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Senior Living Community Leases and Management Agreements | 12 Months Ended
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Dec. 31, 2021
Risks and Uncertainties [Abstract] |
Senior Living Community Leases and Management Agreements | Senior Living Community Leases and Management Agreements As of December 31, 2019, we leased 166 senior living communities to Five Star. As of that date, we also leased to our TRSs 78 communities that we owned and that were managed by Five Star for our account. Restructuring our Business Arrangements with Five Star The Transaction Agreement with Five Star. Pursuant to the Transaction Agreement, effective January 1, 2020, or the Conversion Time: •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, which agreements were subsequently replaced in June 2021, as described below; •AlerisLife issued to us 10,268,158 of its common shares and an aggregate of approximately 16,118,849 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 making cash payments to Five Star, resulting in a gain on lease termination of $22,896 for the year ended December 31, 2020 in our consolidated statements of comprehensive income (loss); and •pursuant to a guaranty agreement dated as of January 1, 2020 and amended and restated on June 9, 2021, made by AlerisLife in favor of our applicable subsidiaries, AlerisLife has guaranteed the payment and performance of each of its applicable subsidiary's obligations under our applicable management agreements with Five Star. Also pursuant to the Transaction Agreement: (1) commencing February 1, 2019, the aggregate amount of monthly minimum rent payable to us by Five Star under our previously existing master leases with Five Star was set at $11,000 as of February 1, 2019, subject to adjustment, and subsequently reduced in accordance with the Transaction Agreement as a result of our subsequent sales of certain of the leased senior living communities, and no additional rent was payable to us by Five Star from such date until the Conversion Time; and (2) as of April 1, 2019, we purchased from Five Star $49,155 of unencumbered Qualifying PP&E (as defined in the Transaction Agreement) related to our senior living communities leased and operated by 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 included: •that Five Star agreed to cooperate 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, 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, were closed and are being evaluated 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. In addition, AlerisLife delivered to us a related amended and restated guaranty agreement pursuant to which AlerisLife is continuing to guarantee the payment and performance of each of its applicable subsidiary's obligations under the applicable management agreements. Pursuant to the Master Management Agreement, Five Star receives a management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement for its direct costs and expenses related to such communities. Commencing with the calendar year 2021, Five Star may receive an annual incentive fee equal to 15% of the amount by which the annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of all communities on a combined basis exceeds the target EBITDA for all communities on a combined basis for such calendar year. The target EBITDA for those communities on a combined basis is increased annually based on the greater of the annual increase of the consumer price index, or CPI, or 2%, plus 6% of any capital investments funded at the managed communities on a combined basis in excess of the target capital investment. Unless otherwise agreed, the target capital investment increases annually based on the greater of the annual increase of CPI or 2%. Any senior living communities that are undergoing a major renovation or repositioning are excluded from the calculation of the incentive fee. The Master Management Agreement expires in 2036, subject to Five Star's right to extend for two consecutive five year terms if Five Star achieves certain performance targets for the combined managed communities portfolio, unless earlier terminated. Pursuant to the Master Management Agreement, beginning in 2025, we 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. Pursuant to a guaranty agreement dated as of January 1, 2020, and subsequently amended and restated on June 9, 2021, made by AlerisLife in favor of our applicable subsidiaries, AlerisLife has guaranteed the payment and performance of each of its applicable subsidiary's obligations under the Master Management Agreement. On April 1, 2019, we concluded that the 2020 Restructuring Transaction constituted a reconsideration event requiring us to assess whether we held a controlling financial interest in AlerisLife. As a result of this assessment, we determined that AlerisLife was a VIE effective as of the date of the Transaction Agreement. We determined not to consolidate AlerisLife in our consolidated financial statements, as we do not have the power to direct the activities of AlerisLife that most significantly impact AlerisLife's economic performance and therefore are not the primary beneficiary of AlerisLife. Effective January 1, 2020, we determined that AlerisLife is not a VIE and we will account for our equity investment in AlerisLife using the equity method of accounting because we are deemed to exert significant influence, but not control, over AlerisLife's most significant activities. We have elected to use the fair value option to account for our investment in AlerisLife. As of December 31, 2021, we had transitioned 107 of the 108 senior living communities, containing 7,340 living units, from Five Star to new third party managers. The remaining senior living community was closed and we are assessing opportunities to redevelop that property. We lease nearly all of our senior living communities, including those managed by Five Star and by the new third party managers, to our TRSs. We incurred and expect to continue to incur costs related to retention and other transition costs for the 107 transitioned communities. For the year ended December 31, 2021, we recorded $17,363 of these costs, of which $13,311 represent expenses reimbursed to Five Star, to acquisition and certain other transaction related costs in our consolidated statements of comprehensive income (loss). The terms of the management agreements with the new third party managers are generally as follows: the new third party managers will receive a management fee equal to 5% to 6% of the gross revenues realized at the applicable senior living communities plus reimbursement for direct costs and expenses related to such communities. These agreements generally also provide for the new third party managers to earn a minimum base fee for a portion of the term of the agreement. Additionally, the new third party managers have the ability to earn incentive fees equal to 15% to 25% of the amount by which EBITDA of the applicable communities exceeds the target EBITDA for the applicable communities. The new third party managers can also earn a construction supervision fee ranging between 3% and 5% of construction costs. The initial terms of the management agreements with the new third party managers are generally five years, subject to automatic extensions of successive terms of two years each unless earlier terminated or timely notice of nonrenewal is delivered. The management agreements with the new third party managers also generally provide us with the right to terminate the management agreements for communities that do not earn 70% to 80% of the target EBITDA for such communities, after an agreed upon stabilized period. Our Senior Living Communities Formerly Leased by Five Star. Prior to the Conversion Time, we leased senior living communities to Five Star pursuant to five master leases with Five Star, each of which was terminated as of January 1, 2020 pursuant to the Transaction Agreement. Under our previously existing leases with Five Star, Five Star paid us annual rent plus percentage rent equal to 4.0% of the increase in gross revenues at certain of our senior living communities over base year gross revenues as specified in the applicable leases. Pursuant to the Transaction Agreement, commencing February 1, 2019, no percentage rent was payable to us by Five Star and annual rent payable to us by Five Star was adjusted as noted above. We previously determined percentage rent due under these leases annually and recognized it when all contingencies were met, which was typically at year end. We recognized total rental income from Five Star of $137,898 (including percentage rent of $538) for the year ended December 31, 2019. Our previously existing leases with Five Star were “triple net” leases, which generally required Five Star to pay rent and all property operating expenses, to indemnify us from liability which may arise by reason of our ownership of the properties, to maintain the properties at Five Star's expense, to remove and dispose of hazardous substances on the properties in compliance with applicable law and to maintain insurance on the properties for Five Star's and our benefit. Under our previously existing leases with Five Star, Five Star could request that we purchase certain improvements to the leased communities and, until we entered into the Transaction Agreement, the annual rent payable to us by Five Star would increase in accordance with a formula specified in the applicable lease in return for such purchases. Pursuant to the Transaction Agreement, the $111,603 of improvements to communities leased to Five Star, including $49,155 of fixed assets and improvements that were purchased pursuant to the Transaction Agreement as discussed above, that we funded during the year ended December 31, 2019 did not result in increased rent payable by Five Star. As of December 31, 2019, Five Star was our most significant tenant. The following is a summary of the assets leased to and revenues earned from Five Star as a tenant as of and for the year ended December 31, 2019 compared to all our other assets and revenues from all sources:
|  | As of December 31, 2019
|  | Gross Book Value of Real Estate Assets (1) |  | % of Total
Five Star (2) |  | $ | 2,286,951 |  |  | 27.2 | %
All others (3) |  | 6,133,672 |  |  | 72.8 | %
|  | $ | 8,420,623 |  |  | 100.0 | %
(1) Represents the gross book value of real estate assets at cost plus certain acquisition costs, before depreciation and purchase price allocations, less impairment write downs, if any. Five Star also managed some of our managed senior living communities as of December 31, 2019. The gross book value of real estate assets of $1,920,070 as of December 31, 2019 for those managed senior living communities is included in the "All others" category. (2) Includes gross book value of real estate assets of $50,951 classified as held for sale in our consolidated balance sheet as of December 31, 2019. (3) Includes gross book value of real estate assets of $213,416 classified as held for sale in our consolidated balance sheet as of December 31, 2019.
|  | Year Ended
|  | December 31, 2019
|  | Total Revenues(1) |  | % of Total
Five Star |  | $ | 137,898 |  |  | 13.3 | %
All others |  | 902,257 |  |  | 86.7 | %
|  | $ | 1,040,155 |  |  | 100.0 | %
(1) Five Star also managed some of our managed senior living communities as of December 31, 2019. Our revenues of $433,597 for the year ended December 31, 2019, from those communities are included in the “All others” category. Our Senior Living Communities Managed by Five Star. Five Star managed 120, 235 and 78 senior living communities for our account as of December 31, 2021, 2020 and 2019, respectively. We lease our senior living communities that are managed by Five Star to our TRSs, and Five Star manages these communities pursuant to long term management agreements. As described above, pursuant to the Transaction Agreement, effective January 1, 2020, we replaced our long term management and pooling agreements with Five Star with new management agreements and a related omnibus agreement, which agreements were subsequently replaced in June 2021 with the Master Management Agreement, the terms of which are described above. We incurred management fees payable to Five Star of $47,479, $62,880 and $15,327 for the years ended December 31, 2021, 2020 and 2019, respectively. For the years ended December 31, 2021 and 2020, $43,864 and $60,413, respectively, of the total management fees were expensed to property operating expenses in our consolidated statements of comprehensive income (loss) and $3,615 and $2,467, respectively, were capitalized in our consolidated balance sheets and are being depreciated over the estimated useful lives of the related capital assets. In addition to providing management services to us, Five Star also provides certain other services to residents at some of the senior living communities it manages for us, such as rehabilitation services. At senior living communities Five Star manages for us where Five Star provides rehabilitation services on an outpatient basis, the residents, third party payers or government programs pay Five Star for those rehabilitation services. At senior living communities Five Star manages for us where Five Star provides both inpatient and outpatient rehabilitation services, we generally pay Five Star for those rehabilitation services and charges for these services are included in amounts charged to residents, third party payers or government programs. We incurred fees of $11,233, $25,687 and $5,920 for the years ended December 31, 2021, 2020 and 2019, respectively, with respect to rehabilitation services Five Star provided at senior living communities that are payable by us. These amounts are included in property operating expenses in our 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 paid that amount to the OIG in January 2021. Five Star refunded to us $115 of management fees it previously received relating to the Medicare payments we refunded to the OIG. With respect to this settlement amount, we accrued a revenue reserve of $3,842 at December 31, 2020 for historical Medicare payments we received and agreed to repay to the OIG and we recorded expenses of $1,921 for the year ended December 31, 2020 for OIG-imposed penalties. 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 for further information regarding these sales. During 2021, we transitioned 107 senior living communities from Five Star to new third party managers and we closed one senior living community that was previously managed by Five Star. We lease to Five Star space at certain of our senior living communities, which it uses to provide certain outpatient rehabilitation and wellness services. We recorded $1,591 and $1,561 for the years ended December 31, 2021 and 2020, respectively, with respect to these leases. The following table presents residents fees and services revenue from our managed senior living communities disaggregated by the type of contract and payer:
|  | Year Ended December 31,
Revenue from contracts with customers: |  | 2021 |  | 2020 |  | 2019
Basic housing and support services |  | $ | 750,644 |  |  | $ | 856,687 |  |  | $ | 353,699 |
Medicare and Medicaid programs |  | 98,273 |  |  | 173,878 |  |  | 31,324 |
Private pay and other third party payer SNF services |  | 125,706 |  |  | 174,246 |  |  | 48,574 |
Total residents fees and services |  | $ | 974,623 |  |  | $ | 1,204,811 |  |  | $ | 433,597 |

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- Definition The entire disclosure for any concentrations existing at the date of the financial statements that make an entity vulnerable to a reasonably possible, near-term, severe impact. This disclosure informs financial statement users about the general nature of the risk associated with the concentration, and may indicate the percentage of concentration risk as of the balance sheet date. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 275 -URI http://asc.fasb.org/topic&trid=2134479 + Details
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