Leases and Management Agreements with Five Star

3 Months Ended

Mar. 31, 2021

Leases and Management Agreements with Five Star

2020 Restructuring of our Business Arrangements with Five Star. Effective as of January 1, 2020:

•our previously existing master leases with Five Star for all of our senior living communities that Five Star leased, as well as our previously existing management agreements and pooling agreements with Five Star for our senior living communities that Five Star managed, were terminated and replaced with new management agreements and a related omnibus agreement, or collectively, the Five Star management agreements;

•Five Star issued to us 10,268,158 Five Star common shares and an aggregate of 16,118,849 Five Star common shares to our shareholders of record as of December 13, 2019;

•as consideration for these share issuances, we provided Five Star with $75,000 of additional consideration by assuming certain of Five Star's working capital liabilities and through cash payments, resulting in a gain on lease termination of $22,896 for the three months ended March 31, 2020 in our condensed consolidated statements of comprehensive income (loss); and

•pursuant to a guaranty agreement dated as of January 1, 2020 made by Five Star in favor of our applicable subsidiaries, Five Star has guaranteed the payment and performance of each of its applicable subsidiary's obligations under the applicable Five Star management agreements.

Effective January 1, 2020, we determined that Five Star is not a VIE and we will account for our 33.8% investment in Five Star using the equity method of accounting because we are deemed to exert significant influence, but not control, over Five Star's most significant activities. We have elected to use the fair value option to account for our investment in Five Star.

2021 Amendments to our Management Arrangements with Five Star. On April 9, 2021, we announced that we have agreed to amend our management arrangements with Five Star. The principal changes to the management arrangements will include:

•that Five Star will cooperate with us in transitioning 108 of our senior living communities with approximately 7,500 living units to other third party operators without our payment of any termination fee to Five Star, and that we will no longer have the right to sell up to an additional $682,000 of senior living communities currently managed by Five Star and terminate Five Star's management of those communities without our payment of a fee to Five Star upon sale;

•that Five Star will continue to manage 120 of our senior living communities with approximately 18,000 living units for our account, and that the skilled nursing units in all of our continuing care retirement communities that Five Star will continue to manage for our account, which currently includes approximately 1,500 living units, will be closed and repositioned;

•that our performance termination rights pursuant to our existing management agreements with Five Star will be amended for the senior living communities that Five Star will continue to manage for our account, such that, commencing in 2025, we can terminate up to 10% of the senior living communities managed by Five Star for our account, based on total revenues, per year without our payment of any termination fee to Five Star for failure to meet 80% of a target EBITDA in prior years;

•that the incentive fee calculation included in our existing management agreements with Five Star will be amended for the senior living communities that Five Star will continue to manage for our account such that there will no longer be a cap placed on any incentive fee earned by Five Star in any calendar year and that any senior living communities that are undergoing a major renovation or repositioning will be excluded from the calculation;

•that RMR LLC will assume control of any major renovation or repositioning activities at the senior living communities that Five Star will continue to manage for our account; and

•that the term of our existing management agreements with Five Star will be extended by two years to December 31, 2036.

We expect that the transition of the management of the 108 senior living communities to other third party operators will be completed before year end 2021. We also expect to incur costs related to retention, temporary labor and other transition costs for these communities, which costs may be significant.

Our Senior Living Communities Managed by Five Star. Five Star managed 235, including seven closed senior living communities, and 244 senior living communities for our account as of March 31, 2021 and 2020, respectively. We lease our senior living communities that are managed by Five Star to our taxable REIT subsidiaries, or TRSs.

We incurred management fees payable to Five Star of $13,850 and $17,050 for the three months ended March 31, 2021 and 2020, respectively. For the three months ended March 31, 2021 and 2020, $13,016 and $16,588, respectively, of the total management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $834 and $462, respectively, were capitalized in our condensed consolidated balance sheets.

The following table presents residents fees and services revenue disaggregated by type of contract and payer:


	Three Months Ended March 31,
Revenue from contracts with customers:	2021		2020
Basic housing and support services	$	188,029	$	231,516
Medicare and Medicaid programs	35,948		49,668
Private pay and other third party payer SNF services	35,989		50,785
Total residents fees and services	$	259,966	$	331,969

We incurred fees of $5,441 and $8,057 for the three months ended March 31, 2021 and 2020, respectively, with respect to rehabilitation services Five Star provided at senior living communities it manages for our account that are payable by us. These amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income (loss).

As a result of routine monitoring protocols that are a part of Five Star's compliance program activities related to Medicare billing, Five Star discovered potentially inadequate documentation at one of our senior living communities that Five Star manages. This monitoring was not initiated in response to any specific complaint or allegation but rather was of the type that Five Star periodically undertakes to test its compliance with applicable Medicare billing rules. We and Five Star voluntarily disclosed this matter to the United States Department of Health and Human Services, Office of the Inspector General, or the OIG, pursuant to the OIG’s Provider Self-Disclosure Protocol. In January 2021, we and Five Star settled this matter with the OIG and we agreed to pay approximately $5,763 in exchange for a customary release, but we and Five Star did not admit any liability. We recognized that amount in our consolidated statement of comprehensive income (loss) during the year ended December 31, 2020 and paid that amount to the OIG in January 2021. Five Star refunded to us approximately $115 of management fees it previously received relating to the Medicare payments we refunded to the OIG.

Since January 1, 2020, we sold certain senior living communities that were then managed by Five Star. We and Five Star terminated our management agreements for these senior living communities in connection with these sales. See Note 3 to the consolidated financial statements contained in our Annual Report for further information regarding these sales.

We lease to Five Star space at certain of our senior living communities that Five Star manages. Five Star uses this space for outpatient rehabilitation clinics. We recognized a reduction in property operating expenses of $397 and $294 for the three months ended March 31, 2021 and 2020, respectively, with respect to these leases.