adjustments by the Internal Revenue Service.

During the third quarter of 2012, we released a valuation allowance of $752 related to capital losses which were used to offset a capital gain incurred in the sale of our pharmacy business. We maintain a partial valuation allowance against certain deferred tax assets related to impaired investments. When we believe that we will more likely than not realize the benefit of these deferred tax assets, we will record deferred tax assets as an income tax benefit in our condensed consolidated statements of income, which will affect our results of operations.

Note 7. Earnings Per Share

We computed basic earnings per common share, or EPS, for the three and nine months ended September 30, 2012 and 2011 using the weighted average number of shares outstanding during the periods. Diluted EPS for the periods ended September 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 553 and 486 unvested common shares as of September 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 income (loss) from discontinued operations and the number of common shares used in the computations of diluted EPS:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,
	2012					2011
	Income		Shares	Per Share		Income (loss)			Shares	Per Share
Income from continuing operations	$	3,405	47,927	$	0.07	$	3,546		47,557	$	0.08
Effect of the Notes	166		2,461			—			—
Diluted income from continuing operations	$	3,571	50,388	$	0.07	$	3,546		47,557	$	0.08

Diluted income (loss) from discontinued operations	$	13,034	50,388	$	0.26	$	(4,074	)	47,557	$	(0.09	)

	Nine Months Ended September 30,
	2012					2011
	Income		Shares	Per Share		Income (loss)			Shares	Per Share
Income from continuing operations	$	9,935	47,913	$	0.21	$	14,750		40,294	$	0.37
Effect of the Notes	—		—			1,007			2,875
Diluted income from continuing operations	$	9,935	47,913	$	0.21	$	15,757		43,169	$	0.36

Diluted income (loss) from discontinued operations	$	11,511	47,913	$	0.24	$	(5,950	)	43,169	$	(0.14	)

Note 8. 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 September 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)	$	11,772	$	—	$	11,772
Long lived assets of discontinued operations (2)	8,644		—		8,644
Cash equivalents (3)	18,102		18,102		—
Available for sale securities (4)
Equity securities
Financial services industry	6,587		6,587		—
REIT industry	504		504		—
Other	792		792		—
Total equity securities	7,883		7,883		—
Debt securities
International bond fund	2,337		2,337		—
High yield fund	2,094		2,094
Industrial bonds	7,165		7,165		—
Government bonds	5,501		5,501		—
Financial bonds	993		993		—
Other	873		873		—
Total debt securities	18,963		18,963		—
Total available for sale securities	26,846		26,846		—

Total	$	65,364	$	44,948	$	20,416

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

(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 2012 and 2011, we recorded an asset impairment charge of $294 and $3,938, respectively, 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. In September 2012, in connection with the sale of our pharmacy business to Omnicare, Inc., or Omnicare, Omnicare did not acquire the real estate associated with one pharmacy. We have decided to pursue the sale of this real estate and during the third quarter of 2012 we recorded a $350 asset impairment charge to reduce the carrying value of this property to its estimated fair value less costs to sell. The estimated fair value of long-lived assets of discontinued operations was determined based on offers to purchase the properties and appraisals made by third parties (Level 2 inputs).

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

(4) Investments in available for sale securities are reported in our balance sheet as current and long term investments in available for sale securities and are reported at fair value of $14,942 and $11,904, respectively, at September 30, 2012. We estimate the fair value of our investments in available for sale securities by reviewing each security’s current market price, the ratings of the security, the financial condition of the issuer and our intent and ability to retain the investment during temporary market price fluctuations or until maturity. In evaluating the factors described above, we presume a decline in value to be an “other than temporary impairment” if the quoted market price of the security is below the security’s cost basis for an extended period. However, this presumption may be overcome if there is persuasive evidence indicating the value decline is temporary in nature, such as when the operating performance of the obligor is strong or if the market price of the security is historically volatile. Additionally, there may be instances in which impairment losses are recognized even if the decline in value does not fall within the criteria described above, such as if we plan to sell the security in the near term and the fair value is below our cost basis. When we believe that a change in fair value of an available for sale security is temporary, we record a corresponding credit or charge to other comprehensive income for any unrealized gains and losses. When we determine that an impairment in the fair value of an available for sale security is an “other than temporary impairment”, we record a charge to earnings.

Our investments in available for sale securities had amortized costs of $25,036 and $20,827 as of September 30, 2012 and December 31, 2011, respectively, had unrealized gains of $2,050 and $1,586 as of September 30, 2012 and December 31, 2011, respectively, and had unrealized losses of $240 and $185 as of September 30, 2012 and December 31, 2011, respectively. At September 30, 2012, seven of the securities we hold, with a fair value of $5,928, have been in a loss position for less than 12 months. At September 30, 2012, three of the securities we hold, with a fair value of $3,667, have been in a loss position for greater than 12 months. Since these securities have not been in a loss period for an extended period of time, or we believe other factors support a conclusion that the loss is temporary, we do not believe these securities are impaired. During the nine months ended September 30, 2012, we received gross proceeds of $928 in connection with the sales of available for sale securities and recorded gross realized gains totaling $65 and gross realized losses totaling $3.

During the nine months ended September 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 nine months ended September 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 10), approximate fair value as of September 30, 2012 and December 31, 2011. The carrying value and fair value of the Notes were $24,872 and $24,499, respectively, as of September 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 proportion as each of the other seven shareholders of that company (see Note 12), 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 9. 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:

	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 nine months ended September 30, 2012 and 2011, we incurred acquisition related costs of $100 and $1,530, respectively. These costs include transaction closing costs, professional fees (legal and accounting) and other acquisition related expenses.

Note 10. 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 a spread. As of September 30, 2012, the interest rate payable on borrowings under our Credit Agreement was 6% and we had $0 outstanding and $35,000 available under our Credit Agreement. 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 September 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 $154 and $185 for the three months ended September 30, 2012 and 2011, respectively, and $509 and $548 for the nine months ended September 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 our payment of extension fees and meeting certain other conditions, we have options to extend the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

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. Borrowings under our New Credit Facility bear interest at LIBOR plus a spread. As of September 30, 2012, the interest rate payable on borrowings under our New Credit Facility was 2.73% and we had $0 outstanding and $149,370 available under our New Credit Facility. 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 September 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 $762 and $1,287 for the three and nine months ended September 30, 2012, respectively.

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 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 April 2012 repayment 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 $0 and $187 for the three months ended September 30, 2012 and 2011, respectively, and $314 and $245 for the nine months ended September 30, 2012 and 2011, respectively.

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 $245 and $366 for the three months ended September 30, 2012 and 2011, respectively, and $876 and $1,102 for the nine months ended September 30, 2012 and 2011, respectively. We issued the Notes pursuant to an indenture which contains various customary covenants. As of September 30, 2012, we believe we were in compliance with all applicable covenants of the indenture governing the Notes.

During the nine months ended September 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. We funded this purchase principally with borrowings under our New Credit Facility and cash on hand. During the nine months ended September 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. 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 September 30, 2012, six of our senior living communities were encumbered by mortgage notes totaling $46,559: (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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

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 September 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 $709 and $405 for the three months ended September 30, 2012 and 2011, respectively, and $2,134 and $842 for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, we believe we were in compliance with all applicable covenants under these mortgages.

Note 11. Off Balance Sheet Arrangements

We have pledged certain of our assets, such as accounts receivable, with a carrying value, as of September 30, 2012, of $13,542 arising from our operation of 45 properties owned by SNH and leased to us which secures SNH’s borrowings from its lender, FNMA. As of September 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.

Note 12. 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. SNH is our largest landlord and we manage several senior living communities for SNH. As of September 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 30 senior living communities for the account of SNH. One of our Managing Directors, Mr. Barry Portnoy, is also a managing trustee of SNH. Mr. Barry Portnoy’s son, Mr. Adam Portnoy, serves as a managing trustee 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 as of September 30, 2012 was $196,704, excluding percentage rent. Our total rent expense under all of our leases with SNH, net of lease inducement amortization, was $50,119 and $50,456 for the three months ended September 30, 2012 and 2011, respectively, and $149,842 and $144,988 for the nine months ended September 30, 2012 and 2011, respectively. During the nine months ended September 30, 2012, pursuant to the terms of our leases with SNH, we sold $18,249 of improvements made to properties leased from SNH, and, as a result, our annual rent payable to SNH increased by approximately $1,472. As of September 30, 2012, our property and equipment included $11,772 for similar improvements we have made to properties we lease from SNH that we currently expect to request that SNH purchase from us for an increase in future rent; however, we are not obligated to make these sales and SNH is not obligated to purchase such assets.

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. We have since begun managing additional communities that SNH has acquired. We manage the SNH managed communities pursuant to long term management agreements on substantially consistent terms. In connection with these management agreements, we and SNH have entered into three pooling agreements, two pooling agreements which pool our management agreements with SNH for communities that include assisted living units, or the AL Pooling Agreements, and a third pooling agreement, which pools our management agreements with SNH for communities consisting only of independent living units, or the IL Pooling Agreement. We entered into the initial AL Pooling Agreement in May 2011 and the second AL Pooling Agreement in October 2012. In connection with entering into the second AL Pooling Agreement, we and SNH amended and restated the initial AL Pooling Agreement so that it includes only the management agreements for 20 of the communities that include assisted living units that we and SNH agreed we would manage for SNH’s account. The second AL Pooling Agreement includes the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

management agreements for the remaining communities that include assisted living units that we currently manage for SNH’s account (other than with respect to the senior living community in New York described below). We entered into the IL Pooling Agreement in August 2012 and that agreement currently includes management agreements for two communities consisting only of independent living units. Each of the AL Pooling Agreements and the IL Pooling Agreement aggregates the determinations of fees and expenses of the various communities that are subject to each such pooling agreement, including determinations of our incentive fees and SNH’s return of its invested capital. We earned management fee revenue of $1,284 and $3,431, respectively, for the three and nine months ended September 30, 2012, and $326 and $351 for the three and nine months ended September 30, 2011, respectively, 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 two senior living communities SNH is currently leasing to Sunrise Senior Living, Inc., or Sunrise. Our management of those two communities is subject to conditions, including receipt of regulatory approvals, 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 February 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 Alabama with 92 living units. This management agreement is included in the second AL Pooling Agreement.

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 living units, which community we had been managing for the prior owner’s account pending SNH’s acquisition. This management agreement is included in the second AL Pooling Agreement.

Also 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 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 affected 10 Communities. As of October 30, 2012, we have entered into long term management agreements with SNH for eight of the 10 Communities, 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. These management agreements are included in the second AL Pooling Agreement. We currently expect that, following the termination of the leases for the remaining two of the 10 Communities, we will enter into long term management agreements 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 those communities for SNH’s account and that those communities will also be added to the second AL Pooling Agreement. The termination of the leases for those remaining two communities and our management of those communities for SNH’s account are subject to conditions, including receipt of regulatory approvals, and may not occur.

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 living units, which community we had previously been managing for the prior owner’s account pending SNH’s acquisition. This management agreement was added to our second AL Pooling Agreement.

In August 2012, we entered into a long term management agreement with SNH, on terms substantially consistent with the terms of our other management agreement that we have previously entered into with SNH for communities consisting only of independent living units, to manage for SNH’s account a senior living community in Missouri with 87 living units. This management agreement was added to our IL Pooling Agreement.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Also in August 2012, we entered into a long term management agreement with SNH to manage for SNH’s account a portion of a senior living community in New York that is not subject to the requirements of New York healthcare licensing laws, consisting of 198 living units, 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, except that the management fee payable to us is equal to 5% of the gross revenues realized at that portion of the community, instead of 3% of gross revenues as is typically provided under our management agreements with SNH, and there is no incentive fee payable to us under this management agreement. In order to accommodate certain requirements of New York healthcare licensing laws, SNH subleased the portion of this senior living community that is subject to such requirements, consisting of 111 living units, to an entity, D&R Yonkers LLC, which is owned by SNH’s president and chief operating officer and its treasurer and chief financial officer, and we entered into a long term management agreement with D&R Yonkers LLC to manage that portion of the community for D&R Yonkers LLC’s account. Pursuant to that management agreement, D&R Yonkers LLC pays us a management fee equal to 3% of the gross revenues realized at that portion of the community and we are not entitled to any incentive fee under that agreement.

As discussed above in Notes 9 and 10, 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 $0 and $314, respectively, for the three and nine months ended September 30, 2012, and $187 and $245, respectively, for the three and nine months ended September 30, 2011, which amounts are included in interest and other expense in our condensed consolidated statements of income.

I n August 2012, SNH prepaid certain outstanding debt it had borrowed from FNMA, which debt was secured by certain properties we lease from SNH and other assets relating to those properties. As a result of this prepayment, 11 of the 28 properties securing that debt were released from the mortgage and, in connection with that release, we entered into amendments to our leases with SNH so that these 11 properties were removed from the lease that exists to accommodate this debt and added to our other leases with SNH.

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 $3,218 and $3,021 for the three months ended September 30, 2012 and 2011, respectively, and $9,696 and $8,668 for the nine months ended September 30, 2012 and 2011, respectively. These amounts are included in general and administrative expenses in our condensed consolidated statements of income. We lease our headquarters from an affiliate of RMR for annual rent of approximately $748. We incurred rent of $187 and $183 for the three months ended September 30, 2012 and 2011, respectively, and $552 and $718 for the nine months ended September 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 $142 for the three months ended September 30, 2012 and 2011, respectively, and $515 and $206 for the nine months ended September 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. All of our Directors, all of the trustees and directors of the other publicly held AIC shareholders and nearly all of the directors of RMR currently serve on the board of directors of AIC. RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC. 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

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

recognized income of $115 and $28 for the three months ended September 30, 2012 and 2011, respectively, and $236 and $111 for the nine months ended September 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 as we acquire or dispose 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, “Warning Concerning Forward Looking Statements” in Part I, and “Other Information” in Part II, Item 5, 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, including Note 15 to our Consolidated Financial Statements included in our Annual Report, the sections captioned “Business”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” and “Warning Concerning Forward Looking Statements” of our Annual Report and the section captioned “Related Person Transactions and Company Review of Such Transactions” and the information regarding our Directors and executive officers in our Proxy Statement. In addition, please see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise 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. Copies of certain of our agreements with our related parties, including our leases, forms of management agreements and related pooling agreements and Bridge Loan agreement with SNH, our management agreement with D&R Yonkers LLC, our business management agreement with RMR, our headquarters lease with an affiliate of RMR and our shareholders agreement with AIC and its shareholders, are also publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website.

Note 13. 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. In October 2012, we entered into an agreement to sell these two SNFs for a sale price of $8,000, including the transfer of $7,583 of HUD mortgage debt to the buyer. In connection with this agreement, we recorded a $294 asset impairment charge to reduce the carrying value of these properties to their estimated fair value less costs to sell. Completion of this sale is subject to customary closing conditions and 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 offering this assisted living community for sale and, if sold, our annual minimum rent payable to SNH will decrease by 9.0% of the net proceeds of the sale to SNH, in accordance with the terms of our lease with SNH.

In September 2012, we completed the sale of our pharmacy business to Omnicare. We received $34,298 in sale proceeds from Omnicare, which included $3,789 in working capital. Further, we retained certain additional items of net working capital invested in the pharmacy business of $3,501. Accordingly, we expect to receive a total of $37,799 (before taxes and transaction costs) in net cash receipts resulting from the sale. We recorded a pre-tax capital gain on sale of the pharmacy business of $23,347. In connection with the sale, Omnicare did not acquire the real estate associated with one pharmacy located in South Carolina. We have decided to pursue the sale of this real estate and we recorded a $350 asset impairment charge during the third quarter of 2012 to reduce the carrying value of this property to its estimated fair value less costs to sell.

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

We have reclassified the condensed consolidated balance sheets and the condensed consolidated statements of income for all periods presented to show the financial position and results of operations of our pharmacies and 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 condensed consolidated financial statements for the three and nine months ended September 30, 2012 and 2011:

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Revenues	$	17,583		$	25,208		$	64,505		$	83,032
Expenses	(20,256		)	(29,282		)	(69,206		)	(88,982		)
Gain on sale	23,347			—			23,347			—
Provision for income taxes	(7,640		)	—			(7,135		)	—
Net income (loss)	$	13,034		$	(4,074	)	$	11,511		$	(5,950	)

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

RESULTS OF OPERATIONS

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

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

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

Senior living communities:

	Three months ended September 30,
(dollars in thousands, except average daily rate)	2012			2011			$ Change			% Change
Senior living revenue	$	277,568		$	275,605		$	1,963		0.7	%
Management fee revenue	1,277			359			918			255.6	%
Reimbursed costs incurred on behalf of managed communities	27,247			8,324			18,923			227.3	%
Total revenue	306,092			284,288			21,804			7.7	%
Senior living wages and benefits	(137,816		)	(136,135		)	(1,681		)	(1.2	)%
Other senior living operating expenses	(66,858		)	(68,669		)	1,811			2.6	%
Costs incurred on behalf of managed communities	(27,247		)	(8,324		)	(18,923		)	(227.3	)%
Rent expense	(47,844		)	(47,541		)	(303		)	(0.6	)%
Depreciation and amortization expense	(5,741		)	(4,923		)	(818		)	(16.6	)%
Interest and other expense	(601		)	(294		)	(307		)	(104.4	)%
Interest and other income	22			19			3			(15.8	)%
Senior living income from continuing operations	$	20,007		$	18,421		$	1,586		8.6	%

Total number of communities (end of period):
Owned and leased communities	222			222			—			—
Managed communities	30			14			16			114.3	%
Number of total communities	252			236			16			6.8	%

Total number of living units (end of period):
Owned and leased living units	23,764			23,764			—			—
Managed living units	4,498			1,415			3,083			217.9	%
Number of total living units	28,262			25,179			3,083			12.2	%

Owned and leased communities:
Occupancy %	85.7		%	86.0		%	n/a			(0.3	)%
Average daily rate	$	145.56		$	147.46		$	(1.90	)	(1.3	)%
Percent of senior living revenue from Medicaid	12.4		%	12.3		%	n/a			0.1	%
Percent of senior living revenue from Medicare	12.6		%	14.7		%	n/a			(2.1	)%
Percent of senior living revenue from private and other sources	75.0		%	73.0		%	n/a			2.0	%

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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, leased or managed and operated continuously since July 1, 2011):

	Three months ended September 30,
(dollars in thousands, except average daily rate)	2012			2011			$ Change			% Change
Senior living revenue	$	274,414		$	275,054		$	(640	)	(0.2	)%
Management fee revenue	259			245			14			5.7	%
Senior living wages and benefits	(136,887		)	(135,821		)	(1,066		)	(0.8	)%
Other senior living operating expenses	(65,880		)	(68,437		)	2,557			3.7	%

No. of communities (end of period)
Owned and leased communities	218			218			—			—
Managed communities	10			10			—			—
Number of total communities	228			228			—			—

No. of living units (end of period)
Owned and leased living units	23,278			23,278			—			—
Managed living units	934			934			—			—
Number of total living units	24,212			24,212			—			—

Occupancy %	85.7		%	86.0		%	n/a			(0.3	)%
Average daily rate	$	146.88		$	147.65		$	(0.77	)	(0.5	)%
Percent of senior living revenue from Medicaid	12.6		%	12.4		%	n/a			0.2	%
Percent of senior living revenue from Medicare	12.7		%	14.7		%	n/a			(2.0	)%
Percent of senior living revenue from private and other sources	74.7		%	72.9		%	n/a			1.8	%

Corporate and Other: (1)

	Three months ended September 30,
(dollars in thousands)	2012			2011			$ Change			% Change
Rehabilitation hospital revenues	$	26,328		$	26,273		$	55		0.2	%
Rehabilitation hospital expenses	(23,734		)	(23,300		)	(434		)	(1.9	)%
Rehabilitation hospital rent expense	(2,679		)	(2,597		)	(82		)	(3.2	)%
Depreciation and amortization expense	(583		)	(574		)	(9		)	(1.6	)%
General and administrative expense (2)	(14,602		)	(14,418		)	(184		)	(1.3	)%
Equity in earnings of Affiliates Insurance Company	115			28			87			310.7	%
Gain on sale of available for sale securities	63			529			(466		)	(88.1	)%
Interest and other income	177			336			(159		)	(47.3	)%
Interest and other expense	(1,161		)	(740		)	(421		)	(56.9	)%
Acquisition related costs	(100		)	(226		)	126			55.8	%
Provision for income taxes	(426		)	(186		)	(240		)	(129.0	)%
Corporate and Other loss from continuing operations	$	(16,602	)	$	(14,875	)	$	(1,727	)	(11.6	)%

(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 specific reportable 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:

	Three months ended September 30,
(dollars in thousands)	2012		2011		$ Change		% Change
Summary of revenue:
Senior living communities	$	306,092	$	284,288	$	21,804	7.7	%
Corporate and other	26,328		26,273		55		0.2	%
Total revenue	$	332,420	$	310,561	$	21,859	7.0	%

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

Summary of income (loss) from continuing operations:
Senior living communities	$	20,007		$	18,421		$	1,586		8.6	%
Corporate and other	(16,602		)	(14,875		)	(1,727		)	(11.6	)%
Income from continuing operations	$	3,405		$	3,546		$	(141	)	(4.0	)%

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

Senior living communities:

Our senior living revenue increased by 0.7% for the three months ended September 30, 2012 compared to the same period in 2011 primarily due to an increase from 218 to 222 in the number of communities that we owned and leased since July 1, 2011, partially offset by a 7.5% reduction in aggregate Medicare payment rates for SNFs. Our senior living revenue at the communities that we operated continuously since July 1, 2011, or our current quarter comparable communities, decreased 0.2% for the three months ended September 30, 2012 compared to the same period in 2011, primarily due to decreased per diem charges to residents and a 7.5% reduction in aggregate Medicare payment rates for our SNFs, partially offset by an increase in Medicaid payment rates in certain states.

In the third quarter of 2011, we began managing four senior living communities for SNH’s account and for the account of another owner pending SNH’s acquisition of that other owner’s community. These four managed senior living communities were in addition to the 10 we began managing in the second quarter of 2011 for SNH. Our management fee revenue and reimbursed costs incurred at these communities increased significantly during the three months ended September 30, 2012 compared to the same period in the previous year due to an increase from 14 to 30 in the number of communities we manage and because we managed these communities for the full quarter in 2012 and began managing four of them in the third quarter of 2011.

Our senior living wages and benefits increased 1.2% for the three months ended September 30, 2012 compared to the same period in 2011 primarily due to an increase from 218 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, decreased by 2.6% due to net decreased charges for purchased services and decreased utility and various medical supply expenses at our current quarter comparable communities, partially offset by an increase in the number of communities that we owned and leased from 218 to 222, plus increased service provider fees at our current quarter comparable communities. Our senior living wages and benefits at our current quarter comparable communities increased by 0.8% primarily due to wage increases. Our other senior living operating expenses at our current quarter comparable communities decreased by 3.7% primarily due to net decreased charges for purchased services and decreased utility and various medical supplies, partially offset by increased service provider fees. Our senior living rent expense increased by 0.6% compared to the same period in 2011 primarily due to our payment of additional rent for senior living community capital improvements purchased by SNH at our request since July 1, 2011.

Our senior living depreciation and amortization expense increased by 16.6% for the three months ended September 30, 2012 compared to the same period in 2011 primarily due to additional depreciation and amortization resulting from the three owned senior living communities that we acquired in the third quarter 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 104.4% for the three months ended September 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.

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

Corporate and Other:

Our rehabilitation hospital revenues increased by 0.2% for the three months ended September 30, 2012 compared to the same period in 2011 primarily due to higher Medicare rates and an increase in occupancy, partially offset by a decrease in managed care revenue.

Our rehabilitation hospital expenses increased by 1.9% for the three months ended September 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 3.2% for the three months ended September 30, 2012 compared to the same period in 2011 due to our payment of additional rent for rehabilitation hospital capital improvements purchased by SNH at our request since July 1, 2011.

General and administrative expenses increased by 1.3% for the three months ended September 30, 2012 compared to the same period in 2011 primarily due to increased personnel and information technology costs resulting from our acquisitions of additional communities during 2011 and wage increases.

Our interest and other income decreased by 47.3% for the three months ended September 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 56.9% for the three months ended September 30, 2012 compared to the same period in 2011 primarily due to interest paid on the New Credit Facility, partially offset by our purchase and retirement of $12.4 million par value of the outstanding Notes since September 30, 2011.

For the three months ended September 30, 2012, we recognized tax expense from continuing operations of $426,000. Our effective income tax rate increased during the three months ended September 30, 2012 to 32.7% 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 deferred tax assets, which include, among other things, our NOLs and tax credits, and determined that it was 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 $97.8 million, and our tax credit carry forward, which will begin to expire in 2022 if unused, was approximately $8.8 million.

Discontinued operations:

Income from discontinued operations for the three months ended September 30, 2012 increased $17.1 million to $13.0 million, compared to a loss of $4.1 million for the three months ended September 30, 2011. Income from discontinued operations for the three months ended September 30, 2012 is primarily due to the $23.3 million gain on sale, before income tax expense of $7.6 million, we recorded relating to the sale of our pharmacy business, partially offset by losses we incurred at assisted living communities and SNFs that we have sold or expect to sell. The loss from discontinued operations for the three months ended September 30, 2011 is primarily due to an impairment charge of $3.9 million to reduce the carrying value of two SNFs we own to their estimated fair value.

Key Statistical Data For the Nine Months Ended September 30, 2012 and 2011:

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

Senior living communities:

	Nine months ended September 30,
(dollars in thousands, except average daily rate)	2012			2011			$ Change			% Change
Senior living revenue	$	831,864		$	803,647		$	28,217		3.5	%
Management fee revenue	3,666			383			3,283			857.2	%
Reimbursed costs incurred on behalf of managed communities	76,750			8,887			67,863			763.6	%
Total revenue	912,280			812,917			99,363			12.2	%
Senior living wages and benefits	(412,808		)	(398,975		)	(13,833		)	(3.5	)%
Other senior living operating expenses	(200,062		)	(193,123		)	(6,939		)	(3.6	)%
Costs incurred on behalf of managed communities	(76,750		)	(8,887		)	(67,863		)	(763.6	)%
Rent expense	(143,092		)	(137,716		)	(5,376		)	(3.9	)%
Depreciation and amortization expense	(16,893		)	(12,159		)	(4,734		)	(38.9	)%
Interest and other expense	(1,807		)	(509		)	(1,298		)	(255.0	)%
Interest and other income	61			100			(39		)	(39.0	)%
Senior living income from continuing operations	$	60,929		$	61,648		$	(719	)	(1.2	)%

Total number of communities (end of period):
Owned and leased communities	222			222			—			—
Managed communities	30			14			16			114.3	%
Number of total communities	252			236			16			6.8	%

Number of living units:
Owned and leased living units	23,764			23,764			—			—
Managed living units	4,498			1,415			3,083			217.9	%
Number of total living units	28,262			25,179			3,083			12.2	%

Owned and leased communities:
Occupancy %	85.7		%	85.6		%	n/a			0.1	%
Average daily rate	$	146.64		$	150.15		$	(3.51	)	(2.3	)%
Percent of senior living revenue from Medicaid	12.7		%	12.6		%	n/a			0.1	%
Percent of senior living revenue from Medicare	12.8		%	15.4		%	n/a			(2.6	)%
Percent of senior living revenue from private and other sources	74.5		%	72.0		%	n/a			2.5	%

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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 January 1, 2011):

	Nine months ended September 30,
(dollars in thousands, except average daily rate)	2012			2011			$ Change			% Change
Senior living revenue	$	794,096		$	791,717		$	2,379		0.3	%
Senior living wages and benefits	(400,310		)	(394,724		)	(5,586		)	(1.4	)%
Other senior living operating expenses	(190,316		)	(190,096		)	(220		)	(0.1	)%
No. of communities (end of period)	209			209			—			—
No. of living units (end of period)	22,175			22,175			—			—
Occupancy %	85.4		%	85.5		%	—			(0.1	)%
Average daily rate	$	150.79		$	151.48		$	(0.69	)	(0.5	)%
Percent of senior living revenue from Medicaid	13.2		%	12.7		%	n/a			0.5	%
Percent of senior living revenue from Medicare	13.4		%	15.6		%	n/a			(2.2	)%
Percent of senior living revenue from private and other sources	73.4		%	71.7		%	n/a			1.7	%

Corporate and other: (1)

	Nine months ended September 30,
(dollars in thousands)	2012			2011			$ Change			% Change
Rehabilitation hospital revenues	$	79,501		$	78,235		$	1,266		1.6	%
Rehabilitation hospital expenses	(71,725		)	(70,798		)	(927		)	(1.3	)%
Rehabilitation hospital rent expense	(7,951		)	(7,758		)	(193		)	(2.5	)%
Depreciation and amortization expense	(1,738		)	(1,546		)	(192		)	(12.4	)%
General and administrative (2)	(45,445		)	(42,242		)	(3,203		)	(7.6	)%
Equity in earnings of Affiliates Insurance Company	236			111			125			112.6	%
Gain on settlement	3,365			—			3,365			100.0	%
Gain on early extinguishment of debt	45			1			44			4,400.0	%
Gain on sale of available for sale securities	62			656			(594		)	(90.5	)%
Interest and other income	577			875			(298		)	(34.1	)%
Interest and other expense	(2,986		)	(1,896		)	(1,090		)	(57.5	)%
Acquisition related costs	(100		)	(1,530		)	1,430			93.5	%
Provision for income taxes	(4,835		)	(1,006		)	(3,829		)	(380.6	)%
Corporate and Other loss from continuing operations	$	(50,994	)	$	(46,898	)	$	(4,096	)	(8.7	)%

(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 specific reportable 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.

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

Consolidated:

	Nine months ended September 30,
(dollars in thousands)	2012			2011			$ Change			% Change
Summary of revenue:
Senior living communities	$	912,280		$	812,917		$	99,363		12.2	%
Corporate and Other	79,501			78,235			1,266			1.6	%
Total revenue	$	991,781		$	891,152		$	100,629		11.3	%

Summary of income (loss) from continuing operations:
Senior living communities	$	60,929		$	61,648		$	(719	)	(1.2	)%
Corporate and Other	(50,994		)	(46,898		)	(4,096		)	(8.7	)%
Income from continuing operations	$	9,935		$	14,750		$	(4,815	)	(32.6	)%

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Senior living communities:

Our senior living revenue increased by 3.5% for the nine months ended September 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, partially offset by a 7.5% 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 0.3% for the nine months ended September 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 7.5% reduction in aggregate Medicare payment rates for our SNFs.

In June 2011, we began managing 10 senior living communities for SNH. In the third quarter of 2011 we began managing four additional senior living communities for SNH’s account and for the account of another owner pending SNH’s acquisition of that other owner’s community. Our management fee revenue and reimbursed costs incurred at these communities increased significantly during the nine months ended September 30, 2012 due to an increase from 14 to 30 in the number of communities we manage and because we managed these communities for the full nine months in 2012 versus our beginning to manage 10 of them in June 2011 and four in the third quarter of 2011.

Our senior living wages and benefits increased 3.5% for the nine months ended September 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 3.6% due to an increase in the number of communities that we owned and leased from 209 to 222, plus increased service provider fees at our comparable communities, partially offset by a decrease in various medical supplies and decreased 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 1.4% primarily due to wage increases. Our other senior living operating expenses at our comparable communities increased by 0.1%

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

primarily due to an increase in service provider fees, partially offset by a decrease in various medical supplies and decreased 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 3.9% 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 at our request since January 1, 2011.

Our senior living depreciation and amortization expense increased by 38.9% for the nine months ended September 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 255.0% for the nine months ended September 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.

Corporate and Other:

Our rehabilitation hospital revenues increased by 1.6% for the nine months ended September 30, 2012 compared to the same period in 2011 primarily due to higher Medicare and third party payer rates, partially offset by a decrease in occupancy.

Our rehabilitation hospital expenses increased by 1.3% for the nine months ended September 30, 2012 compared to the same period in 2011 primarily due to increases in labor and benefit costs, partially offset by a decrease in purchases relating to ancillary supplies.

Our rehabilitation hospital rent expense increased by 2.5% for the nine months ended September 30, 2012 compared to the same period in 2011 due to our payment of additional rent for rehabilitation hospital capital improvements purchased by SNH at our request since January 1, 2011.

General and administrative expenses increased by 7.6% for the nine months ended September 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 and wage increases.

Our interest and other income decreased by 34.1% for the nine months ended September 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 57.5% for the nine months ended September 30, 2012 compared to the same period in 2011 primarily due to interest paid on the New Credit Facility and the Bridge Loan, partially offset by our purchase and retirement of $12.4 million par value of the outstanding Notes since September 30, 2011.

During the nine months ended September 30, 2012, we recorded a gain of $3.4 million, net of legal fees, pursuant to a litigation settlement with Sunrise.

During the nine months ended September 30, 2012 and 2011, we incurred $100,000 and $1.5 million, respectively, of acquisition related costs in connection with our acquisition activity.

For the nine months ended September 30, 2012, we recognized tax expense from continuing operations of $4.8 million. Our effective income tax rate increased during the nine months ended September 30, 2012 to 32.7% 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 deferred tax assets, which include, among other things, our NOLs 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 $97.8 million, and our tax credit carry forward, which will begin to expire in 2022 if unused, was approximately $8.8 million.

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

Discontinued operations:

Income from discontinued operations for the nine months ended September 30, 2012 increased $17.5 million to $11.5 million, compared to a loss of $6.0 million for the nine months ended September 30, 2011. Income from discontinued operations for the nine months ended September 30, 2012 is primarily due to the $23.3 million gain on sale, before income tax expense of $7.1 million, we recorded relating to the sale of our pharmacy business, partially offset by losses we incurred at assisted living communities and SNFs that we have sold or expect to sell. The loss from discontinued operations for the three months ended September 30, 2011 is primarily due to an impairment charge of $3.9 million to reduce the carrying value of two SNFs we own to their estimated fair value and losses we incurred at assisted living communities and these SNFs.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2012, we had unrestricted cash and cash equivalents of $14.3 million, $35.0 million available to borrow under our Credit Agreement and $149.4 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 10 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 non-government rates we receive for our services decline, if government reimbursement rates are 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 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.

Assets and Liabilities

Our total current assets at September 30, 2012 were $128.5 million, compared to $148.3 million at December 31, 2011. At September 30, 2012, we had cash and cash equivalents of $14.3 million compared to $28.4 million at December 31, 2011. Our current liabilities were $157.9 million at September 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 our New Credit Facility, the Bridge Loan and a portion of the outstanding Notes during 2012 with cash on hand, partially offset by cash received from the sale of our pharmacy business. The decrease in current liabilities results from the repayment of the Bridge Loan, partially offset by timing of payment and accrual differences.

We had net cash flows from continuing operations of $43.2 million for the nine months ended September 30, 2012 compared to $46.0 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 $22.0 million and $18.7 million for the nine months ended September 30, 2012 and 2011, respectively.

Our Leases and Management Agreements with SNH

As of September 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 30 senior living communities for the account of SNH. Our total minimum annual rent payable to SNH under those leases as of September 30, 2012 was $196.7 million, excluding percentage rent. We paid approximately $1.2 million and $1.3 million in percentage rent to SNH for the three months ended September 30, 2012 and 2011, respectively, and $3.6 million and $3.8 million in percentage rent to SNH for the nine months ended September 30, 2012 and 2011, respectively.

Upon our request, SNH may purchase capital improvements made at the properties we lease from SNH and increase our rent pursuant to contractual formulas; however, SNH is not obligated to purchase these improvements from us and we are not obligated to sell them to SNH. During the nine months ended September 30, 2012, pursuant to the terms of our

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

existing leases with SNH, we sold $18.2 million of improvements made to properties leased from SNH, and, as a result, our annual rent payable to SNH increased by approximately $1.5 million. As of September 30, 2012, our property and equipment included $11.8 million for similar improvements we have made to properties we lease from SNH that we currently expect to request that SNH purchase from us for an increase in future rent.

As of September 30, 2012, we managed 30 senior living communities for SNH’s account pursuant to long term management agreements, which, subject to certain exceptions, generally provide us with a management fee equal to 3% of the gross revenues realized at the communities, plus reimbursement for our direct costs and expenses related to the communities and an incentive fee equal to 35% of the annual net operating income of the communities after SNH realizes an annual return equal to 8% of its invested capital. We have entered into three pooling agreements with SNH, which combine our management agreements with SNH and aggregate the determinations of fees and expenses of the various communities that are subject to each such pooling agreement, including determinations of our incentive fees and SNH’s return of its invested capital. We earned management fee revenue of $1.3 million and $3.4 million, respectively, for the three and nine months ended September 30, 2012, and $326,000 and $351,000, respectively, for the three and nine months ended September 30, 2011, with respect to the communities we managed for the account of SNH during those periods.

For further information regarding our leases and management agreements with SNH , please see Note 12 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Pharmacy Sale

In September 2012, we completed the sale of our pharmacy business. We received $34.3 million in sale proceeds, which included $3.8 million in working capital. Further, we retained certain additional items of net working capital invested in the pharmacy business of $3.5 million. Accordingly, we expect to receive a total of $37.8 million (before taxes and transaction costs) in net cash receipts resulting from the sale. We recorded a pre-tax capital gain on sale of the pharmacy business of $23.3 million.

Other Disposition Activity

In October 2012, we entered into an agreement to sell two SNFs with a total of 271 living units that we own which are located in Michigan for a sale price of $8.0 million, including the transfer of $7.6 million of HUD mortgage debt to the buyer. Completion of this sale is subject to customary closing conditions and we can provide no assurance that a sale of these SNFs will be completed.

Our Revenues

Our revenues from services to residents at our senior living communities and patients of our rehabilitation hospitals and clinics, 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 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 Reports on Form 10-Q for the quarters ended March 31, 2012 and June 30, 2012, under the caption “Our Revenues”. Medicare and Medicaid revenues were earned primarily at our SNFs and our two rehabilitation hospitals. We derived 29.4% and 31.5% of our total revenues from these programs during the nine months ended September 30, 2012 and 2011, respectively.

Our net Medicare revenues from services to senior living community residents and at our rehabilitation hospitals totaled $157.8 million and $173.0 million during the nine months ended September 30, 2012 and 2011, respectively. Our net

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

Medicaid revenues from services to senior living community residents and at our rehabilitation hospitals totaled $105.9 million and $102.0 million during the nine months ended September 30, 2012 and 2011, respectively.

Effective October 1, 2011, the Federal Centers for Medicare and Medicaid Services, or CMS, adopted a rule that updated Medicare prospective payment rates for SNFs, which affects the 5,356 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 nine months ended September 30, 2012 was a reduction of approximately $7.9 million. CMS also 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. Despite this increase, Medicare payment rates for SNFs in federal fiscal year 2013 continue to be lower than rates two years ago in federal fiscal year 2011. We expect Medicare payment rates for SNFs to continue to have a material and adverse effect on our future financial results of operations in federal fiscal year 2013.

Also effective October 1, 2011, CMS adopted a rule that updated 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 nine months ended September 30, 2012, were approximately $68.6 million and $52.8 million, respectively. CMS also 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 again 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.

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 since the recent recession, 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 the Patient Protection and Affordable Care Act, or 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 a spread. As of September 30, 2012, the interest rate payable on borrowings under our Credit Agreement was 6% and we had $0 outstanding and $35.0 million available under our Credit Agreement. We are the borrower under our Credit Agreement and certain of our subsidiaries guarantee our obligations under our Credit

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

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 September 30, 2012, we believe we were in compliance with all applicable covenants under our Credit Agreement.

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 our 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. Borrowings under our New Credit Facility bear interest at LIBOR plus a spread. As of September 30, 2012, the interest rate payable on borrowings under our New Credit Facility was 2.73% and we had $0 outstanding and $149.4 million available under our New Credit Facility. 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 September 30, 2012, we believe we were in compliance with all applicable covenants under our New Credit Facility.

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 September 30, 2012, we believe we were in compliance with all applicable covenants of the indenture governing the Notes.

During the nine months ended September 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. We funded this purchase principally with borrowings under our New Credit Facility and cash on hand. During the nine months ended September 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. 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 September 30, 2012, six of our senior living communities were encumbered by mortgage notes totaling $46.6 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 September 30, 2012. Payments of principal and interest are due monthly until maturities at varying dates ranging from June 2023 to May 2039. As of September 30, 2012, we believe we were in compliance with all applicable covenants under these mortgages.

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

Off Balance Sheet Arrangements

We have pledged certain of our assets, such as accounts receivable, with a carrying value, as of September 30, 2012, of $13.5 million arising from our operation of 45 properties owned by SNH and leased to us which secures SNH’s borrowings from its lender, FNMA. As of September 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; D&R Yonkers LLC, which is owned by SNH’s executive officers and for which we manage that portion of a senior living community which it subleases from SNH in order to accommodate certain requirements of New York healthcare licensing laws; we, SNH, RMR and five other companies to which RMR provides management services each currently own 12.5% of AIC, an Indiana insurance company, and we and the other shareholders of AIC have property insurance in place providing $500.0 million of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts. 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 transactions, please see Note 12 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. In addition, for more information about these transactions and relationships, please see elsewhere in this Quarterly Report on Form 10-Q, including “Warning Concerning Forward Looking Statements” in Part I, and “Other Information” in Part II, Item 5, 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”, “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. Copies of certain of our agreements with these related parties, including our leases, forms of management agreements and related pooling agreements and Bridge Loan agreement with SNH, our management agreement with D&R Yonkers LLC, our business management agreement with RMR, our headquarters lease with an affiliate of RMR and our shareholders agreement with AIC and its shareholders, are also publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website.

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

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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 $46.6 million aggregate principal amount of outstanding mortgage debt and $24.9 million aggregate principal amount of the outstanding Notes on September 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 $46.6 million aggregate principal amount of outstanding mortgage debt and $24.9 million aggregate principal amount of the outstanding Notes on September 30, 2012, would increase by approximately $3.4 million.

Borrowings under our Credit Agreement bear interest at floating rates and our Credit Agreement matures on March 18, 2013. As of September 30, 2012, we had $0 outstanding and $35.0 million available 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 a spread. 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.

Borrowings under our New Credit Facility bear interest at floating rates and our New Credit Facility matures on April 13, 2015. As of September 30, 2012, we had $0 outstanding and $149.4 million available under our New Credit Facility. We borrow in U.S. dollars and borrowings under our New Credit Facility bear interest at LIBOR plus a spread. 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 maximum amount of $149.4 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 September 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 THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE” OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. FORWARD LOOKING STATEMENTS IN THIS REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:

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

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

· OUR ABILITY TO MEET OUR DEBT AND RENT OBLIGATIONS,

· 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,

· 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, AIC 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.

FOR EXAMPLE:

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

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· 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 EXPECT TO BEGIN MANAGING THE REMAINING TWO COMMUNITIES OWNED BY SNH AND CURRENTLY LEASED BY SUNRISE BEFORE YEAR END 2012 AND AFTER ALL APPROPRIATE REGULATORY APPROVALS ARE OBTAINED. THE TRANSFER OF OPERATING CONTROL OF THESE TWO COMMUNITIES IS SUBJECT TO REGULATORY APPROVALS IN THE STATE WHERE EACH COMMUNITY IS LOCATED. WE CANNOT CONTROL THE RESULTS OR TIMING OF THESE APPROVAL PROCESSES. ACCORDINGLY, SOME OF THESE APPROVALS MAY BE DELAYED OR NOT OCCUR AND OUR MANAGEMENT OF THESE COMMUNITIES MAY BE DELAYED OR MAY NOT OCCUR,

· 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 AT SEPTEMBER 30, 2012, WE HAD $14.3 MILLION OF CASH AND CASH EQUIVALENTS, THAT THERE WERE NO AMOUNTS OUTSTANDING UNDER OUR CREDIT FACILITIES, THAT WE HAD $184.4 MILLION AVAILABLE TO BORROW UNDER OUR CREDIT FACILITIES, AND THAT WE HAVE IN THE PAST SOLD 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 LOWER RATES FROM 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 CREDIT AGREEMENT AND OUR NEW CREDIT FACILITY IS SUBJECT TO OUR HAVING QUALIFIED COLLATERAL, WHICH IS PRIMARILY BASED ON THE VALUE OF OUR ACCOUNTS RECEIVABLES AND INVENTORY SECURING OUR CREDIT AGREEMENT AND THE VALUE OF THE PROPERTIES SECURING OUR NEW CREDIT FACILITY. ACCORDINGLY, THE AVAILABILITY OF BORROWINGS UNDER OUR CREDIT AGREEMENT AND UNDER OUR NEW CREDIT FACILITY AT ANY TIME MAY BE LESS THAN $35.0 MILLION AND $150.0 MILLION, RESPECTIVELY; FURTHER, OUR CREDIT AGREEMENT IS SCHEDULED TO EXPIRE IN MARCH 2013,

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· THIS QUARTERLY REPORT ON FORM 10-Q DISCUSSES THE INTEREST TO BE PAID ON BORROWINGS UNDER OUR CREDIT AGREEMENT AND UNDER OUR NEW CREDIT FACILITY. HOWEVER, ACTUAL COSTS UNDER OUR CREDIT AGREEMENT AND UNDER OUR NEW CREDIT FACILITY WILL BE HIGHER THAN LIBOR PLUS A SPREAD BECAUSE OF OTHER 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 OUR EXPECTED NET CASH RECEIPTS RESULTING FROM THE SALE OF OUR PHARMACY BUSINESS ARE $37.8 MILLION, BEFORE TRANSACTION COSTS. THESE EXPECTED NET CASH RECEIPTS INCLUDE ACCOUNTS RECEIVABLE THAT WE RETAINED. FURTHER, THE PURCHASE AGREEMENT INCLUDES CUSTOMARY INDEMNIFICATION OBLIGATIONS AND REQUIRES US TO ESCROW A PORTION OF THE PURCHASE PRICE IN CONNECTION WITH THE INDEMNIFICATION OBLIGATIONS. IF WE ARE UNABLE TO COLLECT ACCOUNTS RECEIVABLE THAT WE HAVE RETAINED OR ARE REQUIRED TO PAY AMOUNTS (INCLUDING WITH ESCROWED PROCEEDS) TO SATISFY INDEMNIFICATION OBLIGATIONS IN THE FUTURE, THE ACTUAL NET CASH RECEIPTS WE MAY REALIZE FROM THIS SALE, AND ANY CORRESPONDING CAPITAL GAIN, MAY BE REDUCED,

· THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE HAVE ENTERED INTO AN AGREEMENT TO SELL TWO SNFs THAT WE OWN LOCATED IN MICHIGAN. THIS SALE IS SUBJECT TO CUSTOMARY CLOSING CONDITIONS. SOME OF THESE CONDITIONS MAY NOT BE MET, THE SALE MAY NOT OCCUR OR THE SALE MAY BE DELAYED,

· THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE AND SNH ARE OFFERING FOR SALE AN ASSISTED LIVING COMMUNITY IN PENNSYLVANIA THAT WE LEASE FROM SNH. WE AND SNH MAY NOT BE ABLE TO SELL THIS PROPERTY ON ACCEPTABLE TERMS 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.

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 5. Other Information

As discussed elsewhere in this Quarterly Report on Form 10-Q, in May 2011, we and SNH entered into an AL Pooling Agreement which pools our management agreements with SNH for communities that include assisted living units. On October 30, 2012, we and SNH entered into an amendment and restatement of the initial AL Pooling Agreement so that it includes only the management agreements for 20 of the communities that include assisted living units that we and SNH agreed we would manage for SNH’s account. Also on October 30, 2012, we and SNH entered into a second AL Pooling Agreement which pools our management agreements with SNH for the remaining communities that include assisted living units that we currently manage for SNH’s account (other than with respect to the senior living community in New York described in Note 12 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report).

The terms of the second AL Pooling Agreement are substantially similar to the terms of the amended and restated initial AL Pooling Agreement. Descriptions of the first AL Pooling Agreement appear in Note 15 to our Consolidated Financial Statements included in our Annual Report and in the sections of our Annual Report captioned “Properties — Our SNH Leases and Management Agreements — Management Contracts” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Our Leases and Management Agreements with SNH” and “—Related Person Transactions,” which descriptions are hereby incorporated by reference.

For more information about the AL Pooling Agreements and the management agreements pooled under the AL Pooling Agreements, please see the descriptions of those agreements elsewhere in this Quarterly Report on Form 10-Q, including Note 12 to our Condensed Consolidated Financial Statements included in Part I, Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Our Leases and Management Agreements with SNH” and “—Related Person Transactions” in Part I, Item 2, and in our Annual Report, including the sections of the Annual Report referred to in the preceding paragraph.

The foregoing descriptions of the AL Pooling Agreements and the management agreements pooled under the AL Pooling Agreements are not complete and are subject to and qualified in their entirety by reference to the copy of the first AL Pooling Agreement filed as Exhibit 10.18 to our Current Report on Form 8-K dated May 13, 2011, or our May 2011 Current Report, the copy of the related representative form of accession agreement filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, the copies of the initial AL Pooling Agreement, as amended and restated, and the second AL Pooling Agreement filed as Exhibits 10.2 and 10.3, respectively, to this Quarterly Report on Form 10-Q and the copy of the representative form of management agreement for assisted living communities filed as Exhibit 10.17 to our May 2011 Current Report, each of which is incorporated herein by reference.

The terms of the initial AL Pooling Agreement, as amended and restated, and the second AL Pooling Agreement were approved by our Independent Directors and Board of Directors and by the independent trustees and board of trustees of SNH.

For more information about our relationships and transactions with SNH, RMR and other companies to which RMR provides management services and others affiliated with or related to them, please see Part I of this Quarterly Report on Form 10-Q, including Note 12 to our Condensed Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions.”

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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. ( Filed herewith. )

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		Representative form of Indemnification Agreement. ( Filed herewith. )

10.2		Amended and Restated Pooling Agreement No. 1, dated October 30, 2012, between FVE Managers, Inc. and certain subsidiaries of Senior Housing Properties Trust, amending the Pooling Agreement, dated as of May 12, 2011, between such parties. ( Filed herewith. )

10.3		Pooling Agreement No. 2, dated October 30, 2012, between FVE Managers, Inc. and certain subsidiaries of Senior Housing Properties Trust. ( Filed herewith. )

10.4		Eighth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 31, 2012, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant. ( Filed herewith. )

10.5		Fifth Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of August 31, 2012, among certain affiliates of Senior Housing Properties Trust, as Landlord, and certain affiliates of Five Star Quality Care, Inc., as Tenant. ( Filed herewith. )

10.6		Fourth Amendment to Amended and Restated Master Lease Agreement (Lease No. 4), dated as of August 31, 2012, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. ( Filed herewith. )

10.7		Partial Termination of and Amendment No. 2 to Amended and Restated Master Lease Agreement, dated as of August 31, 2012, among SNH FM Financing LLC, SNH FM Financing Trust and Ellicott City Land I, LLC, as Landlord, and FVE FM Financing, Inc., as Tenant. ( Filed herewith. )

31.1		Rule 13a-14(a) Certification of Chief Executive Officer. ( Filed herewith. )

31.2		Rule 13a-14(a) Certification of Chief Financial Officer. ( Filed herewith. )

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32.1		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. ( Furnished herewith. )

99.1		Pooling Agreement, dated August 31, 2012, between FVE IL Managers, Inc. and certain subsidiaries of Senior Housing Properties Trust. ( Filed herewith. )

99.2		Management Agreement, dated as of August 31, 2012, between FVE Managers, Inc., as Manager, and D&R Yonkers LLC, as Licensee. ( Filed herewith. )

99.3		Joinder to, Amendment and Confirmation of Guarantees and Security Agreements, dated as of August 31, 2012, by and among certain subsidiaries of Senior Housing Properties Trust, Five Star Quality Care, Inc. and certain subsidiaries of Five Star Quality Care, Inc. ( Filed herewith. )

99.4		Joinder to, Amendment and Confirmation of Guarantees and Security Agreements, dated as of August 31, 2012, by and among certain subsidiaries of Senior Housing Properties Trust, Five Star Quality Care, Inc. and certain subsidiaries of Five Star Quality Care, Inc. ( Filed herewith. )

99.5		Joinder to, Amendment and Confirmation of Guarantees and Security Agreements, dated as of August 31, 2012, by and among certain subsidiaries of Senior Housing Properties Trust, Five Star Quality Care, Inc. and certain subsidiaries of 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 September 30, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, and (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: October 30, 2012

	/s/ Paul V. Hoagland
	Paul V. Hoagland
	Treasurer and Chief Financial Officer
	(Principal Financial and Accounting Officer)
	Dated: October 30, 2012

Exhibit 4.1

COMMON COUNTERSIGNED AND REGISTERED: WELLS FARGO BANK, N.A. TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE AMERICAN FINANCIAL PRINTING INCORPORATED – MINNEAPOLIS COMMON A CORPORATION FORMED UNDER THE LAWS OF THE STATE OF MARYLAND CUSIP 33832D 10 6 THIS CERTIFIES THAT is the owner of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, OF FIVE STAR QUALITY CARE, INC. (the “Corporation”) transferable on the books of the Corporation by the holder hereof in person or by its duly authorized attorney, upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to all of the provisions of the Charter and Bylaws of the Corporation and any amendments thereto. The holder of this Certificate and every transferee or assignee hereof by accepting or holding the same agrees to be bound by all of the provisions of the Charter and Bylaws of the Corporation, as amended from time to time.This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be executed on its behalf by its duly authorized officers. Dated: TREASURER AMERICAN FINANCIAL PRINTING INCORPORATED – MINNEAPOLIS PRESIDENT SEE REVERSE FOR IMPORTANT NOTICE ON TRANSFER RESTRICTIONS AND OTHER INFORMATION

FIVE STAR QUALITY CARE, INC. IMPORTANT NOTICE PURSUANT AND SUBJECT TO THE TERMS OF THE CHARTER OF THE CORPORATION (TOGETHER WITH ALL AMENDMENTS THERETO, THE “CHARTER”), THE CORPORATION HAS THE AUTHORITY TO CREATE ONE OR MORE ADDITIONAL CLASSES OR SERIES OF SHARES AND ISSUE ADDITIONAL SHARES OF ANY EXISTING CLASS OR SERIES OF SHARES. THE CORPORATION WILL FURNISH A FULL STATEMENT OF (i) THE AUTHORITY OF THE CORPORATION TO CREATE ADDITIONAL CLASSES OR SERIES OF SHARES AND ISSUE ADDITIONAL SHARES OF ANY EXISTING CLASS OR SERIES OF SHARES, (ii) THE TERMS OF ANY EXISTING CLASS OR SERIES OF SHARES, AND (iii) SUCH OTHER INFORMATION AS IS REQUIRED BY SECTION 2-211(b) OF THE MARYLAND GENERAL CORPORATION LAW, WITHOUT CHARGE TO ANY SHAREHOLDER UPON REQUEST TO THE SECRETARY OF THE CORPORATION. THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON OWNERSHIP AND TRANSFER WHICH ARE OR MAY HEREAFTER BE CONTAINED IN THE CHARTER OR IN THE BYLAWS OF THE CORPORATION, AS AMENDED FROM TIME TO TIME (THE “BYLAWS”), INCLUDING PROVISIONS OF THE CHARTER WHICH PROHIBIT THE OWNERSHIP OF MORE THAN 9.8% OF ANY CLASS OR SERIES OF THE CORPORATION’S SECURITIES BY ANY PERSON OR GROUP AND PROVISIONS OF THE BYLAWS PROHIBITING, FOR PURPOSES OF PRESERVING CERTAIN TAX BENEFITS OF THE CORPORATION, TRANSFERS OF THE CORPORATION’S SHARES TO THE EXTENT THAT, AS A RESULT OF SUCH TRANSFER, EITHER A PERSON, ENTITY OR GROUP WOULD OWN 5% OR MORE OF THE CORPORATION’S OUTSTANDING SHARES OR THE PERCENTAGE OWNERSHIP OF ANY PERSON, ENTITY OR GROUP THEN OWNING 5% OR MORE OF THE CORPORATION’S OUTSTANDING SHARES WOULD INCREASE AS A RESULT. THIS DESCRIPTION OF THE RESTRICTIONS UPON OWNERSHIP OR TRANSFER OF THE CORPORATION’S SECURITIES IS NOT COMPLETE. A MORE COMPLETE DESCRIPTION OF THESE RESTRICTIONS APPEARS IN THE CORPORATION’S CHARTER OR BYLAWS, AS APPLICABLE, COPIES OF WHICH WILL BE SENT WITHOUT CHARGE TO ANY SHAREHOLDER UPON REQUEST TO THE SECRETARY OF THE CORPORATION. THIS CERTIFICATE ALSO EVIDENCES AND ENTITLES THE HOLDER HEREOF TO CERTAIN RIGHTS AS SET FORTH IN THE RIGHTS AGREEMENT DATED AS OF MARCH 10, 2004 BETWEEN THE CORPORATION AND WELLS FARGO BANK, NATIONAL ASSOCIATION, AS SUCCESSOR RIGHTS AGENT, AND ANY AMENDMENTS OR RENEWALS THEREOF (THE “RIGHTS AGREEMENT”), THE TERMS OF WHICH ARE HEREBY INCORPORATED HEREIN BY REFERENCE AND A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICES OF THE CORPORATION. UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, SUCH RIGHTS WILL BE EVIDENCED BY SEPARATE CERTIFICATES AND WILL NO LONGER BE EVIDENCED BY THIS CERTIFICATE. THE CORPORATION WILL MAIL TO THE HOLDER OF THIS CERTIFICATE A COPY OF THE RIGHTS AGREEMENT, AS IN EFFECT ON THE DATE OF MAILING, WITHOUT CHARGE PROMPTLY AFTER RECEIPT OF A WRITTEN REQUEST THEREFOR. UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS BENEFICIALLY OWNED (AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT) BY ANY PERSON WHO IS, WAS OR BECOMES AN ACQUIRING PERSON, OR ANY AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT), WHETHER CURRENTLY HELD BY OR ON BEHALF OF SUCH PERSON OR BY ANY SUBSEQUENT HOLDER MAY BECOME NULL AND VOID. THE RIGHTS SHALL NOT BE EXERCISABLE AND SHALL BE VOID SO LONG AS HELD, BY A HOLDER IN ANY JURISDICTION WHERE THE REQUISITE QUALIFICATION TO THE ISSUANCE TO SUCH HOLDER, OR THE EXERCISE BY SUCH HOLDER, OF THE RIGHTS IN SUCH JURISDICTION SHALL NOT HAVE BEEN OBTAINED OR BE OBTAINABLE. The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM – as tenants in common UTMA – ____________ Custodian ____________ (Cust) (Minor) TEN ENT – as tenants by entireties under Uniform Transfers to Minors JT TEN – as joint tenants with right of survivorship Act ________________________________ and not as tenants in common (State) Additional abbreviations may also be used though not in above list. For value received ________________________________________________ hereby sell, assign, and transfer unto (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE) Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated ________________ X X NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE GUARANTEED ALL GUARANTEES MUST BE MADE BY A FINANCIAL INSTITUTION (SUCH AS A BANK OR BROKER) WHICH IS A PARTICIPANT IN THE SECURITIES TRANSFER AGENTS MEDALLION PROGRAM (“STAMP”), THE NEW YORK STOCK EXCHANGE, INC. MEDALLION SIGNATURE PROGRAM (“MSP”), OR THE STOCK EXCHANGES MEDALLION PROGRAM (“SEMP”) AND MUST NOT BE DATED. GUARANTEES BY A NOTARY PUBLIC ARE NOT ACCEPTABLE. PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE

Exhibit 10.1

INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (this “Agreement”) is made and entered March 10, 2004 (the “Effective Date”), by and between Five Star Quality Care, Inc., a Maryland Corporation (the “Company”), and Rosemary Esposito, R.N. (“Indemnitee”).

WHEREAS Indemnitee currently serves as an officer of the Company and may, in connection therewith, be subjected to claims, suits or proceedings arising from such service; and

WHEREAS, as an inducement to Indemnitee to continue to serve as such officer, the Company has agreed to indemnify and to advance expenses and costs incurred by Indemnitee in connection with any such claims, suits or proceedings, to the fullest extent permitted by law as hereinafter provided; and

NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:

Section 1. Definitions . For purposes of this Agreement:

(a) “Change in Control” means a change in control of the Company occurring after the Effective Date of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the “Act”), whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if after the Effective Date (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 10% or more of the combined voting power in the election of directors of the Company’s then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (ii) there occurs a proxy contest, or the Company is a party to a merger, consolidation, sale of assets, plan of liquidation or other reorganization not approved by at least two-thirds of the members of the Board of Directors then in office, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iii) during any period of two consecutive years, other than as a result of an event described in clause (a)(ii) of this Section 1 , individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors.

(b) “Corporate Status” means the status of a person who is or was a director, trustee, officer or agent of the Company.

(c) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

(d) “Expenses” means all expenses, including, but not limited to, all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding.

(e) “Independent Counsel” means a law firm, or a member of a law firm, that is retained by Indemnitee and is not serving as counsel to the Company.

(f) “Proceeding” means any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative (including on appeal), except one initiated by an Indemnitee pursuant to Section 9 .

Section 2. Indemnification - General . The Company shall indemnify, and advance Expenses to, Indemnitee (a) as provided in this Agreement and (b) otherwise to the fullest extent permitted by Maryland law in effect on the date hereof and as amended from time to time; provided , however , that no change in Maryland law shall have the effect of reducing the benefits available to Indemnitee hereunder based on Maryland law as in effect on the date hereof. The rights of Indemnitee provided in this Section 2 shall include, without limitation, the rights set forth in the other sections of this Agreement, including any additional indemnification permitted by Section 2-418(g) of the Maryland General Corporation Law (“MGCL”).

Section 3. Proceedings Other Than Proceedings by or in the Right of the Company . Indemnitee shall be entitled to the rights of indemnification provided in this Section 3 if, by reason of his Corporate Status, he is, or is threatened to be, made a party to any threatened, pending, or completed Proceeding, other than a Proceeding by or in the right of the Company. Pursuant to this Section 3 , Indemnitee shall be indemnified against all judgments, penalties, fines and amounts paid in settlement and all Expenses incurred by him or on his behalf in connection with a Proceeding by reason of Indemnitee’s Corporate Status unless it is established that (i) the act or omission of Indemnitee was material to the matter giving rise to the Proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty, (ii) Indemnitee actually received an improper personal benefit in money, property or services, or (iii) in the case of any criminal Proceeding, Indemnitee had reasonable cause to believe that his conduct was unlawful.

Section 4. Proceedings by or in the Right of the Company . Indemnitee shall be entitled to the rights of indemnification provided in this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be, made a party to any threatened, pending or completed Proceeding brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 4 , Indemnitee shall be indemnified against all amounts paid in settlement and all Expenses incurred by him or on his behalf in connection with such Proceeding unless it is established that (i) the act or omission of Indemnitee was material to the matter giving rise to such a Proceeding and (a) was committed in bad faith or (b) was the result of active and

deliberate dishonesty or (ii) Indemnitee actually received an improper personal benefit in money, property or services.

Section 5. Indemnification for Expenses of a Party Who is Partly Successful . Without limitation on Section 3 and Section 4 , if Indemnitee is not wholly successful in any Proceeding covered by this Agreement, but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee under this Section 5 for all Expenses incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter, allocated on a reasonable and proportionate basis. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

Section 6. Advance of Expenses . The Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding to which Indemnitee is, or is threatened to be, made a party or a witness, within ten days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by a written affirmation by Indemnitee of Indemnitee’s good faith belief that the standard of conduct necessary for indemnification by the Company as authorized by law and by this Agreement has been met and a written undertaking by or on behalf of Indemnitee, in substantially the form attached hereto as Exhibit A or in such form as may be required under applicable law as in effect at the time of the execution thereof, to reimburse the portion of any Expenses advanced to Indemnitee relating to claims, issues or matters in the Proceeding as to which it shall ultimately be established that the standard of conduct has not been met and which have not been successfully resolved as described in Section 5 . To the extent that Expenses advanced to Indemnitee do not relate to a specific claim, issue or matter in the Proceeding, such Expenses shall be allocated on a reasonable and proportionate basis. The undertaking required by this Section 6 shall be an unlimited general obligation by or on behalf of Indemnitee and shall be accepted without reference to Indemnitee’s financial ability to repay such advanced Expenses and without any requirement to post security therefor.

Section 7. Procedure for Determination of Entitlement to Indemnification .

(a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification.

(b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 7(a) hereof, a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall promptly be made in the specific case: (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Board of

Directors, a copy of which shall be delivered to Indemnitee; or (ii) if a Change of Control shall not have occurred or if after a Change of Control Indemnitee shall so request, (A) by the Board of Directors (or a duly authorized committee thereof) by a majority vote of a quorum consisting of Disinterested Directors (as herein defined), or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee, or (C) if so directed by a majority of the members of the Board of Directors, by the stockholders of the Company; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Expenses incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company shall indemnify and hold Indemnitee harmless therefrom.

Section 8. Presumptions and Effect of Certain Proceedings .

(a) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 7(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making of any determination contrary to that presumption.

(b) The termination of any Proceeding by judgment, order, settlement, conviction, a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, does not create a presumption that Indemnitee did not meet the requisite standard of conduct described herein for indemnification.

Section 9. Remedies of Indemnitee .

(a) If (i) a determination is made pursuant to Section 7 that Indemnitee is not entitled to indemnification under this Agreement, (ii) advance of Expenses is not timely made pursuant to Section 6 , (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 7(b) within 30 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 5 within ten days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within ten days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Maryland, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advance of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the commercial

Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 9(a) ; provided , however , that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his rights under Section 5 .

(b) In any judicial proceeding or arbitration commenced pursuant to this Section 9 , the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or advance of Expenses, as the case may be.

(c) If a determination shall have been made pursuant to Section 7(b) that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 9 , absent a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification.

(d) In the event that Indemnitee, pursuant to this Section 9 , seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company for, any and all Expenses incurred by him in such judicial adjudication or arbitration. If it shall be determined in such judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advance of Expenses sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.

Section 10. Defense of the Underlying Proceeding .

(a) Indemnitee shall notify the Company promptly upon being served with or receiving any summons, citation, subpoena, complaint, indictment, information, notice, request or other document relating to any Proceeding which may result in the right to indemnification or the advance of Expenses hereunder; provided , however , that the failure to give any such notice shall not disqualify Indemnitee from the right, or otherwise affect in any manner any right of Indemnitee, to indemnification or the advance of Expenses under this Agreement unless the Company’s ability to defend in such Proceeding or to obtain proceeds under any insurance policy is materially and adversely prejudiced thereby, and then only to the extent the Company is thereby actually so prejudiced.

(b) Subject to the provisions of the last sentence of this Section 10(b) and of Section 10(c) below, the Company shall have the right to defend Indemnitee in any Proceeding which may give rise to indemnification hereunder; provided , however , that the Company shall notify Indemnitee of any such decision to defend within 15 calendar days following receipt of notice of any such Proceeding under Section 10(a) above. The Company shall not, without the prior written consent of Indemnitee, which shall not be unreasonably withheld or delayed, consent to the entry of any judgment against Indemnitee or enter into any settlement or compromise which (i) includes an admission of fault of Indemnitee or (ii) does not include, as an unconditional term thereof, the full release of Indemnitee from all liability in respect of such Proceeding, which

release shall be in form and substance reasonably satisfactory to Indemnitee. This Section 10(b) shall not apply to a Proceeding brought by Indemnitee under Section 9 above or Section 14 .

(c) Notwithstanding the provisions of Section 10(b) , if in a Proceeding to which Indemnitee is a party by reason of Indemnitee’s Corporate Status, (i) Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval shall not be unreasonably withheld, that he may have separate defenses or counterclaims to assert with respect to any issue which may not be consistent with other defendants in such Proceeding, (ii) Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval shall not be unreasonably withheld, that an actual or apparent conflict of interest or potential conflict of interest exists between Indemnitee and the Company, or (iii) the Company fails to assume the defense of such Proceeding in a timely manner, Indemnitee shall be entitled to be represented by separate legal counsel of Indemnitee’s choice, subject to the prior approval of the Company, which shall not be unreasonably withheld, at the expense of the Company. In addition, if the Company fails to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any Proceeding to deny or to recover from Indemnitee the benefits intended to be provided to Indemnitee hereunder, Indemnitee shall have the right to retain counsel of Indemnitee’s choice, subject to the prior approval of the Company, which shall not be unreasonably withheld, at the expense of the Company (subject to Section 9(d)) , to represent Indemnitee in connection with any such matter.

Section 11. Non-Exclusivity; Survival of Rights .

(a) The rights of indemnification and advance of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Articles of Incorporation or Bylaws of the Company, any agreement or a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal.

(b) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

(c) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

Section 12. Duration of Agreement; Binding Effect .

(a) This Agreement shall continue until and terminate ten years after the date that Indemnitee shall have ceased to serve as a director, trustee, officer, employee, or agent of the

Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which Indemnitee served at the request of the Company; provided , however , that the rights of Indemnitee hereunder shall continue until the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advance of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 9 relating thereto.

(b) The indemnification and advance of Expenses provided by, or granted pursuant to, this Agreement shall be binding upon and be enforceable by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), shall continue as to an Indemnitee who has ceased to be a director, trustee, officer, employee or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the written request of the Company, and shall inure to the benefit of Indemnitee and his or her spouse, assigns, heirs, devisees, executors and administrators and other legal representatives.

(c) The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.

Section 13. Severability . If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

Section 14. Limitation and Exception to Right of Indemnification or Advance of Expenses . Notwithstanding any other provision of this Agreement, (a) any indemnification or advance of Expenses to which Indemnitee is otherwise entitled under the terms of this Agreement shall be made only to the extent such indemnification or advance of Expenses does not conflict with applicable Maryland law and (b) Indemnitee shall not be entitled to indemnification or advance of Expenses under this Agreement with respect to any Proceeding brought by Indemnitee, unless (i) the Proceeding is brought to enforce indemnification under this Agreement or otherwise or (ii) the Company’s Bylaws, as amended, the Articles of Incorporation, a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors or an agreement approved by the Board of Directors to which the Company is a party expressly provide otherwise.

Section 15. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. One such counterpart signed by the party against whom enforceability is sought shall be sufficient to evidence the existence of this Agreement.

Section 16. Headings . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

Section 17. Modification and Waiver . No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

Section 18. Notices . Any notice, report or other communication required or permitted to be given hereunder shall be in writing unless some other method of giving such notice, report or other communication is accepted by the party to whom it is given, and shall be given by being delivered at the following addresses to the parties hereto:

(a) If to Indemnitee, to: The address set forth on the signature page hereto.

(b) If to the Company to:

Five Star Quality Care, Inc.

400 Centre Street

Newton, Massachusetts 02458

Attn: Secretary

or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.

Section 19. Governing Law . The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Maryland, without regard to its conflicts of laws rules.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.

ATTEST:	FIVE STAR QUALITY CARE, INC.


/s/ Jennifer B. Clark	By:	/s/ Bruce J. Mackey Jr.	(SEAL)
	Name:	Bruce J. Mackey Jr.
	Title:	Treasurer, Chief Financial Officer and Assistant Secretary



WITNESS:	INDEMNITEE


/s/ Judith A. Stapleton	/s/ Rosemary Esposito, R.N.
	Name: Rosemary Esposito, R.N.
	Address: [address omitted]

EXHIBIT A

FORM OF UNDERTAKING TO REPAY EXPENSES ADVANCED

The Board of Directors of Five Star Quality Care, Inc.

Re: Undertaking to Repay Expenses Advanced

Ladies and Gentlemen:

This undertaking is being provided pursuant to that certain Indemnification Agreement dated , 2004, by and between Five Star Quality Care, Inc. (the “Company”) and the undersigned Indemnitee (the “Indemnification Agreement”), pursuant to which I am entitled to advance of expenses in connection with [Description of Proceeding] (the “Proceeding”).

Terms used herein and not otherwise defined shall have the meanings specified in the Indemnification Agreement.

I am subject to the Proceeding by reason of my Corporate Status or by reason of alleged actions or omissions by me in such capacity. I hereby affirm that at all times, insofar as I was involved as [a director] [an officer] of the Company, in any of the facts or events giving rise to the Proceeding, I (1) acted in good faith and honestly, (2) did not receive any improper personal benefit in money, property or services and (3) in the case of any criminal proceeding, had no reasonable cause to believe that any act or omission by me was unlawful.

In consideration of the advance of expenses by the Company for reasonable attorney’s fees and related expenses incurred by me in connection with the Proceeding (the “Advanced Expenses”), I hereby agree that if, in connection with the Proceeding, it is established that (1) an act or omission by me was material to the matter giving rise to the Proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty or (2) I actually received an improper personal benefit in money, property or services or (3) in the case of any criminal proceeding, I had reasonable cause to believe that the act or omission was unlawful, then I shall promptly reimburse the portion of the Advanced Expenses relating to the claims, issues or matters in the Proceeding as to which the foregoing findings have been established and which have not been successfully resolved as described in Section 5 of the Indemnification Agreement. To the extent that Advanced Expenses do not relate to a specific claim, issue or matter in the Proceeding, I agree that such Expenses shall be allocated on a reasonable and proportionate basis.

IN WITNESS WHEREOF, I have executed this Affirmation and Undertaking on this day of , 200 .

WITNESS:

(SEAL)

Schedule to Exhibit 10. 1

The following individuals are parties to Indemnification Agreements with the Company which are substantially identical in all material respects to the representative Indemnification Agreement filed herewith and are dated as of the respective dates listed below. The other Indemnification Agreements are omitted pursuant to Instruction 2 to Item 601 of Regulation S-K.

Name of Signatory		Date
Evrett W. Benton		March 10, 2004
Rosemary Esposito, R.N.		March 10, 2004
Bruce M. Gans, M.D.		March 10, 2004
Barbara D. Gilmore		March 10, 2004
Maryann Hughes		March 10, 2004
Arthur G. Koumantzelis		March 10, 2004
Bruce J. Mackey Jr.		March 10, 2004
Gerard M. Martin		March 10, 2004
Barry M. Portnoy		March 10, 2004
William J. Sheehan		May 7, 2004
Travis K. Smith		February 27, 2008
Francis R. Murphy III		May 1, 2008
Paul V. Hoagland		November 11, 2009
Donna D. Fraiche		November 22, 2010
Vern D. Larkin		September 6, 2011
Jennifer B. Clark		February 27, 2012
Katherine E. Potter		February 27, 2012
R. Scott Herzig		September 4, 2012

Exhibit 10.2

AMENDED AND RESTATED POOLING AGREEMENT No. 1

THIS AMENDED AND RESTATED POOLING AGREEMENT No. 1 (this “Agreement”) is made as of October 30, 2012, by and among FVE Managers, Inc. (“Manager”) and the parties listed on Schedule A (each a “TRS” and collectively, “TRSes”).

RECITALS:

Each TRS has entered into a Management Agreement with Manager (each a “Management Agreement” and collectively, the “Management Agreements”) with respect to certain real estate and personal property which is licensed as an assisted living facility and/or a skilled nursing facility (each a “Facility” and collectively, the “Facilities”).

Manager and the TRSes are parties to a Pooling Agreement dated as of May 12, 2011 (the “Original Agreement”).

Under the Original Agreement, working capital of each of the Facilities and all revenues from operation of each of the Facilities are pooled for purposes of paying operating expenses of the Facilities, fees and other amounts due to Manager and the TRSes under the Management Agreements.

Manager and the TRSes have determined that the number of Facilities subject to a single pooling agreement should be limited and desire to amend and restate the Original Agreement to remove the Facilities listed on Schedule B to this Agreement, and upon such removal, each of SNH SE Daniel Island Tenant LLC and SNH SG Tenant LLC shall be deemed to have withdrawn as parties.

NOW, THEREFORE, the parties agree as follows:

ARTICLE I
DEFINED TERMS

1.01. Definitions . Capitalized terms used, but not otherwise defined in this Agreement shall have the meanings given to such terms in the Management Agreements. The following capitalized terms as used in this Agreement shall have the meanings set forth below:

“Additional Facility” is defined in Section 7.01.

“Additional Management Agreement” is defined in Section 7.01.

“Additional TRS” is defined in Section 7.01.

“Aggregate Annual Statement” means the Aggregate Monthly Statement for the month of December in each year.

“Aggregate Base Fee” means an amount equal to 3% of the Aggregate Gross Revenues.

“Aggregate Facility Expenses” means the sum of Facility Expenses of the Facilities.

“Aggregate Gross Revenues” means the sum of Gross Revenues of the Facilities.

“Aggregate Incentive Fee” means an amount that is equal to thirty-five percent (35%) of Aggregate Net Operating Income remaining after payment of the Aggregate TRS Priority Return.

“Aggregate Invested Capital” means the sum of the Invested Capital for each of the Facilities, including each Additional Facility.

“Aggregate Monthly Statement” is defined in Section 4.01(a).

“Aggregate Net Operating Income” means an amount equal to Aggregate Gross Revenues less Aggregate Facility Expenses.

“Aggregate TRS Priority Return” means an annual amount equal to eight percent of Aggregate Invested Capital.

“Aggregate TRS Residual Payment” means an amount equal to 65% of the Aggregate Net Operating Income after payment of the Aggregate TRS Priority Return.

“Agreement” is defined in the Preamble.

“Facility” and “Facilities” is defined in the Recitals and as of close of business on the date of this Agreement, the Facilities subject to this Agreement are those listed on Schedule C.

“Management Agreement” and “Management Agreements” is defined in the Recitals and as of close of business on the date of this Agreement, the Management Agreements for the Facilities subject to this Agreement are those listed on Schedule D.

“Manager” is defined in the Preamble.

“Manager Shortfall Advance” is defined in Section 5.01.

“Non-Economic Facilities” is defined in Section 5.02.

“Priority Return Shortfall” is defined in Section 5.01.

“TRS” is defined in the Preamble.

ARTICLE II
GENERAL

2.01. Removal of Facilities . Effective as of the close of business on the date of this Agreement, the Facilities listed on Schedule B shall be removed from, and no longer subject to, this Agreement.

2.02. General . The parties agree that so long as a Facility is subject to this Agreement, all Working Capital and all Gross Revenues of such Facility shall be pooled pursuant to this Agreement and disbursed to pay all Aggregate Facility Expenses, fees and other amounts due

Manager and TRSes (not including amounts due pursuant to Section 15.05 of the Management Agreements) with respect to the Facilities and that the corresponding provisions of each Management Agreement shall be superseded as provided in Section 3.03. The parties further agree that if Manager gives a notice of non-renewal of the Term with respect to any Facility, it shall be deemed to be a notice of non-renewal of the Term with respect to all the Facilities.

ARTICLE III
PRIORITIES FOR
DISTRIBUTION OF AGGREGATE GROSS REVENUES

3.01. Priorities for Distribution of Aggregate Gross Revenues . Aggregate Gross Revenues shall be distributed in the following order of priority:

(1) First, to pay Aggregate Facility Expenses (which shall not include the Aggregate Base Fee).

(2) Second, to Manager to pay the Aggregate Base Fee and any interest that may have accrued pursuant to Section 3.02.

(3) Third, to TRS in an amount equal to the Aggregate TRS Priority Return and any interest that may have accrued pursuant to Section 3.02.

(4) Fourth, to Manager to reimburse it for payment of any Manager Shortfall Advance, plus applicable interest calculated at the Interest Rate.

(5) Fifth, to Manager, in an amount equal to the Aggregate Incentive Fee.

(6) Sixth, to TRS, in an amount equal to the Aggregate TRS Residual Payment.

3.02. Timing of Payments . Payment of the Aggregate Facility Expenses, excluding the Aggregate Base Fee, shall be made in the ordinary course of business. The Aggregate Base Fee and accrued interest, if any, shall be paid on the first Business Day of each calendar month, in advance, based upon Manager’s then estimate of the prior month’s Aggregate Gross Revenues. The Aggregate TRS Priority Return and accrued interest, if any, shall be paid on the first Business Day of each calendar month, in advance in approximately equal monthly installments, based upon Aggregate Invested Capital most recently reported to Manager by TRS. The Aggregate Base Fee and Aggregate TRS’s Priority Return shall be subject to adjustment by increasing or decreasing the payment due in the following month based upon Aggregate Gross Revenues reflected in the Aggregate Monthly Financial Statements and increases or decreases in Aggregate Invested Capital reported to Manager by TRS, as the case may be. If any installment of the Aggregate Base Fee or the Aggregate TRS Priority Return is not paid when due, it shall accrue and bear interest at the Interest Rate. The Aggregate Incentive Fee and Aggregate TRS Residual Payment shall be paid on the last Business Day of the calendar month following the month to which such Aggregate Incentive Fee and Aggregate TRS Residual Payment relate, in arrears, and shall be based upon the Aggregate Monthly Statements. Additional adjustments to all payments will be made on an annual basis based upon the Aggregate Monthly Statements for the full calendar year and any audits conducted pursuant to Section 6.03 of the Management

Agreements. The Aggregate TRS Priority Return and Aggregate TRS Residual Payment shall be allocated among TRSes as the TRSes shall determine in their sole discretion and Manager shall have no responsibility or liability in connection therewith.

3.03. Relationship with Management Agreements . For as long as this Agreement is in effect with respect to a Facility, the provisions of Section 3.01 and 3.02 shall supersede Sections 5.01 and 5.02 of the Management Agreement then in effect with the applicable Facility.

ARTICLE IV
FINANCIAL STATEMENTS

Manager shall prepare and deliver the following financial statements to the TRSes:

(a) not later than ten Business Days after the end of each calendar month, a consolidated balance sheet and related statement of income and expense of all of the Facilities for such calendar month and for the then current calendar year to date, certified by Manager’s Controller on a monthly basis and by Manager’s Chief Financial Officer on a quarterly basis as being true and correct to the best of his/her knowledge (“Aggregate Monthly Statement”).

(b) Manager shall also prepare and deliver such other statements or reports as any TRS may, from time to time, reasonably request.

The financial statements delivered pursuant to this Article IV are in addition to any financial statements required to be prepared and delivered pursuant to the Management Agreements.

ARTICLE V
SHORTFALL; NON-ECONOMIC FACILITIES

5.01. Shortfall . If in each of three consecutive calendar years the Aggregate TRS Priority Return (together with any accrued interest) has not been paid in full (a “Priority Return Shortfall”), by notice given after December 31, 2017, within sixty (60) days after receipt of the Aggregate Annual Statement for such third year, the TRSes may terminate all, but not less than all, of the Management Agreements. Prior to exercising the right to terminate, TRSes shall give Manager notice and if within ten (10) days thereafter, Manager funds the Priority Return Shortfall (a “Manager Shortfall Advance”), TRSes shall not exercise the right to terminate, provided Manger may not exercise its right to fund the Priority Return Shortfall more frequently than once every four (4) years. Manager may recover any amounts paid by it as a Manager Shortfall Advance as provided in Section 3.01, provided that amounts not recovered during the four (4) calendar years following the year in which payment of a Manager Shortfall Advance was made shall be deemed waived and shall not be payable in any subsequent year.

Invested Capital in the aggregate would exceed twenty percent (20%) of Aggregate Invested Capital and further provided for purposes of this Section 5.02 only, Aggregate Invested Capital shall be determined without giving effect to the termination of the Management Agreement of a Non-Economic Facility and without reduction for proceeds from the sale, or deemed sale, of any Non-Economic Facility. Manager may request an increase in the foregoing twenty percent (20%) threshold at any time, which Owner may accept or reject in its sole discretion.

Manager shall market a Facility designated as a Non-Economic Facility for sale and any costs incurred by the Manager in connection with such marketing activities and the sale of such Facility shall be paid out of the net proceeds of such sale. The relevant TRS and Owner shall cooperate with Manager in compiling any relevant information, preparing marketing materials and otherwise in connection with the sale of a Non-Economic Facility.

5.03. Sale Process . If a Non-Economic Facility is marketed for sale in accordance with Section 5.02 and Manager receives an offer therefor which it wishes to accept on behalf of the TRS and Owner, Manager shall give the relevant TRS prompt notice thereof, which notice shall include a copy of the offer and any other information reasonably requested by such TRS. If the relevant TRS, on behalf of the relevant Owner, shall fail to accept or reject such offer within seven (7) Business Days after receipt of such notice and other information from Manager, such offer shall be deemed to be accepted. If the offer is rejected by the relevant TRS on behalf of the relevant Owner and, if the Manager elects to continue marketing the Facility by providing written notice to the relevant TRS within seven (7) days of such rejection and the Manager does not obtain another offer within ninety (90) days that is accepted by the relevant TRS, the Non-Economic Facility shall be deemed to have been sold to the relevant TRS on the date, at the price and on the other terms contained in the offer. If a Non-Economic Facility is sold to a third party or deemed to have been sold to the relevant Owner pursuant to such offer, effective as of the date of sale or deemed sale: (i) the Management Agreement shall terminate with respect to such Non-Economic Facility; (ii) the Aggregate Invested Capital shall be reduced by an amount equal to the net proceeds of sale after reduction for the costs and expenses of the relevant TRS, relevant Owner and/or Manager (or, in the case of a deemed sale, the net proceeds of sale determined by reference to such offer, after reduction for any amounts actually expended and any amounts which would reasonably have been expected to have been expended if the sale had been consummated, by the relevant TRS, relevant Owner and/or Manager). If the reduction of Aggregate Invested Capital is less than the Invested Capital of the Non-Economic Facility sold or deemed sold, the difference shall be proportionately reallocated to the Invested Capital of the remaining Facilities.

ARTICLE VI
ACCOUNTS

signatory on all accounts maintained with respect to the Facility, and TRSes shall have the right to require that one or more TRS’s signature be required on all checks/withdrawals after the occurrence of an Event of Default by Manager under this Agreement. The TRSes shall provide such instructions to the applicable bank(s) as are necessary to permit Manager to implement the Manager’s rights and obligations under this Agreement. The failure of any TRS to provide such instructions shall relieve Manager of its obligations hereunder until such time as such failure is cured.

ARTICLE VII
ADDITION AND REMOVAL OF FACILITIES

7.01. Addition of Facilities . At any time and from time to time, Manager and any TRS or any Affiliate of TRS (an “Additional TRS”) which enters into a management agreement with Manager (an “Additional Management Agreement”) for the operation of an additional assisted living facility or skilled nursing facility (an “Additional Facility”), the Additional TRS may become a party to this Agreement by signing an accession agreement confirming the applicability of this Agreement to such Additional Facility. If an Additional Facility is made subject to this Agreement other than on the first day of a calendar month, the parties shall include such prorated amounts of the Gross Revenues and Facility Expenses (and other amounts as may be necessary) applicable to the Additional Facility for such calendar month, as mutually agreed in their reasonable judgment, in the calculation of Aggregate Gross Revenues and Aggregate Facility Expenses (and other amounts as may be necessary) for the calendar month in which the Additional Facility became subject to this Agreement and shall make any other prorations, adjustments, allocations and changes required. Additionally, any amounts held as Working Capital or for Capital Replacements at the Additional Facility, if any, shall be held by Manager under this Agreement.

7.02. Removal of Facilities . From and after the date of termination of any Management Agreement, the Facility managed thereunder shall no longer be subject to this Agreement. If the termination occurs on a day other than the last day of a calendar month, the parties shall exclude such prorated amounts of the Gross Revenues and Facility Expenses (and other amounts as may be necessary) applicable to such Facility for such calendar month, as mutually agreed in their reasonable judgment, in the calculation of Aggregate Gross Revenues and Aggregate Facility Expenses (and other amounts as may be necessary) for the calendar month in which the termination occurred. Additionally, the relevant TRS and Manager, both acting reasonably, shall mutually agree to the portion of the Working Capital and Aggregate Gross Revenues and any amounts being held by Manager for Capital Replacements allocable to the Facility being removed from this Agreement and the amount of the Working Capital, Aggregate Gross Revenues and amounts being held by Manager for Capital Replacements, if any, so allocated shall be remitted to the relevant TRS and the relevant TRS and Manager shall make any other prorations, adjustments, allocations and changes required.

ARTICLE VIII
TERM AND TERMINATION

8.01. Term . This Agreement shall continue and remain in effect indefinitely unless terminated pursuant to Section 8.02.

8.02. Termination . This Agreement may be terminated as follows:

(a) By the mutual consent of Manager and TRSes which are parties to the Agreement.

(b) Automatically, if all Management Agreements terminate or expire for any reason.

(c) By Manager, if any or all TRSes do not cure a material breach of this Agreement by any TRS or Owner within thirty (30) days of written notice of such breach from Manager and if such breach is not cured, it shall be an Event of Default under the Management Agreements.

(d) By TRSes, if Manager does not cure a material breach of this Agreement by Manager within thirty (30) days of written notice of such breach from any TRS.

8.03. Effect of Termination . Upon the termination of this Agreement, except as otherwise provided in Section 12.02(i) or 14.04 of the Management Agreements, Manager shall be compensated for its services only through the date of termination and all amounts remaining in any accounts maintained by Manager pursuant to Article VI, after payment of such amounts as may be due to Manager hereunder, shall be distributed to TRSes. Notwithstanding the foregoing, upon the termination of any single Management Agreement, pooled funds shall be allocated as described in Section 7.02.

8.04. Survival . The following Sections of this Agreement shall survive the termination of this Agreement: 8.03 and Article IX.

ARTICLE IX
MISCELLANEOUS PROVISIONS

9.01. Notices . All notices, demands, consents, approvals, and requests given by any party to another party hereunder 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, or on the next business day if transmitted by nationally recognized overnight courier, to the parties at the following addresses:

To TRS :

c/o SNH SE Tenant TRS, Inc.

Two Newton Place

225 Washington Street

Newton, Massachusetts 02458

Attn: David J. Hegarty

Telephone: (617) 796-8104

Facsimile: (617) 796-8349

To Manager :

FVE Managers, Inc.

400 Centre Street

Newton, Massachusetts 02458

Attn: Bruce J. Mackey

Telephone: (617) 796-8214

Facsimile: (617) 796-8243

9.02. Applicable Law; Arbitration . This Agreement shall be interpreted, construed, applied and enforced in accordance with the laws of the Commonwealth of Massachusetts, with regard to its “choice of law” rules. Any “Dispute” (as such term is defined in the Management Agreements) under this Agreement shall be resolved through final and binding arbitration conducted in accordance with the procedures and with the effect of, arbitration as provided for in the Management Agreements.

9.03. Severability . If any term or provision of this Agreement 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.

9.04. Gender and Number . Whenever the context of this Agreement requires, the gender of all words herein shall include the masculine, feminine, and neuter, and the number of all words herein shall include the singular and plural.

9.05. Headings and Interpretation . The descriptive headings in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. References to “Section” in this Agreement shall be a reference to a Section of this Agreement unless otherwise indicated. Whenever the words “include”, “includes” or “including” are used in this Agreement they shall be deemed to be followed by “without limitation.” The words “hereof,” “herein,” “hereby,” and “hereunder, when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision unless otherwise indicated. The word “or” shall not be exclusive. This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting.

9.06. Confidentiality of Information . Any information exchanged between the Manager and each TRS pursuant to the terms and conditions of this Agreement shall be subject to Sections 17.06 or 17.07 of the Management Agreement and the Business Associate Agreement entered into between the Manager and each TRS.

9.07. Assignment . Neither Manager nor any TRS may assign its rights and obligations under this Agreement to any other Person without the prior written consent of the other parties.

hereof. Accordingly, in the event of any conflict between the provisions of this Agreement and the Management Agreements, the provisions of this Agreement shall control, and the provisions of the Management Agreements are deemed amended and modified, in each case as required to give effect to the intent of the parties in this Agreement. All other terms and conditions of the Management Agreements shall remain in full force and effect; provided that, to the extent that compliance with this Agreement shall cause a default, breach or other violation of the Management Agreement by one party, the other party waives any right of termination, indemnity, arbitration or otherwise under the Management Agreement related to that specific default, breach or other violations, to the extent caused by compliance with this Agreement. This Agreement may not be modified, altered or amended in any manner except by an amendment in writing, duly executed by the parties hereto.

9.09. Third Party Beneficiaries . The terms and conditions of this Agreement shall inure to the benefit of, and be binding upon, the respective successors, heirs, legal representatives or permitted assigns of each of the parties hereto and except for Owners, which are intended third party beneficiaries, no Person other than the parties hereto and their successors and permitted assigns is intended to be a beneficiary of this Agreement.

[Signatures begin on the following page.]

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement with the intention of creating an instrument under seal.

	FVE Managers, Inc.


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

	SNH SE Tenant TRS, Inc.


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

	SNH SE Burlington Tenant LLC


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

	SNH SE Kings Mtn Tenant LLC


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

	SNH SE Mooresville Tenant LLC


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

	SNH SE Ashley River Tenant LLC


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

	SNH SE N. Myrtle Beach Tenant LLC


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

	SNH SE Barrington Boynton Tenant LLC


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

	SNH SE Holly Hill Tenant LLC


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

	SNH SE Habersham Savannah Tenant LLC


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

	SNH CALI Tenant LLC


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

	SNH BRFL Tenant LLC


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

	SNH CCMD Tenant LLC


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

	SNH PLFL LLC


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

	SNH Teaneck Tenant LLC


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

	SNH SE Daniel Island Tenant LLC


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

	SNH SE SG Tenant LLC


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

Schedule A

TRSes

SNH SE Tenant TRS, Inc.

SNH SE Burlington Tenant LLC

SNH SE Kings Mtn Tenant LLC

SNH SE Mooresville Tenant LLC

SNH SE Ashley River Tenant LLC

SNH SE N. Myrtle Beach Tenant LLC

SNH SE Barrington Boynton Tenant LLC

SNH SE Holly Hill Tenant LLC

SNH SE Habersham Savannah Tenant LLC

SNH CALI Tenant LLC

SNH BRFL Tenant LLC

SNH CCMD Tenant LLC

SNH PLFL Tenant LLC

SNH Teaneck Tenant LLC

SNH SE Daniel Island Tenant LLC

SNH SE SG Tenant LLC

Schedule B

Removed Facilities

Cooper Hall and Savannah Grace, Mt. Pleasant, SC

Summit Place of Daniel Island, Charleston, SC

Five Star Premier Residence of Pompano Beach, Pompano Beach, FL

The Terrace at Priceville, Priceville, AL

Stratford Court of Palm Harbor, Palm Harbor, FL

The Gardens of Scottsdale, Scottsdale, AZ

The Gardens of Bellaire, Bellaire, TX

The Gardens of Sun City, Sun City, AZ

The Gardens of Port St. Lucie, Port St. Lucie, FL

The Gardens of Virginia Beach, Virginia Beach, VA

The Horizon Club, Deerfield Beach, FL

Calusa Harbour, Fort Myers, FL

Schedule C

Facilities

Palms of Lake Spivey, Jonesboro, GA

Seasons at Southpoint, Durham, NC

Summit Place of South Park, Charlotte, NC

Summit Place of Beaufort, Beaufort, SC

Seasons by Riviera, Ormond Beach, FL and Riviera, Holly Hill, FL

Lexington Manor, Port Charlotte, FL

Home Place of Burlington, Burlington, NC

Summit Place of Kings Mountain, Kings Mountain, NC

Summit Place of Mooresville, Mooresville, NC

Ashley River Plantation, Charleston, SC

Summit Place of N. Myrtle Beach, Little River, SC

Barrington Terrace at Boynton Beach, Boynton Beach, FL

Habersham House, Savannah, GA

Tiffany Court, Walnut Creek, CA

Five Star Premier Residences of Boca Raton, Boca Raton, FL

Five Star Premier Residences of Chevy Chase, Chevy Chase, MD

Five Star Premier Residences of Plantation, Plantation, FL

Five Star Premier Residences of Teaneck, Teaneck, NJ

Five Star Premier Residences of Hollywood, Hollywood, FL

Five Star Premier Residences of Reno, Reno, NV

Schedule D

Management Agreements

Management Agreement dated May 12, 2011 between FVE Managers, Inc. and SNH SE Tenant TRS, Inc. (Palms of Lake Spivey)

Management Agreement dated May 12, 2011 between FVE Managers, Inc. and SNH SE Tenant TRS, Inc. (Seasons at Southpoint)

Management Agreement dated May 12, 2011 between FVE Managers, Inc. and SNH SE Tenant TRS, Inc. (Summit Place of South Park)

Management Agreement dated May 12, 2011 between FVE Managers, Inc. and SNH SE Tenant TRS, Inc. (Summit Place of Beaufort)

Management Agreement dated May 12, 2011 between FVE Managers, Inc. and SNH SE Tenant TRS, Inc. (Seasons by Riviera)

Management Agreement dated May 12, 2011 between FVE Managers, Inc. and SNH SE Tenant TRS, Inc. (Lexington Manor)

Management Agreement dated May 12, 2011 between FVE Managers, Inc. and SNH SE Burlington Tenant LLC (Home Place of Burlington)

Management Agreement dated May 12, 2011 between FVE Managers, Inc. and SNH SE Kings Mtn Tenant LLC (Summit Place of Kings Mountain)

Management Agreement dated May 12, 2011 between FVE Managers, Inc. and SNH SE Mooresville Tenant LLC (Summit Place of Mooresville)

Management Agreement dated May 12, 2011 between FVE Managers, Inc. and SNH SE Ashley River Tenant LLC (Ashley River Plantation)

Management Agreement dated May 12, 2011 between FVE Managers, Inc. and SNH SE N. Myrtle Beach Tenant LLC (Summit Place of North Myrtle Beach)

Management Agreement dated May 12, 2011 between FVE Managers, Inc. and SNH SE Barrington Boynton Tenant LLC (Barrington Terrace at Boynton Beach)

Management Agreement dated May 12, 2011 between FVE Managers, Inc. and SNH SE Holly Hill Tenant LLC (Riviera)

Management Agreement dated May 12, 2011 between FVE Managers, Inc. and SNH SE Habersham Savannah Tenant LLC (Habersham House)

Management Agreement dated December 1, 2011 between FVE Managers, Inc. and SNH CALI Tenant LLC (Tiffany Court)

Management Agreement dated December 15, 2011 between FVE Managers, Inc. and SNH BRFL Tenant LLC (Five Star Premier Residences of Boca Raton)

Management Agreement dated December 15, 2011 between FVE Managers, Inc. and SNH CCMD Tenant LLC (Five Star Premier Residences of Chevy Chase)

Management Agreement dated December 15, 2011 between FVE Managers, Inc. and SNH PLFL Tenant LLC (Five Star Premier Residences of Plantation)

Management Agreement dated December 15, 2011 between FVE Managers, Inc. and SNH Teaneck Tenant LLC (Five Star Premier Residences of Teaneck)

Management Agreement dated December 15, 2011 between FVE Managers, Inc. and SNH SE Tenant TRS, Inc. (Five Star Premier Residences of Hollywood)

Management Agreement dated December 15, 2011 between FVE Managers, Inc. and SNH SE Tenant TRS, Inc. (Five Star Premier Residences of Reno)

Exhibit 10.3

POOLING AGREEMENT No. 2

THIS POOLING AGREEMENT No. 2 (this “Agreement”) is made as of October 30, 2012, by and among FVE Managers, Inc. (“Manager”) and the parties listed on Schedule A (each a “TRS” and collectively, “TRSes”).

RECITALS:

Each TRS has entered into a Management Agreement with Manager (each a “Management Agreement” and collectively, the “Management Agreements”) with respect to the real estate and personal property described in Schedule B opposite such Tenant’s name which is licensed as an assisted living facility and/or a skilled nursing facility (each a “Facility” and collectively, the “Facilities”), which Management Agreements are listed on Schedule C.

The parties desire that working capital of each of the Facilities and all revenues from operation of each of the Facilities be pooled for purposes of paying operating expenses of the Facilities, fees and other amounts due to Manager and TRSes.