Leases and Management Agreements with Five Star

6 Months Ended

Jun. 30, 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. These new management and omnibus agreements were subsequently replaced in June 2021, as described below;

•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 six months ended June 30, 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 our applicable management agreements with Five Star.

Effective January 1, 2020, we determined that Five Star was not a VIE and we account for our 33.7% 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 June 9, 2021, we amended our management arrangements with Five Star. The principal changes to the management arrangements include:

•that Five Star is cooperating with us in transitioning 108 of our senior living communities with approximately 7,500 living units to other third party managers without our payment of any termination fee to Five Star;

•that we 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 is continuing to manage 120 of our senior living communities with approximately 18,000 living units, and that the skilled nursing units in all of our continuing care retirement communities that Five Star is continuing to manage, which then included approximately 1,500 living units, are being closed and repositioned;

•that beginning in 2025, we will have the right to terminate up to 10% of the senior living communities that Five Star is continuing to manage, based on total revenues per year for failure to meet 80% of a target EBITDA for the applicable period;

•that the incentive fee that Five Star may earn in any calendar year for the senior living communities that Five Star is continuing to manage is no longer subject to a cap and that any senior living communities that are undergoing a major renovation or repositioning are excluded from the calculation of the incentive fee;

•that RMR LLC will oversee any major renovation or repositioning activities at the senior living communities that Five Star is continuing to manage; and

•that the term of our management agreements with Five Star for our senior living communities that Five Star is continuing to manage was extended by two years to December 31, 2036.

Pursuant to these changes, we and Five Star entered into an amended and restated master management agreement, or the Master Management Agreement, for the senior living communities that Five Star is continuing to manage and interim management agreements for the senior living communities that we and Five Star agreed to transition to new operators. These agreements replaced our prior management and omnibus agreements with Five Star. In addition, Five Star delivered to us a related amended and restated guaranty agreement pursuant to which Five Star is continuing to guarantee the payment and performance of each of its applicable subsidiary's obligations under the applicable management agreements.

We expect that the transition of the management of the 108 senior living communities from Five Star to other third party managers will be completed before year end 2021. As of August 3, 2021, we had executed agreements with four new third party managers to transition 76 senior living communities. Of these 76 senior living communities, 41 have been transitioned to new third party managers. We lease our senior living communities that have been transitioned to new managers to our taxable REIT subsidiaries, or TRSs. We also expect to incur costs related to retention and other transition costs for these communities, which costs may be significant. For the three and six months ended June 30, 2021, we recorded $11,914 of these costs to acquisition and certain other transaction related costs in our condensed consolidated statements of comprehensive income (loss).

Our Senior Living Communities Managed by Five Star. Five Star managed 235 and 241 of our senior living communities as of June 30, 2021 and 2020, respectively, which included seven closed senior living communities for the 2021 period. We lease our senior living communities that are managed by Five Star to our TRSs.

We incurred management fees payable to Five Star of $12,927 and $15,706 for the three months ended June 30, 2021 and 2020, respectively, and $26,777 and $32,756 for the six months ended June 30, 2021 and 2020, respectively. For the three months ended June 30, 2021 and 2020, $12,212 and $15,262, respectively, of the total management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $715 and $444, respectively, were capitalized in our condensed consolidated balance sheets and are being depreciated over the estimated useful lives of the related capital assets. For the six months ended June 30, 2021 and 2020, $25,228 and $31,850, respectively, of the total management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $1,549 and $906, respectively, were capitalized in our condensed consolidated balance sheets and are being depreciated over the estimated useful lives of the related capital assets.

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


	Three Months Ended June 30,				Six Months Ended June 30,
Revenue from contracts with customers:	2021		2020		2021		2020
Basic housing and support services	$	188,169	$	218,783	$	376,198	$	450,299
Medicare and Medicaid programs	24,907		42,910		60,855		92,578
Private pay and other third party payer SNF services	30,871		42,411		66,860		93,196
Total residents fees and services	$	243,947	$	304,104	$	503,913	$	636,073

We incurred fees of $2,630 and $5,814 for the three months ended June 30, 2021 and 2020, respectively, and $8,071 and $13,871 for the six months ended June 30, 2021 and 2020, respectively, with respect to rehabilitation services Five Star provided at our senior living communities it manages 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 where Five Star provides certain outpatient rehabilitation and wellness services clinics. We recorded $398 and $488 for the three months ended June 30, 2021 and 2020, respectively, and $795 and $782 for the six months ended June 30, 2021 and 2020, respectively, with respect to these leases.