I agree: Sell the houses, and use the proceeds buy a small one-level condo. As she grows older, she may find herself less able (and interested) in the work that goes along with being a landlord, and her retirement income may not be enough to take care of the emergencies that home ownership sometimes entails (i.e., my heat just went out -- get me a new furnace tomorrow).
With a paid-for house and work expenses off the table, her social security sounds like enough to cover one person's expenses at a minimal level, and then she'll have some savings as well (more once she sells the two houses). I don't think this will provide her with a cruise-twice-a-year and pay for the grandkids' college type of retirement, but I think she'll have enough to be comfortable without excessive financial sacrifices. I think she'll have enough income to go out to lunch with friends, take part in the activities that interest her, etc.
You said she was interested in moving in with a friend -- how about having the friend move in with her in her new condo? Having a roommate would stretch her dollars, but if she does it in HER OWN HOME, she may face the issue of the roommate needing to go into assisted living (or similar), but she herself won't be put out, as you say, at an inopportune time.