Senior Living Community Management Agreements

9 Months Ended

Sep. 30, 2022

Senior Living Community Management Agreements

Our managed senior living communities are operated by third parties pursuant to management agreements. Five Star Senior Living, or Five Star, which is an operating division of AlerisLife, manages certain of our SHOP communities.

2021 Amendments to our Management Arrangements with Five Star. On June 9, 2021, we and Five Star amended our management arrangements, as follows:

•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;

•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;

•Five Star continued to manage 120 of our senior living communities, and 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;

•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 earnings before interest, taxes, depreciation and amortization for the applicable period;

•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 any senior living communities that are undergoing a major renovation or repositioning are excluded from the calculation of the incentive fee;

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

•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 other third party managers. These agreements replaced our prior master leases and management and pooling agreements with Five Star. 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 its subsidiaries' obligations under the applicable management agreements.

As of December 31, 2021, we had transitioned 107 of the 108 senior living communities, containing 7,340 living units, from Five Star to other third party managers, of which 69 senior living communities with approximately 4,800 living units were transitioned during the three months ended September 30, 2021. The remaining senior living community was closed in February 2022 and we are assessing opportunities to redevelop that property. We continue to lease our senior living communities that have been transitioned to new managers to our taxable REIT subsidiaries, or TRSs. We incurred costs related to retention and other transition costs for these communities. We recorded $220 and $3,123 for the three months ended September 30, 2022 and 2021, respectively, and $1,665 and $15,037 for the nine months ended September 30, 2022 and 2021, respectively, 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 120 and 159 of our senior living communities as of September 30, 2022 and 2021, respectively. We lease our senior living communities that are managed by Five Star to our TRSs. Effective October 31, 2022, Five Star ceased managing an active adult community we own located in Plano, Texas, and effective as of November 1, 2022, RMR assumed management of that community pursuant to our property management agreement with RMR. We paid Five Star a termination fee of $350 in connection with the termination of Five Star's management of this community.

We incurred management fees payable to Five Star of $9,477 and $11,220 for the three months ended September 30, 2022 and 2021, respectively, and $27,380 and $37,997 for the nine months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022 and 2021, $8,601 and $10,518, respectively, of the total management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $876 and $702, respectively, were capitalized in our condensed consolidated balance sheets. For the nine months ended September 30, 2022 and 2021, $25,017 and $35,746, respectively, of the total management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $2,363 and $2,251, respectively, were capitalized in our condensed consolidated balance sheets. The amounts capitalized are being depreciated over the estimated useful lives of the related capital assets.

We incurred fees of $1,590 and $1,508 for the three months ended September 30, 2022 and 2021, respectively, and $5,242 and $9,579 for the nine months ended September 30, 2022 and 2021, respectively, with respect to rehabilitation services Five Star provided at our senior living communities that are payable by us. These amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income (loss).

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 $380 and $399 for the three months ended September 30, 2022 and 2021,

respectively, and $1,147 and $1,194 for the nine months ended September 30, 2022 and 2021, respectively, with respect to these leases.

Our Senior Living Communities Managed by Other Third Party Managers. We incurred management fees payable to our other third party managers of $5,108 and $1,678 for the three months ended September 30, 2022 and 2021, respectively, and $15,434 and $1,678 for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022 and 2021, respectively, our other third party managers managed 107 and 69 of our senior living communities. These amounts are included in property operating expenses in our condensed consolidated financial statements.

The following table presents residents fees and services revenue from all of our managed senior living communities disaggregated by the type of contract and payer:


	Three Months Ended September 30,				Nine Months Ended September 30,
Revenue from contracts with customers:	2022		2021		2022		2021
Basic housing and support services	$	204,842	$	188,381	$	594,715	$	564,579
Medicare and Medicaid programs	21,370		18,948		60,153		79,803
Private pay and other third party payer SNF services	32,748		28,684		100,046		95,544
Total residents fees and services	$	258,960	$	236,013	$	754,914	$	739,926