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

PORTFOLIO OVERVIEW
(Dollars in thousands)

                                                                                                           % of
                                                          Investment:                    Annualized     Annualized
                                # of           # of         Carrying         % of         Current        Current
(As of December 31, 2008)    Properties     Units/Beds      Value(1)      Investment        Rent           Rent
Facility Type
Independent living                    42         11,465    $ 1,094,131          39.0%    $   107,467          38.4%
communities(2)
Assisted living                      121          8,531        905,905          32.3%         84,943          30.3%
facilities
Skilled nursing                       58          5,844        229,126           8.2%         19,874           7.1%
facilities
Rehabilitation hospitals               2            364         54,714           1.9%         11,143           4.0%
Wellness centers(3)                   10              -        180,017           6.4%         16,097           5.8%
MOBs(4)                               38              -        343,363          12.2%         40,419          14.4%

Total                                271         26,204    $ 2,807,256         100.0%    $   279,943         100.0%

Tenant/Operator
Five Star (Lease                     100          8,600    $   711,557          25.3%    $    63,197          22.6%
No. 1)(5)
Five Star (Lease                      32          7,639        759,412          27.1%         81,489          29.1%
No. 2)(5)
Five Star (Lease                      44          3,251        310,918          11.1%         23,727           8.5%
No. 3)(5)
Five Star (Lease                       7            614         66,608           2.4%          7,596           2.7%
No. 4)(6)
Sunrise/Marriott(7)                   14          4,091        325,165          11.6%         32,547          11.6%
Brookdale                             18            894         61,122           2.2%          8,000           2.9%
6 private companies                    8          1,115         49,094           1.6%          6,872           2.5%
(combined)
Starmark(3)                            6              -         80,008           2.9%          6,519           2.3%
Life Time Fitness(3)                   4              -        100,009           3.6%          9,577           3.4%
Multi-tenant MOBs(4)                  38              -        343,363          12.2%         40,419          14.4%

Total                                271         26,204    $ 2,807,256         100.0%    $   279,943         100.0%

                                                                                  Percentage of Operating
                                                                                      Revenue Sources
                                   Rent Coverage       Occupancy        Private Pay       Medicare        Medicaid
Tenant Operating Statistics(8)    2008      2007      2008    2007     2008     2007    2008    2007    2008    2007
Five Star (Lease No. 1)(5) (9)     1.29x     1.32x      89%     90%      65%      64%     22%     23%     13%     13%
Five Star (Lease No. 2)(5)         1.48x     1.52x      88%     90%      69%      69%      3%      4%     28%     27%
Five Star (Lease No. 3)(5) (9)     1.56x     2.96x      85%     87%      42%      24%     40%     52%     18%     24%
Five Star (Lease No. 4)(6)         1.20x     1.42x      86%     88%      99%     100%      1%       -       -       -
Sunrise/Marriott(7)                1.52x     1.26x      91%     89%      80%      79%      3%      3%     17%     18%
Brookdale                          2.14x     2.12x      92%     88%      99%      98%      1%      2%       -       -
6 private companies (combined)     1.95x     1.86x      84%     88%      27%      25%     51%     52%     22%     23%
Starmark(3)                        2.03x        NA     100%      NA       NA       NA      NA      NA      NA      NA
Life Time Fitness(3)               2.57x        NA     100%      NA       NA       NA      NA      NA      NA      NA
Multi-tenant MOBs(4)                  NA        NA      99%      NA       NA       NA      NA      NA      NA      NA


--------------------------------------------------------------------------------
   º (1)

º (3)
º In August 2008, we acquired four wellness centers that are leased to a subsidiary of Life Time Fitness. These wellness centers have 458,000 square feet of floor space. In October and November 2007, we acquired six wellness centers that are leased to subsidiaries of Starmark. These wellness centers have 354,000 square feet of floor space.

º (4)
º From June 2008 through December 2008, we acquired a total of 38 MOBs. These MOBs have a total of approximately 1.6 million square feet.

º (5)
º In June 2008, we realigned three of our leases with Five Star. The rent payable by Five Star to us was unchanged as a result of this lease realignment. The increased rent payable, if and as we purchase improvements to the leased properties, will be the greater of 8.0% per annum or the 10 year Treasury rate plus 300 basis points but not to exceed 11.5%.

º (6)
º In July 2008, we sold three assisted living properties with 259 living units that were formerly operated by NewSeasons to Five Star for $21.4 million. Five Star also assumed the NewSeasons and IBC lease obligations to us for the remaining seven properties that were formerly operated by NewSeasons. The data provided above represents the seven properties we continue to own.

º (7)
º Marriott guarantees the lease for the 14 properties leased to Sunrise.

º (8)
º All tenant operating data presented are based upon the operating results provided by our tenants for the nine months ended September 30, 2008 and 2007, or the most recent prior period for which tenant operating results are available to us from our tenants. Rent coverage is calculated as operating cash flow from our tenants' operations of our properties, before subordinated charges, divided by rent payable to us. We have not independently verified our tenants' operating data.

º (9)
º Excludes data for periods prior to our ownership of some of these properties.

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

Year Ended December 31, 2008, Compared to Year Ended December 31, 2007

                                                   Year Ended December 31,
                                    2008                2007            Change        % Change
                                   (in thousands, except per share amounts)
Rental income                   $      233,210      $      185,952      $ 47,258          25.4%
Interest and other income                2,327               2,070           257          12.4%
Property operating                       2,792                   -         2,792         100.0%
expenses
Interest expense                        40,154              37,755         2,399           6.4%
Depreciation expense                    60,831              47,384        13,447          28.4%
General and administrative              17,136              14,154         2,982          21.1%
expense
Loss on early                                -               2,026        (2,026 )     (100.0)%
extinguishment of debt
Impairment of assets                     8,379               1,400         6,979         498.5%
Income before gain on sale             106,245              85,303        20,942          24.6%
of properties
Gain on sale of properties                 266                   -           266         100.0%
Net income                      $      106,511      $       85,303      $ 21,208          24.9%
Weighted average shares                105,153              83,168        21,985          26.4%
outstanding
Per share amounts:
Income before gain on sale      $         1.01      $         1.03      $  (0.02 )       (1.9)%
of properties
Gain on sale of properties                   -                   -             -              -
Net income                      $         1.01      $         1.03      $  (0.02 )       (1.9)%

Rental income increased in 2008 because of rents from our real estate acquisitions during 2008, including $12.3 million of rental income due to our acquisition of 38 MOBs from June 2008 through December 2008, and the full year impact of rents from our acquisitions in 2007. These increases were offset by rent reductions resulting from the sale of three properties during the third quarter of 2008. Interest and other income increased as a result of higher levels of investable cash in money market funds.

Property operating expenses is the result of our acquisition of 38 MOBs from June 2008 through December 2008 and mainly includes expenses related to real estate taxes, utilities, management fees paid to RMR and cleaning costs.

Interest expense increased because of greater amounts outstanding under our revolving credit facility, offset by lower interest rates under our revolving credit facility. This increase was also due to $61.3 million of debt assumed as part of our third quarter 2008 acquisitions and $14.9 million of debt assumed as part of our fourth quarter 2007 wellness centers acquisition, offset by our prepayment of a mortgage of $12.6 million on April 1, 2008. Our weighted average balance outstanding and interest rate under our revolving facility was $70.2 million and 4.7% and $20.4 million and 5.7% for the years ended December 31, 2008 and 2007, respectively.

Depreciation expense increased because of real estate acquisitions since January 1, 2007, including $3.3 million of depreciation expense due to our acquisition of 38 MOBs from June 2008 through December 2008. These increases were offset by depreciation eliminated by the sale of three properties during the third quarter of 2008. General and administrative expenses increased in 2008 due principally to our acquisitions since January 1, 2007, and higher stock grants, accounting fees and legal fees, offset by a decrease in state taxes.

In July 2008, we sold three assisted living facilities for net proceeds of $21.4 million. Our carrying value of these properties at the time of sale was $21.1 million, resulting in a gain on sale of $266,000.

Income before gain on sale of properties and net income increased because of the changes in revenues and expenses described above. Income before gain on sale of properties per share and net income per share increased because of the changes in revenues and expenses described above offset by the effect of an increase in the weighted average number of shares outstanding resulting from our issuance of common shares in February and December 2007 and in February and June 2008.

Year Ended December 31, 2007, Compared to Year Ended December 31, 2006

                                                   Year Ended December 31,
                                    2007                2006            Change        % Change
                                   (in thousands, except per share amounts)
Rental income                   $      185,952      $      178,372      $  7,580           4.2%
Interest and other income                2,070               1,434           636          44.4%
Interest expense                        37,755              47,020        (9,265 )      (19.7)%
Depreciation expense                    47,384              44,073         3,311           7.5%
General and administrative              14,154              14,645          (491 )       (3.4)%
expense
Loss on early                            2,026               6,526        (4,500 )      (69.0)%
extinguishment of debt
Impairment of assets                     1,400               1,420           (20 )       (1.4)%
Income before loss on sale              85,303              66,122        19,181          29.0%
of properties
Loss on sale of properties                   -                 (21 )         (21 )     (100.0)%
Net income                      $       85,303      $       66,101      $ 19,202          29.0%
Weighted average shares                 83,168              72,529        10,639          14.7%
outstanding
Per share amounts:
Income before loss on sale      $         1.03      $         0.91      $   0.12          13.2%
of properties
Loss on sale of properties                   -                   -             -             -%
Net income                      $         1.03      $         0.91      $   0.12          13.2%

Rental income increased in 2007 because of rents from our real estate acquisitions during 2007 and the full year impact of rents from our acquisitions in 2006. These increases were offset by rent reductions resulting from the sale of three properties during the fourth quarter of 2006. Rental income in 2006 also includes $5.7 million of additional rent received from HealthSouth as part of the settlement of our litigation with HealthSouth. Interest and other income increased as a result of higher levels of investable cash and increased yields on our cash and marketable securities.

Interest expense decreased because of lower interest rates and lesser amounts outstanding under our revolving credit facility. Our weighted average balance outstanding and interest rate under our revolving facility was $20.4 million and 5.7% and $135.9 million and 6.2% for the years ended December 31, 2007 and 2006, respectively. We assumed $14.9 and $12.8 million of mortgage debt at 6.91% and 7.15% in connection with acquisitions during the years ended December 31, 2007 and 2006, respectively. The decrease in interest expense is also due to a decrease in interest on our senior notes and junior subordinated debentures as a result of our purchase and retirement of $20.0 million of our

senior notes in January 2007 and repayment of $52.5 million of our senior notes in January 2006 and all $28.2 million of our junior subordinated debentures in June 2006.

Depreciation expense increased because of 2007 real estate acquisitions totaling $125.4 million and the full year impact of 2006 real estate acquisitions totaling $133.1 million. These increases were offset by depreciation eliminated by the sale of three properties during the fourth quarter of 2006. General and administrative expense includes $1.7 million of HealthSouth litigation costs for the year ended December 31, 2006. General and administrative expense, exclusive of litigation costs in 2006, increased in 2007 by $1.2 million, or 9.3%, as a result of property acquisitions and incentive fees payable to RMR.

We recognized a loss on early extinguishment of debt of $2.0 million in connection with our redemption of a portion of our 85/8% senior notes in January 2007 and $6.5 million in connection with our redemption of a portion of our 77/8% unsecured senior notes in January 2006 and our redemption of all $28.2 million of our 10.125% junior subordinated debentures in June 2006. Also, during 2007 and 2006, we recognized an impairment of assets charge of $1.4 million in both periods related to one property that we have classified as held for sale and three properties that were sold during 2006, respectively.

Income before loss on sale of properties and income before loss on sale of properties per share increased because of the changes in revenues and expenses described above.

During the year ended December 31, 2006, we recorded a loss of $21,000 related to three properties sold during 2006.

Net income increased because of the changes that affected income before loss on sale of properties. Net income per share increased because of the changes in revenues and expenses described above, partially offset by an increase in the weighted average number of shares outstanding that resulted from our issuance of common shares in February and December 2007 and November 2006.

LIQUIDITY AND CAPITAL RESOURCES

Our principal source of funds to meet operating expenses and pay planned distributions on our shares is rental income from our properties. This flow of funds has historically been sufficient to pay operating expenses and debt service relating to our properties. We believe that our operating cash flow will be sufficient to meet our operating expenses, debt service and planned distributions on our shares for the foreseeable future. Our future cash flows from operating activities will depend primarily upon our ability to:

º •
º maintain the occupancy of and the current rent rates at our properties;

º •
º control operating cost increases at our properties; and

º •
º purchase additional properties which produce positive cash flows from operations.

Our Operating Liquidity and Resources

Rents from our properties are our principal sources of funds for current expenses, debt service and distributions to shareholders. We generally receive minimum rents monthly or quarterly from our tenants and we receive percentage rents monthly, quarterly or annually. This flow of funds has historically been sufficient for us to pay our operating expenses, debt service and distributions to shareholders. During 2008, we generated $184.5 million of cash from operations and at December 31, 2008, we had $6.0 million of cash and cash equivalents. We believe that our operating cash flow will be sufficient to meet our operating expenses, debt service and expected distribution payments for the foreseeable future.

In order to fund acquisitions and to accommodate cash needs that may result from timing differences between our receipts of rents and our need or desire to pay operating expenses and distributions to our shareholders, we maintain a revolving credit facility with a group of institutional lenders. The facility matures in December 2010, with an extension option to December 2011 upon payment of an extension fee. The revolving credit facility permits us to borrow up to $550.0 million. Borrowings under our revolving credit facility are unsecured. We may borrow, repay and reborrow funds until maturity. No principal repayment is due until maturity. We pay interest on borrowings under the revolving credit facility at LIBOR plus a premium. At December 31, 2008, the weighted average interest rate payable on our revolving credit facility was 2.2%. As of December 31, 2008, we had $257.0 million outstanding under this credit facility and as of February 27, 2009, we had $190.0 million outstanding under this credit facility.

In February 2008, we issued 6.2 million common shares in a public offering, raising net proceeds of $129.4 million. In June 2008, we issued 19.6 million common shares in a public offering, raising net proceeds of $393.5 million. In February 2009, we issued 5.9 million common shares in a public offering, raising net proceeds of approximately $96.8 million. We used the net proceeds from these offerings, to repay borrowings outstanding on our revolving credit facility, to fund the acquisitions described below and for general business purposes.

During the three months ended March 31, 2008, we purchased 19 senior living properties with a total of 1,692 living units for approximately $272.3 million from five unaffiliated parties. We leased these properties to Five Star for initial rent of $21.8 million and added them to what we now refer to as Five Star lease no. 1 and lease no. 3, which have current terms expiring in 2022 and 2024, respectively. Percentage rent, based on increases in gross revenues at these properties, will commence in 2010. We funded these acquisitions using cash on hand, proceeds from equity issuances and borrowings under our revolving credit facility.

In April 2008, we paid in full a mortgage loan on one of our properties for $12.6 million. We used cash on hand and borrowings under our revolving credit facility to fund this payment.

In May 2008, we entered into a series of agreements to acquire 48 MOBs from HRPT for an aggregate purchase price of approximately $565.0 million. As of December 31, 2008, these 48 buildings that we agreed to acquire were 98% leased to approximately 220 tenants for an average lease term of 8.2 years. Between June and December 31, 2008, we acquired 37 of these properties containing 1.5 million square feet for approximately $346.8 million, excluding closing costs. In January 2009 we acquired one additional property for approximately $19.3 million, excluding closing costs, and we expect the closings of the remaining 10 acquisitions to occur in 2010. We and HRPT may mutually agree to accelerate the closings of these acquisitions. In addition, because a third party consent was not received, one of the agreements was amended so that one of the remaining buildings with an allocated value of $3.0 million is no longer subject to being purchased; in the event HRPT obtains the third party consent we may nonetheless purchase that building. We funded these acquisitions using cash on hand, proceeds from equity issuances, borrowings under our revolving credit facility and by assuming three mortgage loans on two properties totaling $10.8 million with a weighted average interest rate of 7.1% per annum and a weighted average maturity in 2018. Our obligations to complete our outstanding purchases from HRPT are subject to various conditions typical of commercial real estate purchases. We can provide no assurance that we will purchase all of these buildings or that the remaining purchases will be completed in 2010 or sooner. In addition, we also acquired rights of first refusal to purchase any of 45 additional buildings (containing approximately 4.6 million square feet of rental space) that are leased to tenants in medical related businesses which HRPT will continue to own after these transactions. HRPT was formerly our parent company, and both we and HRPT are managed by RMR. Because we and HRPT are both managed by RMR, the terms of these transactions were negotiated by

special committees of our and HRPT's boards of trustees composed solely of independent trustees who were not also independent trustees of both companies.

In June 2008, we realigned three of our leases with Five Star. Lease no. 1 now includes 100 properties, including nine properties acquired during the first quarter of 2008. This lease includes independent living communities, assisted living communities and skilled nursing facilities, and expires in 2022. Lease no. 2 now includes 32 properties, including independent living communities, assisted living communities, skilled nursing facilities and two rehabilitation hospitals, and expires in 2026. Lease no. 3 now includes 44 properties, including 10 properties acquired during the first quarter of 2008, 10 properties acquired during the third quarter of 2008 and one property acquired on November 1, 2008 described below. This lease includes independent living communities, assisted living communities and skilled nursing facilities and expires in 2024. The total rent payable by Five Star to us for these properties was unchanged as a result of this lease realignment. The increased rent payable for these three leases with Five Star, if and as we purchase improvements to the leased properties, is the greater of 8.0% per annum or the 10 year Treasury rate plus 300 basis points, but may not exceed 11.5%.

Five Star was formerly our subsidiary. In addition to being our manager, RMR also provides management services to Five Star. Because of these and other relationships between us and Five Star, all transactions between us and Five Star are approved by our Independent Trustees and Five Star's independent directors.

In July 2008, we sold three assisted living properties with 259 living units, which were formerly operated by NewSeasons, to Five Star for $21.4 million. Five Star also assumed the NewSeasons and IBC lease obligations to us for the remaining seven properties that were formerly operated by NewSeasons. The rent payable by Five Star for these seven properties is approximately $7.6 million per annum under lease no. 4 between us and Five Star.

In August 2008, we acquired, from an unaffiliated party, two senior living properties with a total of 112 units for approximately $14.1 million, excluding closing costs. We leased the properties to Five Star until 2024 under our Five Star lease no. 3 described above and increased rent under that lease by $1.1 million. Percentage rent, based on increases in gross revenues at these properties, will commence in 2010. We funded this acquisition using cash on hand.

In August 2008, we acquired four wellness centers for approximately $100.0 million, excluding closing costs, from Life Time Fitness. We leased these wellness centers to a subsidiary of Life Time Fitness for initial rent of $9.1 million, plus rent increases of 10% every five years. This lease has a current term expiring in 2028, plus renewal options. We funded this acquisition using cash on hand and borrowings under our revolving credit facility.

In September 2008, we acquired, from an unaffiliated party, eight senior living properties with a total of 451 units for approximately $62.1 million, excluding closing costs. We leased these properties to Five Star until 2024 under our Five Star lease no. 3 described above and increased rent under that lease by $5.0 million. Percentage rent, based on increases in gross revenues at these properties, will commence in 2010. We funded this acquisition using cash on hand, borrowings under our revolving credit facility and by assuming 15 mortgages on these eight properties totaling $50.5 million with a weighted average interest rate of 6.54% per annum and a weighted average maturity in 2017.

In September 2008, we acquired, from an unaffiliated party, one medical office building for approximately $18.6 million, excluding closing costs. This building is currently 100% leased to 12 tenants for an average lease term of 6.3 years. We funded this acquisition using cash on hand and borrowings under our revolving credit facility.

In September 2008, we entered into a purchase and sale agreement to sell one of our properties, classified as held for sale, to an unaffiliated party for approximately $1.2 million. The sale of this

property is subject to customary contingencies. We can provide no assurance that we will sell this property.

In November 2008, we acquired, from an unaffiliated party, a senior living property with a total of 252 units for approximately $29.0 million. We leased this property to Five Star and added it to our Five Star lease no. 3, which has . . .