UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2020March 31, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-16817
FIVE STAR SENIOR LIVING INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland04-3516029
(State or Other Jurisdiction of Incorporation or Organization)(IRS Employer Identification No.)
400 Centre Street,, Newton,, Massachusetts02458
(Address of Principal Executive Offices) (Zip Code) 

617-796-8387617-796-8387
(Registrant’s Telephone Number, Including Area Code):
Securities registered pursuant to Section 12(b) of the Act:

Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common StockFVEThe Nasdaq Stock Market LLC
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  ☒ No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes  ☒ No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer☐Accelerated filer☐
Non-accelerated filer☒Smaller reporting company☒
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes  ☐ No   ☒

Number of registrant’s shares of common stock, $0.01 par value, outstanding as of August 3, 2020:  31,574,499.  
May 1, 2021: 31,675,843.



FIVE STAR SENIOR LIVING INC.
FORM 10-Q
June 30, 2020March 31, 2021
Table of Contents
 
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References in this Quarterly Report on Form 10-Q to the Company, Five Star, we, us or our include Five Star Senior Living Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context indicates otherwise.

“FiveThis Quarterly Report on Form 10-Q includes our trademarks, such as “Five Star Senior Living”, “Bridge to Rediscovery” and “Ageility Physical Therapy Solutions” which are our property and are protected under applicable intellectual property laws. Solely for convenience, these trademarks referred to in this Quarterly Report on Form 10-Q may appear without the TM symbol, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks.





PART I. Financial Information
Item 1. Financial Statements
Five Star Senior Living Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share amounts)
(unaudited)
 June 30, 2020 December 31, 2019 March 31, 2021December 31, 2020
ASSETS    ASSETS  
Current assets:    Current assets:
Cash and cash equivalents $76,114
 $31,740
Cash and cash equivalents$109,485 $84,351 
Restricted cash and cash equivalents 23,858
 23,995
Restricted cash and cash equivalents23,717 23,877 
Accounts receivable, net of allowance of $3,976 and $4,664, respectively 9,387
 34,190
Accounts receivable, net of allowance of $3,248 and $3,149, respectivelyAccounts receivable, net of allowance of $3,248 and $3,149, respectively9,558 9,104 
Due from related person 73,466
 5,533
Due from related person86,204 96,357 
Debt and equity investments, of which $12,604 and $12,622 are restricted, respectively 21,739
 21,070
Debt and equity investments, of which $10,965 and $11,125 are restricted, respectivelyDebt and equity investments, of which $10,965 and $11,125 are restricted, respectively19,528 19,961 
Prepaid expenses and other current assets 19,118
 17,286
Prepaid expenses and other current assets22,376 28,658 
Assets held for sale —
 9,554
Total current assets 223,682
 143,368
Total current assets270,868 262,308 
    
Property and equipment, net 162,037
 167,247
Property and equipment, net158,716 159,251 
Equity investment of an investee 11
 298
Operating lease right-of-use assetsOperating lease right-of-use assets27,040 18,030 
Finance lease right-of-use assetsFinance lease right-of-use assets4,160 4,493 
Restricted cash and cash equivalents 781
 1,244
Restricted cash and cash equivalents1,189 1,369 
Restricted debt and equity investments 6,887
 7,105
Restricted debt and equity investments4,945 4,788 
Right of use assets 19,459
 20,855
Equity investment of an investee, netEquity investment of an investee, net11 11 
Other long-term assets 4,254
 5,676
Other long-term assets4,201 3,956 
Total assets $417,111
 $345,793
Total assets$471,130 $454,206 
    
LIABILITIES AND SHAREHOLDERS’ EQUITY    LIABILITIES AND SHAREHOLDERS’ EQUITY  
Current liabilities:    Current liabilities:
Accounts payable $15,567
 $30,440
Accounts payable$24,401 $23,454 
Accrued expenses and other current liabilities 49,525
 55,981
Accrued expenses and other current liabilities45,190 41,843 
Accrued compensation and benefits 48,287
 35,629
Accrued compensation and benefits73,675 70,543 
Accrued self-insurance obligations 27,755
 23,791
Accrued self-insurance obligations28,155 31,355 
Lease liabilities 2,977
 2,872
Operating lease liabilitiesOperating lease liabilities2,230 2,567 
Finance lease liabilitiesFinance lease liabilities824 808 
Due to related persons 592
 2,247
Due to related persons3,859 6,585 
Mortgage note payable 375
 362
Mortgage note payable394 388 
Security deposits and current portion of continuing care contracts 409
 434
Security deposits and current portion of continuing care contracts338 365 
Liabilities held for sale —
 12,544
Total current liabilities 145,487
 164,300
Total current liabilities179,066 177,908 
    
Long-term liabilities:    Long-term liabilities:  
Accrued self-insurance obligations 33,381
 33,872
Accrued self-insurance obligations41,098 37,420 
Lease liabilities 18,161
 19,671
Operating lease liabilitiesOperating lease liabilities26,472 17,104 
Finance lease liabilitiesFinance lease liabilities3,710 3,921 
Mortgage note payable 6,980
 7,171
Mortgage note payable6,682 6,783 
Other long-term liabilities 8,996
 798
Other long-term liabilities474 538 
Total long-term liabilities 67,518
 61,512
Total long-term liabilities78,436 65,766 
    
Commitments and contingencies 

 

Commitments and contingencies00
    
Shareholders’ equity:    Shareholders’ equity:  
Common stock, par value $0.01: 75,000,000 shares authorized, 31,574,499 and 5,154,892 shares issued and outstanding, respectively 316
 52
Common stock, par value $0.01: 75,000,000 shares authorized, 31,676,429 and 31,679,207 shares issued and outstanding, respectivelyCommon stock, par value $0.01: 75,000,000 shares authorized, 31,676,429 and 31,679,207 shares issued and outstanding, respectively317 317 
Additional paid-in-capital 459,801
 362,450
Additional paid-in-capital460,113 460,038 
Accumulated deficit (257,697) (245,184)Accumulated deficit(247,824)(251,139)
Accumulated other comprehensive income 1,686
 2,663
Accumulated other comprehensive income1,022 1,316 
Total shareholders’ equity 204,106
 119,981
Total shareholders’ equity213,628 210,532 
Total liabilities and shareholders' equity $417,111
 $345,793
Total liabilities and shareholders' equity$471,130 $454,206 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1

Five Star Senior Living Inc.
Condensed Consolidated Statements of Operations
(amounts in thousands, except per share amounts)
(unaudited)



 Three Months Ended June 30, Six Months Ended June 30, Three Months Ended March 31,
 2020 2019 2020 2019 20212020
REVENUES        REVENUES
Rehabilitation and wellness servicesRehabilitation and wellness services$19,553 $21,384 
Senior living $19,590
 $263,008
 $40,587
 $529,171
Senior living17,057 20,997 
Management fees 15,705
 4,024
 32,756
 8,007
Management fees13,850 17,051 
Rehabilitation and wellness services 19,268
 11,488
 40,652
 22,260
Total management and operating revenues 54,563
 278,520
 113,995
 559,438
 Total management and operating revenues50,460 59,432 
Reimbursed community-level costs incurred on behalf of managed communities 224,104
 77,219
 456,120
 151,824
Reimbursed community-level costs incurred on behalf of managed communities213,160 232,016 
Other reimbursed expenses 6,417
 —
 12,414
 —
Other reimbursed expenses5,480 5,997 
Total revenues 285,084
 355,739
 582,529
 711,262
 Total revenues269,100 297,445 
Other operating income 1,499
 —
 1,499
 —
Other operating income7,793 0 
Total revenues and other operating income 286,583
 355,739
 584,028
 711,262
        
OPERATING EXPENSES        OPERATING EXPENSES
Rehabilitation and wellness services expensesRehabilitation and wellness services expenses16,210 17,501 
Senior living wages and benefits 9,705
 137,259
 19,505
 273,637
Senior living wages and benefits12,013 9,800 
Other senior living operating expenses 8,331
 71,301
 11,573
 146,967
Other senior living operating expenses6,266 3,938 
Rehabilitation and wellness services expenses 15,451
 9,265
 32,471
 17,619
Community-level costs incurred on behalf of managed communities 224,104
 77,219
 456,120
 151,824
Community-level costs incurred on behalf of managed communities213,160 232,016 
General and administrative 23,567
 20,548
 46,432
 47,050
General and administrative22,641 22,865 
Rent 1,378
 33,262
 2,555
 87,804
Depreciation and amortization 2,703
 2,941
 5,404
 11,106
Depreciation and amortization2,940 2,701 
Loss on sale of senior living communities —
 101
 —
 101
Long-lived asset impairment —
 112
 —
 3,260
Total operating expenses 285,239
 352,008
 574,060
 739,368
Total operating expenses273,230 288,821 
        
Operating income (loss) 1,344
 3,731
 9,968
 (28,106)
Operating incomeOperating income3,663 8,624 
        
Interest, dividend and other income 182
 415
 521
 571
Interest, dividend and other income84 339 
Interest and other expense (409) (906) (791) (1,812)Interest and other expense(463)(382)
Unrealized gain (loss) on equity investments 867
 (38) (595) 328
Unrealized gain (loss) on equity investments135 (1,462)
Realized gain on sale of debt and equity investments 116
 144
 95
 236
Realized gain (loss) on sale of debt and equity investmentsRealized gain (loss) on sale of debt and equity investments96 (21)
Loss on termination of leases —
 —
 (22,899) —
Loss on termination of leases0 (22,899)
        
Income (loss) before income taxes and equity in earnings of an investee 2,100
 3,346
 (13,701) (28,783)
Benefit (provision) for income taxes 902
 705
 (506) (785)
Equity in earnings of an investee —
 130
 —
 534
Income (loss) before income taxesIncome (loss) before income taxes3,515 (15,801)
Provision for income taxesProvision for income taxes(200)(1,408)
Net income (loss) $3,002
 $4,181
 $(14,207) $(29,034)Net income (loss)$3,315 $(17,209)
        
Weighted average shares outstanding—basic 31,460
 5,007
 31,454
 5,005
Weighted average shares outstanding—basic31,530 31,448 
Weighted average shares outstanding—diluted 31,582
 5,142
 31,454
 5,005
Weighted average shares outstanding—diluted31,662 31,448 
        
Net income (loss) per share—basic $0.10
 $0.84
 $(0.45) $(5.80)Net income (loss) per share—basic$0.11 $(0.55)
Net income (loss) per share—diluted $0.10
 $0.81
 $(0.45) $(5.80)Net income (loss) per share—diluted$0.10 $(0.55)
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



2

Five Star Senior Living Inc.
Condensed Consolidated Statements of Comprehensive LossIncome (Loss)
(dollars in thousands)
(unaudited)


 Three Months Ended March 31,
 20212020
Net income (loss)$3,315 $(17,209)
Other comprehensive income (loss):
Unrealized (loss) gain on debt investments, net of tax of $0(294)427 
Realized loss on debt investments reclassified and included in net income (loss), net of tax of $00 (10)
Other comprehensive (loss) income(294)417 
Comprehensive income (loss)$3,021 $(16,792)
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
        
Net income (loss)$3,002
 $4,181
 $(14,207) $(29,034)
Other comprehensive income (loss):       
Unrealized gain (loss) on debt investments, net of tax of $0 and $418, and $0 and $1,162, respectively303
 (16) 730
 (221)
Equity in unrealized gain of an investee, net of tax of $0 and $0, and $0 and $0, respectively—
 71
 —
 136
Realized (gain) loss on debt investments reclassified and included in net income (loss), net of tax of $0 and $0, and $0 and $0, respectively(3) (3) (13) 1
Other comprehensive income (loss)300
 52
 717
 (84)
Comprehensive income (loss)$3,302
 $4,233
 $(13,490) $(29,118)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



3

Five Star Senior Living Inc.
Condensed Consolidated Statements of Shareholders’ Equity
(dollars in thousands)
(unaudited)



 Three and Six Months Ended June 30, 2020
 Number of
Shares		 Common
Stock		 Additional
Paid-in
Capital		 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 Total Shareholders' Equity
Balance at January 1, 20205,154,892
 $52
 $362,450
 $(245,184) $2,663
 $119,981
Comprehensive (loss) income:           
Net loss—
 —
 —
 (17,209) —
 (17,209)
Unrealized gain on debt investments, net of tax—
 —
 —
 —
 427
 427
Realized gain on debt investments reclassified and included in net loss, net of tax—
 —
 —
 —
 (10) (10)
Total comprehensive (loss) income—
 —
 —
 (17,209) 417
 (16,792)
Cumulative effect adjustment to beginning accumulated deficit and accumulated other comprehensive income in connection with a reclassification of equity investments previously classified as debt investments—
 —
 —
 1,694
 (1,694) —
Issuance of common shares26,387,007
 264
 97,076
 —
 —
 97,340
Grants under share award plan and share-based compensation4,000
 —
 81
 —
 —
 81
Repurchases under share award plan(3,564) —
 (1) —
 —
 (1)
Balance at March 31, 202031,542,335
 $316
 $459,606
 $(260,699) $1,386
 $200,609
Comprehensive income (loss):           
Net income—
 —
 —
 3,002
 —
 3,002
Unrealized gain on debt investments, net of tax—
 —
 —
 —
 303
 303
Realized gain on debt investments reclassified and included in net income, net of tax—
 —
 —
 —
 (3) (3)
Total comprehensive income—
 —
 —
 3,002
 300
 3,302
Grants under share award plan and share-based compensation35,000
 —
 199
 —
 —
 199
Repurchases under share award plan(2,836) —
 (4) —
 —
 (4)
Balance at June 30, 202031,574,499
 $316
 $459,801
 $(257,697) $1,686
 $204,106



4

Five Star Senior Living Inc.
Condensed Consolidated Statements of Shareholders’ Equity
(dollars in thousands)
(unaudited)


Three Months Ended March 31, 2021
 Number of
Shares		Common
Stock		Additional
Paid-in
Capital		Accumulated
Deficit		Accumulated
Other
Comprehensive
Income		Total Shareholders' Equity
Balance at January 1, 202131,679,207 $317 $460,038 $(251,139)$1,316 $210,532 
Comprehensive income (loss):
Net income— — — 3,315 — 3,315 
Unrealized loss on debt investments, net of tax— — — — (294)(294)
Total comprehensive income (loss)— — — 3,315 (294)3,021 
Grants under share award plan and share-based compensation— — 76 — — 76 
Repurchases under share award plan(2,778)— (1)— — (1)
Balance at March 31, 202131,676,429 $317 $460,113 $(247,824)$1,022 $213,628 

 Three and Six Months Ended June 30, 2019
 Number of
Shares		 Common
Stock		 Additional
Paid-in
Capital		��Accumulated
Deficit		 Accumulated
Other
Comprehensive
Income		 Total Shareholders' Equity
Balance at January 1, 20195,085,345
 $51
 $362,012
 $(292,636) $1,742
 $71,169
Comprehensive loss:           
Net loss—
 —
 —
 (33,215) —
 (33,215)
Unrealized loss on debt investments, net of tax—
 —
 —
 —
 (205) (205)
Realized loss on debt investments reclassified and included in net loss, net of tax—
 —
 —
 —
 4
 4
Equity in unrealized gain of an investee, net of tax—
 —
 —
 —
 65
 65
Total comprehensive loss—
 —
 —
 (33,215) (136) (33,351)
Cumulative effect adjustment to beginning accumulated deficit in connection with the adoption of ASC Topic 842—
 —
 —
 67,473
 —
 67,473
Grants under share award plan and share-based compensation—
 —
 97
 —
 —
 97
Repurchases under share award plan(1,042) —
 —
 —
 —
 —
Balance at March 31, 20195,084,303
 $51
 $362,109
 $(258,378) $1,606
 $105,388
Comprehensive income:           
Net income—
 —
 —
 4,181
 —
 $4,181
Unrealized loss on debt investments, net of tax—
 —
 —
 —
 (16) (16)
Realized gain on debt investments reclassified and included in net income, net of tax—
 —
 —
 —
 (3) (3)
Equity in unrealized gain of an investee, net of tax—
 —
 —
 —
 71
 71
Total comprehensive income—
 —
 —
 4,181
 52
 4,233
Grants under share award plan and share-based compensation6,250
 —
 123
 —
 —
 123
Repurchases under share award plan(3,964) —
 2
 —
 —
 2
Balance at June 30, 20195,086,589
 $51
 $362,234
 $(254,197) $1,658
 $109,746
Three Months Ended March 31, 2020
Number of
Shares		Common
Stock		Additional
Paid-in
Capital		Accumulated
Deficit		Accumulated
Other
Comprehensive
Income		Total Shareholders' Equity
Balance at January 1, 20205,154,892 $52 $362,450 $(245,184)$2,663 $119,981 
Comprehensive income (loss):
Net loss— — — (17,209)— (17,209)
Unrealized gain on debt investments, net of tax— — — — 427 427 
Realized gain on debt investments reclassified and included in net loss, net of tax— — — — (10)(10)
Total comprehensive (loss) income— — — (17,209)417 (16,792)
Cumulative effect adjustment to beginning accumulated deficit and accumulated other comprehensive income in connection with a reclassification of equity investments previously classified as debt investments— — — 1,694 (1,694)0 
Issuance of common shares26,387,007 264 97,076 — — 97,340 
Grants under share award plan and share-based compensation4,000 — 81 — — 81 
Repurchases under share award plan(3,564)— (1)— — (1)
Balance at March 31, 202031,542,335 $316 $459,606 $(260,699)$1,386 $200,609 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4
5

Five Star Senior Living Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)


 Three Months Ended March 31,
 20212020
CASH FLOW FROM OPERATING ACTIVITIES:  
Net income (loss)$3,315 $(17,209)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:  
Depreciation and amortization2,940 2,701 
Unrealized (gain) loss on equity securities(135)1,462 
Realized (gain) loss on sale of debt and equity securities(96)21 
Loss on termination of leases0 22,899 
Share-based compensation75 80 
Provision for losses on accounts receivables260 510 
Other non-cash expense adjustments, net157 69 
Changes in assets and liabilities:  
Accounts receivable(714)22,739 
Due from related person10,153 (15,391)
Prepaid expenses and other current assets5,870 2,276 
Accounts payable947 (10,342)
Accrued expenses and other current liabilities3,332 13,078 
Accrued compensation and benefits3,132 (16,180)
Due to related persons(2,726)(1,102)
Other current and long-term liabilities316 (144)
Net cash provided by operating activities26,826 5,467 
CASH FLOW FROM INVESTING ACTIVITIES:  
Acquisition of property and equipment(2,136)(2,013)
Purchases of debt and equity investments(130)(1,588)
Proceeds from sale of property and equipment0 2,725 
Proceeds from sale of debt and equity investments337 1,453 
     Net cash (used in) provided by investing activities(1,929)577 
CASH FLOW FROM FINANCING ACTIVITIES:  
Costs related to issuance of common stock0 (559)
Repayments of mortgage notes payable(103)(95)
     Net cash used in financing activities(103)(654)
Increase in cash and cash equivalents and restricted cash and cash equivalents24,794 5,390 
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period109,597 56,979 
Cash and cash equivalents and restricted cash and cash equivalents at end of period$134,391 $62,369 
Reconciliation of cash and cash equivalents and restricted cash and cash equivalents:
Cash and cash equivalents$109,485 $36,641 
Current restricted cash and cash equivalents23,717 24,290 
Other restricted cash and cash equivalents1,189 1,438 
Cash and cash equivalents and restricted cash and cash equivalents at end of period$134,391 $62,369 
Supplemental cash flow information:  
Interest paid$203 $122 
Income taxes paid (refunded), net1 (117)
Non-cash investing and financing activities:
Liabilities assumed related to issuance of our common stock$0 $51,547 
Change in accrued capital(20)4,326 
  Six Months Ended June 30,
  2020 2019
CASH FLOW FROM OPERATING ACTIVITIES:    
Net loss $(14,207) $(29,034)
Adjustments to reconcile net loss to cash provided by operating activities:    
Depreciation and amortization 5,404
 11,106
Loss on sale of senior living communities —
 101
Unrealized loss (gain) on equity securities 595
 (328)
Realized gain on sale of debt and equity investments (95) (236)
Loss on termination of leases 22,899
 —
Long-lived asset impairment —
 3,260
Equity in earnings of an investee —
 (534)
Share-based compensation 275
 222
Provision for losses on accounts receivables 1,208
 2,092
Amortization of non-cash rent adjustments —
 (472)
Other non-cash expense adjustments, net 126
 148
Changes in assets and liabilities:    
Accounts receivable 23,595
 (953)
Due from related person (39,920) 17,010
Prepaid expenses and other current assets (8,739) 2,007
Accounts payable (14,873) (6,506)
Accrued expenses and other current liabilities 41,239
 682
Accrued compensation and benefits 12,658
 6,389
Due to related persons (1,655) (524)
Other current and long-term liabilities 11,648
 994
     Net cash provided by operating activities 40,158
 5,424
     
CASH FLOW FROM INVESTING ACTIVITIES:    
Acquisition of property and equipment (3,121) (24,427)
Purchases of debt and equity investments (5,092) (2,234)
Proceeds from sale of property and equipment 2,725
 78,920
Distributions in excess of earnings from Affiliates Insurance Company 287
 —
Proceeds from sale of debt and equity investments 4,851
 4,446
     Net cash (used in) provided by investing activities (350) 56,705
     
CASH FLOW FROM FINANCING ACTIVITIES:    
Repayments of borrowings on revolving credit facility —
 (51,484)
Costs related to issuance of common stock (559) —
Repayments of mortgage notes payable (190) (181)
Targeted SNF distribution funds received on behalf of others 4,715
 —
Payment of deferred financing fees —
 (1,271)
     Net cash provided by (used in) financing activities 3,966
 (52,936)
     
Change in cash and cash equivalents and restricted cash and cash equivalents 43,774
 9,193
Restricted cash included in held for sale assets —
 (42)
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period 56,979
 51,258
Cash and cash equivalents and restricted cash and cash equivalents at end of period $100,753
 $60,409
     
Reconciliation of cash and cash equivalents and restricted cash and cash equivalents:    
Cash and cash equivalents $76,114
 $35,500
Current restricted cash and cash equivalents 23,858
 23,880
Other restricted cash and cash equivalents 781
 1,029
Cash and cash equivalents and restricted cash and cash equivalents at end of period $100,753
 $60,409
     
Supplemental cash flow information:    
Interest paid $243
 $1,565
Income taxes received, net $(93) $(1,491)
     
Non-cash financing activities:    
Liabilities assumed related to issuance of our common stock $51,547
 $—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5
6

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)


1. Basis of Presentation and Organization

General. The accompanying condensed consolidated financial statements of Five Star Senior Living Inc. and its subsidiaries are unaudited. Certain information and disclosures required by the rules and regulations of the Securities and Exchange Commission, or SEC, and U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted pursuant to SEC rules and regulations related to interim financial statements. We believe the disclosures made are adequate to make the information presented not misleading. 

As of June 30, 2020,March 31, 2021, we managed or operated 265252 senior living communities located in 3231 states with 30,66029,265 living units, including 254243 primarily independent and assisted living communities with 29,39628,310 living units, which include 37 continuing care retirement communities, or CCRCs, with 8,573 living units, and 119 primarily skilled nursing facilities, or SNFs, with 1,264955 living units. As of June 30, 2020,March 31, 2021, we managed 241228 of these senior living communities (28,348(26,963 living units), we owned and operated 20 of these senior living communities (2,1082,099 living units) and we leased and operated 4 of these senior living communities (204(203 living units). Our 265252 senior living communities, as of June 30, 2020,March 31, 2021, included 11,06110,979 independent living apartments, 16,20215,329 assisted living suites (which includes 3,220 of our Bridge to Rediscovery memory care units) and 3,3972,957 SNF units. The foregoing numbers exclude living units categorized as out of service.

Our rehabilitation and wellness services division,segment, which is primarily comprised of Ageility Physical Therapy Solutions, or Ageility, provides a comprehensive suite of rehabilitation and wellness services at our senior living communities as well as at outpatient clinics located separately from ourat unaffiliated senior living communities. As of June 30, 2020,March 31, 2021, we operated 4037 inpatient rehabilitation and wellness services clinics in senior living communities owned by Diversified Healthcare Trust, or DHC, which are managed by us. As of June 30, 2020,March 31, 2021, we operated 206215 outpatient rehabilitation and wellness services clinics, of which 152151 were located at our managed, leased and owned senior living communities and 5464 were located within senior living communities not owned or leased by us or managed on behalf of DHC. Ageility leases from

Strategic Plan. On April 9, 2021, we announced a new strategic plan, or the Strategic Plan, to reposition the Company's senior living management business to focus on larger independent living, assisted living and memory care communities as well as stand-alone independent living and active adult communities.

Pursuant to our Strategic Plan, we intend to, among other things, (i) amend our management arrangements with DHC space at certain of theto transition 108 senior living communities, with approximately 7,500 living units, that we currently manage for DHC.

Restructuring of Business Arrangements with DHC.On April 1, 2019, we entered into a transaction agreement, or the Transaction Agreement, with DHC, to restructurenew operators, (ii) close and reposition 27 skilled nursing units, with approximately 1,500 living units, in CCRCs that we will continue to manage for DHC and (iii) close 37 Ageility inpatient rehabilitation clinics in certain transitioning communities.

As part of our Strategic Plan, we have agreed to amend our management agreements with DHC. See Notes 11 and 16 for more information on our Strategic Plan and our business arrangements with DHC, pursuant to which, effective as of January 1, 2020, or the Conversion Time:DHC.


our 5 then existing master leases with DHC as well as our then existing management and pooling agreements with DHC were terminated and replaced with new management agreements for all of these senior living communities, together with a related omnibus agreement, or collectively, the New Management Agreements;

we issued 10,268,158 of our common shares to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019, or, together, the Share Issuances; and

as consideration for the Share Issuances, DHC provided to us $75,000 by assuming certain of our working capital liabilities and through cash payments. Such consideration, the Conversion and the Share Issuances are collectively referred to as the Restructuring Transactions.

ReclassificationsAs of January 1, 2020, we reorganized our business to better align with the different services we offer older adults. In connection with our reorganization, we changed our reporting structure and the composition of our reporting units.. We have reclassified certainmade reclassifications to the financial statements of prior year amountsperiods to conform to the current year’speriod presentation. See Note 4 for more information regarding our segment reporting.These reclassifications had no effect on net income (loss) or shareholders’ equity.

As of January 1, 2020, we reclassified certain of our investments from debt investments to equity investments to reflect the nature of the investment rather than the nature of the securities held by the investment. As a result, we reclassified the related unrealized gain of $1,694 from accumulated other comprehensive income to accumulated deficit on January 1, 2020. See Note 9 for more information regarding these investments.

The accompanying financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, or our Annual Report. In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

7
6

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)


2. Summary of Significant Accounting Policies

Estimates and Assumptions. The preparation of these financial statements in conformity with GAAP requires us to make estimates and assumptions that may affect the amounts reported in these condensed consolidated financial statements and related notes. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements relate to revenue recognition, including contractual allowances, the allowance offor doubtful accounts, self-insurance reserves long-lived assets and estimates concerning our provisionsprovision for income taxes.

Recently Adopted Accounting Pronouncements. On January 1, 2020, we adopted ASU No. 2018-13, Fair Value Measurement (Topic 820) issued by the Financial Accounting Standards Board,taxes or FASB, which modifies certain disclosure requirements in Topic 820, such as the removal of the need to disclose the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, and several changesvaluation allowance related to Level 3 fair value measurements. The adoptiondeferred tax assets.

Our actual results could differ from our estimates. We periodically review estimates and assumptions and we reflect the effects of this ASU did not have a material impact on ourchanges, if any, in the condensed consolidated financial statements.

statements in the period that they are determined.
On January 1, 2020, we adopted ASU No. 2018-15,
Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40) issued by the FASB, using the prospective transition method, which aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies certain requirements under Topic 740, including eliminating the exception to intraperiod tax allocation when there is a loss from continuing operations and income from other sources, such as other comprehensive income or discontinued operations. We adopted this ASU on January 1, 2020. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted. In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires a financial asset or a group of financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This ASU eliminates the probable initial recognition threshold and instead requires reflection of an entity’s current estimate of all expected credit losses. In addition, this ASU amends the current available for sale security other-than-temporary impairment model for available for sale debt securities. The length of time that the fair value of an available for sale debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists and credit losses will now be limited to the difference between a security’s amortized cost basis and its fair value. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which amends the transition and effective date for nonpublic entities and smaller reporting companies, such as us, and clarifies that receivables arising from operating leases are not in the scope of this ASU. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarifies guidance around how to report expected recoveries. Entities will apply the provisions of the ASU as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This ASU is effective for smaller reporting companies for reporting periods beginning after December 15, 2022. We are assessing the potential impact that the adoption of this ASU (and the related clarifying guidance issued by the FASB) will have on our condensed consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform(Topic (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions on contract modifications meeting certain criteria to ease the financial reporting burdens of the expected market transition from the London Inter-bank Offered Rate, or LIBOR, and other interbank offered rates to the alternative reference rates. For a contract that meets the criteria, this ASU generally allows an entity to account for and present modifications as an event that does not require remeasurement at the modification date or reassessment of a previous accounting determination. This ASU was effective upon issuance and can be applied through December 31, 2022. We are assessing the potential impact thatexpect this ASU will not have a material impact on our condensed consolidated financial statements.
    
3. Revenue and Other Operating Income

7
We recognize revenue from contracts with customers in accordance with ASC Topic 606, Revenue from Contracts with Customers, or ASC Topic 606, using the practical expedient in paragraph 606-10-10-4 that allows for the use of a portfolio approach, because we have determined that the effect of applying the guidance to our portfolios of contracts within the scope of ASC Topic 606 on our condensed consolidated financial statements would not differ materially from applying the guidance to

8

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)

each individual contract within the respective portfolio or our performance obligations within such portfolio. The five-step model defined by ASC Topic 606 requires us to: (i) identify our contracts with customers; (ii) identify our performance obligations under those contracts; (iii) determine the transaction prices of those contracts; (iv) allocate the transaction prices to our performance obligations in those contracts;3. Revenue and (v) recognize revenue when each performance obligation under those contracts is satisfied. Revenue recognition occurs when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services.

Other Operating Income
Senior Living and Rehabilitation and Wellness Services Revenues.A substantial portion of our revenue from our independent living and assisted living communities relates to contracts with residents for housing services that are generally short term in nature and initially are subject to ASC Topic 842, Leases, or ASC Topic 842. As noted above, we have concluded that the non-lease components of these agreements are the predominant components of the contracts; therefore, we recognize revenue for these agreements under ASC Topic 606. We also provide our residents and others with rehabilitation and wellness services at our senior living communities as well as at outpatient clinics located separately from our senior living communities. Our contracts with residents and other customers that are within the scope of ASC Topic 606 are generally short term in nature. We have determined that services performed under those contracts are considered one performance obligation in accordance with ASC Topic 606 as such services are regarded as a series of distinct events with the same timing and pattern of transfer to the resident or customer. Revenue is recognized for those contracts when our performance obligation is satisfied by transferring control of the service provided to the resident or customer, which are generally when the services are provided over time.

Resident fees at our independent living and assisted living communities consist of regular monthly charges for basic housing and support services and fees for additional requested services, such as assisted living services, personalized health services and ancillary services. Fees are specified in our agreements with residents, which are generally short term (30 days to one year), with regular monthly charges billed in advance. Funds received from residents in advance of services provided are not material to our condensed consolidated financial statements. Some of our senior living communities require payment of an upfront entrance fee in advance of a resident moving into the community; substantially all of these community fees are non-refundable and are initially recorded as deferred revenue and included in other current liabilities in our condensed consolidated balance sheets. These deferred amounts are then amortized on a straight-line basis into revenue over the term of the resident's agreement. When the resident no longer resides within our community, the remaining deferred non-refundable fees are recognized in revenue. Revenue recorded and deferred in connection with community fees is not material to our condensed consolidated financial statements. Revenue for basic housing and support services and additional requested services is recognized in accordance with ASC Topic 606 and measured based on the consideration specified in the resident agreement and is recorded when the services are provided.

Rehabilitation and wellness services revenues at our Ageility clinics consist of charges for clinically-based rehabilitation services, including physical therapy, speech therapy and occupational therapy, as well as other service-based programs and therapies. Revenue for these services is recognized in accordance with ASC Topic 606 and is recorded when the services are provided.
Management Fee Revenues and Reimbursed Community-Level Costs Incurred on Behalf of Managed Communities. We manage senior living communities for the account of DHC pursuant to long-term management agreements which provide for periodic management fee payments to us and reimbursement for our direct costs and expenses related to support such communities. Although there are various management and operational activities performed by us under the agreements, we have determined that all community operations management activities constitute a single performance obligation, which is satisfied over time as the services are rendered. We earn management fees equal to 5% of gross revenues realized and 3% of construction costs for construction projects we manage at the senior living communities we manage. We recognize management fee revenues in accordance with ASC Topic 606 in the same period that we provide the management services to DHC, generally monthly. Our estimate of the transaction price for management services also includes the amount of reimbursement due from the owners of the communities for services provided and related costs incurred.

Commencing with the 2021 calendar year, we may also earn incentive fees from DHC under the management agreements, which are payable in cash and are contingent performance-based fees recognized only when earned at the end of each respective measurement period. Incentive management fees are excluded from the transaction price until it becomes probable that there will not be a significant reversal of cumulative revenue recognized. The incentive fee is equal to 15% of the amount by which the annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of all the managed communities on a combined basis exceeds target EBITDA for those communities on a combined basis for such calendar year, provided that in no event shall the incentive fee be greater than 1.5% of the gross revenues realized at all the managed

9

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)

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 2%, plus 6% of any capital investments funded at the managed communities on a combined basis in excess of target amounts. Unless otherwise agreed, the target capital investment increases annually based on the greater of the annual increase of CPI or 2%.

ASU No. 2016-08, Revenue from Contracts with Customers(Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. Where we are the primary obligor and, therefore, control the transfer of the goods and services with respect to any such operating expenses incurred in connection with the management of these communities, we recognize revenue when the goods have been delivered or the service has been rendered and we are due to be reimbursed from DHC pursuant to the New Management Agreements. Such revenue is included in community-level costs incurred on behalf of managed communities in our condensed consolidated statements of operations. The related costs are included in reimbursed community-level costs incurred on behalf of managed communities in our condensed consolidated statements of operations. Amounts due from DHC related to management fees and reimbursed community-level costs incurred on behalf of managed communities are included in due from related persons in our condensed consolidated balance sheets.

Other reimbursed expenses. Other reimbursed expenses include reimbursements that arise from certain centralized services we provide pursuant to our management agreements, a significant portion of which are charged or passed through to and are paid by our customers. We have determined that we control the services provided by third parties for our customers and, therefore, we account for the cost of these services and the related reimbursement revenue on a gross basis. We recognized revenue from other reimbursed expenses of $6,417 for the three months ended June 30, 2020 and $12,414 for the six months ended June 30, 2020. We did 0t recognize revenue from other reimbursed expenses for the three and six months endedJune 30, 2019.

The following tables present revenue from contracts by segment with customers disaggregated by type of payer, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors:

 Three Months Ended June 30, 2020
 Senior Living Rehabilitation and Wellness Services Total
Private payer$19,293
 $1,214
 $20,507
Medicare and Medicaid programs297
 9,564
 9,861
Other third-party payer programs—
 8,490
 8,490
Management fees15,705
 —
 15,705
Reimbursed community-level costs incurred on behalf of managed communities224,104
 —
 224,104
Other reimbursed expenses6,417
 —
 6,417
  Total revenues$265,816
 $19,268
 $285,084


 Three Months Ended June 30, 2019
 Senior Living Rehabilitation and Wellness Services Total
Private payer$200,829
 $640
 $201,469
Medicare and Medicaid programs54,714
 6,128
 60,842
Other third-party payer programs7,465
 4,720
 12,185
Management fees4,024
 —
 4,024
Reimbursed community-level costs incurred on behalf of managed communities77,219
 —
 77,219
  Total revenues$344,251
 $11,488
 $355,739



10

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)

 Six Months Ended June 30, 2020
 Senior Living Rehabilitation and Wellness Services Total
Private payer$39,574
 $2,111
 $41,685
Medicare and Medicaid programs1,013
 19,134
 20,147
Other third-party payer programs—
 19,407
 19,407
Management fees32,756
 —
 32,756
Reimbursed community-level costs incurred on behalf of managed communities456,120
 —
 456,120
Other reimbursed expenses12,414
 —
 12,414
  Total revenues$541,877
 $40,652
 $582,529


 Six Months Ended June 30, 2019
 Senior Living Rehabilitation and Wellness Services Total
Private payer$399,615
 $1,256
 $400,871
Medicare and Medicaid programs114,300
 11,571
 125,871
Other third-party payer programs15,256
 9,433
 24,689
Management fees8,007
 —
 8,007
Reimbursed community-level costs incurred on behalf of managed communities151,824
 —
 151,824
  Total revenues$689,002
 $22,260
 $711,262

Three Months Ended March 31, 2021
Senior
Living
Rehabilitation and Wellness Services(3)
Total
Private payer$16,787 $1,014 $17,801 
Medicare and Medicaid programs270 11,549 11,819 
Other third-party payer programs0 6,990 6,990 
Management fees13,850 (1) (2)0 13,850 
Reimbursed community-level costs incurred on behalf of managed communities213,160 (1)0 213,160 
Other reimbursed expenses5,480 (1)0 5,480 
  Total revenues$249,547 $19,553 $269,100 

(1)    Represents separate revenue streams earned from DHC.
(2)     As noted previously, in 2021 we intend to (i) transition 108 senior living communities managed on behalf of DHC with approximately 7,500 living units to new operators and (ii) close and reposition approximately 1,500 skilled nursing facility units in 27 CCRCs that we will continue to manage for DHC. The management fees we recognized related to these communities and units for the three months ended March 31, 2021 was $5,255. See Notes 11 and 16 for more information.
(3)    As noted previously we expect to close 37 Ageility inpatient rehabilitation clinics during 2021. Revenue related to these clinics for the three months ended March 31, 2021 was $5,441. See Note 16 for more information.

Three Months Ended March 31, 2020
Senior
Living		Rehabilitation and Wellness ServicesTotal
Private payer$20,281 $897 $21,178 
Medicare and Medicaid programs716 9,570 10,286 
Other third-party payer programs0 10,917 10,917 
Management fees17,051 (1)0 17,051 
Reimbursed community-level costs incurred on behalf of managed communities232,016 (1)0 232,016 
Other reimbursed expenses5,997 (1)0 5,997 
  Total revenues$276,061 $21,384 $297,445 

(1)    Represents separate revenue streams earned from DHC.

Other operating income. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law. Under the CARES Act, the U.S. Department of Health and Human Services, or HHS, established the Provider Relief Fund. The Provider Relief Fund was further supplemented on December 27, 2020 by the Consolidated Appropriations Act, 2021. Retention and use of the funds received under the CARES Act are subject to certain terms and conditions.conditions, including certain reporting requirements. Other operating income includes revenuesincome recognized for funds we have received pursuant to the Provider Relief Fund of the CARES Act thatfor which we have determined arethat we were in compliance with the terms and conditions of the Provider Relief Fund of the CARES Act. We recognize other operating income in our condensed consolidated statements of operations to the extent we estimate we have COVID-19 incurred losses thator related costs for which provisions of the CARES Act is intended to compensate. The amount of income we recognize for these estimated losses and costs is limited to the amount of funds we received for those losses during the period in which the estimated losses have beenand costs were recognized or incurred or, if funds were received subsequently, the period in which the funds were received. We recognized other operating income of $1,499$7,793 for the three and six months ended June 30, 2020. At June 30, 2020, accrued expenses and other current liabilities included $221 of funds received under the CARES Act for which we have not met, and may not meet, the required terms and conditions for the use of such funds, and which we may need to return. March 31, 2021. See Note 15 for more information.

4. Segment Information

Segment Information.OperatingWe do not allocate assets to operating segments are components of an enterprise that engages in business activities and, for which separate financialtherefore, no asset information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in determining the allocation of resources and in assessing performance. Our chief operating decision maker is our President and Chief Executive Officer.provided for reportable segments.

Effective as of January 1, 2020, we reorganized our business to better align with the different services we offer to older adults. As a result of the reorganization, our chief operating decision maker changed the manner in which our performance is assessed and, therefore, we changed our reporting structure and the compositionCertain of our general and administrative expenses incurred at our corporate office are deemed centralized services and allocated amongst operating segments. As a result, we have reclassified certain prior year amounts to conform to the current year's presentation.

Subsequent to the reorganization, we operate in 2 reportable segments: (1) senior livingCentralized services are largely determined by job function and (2) rehabilitation and wellness services. In the senior living reportable segment, we manage for the account of others and operate for our own account, independent living communities, assisted living communities and SNFs that are subject to centralized oversight. In the rehabilitation and wellness services segment, we provide a comprehensive suite of rehabilitation and wellness services, including physical, occupational, speech and other specialized therapy services, in the inpatient setting and in outpatient clinics through our Ageility division. Corporate and other amounts excluded from our reportable segments' performance are separately stated below and include amounts related to functional areas such as finance, information technology, legal, human resources

allocated by
11
8

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)

and our captive insurance company subsidiary, which participates in our workers' compensation, professional and general liability and certain automobile insurance programs. Allpercentage of our operations and assets are located in the United States, except for the operations of our captive insurance company subsidiary, which is organized in the Cayman Islands.

We do not allocate assets to operating segments and, therefore, no asset information is provided for reportable segments. total revenue. Results of operations and selected financial information by reportable segment and the reconciliation to the condensed consolidated financial statements are as follows:

 Three Months Ended June 30, 2020
 Senior Living Rehabilitation and Wellness Services Corporate and Other Total
Total revenues and other operating income$265,816
 $20,767
 $—
 $286,583
Operating expenses250,719
 16,259
 18,261
 285,239
Operating income (loss)15,097
 4,508
 (18,261) 1,344
Income (loss) before income taxes and equity in earnings of an investee842
 3,536
 (2,278) 2,100
Net income (loss)842
 3,536
 (1,376) 3,002

 Three Months Ended June 30, 2019
 Senior Living Rehabilitation and Wellness Services Corporate and Other Total
Total revenues and other operating income$344,251
 $11,488
 $—
 $355,739
Operating expenses321,625
 9,650
 20,733
 352,008
Operating income (loss)22,626
 1,838
 (20,733) 3,731
Income (loss) before income taxes and equity in earnings of an investee3,864
 743
 (1,261) 3,346
Net income (loss)4,569
 743
 (1,131) 4,181

 Six Months Ended June 30, 2020
 Senior Living Rehabilitation and Wellness Services Corporate and Other Total
Total revenues and other operating income$541,877
 $42,151
 $—
 $584,028
Operating expenses506,338
 33,877
 33,845
 574,060
Operating income (loss)35,539
 8,274
 (33,845) 9,968
Income (loss) before income taxes and equity in earnings of an investee5,707
 6,234
 (25,642) (13,701)
Net income (loss)5,707
 6,234
 (26,148) (14,207)

 Six Months Ended June 30, 2019
 Senior Living Rehabilitation and Wellness Services Corporate and Other Total
Total revenues and other operating income$689,002
 $22,260
 $—
 $711,262
Operating expenses673,867
 18,356
 47,145
 739,368
Operating income (loss)15,135
 3,904
 (47,145) (28,106)
(Loss) income before income taxes and equity in earnings of an investee(22,770) 1,746
 (7,759) (28,783)
Net (loss) income(23,554) 1,746
 (7,226) (29,034)


Three Months Ended March 31, 2021
Senior
Living(1)
Rehabilitation and Wellness Services(2)
Corporate and OtherTotal
Revenues$249,547 $19,553 $0 $269,100 
Other operating income7,774 19 0 7,793 
Operating expenses237,957 16,338 18,935 273,230 
Operating income19,364 3,234 (18,935)3,663 
Allocated corporate and other costs(12,657)(978)13,635 0 
Other (loss), net(122)0 (26)(148)
Income (loss) before income taxes6,585 2,256 (5,326)3,515 
Provision for income taxes0 0 (200)(200)
Net income (loss)$6,585 $2,256 $(5,526)$3,315 

(1)    As noted previously, in 2021 we intend to (i) transition 108 senior living communities managed on behalf of DHC with approximately 7,500 living units to new operators and (ii) close and reposition approximately 1,500 skilled nursing facility units in 27 CCRCs that we will continue to manage for DHC. See Notes 11 and 16 for more information.

(2)    As noted previously, we expect to close 37 Ageility inpatient rehabilitation clinics during 2021. See Note 16 for more information.
12

Three Months Ended March 31, 2020
Senior
Living		Rehabilitation and Wellness ServicesCorporate and OtherTotal
Revenues$276,061 $21,384 $0 $297,445 
Operating expenses255,619 17,616 15,586 288,821 
Operating income (loss)20,442 3,768 (15,586)8,624 
Allocated corporate and other costs(15,618)(1,068)16,686 0 
Other income (loss), net41 0 (24,466)(24,425)
Income (loss) before income taxes4,865 2,700 (23,366)(15,801)
Provision for income taxes0 0 (1,408)(1,408)
Net income (loss)$4,865 $2,700 $(24,774)$(17,209)
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)

5. Property and Equipment, net

Property and equipment, net consist of the following:
  June 30, 2020 December 31, 2019
Land $12,155
 $12,155
Buildings and improvements 201,847
 201,447
Furniture, fixtures and equipment 58,968
 59,174
Property and equipment, at cost 272,970
 272,776
   Less: accumulated depreciation (110,933) (105,529)
   Property and equipment, net $162,037
 $167,247

 March 31, 2021December 31, 2020
Land$12,155 $12,155 
Buildings, construction in process and improvements203,646 202,679 
Furniture, fixtures and equipment61,902 60,713 
Property and equipment, at cost277,703 275,547 
   Less: accumulated depreciation(118,987)(116,296)
   Property and equipment, net$158,716 $159,251 
 
We recorded depreciation expense relating to our property and equipment of $2,703$2,691 and $2,941$2,701 for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $5,404 and $11,106 for the six months ended June 30, 2020 and 2019, respectively.
 
We review the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. If there is an indication that the carrying value of an asset or group of assets is not recoverable, we estimate the recoverability of these assets by comparing projected undiscounted cash flows associated with these assets to their respective historical carrying values. If we conclude that an impairment exists, we determine the amount of impairment loss by comparing the historical carrying value of the asset or group of assets to their estimated fair value. We determine estimated fair value based on input from market participants, our experience selling similar assets, market conditions and internally developed cash flow models that our assets or asset groups are expected to generate, and we consider these estimates to be a Level 3 fair value measurement. As a result of our long-lived assets impairment review, we recorded $3,148 of impairment charges to certain of our long-lived assets for the six months ended June 30, 2019. The fair value of the impaired assets was $4,520 as of June 30, 2019. We also recorded long-lived impairment charges of $112 for the three and six months ended June 30, 2019 to reduce the carrying value of senior living communities we and DHC sold to their estimated fair value less costs to sell. NaN impairment charges were recorded for the three and six months ended June 30, 2020.
9

As of December 31, 2019, we had $4,813 of net property and equipment classified as held for sale and presented separately in our condensed consolidated balance sheets to be transferred to DHC in connection with the Transaction Agreement. As of June 30, 2020, we did not have net property and equipment classified as held for sale.

6. Accumulated Other Comprehensive Income

The following tables detail the changes in accumulated other comprehensive income, net of tax, for the six months ended June 30, 2020 and 2019:
  Six Months Ended June 30, 2020
  Equity
Investment of an
Investee		 Investments Accumulated
Other
Comprehensive
Income
Balance at January 1, 2020 $(175) $2,838
 $2,663
Cumulative effect adjustment to beginning accumulated deficit and accumulated other comprehensive income in connection with a reclassification of equity investments previously classified as debt investments —
 (1,694) (1,694)
Unrealized gain on debt investments, net of tax —
 730
 730
Equity in unrealized gain of an investee, net of tax —
 —
 —
Realized gain on debt investments reclassified and included in net income, net of tax —
 (13) (13)
Balance at June 30, 2020 $(175) $1,861
 $1,686


13

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)

6. Accumulated Other Comprehensive Income
  Six Months Ended June 30, 2019
  Equity
Investment of an
Investee		 Investments Accumulated
Other
Comprehensive
Income
Balance at January 1, 2019 $(266) $2,008
 $1,742
Unrealized loss on debt investments, net of tax —
 (221) (221)
Equity in unrealized gain of an investee, net of tax 136
 —
 136
Realized gain on debt investments reclassified and included in net loss, net of tax —
 1
 1
Balance at June 30, 2019 $(130) $1,788
 $1,658

The following tables detail the changes in accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31, 2021
 Equity
Investment of an
Investee		InvestmentsAccumulated
Other
Comprehensive
Income
Balance at January 1, 2021$(175)$1,491 $1,316 
Unrealized loss on debt investments, net of tax0 (294)(294)
Balance at March 31, 2021$(175)$1,197 $1,022 
Three Months Ended March 31, 2020
 Equity
Investment of an
Investee		InvestmentsAccumulated
Other
Comprehensive
Income
Balance at January 1, 2020$(175)$2,838 $2,663 
Cumulative effect adjustment to beginning accumulated deficit and accumulated other comprehensive income in connection with a reclassification of equity investments previously classified as debt investments0 (1,694)(1,694)
Unrealized gain on debt investments, net of tax0 427 427 
Realized gain on debt investments reclassified and included in net loss, net of tax0 (10)(10)
Balance at March 31, 2020$(175)$1,561 $1,386 

Accumulated other comprehensive income represents the unrealized gains and losses of our debt investments, net of tax, and our share of other comprehensive income (loss) relating to our former investment in Affiliates Insurance Company, or AIC.AIC, which dissolved on February 13, 2020. The cost of debt investments sold and for which realized gains and losses are reclassified and included in net loss, net of tax,income are determined on a specific identification basis. See Note 13 for more information regarding our arrangements with AIC. AIC dissolved on February 13, 2020.

As of January 1, 2020, we reclassified certain of our investments from debt investments to equity investments to reflect the nature of the investment rather than the nature of the securities held by the investment. As a result, we reclassified the related unrealized gain of $1,694 from accumulated other comprehensive income to accumulated deficit on January 1, 2020. See Note 9 for more information regarding these investments.

7. Income Taxes

We recognized a benefit for income taxes of $902 and a provision for income taxes of $506$200 and $1,408 for the three and six months ended June 30,March 31, 2021 and 2020, respectively. We recognized a benefit for income taxes of $705 and aThe provision for income taxes of $785 for the three and six ended June 30, 2019, respectively. The benefit for income taxes for the three months ended June 30, 2020March 31, 2021 is related to a decrease to the annual projection for federal and state income taxes. The provision for income taxes for the sixthree months ended June 30,March 31, 2020 is related to federal income taxes, partially offset by a federal alternative minimum tax, or AMT, credit refund benefit and a federal benefit related to lease termination expense, plus state income taxes, including a state valuation allowance. See Note 15 for more information regarding the impact of certain provisions of the CARES Act relating to income and other taxes. The benefit for income taxes for the three months ended June 30, 2019 is related to a decrease to our cumulative federal and state income taxes through June 30, 2019 compared to March 31, 2019, and the provision for income taxes for the six months ended June 30, 2019 is related to federal and state income taxes.

We previously determined it was more likely than not that a majority of our net deferred tax assets would not be realized and concluded that a valuation allowance was required, which eliminated the majority of our net deferred tax assets recorded in our condensed consolidated balance sheets. In the future, if we believe that we will more likely than not realize the benefit of these deferred tax assets, we will adjust our valuation allowance and recognize an income tax benefit, which may affect our results of operations.

8. EarningsNet Income (Loss) Per Share

WeBasic net income per share is calculated basic earnings per common share, or EPS, usingby dividing net income (loss) by the weighted average number of shares of ouroutstanding common shares outstanding during the periods.period. When applicable, net income (loss) per share—diluted EPS reflects the more dilutive earnings per common share amount calculated using the two class method or the treasury stock method.


14
10

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
earnings per share using the weighted average number of our common shares calculated using the two-class method, or the treasury stock method.

The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earningsnet income (loss) per share (in thousands):

Three Months Ended March 31,
20212020
Weighted average shares outstanding—basic31,530 31,448 
Effect of dilutive securities: unvested share awards132 0 
Weighted average shares outstanding—diluted (1)
31,662 31,448 

(1)    For the three months ended March 31, 2020, 124 of our unvested common shares were not included in the calculation of net loss per share—diluted because to do so would have been anti-dilutive.
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Weighted average common shares for basic earnings per share31,460
 5,007
 31,454
 5,005
Effect of dilutive securities: unvested share awards122
 135
 —
 —
Weighted average common shares for diluted earnings per share (1)
31,582
 5,142
 31,454
 5,005
        


(1)
For the six months ended June 30, 2020 and 2019, 123 and 122, respectively, of our unvested common shares were not included in the calculation of diluted EPS because to do so would have been antidilutive.

9. Fair Values of Assets and Liabilities

Recurring Fair Value Measures
Our
The tables below present certain of our assets recordedmeasured at fair value have beenat March 31, 2021 and December 31, 2020, categorized based on a fair value hierarchy in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. We applyby the following fair value hierarchy, which prioritizes the inputslevel of input used to measure fair value into three levels.
Level 1 - Inputs are based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 - Inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments and quoted prices in inactive markets.

Level 3 - Inputs are generated from model-based techniques that use significant assumptions that are not observable in the market.valuation of each asset.


 As of March 31, 2021
DescriptionTotalQuoted Prices in
Active Markets
for Identical
 Assets
(Level 1)		Significant 
Other
Observable
 Inputs
(Level 2)		Significant
Unobservable 
Inputs
(Level 3)
Cash equivalents (1)
$26,231 $26,231 $0 $0 
Investments:    
Equity investments (2)
    
High yield fund (3)
3,162 0 3,162 0 
International bond fund (4)
2,781 0 2,781 0 
Financial services industry1,376 1,376 0 0 
Healthcare492 492 0 0 
Technology801 801 0 0 
Other3,851 3,851 0 0 
Total equity investments12,463 6,520 5,943 0 
Debt investments (5)
    
Industrial bonds529 0 529 0 
Technology bonds1,443 0 1,443 0 
Government bonds7,123 7,123 0 0 
Energy bonds478 0 478 0 
Financial bonds1,330 0 1,330 0 
Other1,107 0 1,107 0 
Total debt investments12,010 7,123 4,887 0 
Total investments24,473 13,643 10,830 0 
Total$50,704 $39,874 $10,830 $0 
15
11

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)

 As of December 31, 2020
DescriptionTotalQuoted Prices in
Active Markets
for Identical
Assets
(Level 1)		Significant 
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Cash equivalents (1)
$26,291 $26,291 $0 $0 
Investments:
Equity investments (2)
    
High yield fund (3)
3,156 0 3,156 0 
International bond fund (4)
2,818 0 2,818 0 
Financial services industry1,348 1,348 0 0 
Healthcare477 477 0 0 
Technology765 765 0 0 
Other3,875 3,875 — 0 
Total equity investments12,439 6,465 5,974 0 
Debt investments (5)
    
Industrial bonds540 0 540 0 
Technology bonds1,471 0 1,471 0 
Government bonds7,301 7,301 0 0 
Energy bonds484 0 484 0 
Financial bonds1,359 0 1,359 0 
Other1,155 0 1,155 0 
Total debt investments12,310 7,301 5,009 0 
Total investments24,749 13,766 10,983 0 
Total$51,040 $40,057 $10,983 $0 
Recurring Fair Value Measures

The tables below present certain(1)    Cash equivalents consist of short-term, highly liquid investments and money market funds held primarily for obligations arising from our assets measuredself-insurance programs. Cash equivalents are reported in our condensed consolidated balance sheets as cash and cash equivalents and current and long-term restricted cash and cash equivalents. Cash equivalents include $22,531 and $22,837 of balances that were restricted at fair value at June 30, 2020March 31, 2021 and December 31, 2019, categorized2020, respectively. In addition to the cash equivalents of $26,231 and $26,291 at March 31, 2021 and December 31, 2020, respectively, reflected above, there were cash balances of $105,785 and $80,897 and restricted cash balances of $2,375 and $2,409 at March 31, 2021 and December 31, 2020, respectively.
(2)    The fair value of our equity investments is readily determinable. During the three months ended March 31, 2021 and March 31, 2020, we received gross proceeds of $337 and $45, respectively, in connection with the sales of equity investments and recorded gross realized gains totaling $96 and $0, respectively, and gross realized losses totaling $0 and $30, respectively.
(3)    The investment strategy of this fund is to invest principally in fixed income securities. The fund invests in such securities or investment vehicles it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of primarily fixed income securities issued by companies with below investment grade ratings. There are no unfunded commitments and the levelinvestment can be redeemed weekly.
(4)    The investment strategy of inputs,this fund is to invest principally in fixed income securities issued by non-U.S. issuers. The fund invests in such securities or investment vehicles as definedit considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of U.S. dollar investment-grade fixed income securities. There are no unfunded commitments and the investment can be redeemed weekly.
(5)    As of March 31, 2021, our debt investments, which are classified as available for sale, had a fair value of $12,010 with an amortized cost of $11,548; the difference between the fair value hierarchy under GAAP, usedand amortized cost amounts resulted from unrealized gains of $462, net of unrealized losses of $36. As of December 31, 2020, our debt investments had a fair value of $12,310 with an amortized cost of $11,554; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $756, net of unrealized losses of $4. Debt investments include $8,187 and $8,395 of balances that were restricted as of March 31, 2021 and December 31, 2020, respectively. At March 31, 2021, 4 debt investments we held, with a fair value of $778, had been in a loss position for less than 12 months and we did not hold any debt investments with a fair value in a loss position for greater than 12 months. We do not believe these investments are impaired primarily because they have not been in a loss position for an extended period of time, the valuationfinancial conditions of each asset.the issuers of these investments remain strong with solid fundamentals as of March 31, 2021, we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery, and other factors that support our conclusion that the loss is temporary. During the three months ended March 31, 2021 and 2020, we received gross proceeds of $0 and $1,409, respectively, in connection with the sales of debt investments and recorded gross realized gains totaling $0 and $10, respectively. There were no gross realized losses for the three months ended March 31, 2021 and 2020, respectively. We record gains and losses on the sales of these investments using the specific identification method.
  As of June 30, 2020
    
Quoted Prices in
Active Markets
for Identical
 Assets
 
Significant 
Other
Observable
 Inputs
 
Significant
Unobservable 
Inputs
Description Total (Level 1) (Level 2) (Level 3)
Cash equivalents (1)
 $25,330
 $25,330
 $—
 $—
Investments:        
Equity investments (2)
        
High yield fund (3)
 2,866
 —
 2,866
 —
International bond fund (4)
 2,786
 —
 2,786
 —
Financial services industry 1,179
 1,179
 —
 —
Healthcare 418
 418
 —
 —
Technology 717
 717
 —
 —
Other (5)
 3,953
 3,953
 —
 —
Total equity investments 11,919
 6,267
 5,652
 —
Debt investments (6)
        
Industrial bonds 956
 —
 956
 —
Technology bonds 1,965
 —
 1,965
 —
Government bonds 9,985
 9,985
 —
 —
Energy bonds 646
 —
 646
 —
Financial bonds 1,686
 —
 1,686
 —
Other 1,469
 —
 1,469
 —
Total debt investments 16,707
 9,985
 6,722
 —
Total investments 28,626
 16,252
 12,374
 —
Total $53,956
 $41,582
 $12,374
 $—





16
12

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)

  As of December 31, 2019
    
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant 
Other
Observable
Inputs
 
Significant
 Unobservable
Inputs
Description Total (Level 1) (Level 2) (Level 3)
Cash equivalents (1)
 $27,456
 $27,456
 $—
 $—
Investments:        
Equity investments (2)
        
Financial services industry 1,233
 1,233
 —
 —
Healthcare 395
 395
 —
 —
Technology 281
 281
 —
 —
Other 4,500
 4,500
 —
 —
Total equity investments 6,409
 6,409
 —
 —
Debt investments (6)
      
  
High yield fund (3)
 2,977
 —
 2,977
 —
International bond fund (4)
 2,680
 —
 2,680
 —
Industrial bonds 1,180
 —
 1,180
 —
Technology bonds 2,189
 —
 2,189
 —
Government bonds 9,537
 9,537
 —
 —
Energy bonds 625
 —
 625
 —
Financial bonds (5)
 1,853
 —
 1,853
 —
Other 725
 —
 725
 —
Total debt investments 21,766
 9,537
 12,229
 —
Total investments 28,175
 15,946
 12,229
 —
Total $55,631
 $43,402
 $12,229
 $—
(1)
Cash equivalents consist of short-term, highly liquid investments and money market funds held primarily for obligations arising from our self-insurance programs. Cash equivalents are reported in our condensed consolidated balance sheets as cash and cash equivalents and current and long-term restricted cash and cash equivalents. Cash equivalents include $22,793 and $23,014 of balances that are restricted at June 30, 2020 and December 31, 2019, respectively.
(2)
The fair value of our equity investments is readily determinable. During the six months ended June 30, 2020 and 2019, we received gross proceeds of $2,888 and $1,664, respectively, in connection with the sales of equity investments and recorded gross realized gains totaling $296 and $282, respectively, and gross realized losses totaling $214 and $45, respectively.
(3)
The investment strategy of this fund is to invest principally in fixed income securities. The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of primarily fixed income securities issued by companies with below investment grade ratings. There are no unfunded commitments and the investment can be redeemed weekly. As of January 1, 2020, we reclassified this investment from a debt investment to an equity investment to reflect the nature of the investment rather than the nature of the securities held by the investment.

(4)
The investment strategy of this fund is to invest principally in fixed income securities issued by non-U.S. issuers. The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of U.S. dollar investment grade fixed income securities. There are no unfunded commitments and the investment can be redeemed weekly. As of January 1, 2020, we reclassified this investment from a debt investment to an equity investment to reflect the nature of the investment rather than the nature of the securities held by the investment.

(5)
As of January 1, 2020, we reclassified an investment with a fair value of $286 from a debt investment to an equity investment.

(6)
As of June 30, 2020, our debt investments, which are classified as available for sale, had a fair value of $16,707 with an amortized cost of $15,581; the difference between the fair value and amortized cost amounts resulted in unrealized gains of $1,126, net of unrealized losses of $0. As of December 31, 2019, our debt investments had a fair value of $21,766 with an amortized cost of $19,662; the difference between the fair value and amortized cost amounts resulted in unrealized gains of $2,114, net of unrealized losses of $10. Debt investments include $12,570 and $12,477 of balances that are restricted as of June 30, 2020 and December 31, 2019, respectively. At June 30, 2020, none of our debt or equity investments were in a loss position. During the six months ended June 30, 2020 and 2019, we received gross proceeds of $1,963 and $2,782, respectively, in connection with the sales of debt investments and recorded gross realized gains totaling $13 and $6, respectively, and gross realized losses totaling $0 and $7, respectively. We record gains and losses on the sales of these investments using the specific identification method.


17

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)

The amortized cost basis and fair value of available for sale debt securities at June 30, 2020,March 31, 2021, by contractual maturity, are shown below.

Amortized CostFair Value
Due in one year or less$1,796 $1,826 
Due after one year through five years5,522 5,773 
Due after five years through ten years4,230 4,411 
   Total$11,548 $12,010 
  Amortized Cost Fair Value
Due in one year or less $1,402
 $1,417
Due after one year through five years 8,407
 8,865
Due after five years through ten years 5,772
 6,425
   Total $15,581
 $16,707


Our financial assets (which include cash equivalents and investments) have been valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing third-party pricing services or other market observable data. During the sixthree months ended June 30, 2020,March 31, 2021, we did not change the type of inputs used to determine the fair value of any of our assets and liabilities that we measure at fair value. 
 
The carrying value of accounts receivable and accounts payable approximates fair value as of June 30, 2020March 31, 2021 and December 31, 2019.2020. The carrying value and fair value of our mortgage notes payable were $7,355$7,076 and $8,360,$7,818, respectively, as of June 30, 2020March 31, 2021 and $7,533$7,171 and $8,861,$8,177, respectively, as of December 31, 2019,2020, and are categorized in Level 3 of the fair value hierarchy. We estimate the fair value of our mortgage note payable by using discounted cash flow analyses and currently prevailing market terms as of the measurement date.

Non-Recurring Fair Value Measures
 
We review the carrying value of our long-lived assets, including our right of useright-of-use assets, property and equipment and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. See Note 5 for more information regarding fair value measurements related to impairments of our long-lived assets.
 
10. Indebtedness

In June 2019, we entered into a second amended and restated credit agreement with Citibank, N.A., as administrative agent and lender, and a syndicate of other lenders pursuant to which we obtained aOur $65,000 secured revolving credit facility, or Credit Facility, is governed by a credit agreement with a syndicate of lenders. The current maturity date of our credit facility, scheduled to mature onCredit Facility is June 12, 2021. AtOn March 16, 2021, we exercised our option we mayto extend the maturity dateCredit Facility for a one-year, period, which isuntil June 12, 2022, subject to payment of anthe extension fee and satisfaction of other conditions.

We paid fees of $1,271 in 2019 in connection with the closing of our credit facility, which were deferred and are being amortized over the initial term of our credit facility. Our credit facilityCredit Facility is available for general business purposes, including acquisitions, and provides for the issuance of letters of credit. We are required to pay interest at a rate of LIBOR plus a premium of 250 basis points per annum, or at a base rate, as defined in our credit agreement,Credit Agreement, plus 150 basis points per annum, on borrowings under our credit facility;Credit Facility; the effective annual interest rates,rate options, as of June 30, 2020,March 31, 2021, were 2.66%2.61% and 4.75%, respectively. We are also required to pay a quarterly commitment fee of 0.35% per annum on the unused portion of the available capacity under our credit facility. The weighted average annual interest rate for borrowings under our credit facility was 4.99% for the six months ended June 30, 2019.Credit Facility. As of June 30,March 31, 2021 and 2020, we had 0 borrowings outstanding under our credit facility.Credit Facility. As of June 30, 2020,March 31, 2021, we had letters of credit issued under the Credit Facility in an aggregate amount of $2,442 and $51,804we had $14,935 available for borrowings under our credit facility.Credit Facility. We incurred aggregate interest expense and other associated costs related to our credit facilitiesCredit Facility of $275$253 and $775$254 for the three months ended June 30,March 31, 2021 and 2020, and 2019 respectively, and $539 and $1,547 for the six months ended June 30, 2020 and 2019 respectively.

Our credit facilityCredit Facility is secured by real estate mortgages on 11 senior living communities we own with a combined 1,2451,236 living units owned by certain of our subsidiaries that guarantee our obligations under our credit facility.Credit Facility. Our credit facilityCredit Facility is also secured by these subsidiaries’senior living communities' accounts receivable and related collateral. The amount of available borrowings under our credit facilityCredit Facility is subject to our having sufficient qualified collateral, which is primarily based on the value and operating performance of the communities securing our obligations under our credit facility.Credit Facility. Our credit facilityCredit Facility provides for the acceleration of payment of all amounts outstanding under our credit facilityCredit Facility upon the occurrence and continuation of certain events of default, including a change of control of us, as defined in our credit agreement.Credit Agreement. Our credit agreementCredit Agreement contains financial and other covenants, including those that restrict our ability to pay dividends or make other distributions to our shareholders in certain circumstances.

18

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)


At June 30, 2020,March 31, 2021, we had 7 irrevocable standby letters of credit outstanding, totaling $29,292. One of these letters of credit in the amount of $26,850, which secures our workers' compensation insurance program, is collateralized by approximately $21,543$21,566 of cash equivalents and $6,921$7,723 of debt and equity investments. This letter of credit expires in June 2021
13

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
and is automatically extended for one-year terms unless notice of nonrenewal is provided prior to the end of the applicable term. As of May 5, 2021, we have not received a notice of nonrenewal. We expect that our worker's compensation insurance program will require an increase in the amount of this letter of credit in June 2021. At June 30, 2020,March 31, 2021, the cash equivalents collateralizing this letter of credit including accumulated interest, wereare classified as short-term restricted cash and cash equivalents in our condensed consolidated balance sheets, and the debt and equity investments collateralizing this letter of credit are classified as short-term restricted debt and equity investments in our condensed consolidated balance sheets. The remaining 6 irrevocable standby letters of credit outstanding at June 30, 2020,March 31, 2021, totaling $2,442, which are issued under the Credit Facility, secure certain of our other obligations. As of June 30, 2020,May 5, 2021, these letters of credit arewere scheduled to mature between October 2020June 2021 and September 2021 and are required by the beneficiaries to be renewed annually. As of June 30, 2020, our obligations under these 6 letters of credit, totaling $2,442, remain issued and outstanding under our credit facility.

At June 30, 2020,March 31, 2021, 1 of our senior living communities was encumbered by a mortgage that secured a note. This mortgage note contains standard mortgage covenants. We recorded a discount in connection with the assumption of this mortgage note as part of our acquisition of the senior living community secured by this mortgage in order to record this mortgage note at its then estimated fair value. We amortize this discount as an increase in interest expense until the maturity of this mortgage note. This mortgage note requires payments of principal and interest monthly until maturity. The following table is a summary of this mortgage note as of June 30, 2020:March 31, 2021:
Balance as of
March 31, 2021		Contractual Stated
Interest Rate		Effective
Interest Rate		Maturity DateMonthly
Payment		Lender
$7,297 (1)6.20 %6.70 %September 2032$72 Federal Home Loan Mortgage Corporation

Balance as of
June 30, 2020
 
Contractual Stated
Interest Rate
 
Effective
Interest Rate
 Maturity Date 
Monthly
Payment
 Lender Type
$7,355 
(1) 
6.20% 6.70% September 2032 $72  Federal Home Loan Mortgage Corporation

(1)Contractual principal payment excluding unamortized discount and debt issuance costs of $241.

(1)    Contractual principal payments excluding unamortized discount $221.

We incurred interest expense, net of discount amortization, of $125$122 and $131$128 with respect to the mortgage note for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $253 and $265 for the six months ended June 30, 2020 and 2019, respectively. Our mortgage note requires monthly payments into escrows for taxes, insurance and property replacement funds; certain withdrawals from escrows require Federal Home Loan Mortgage Corporation approval.
As of June 30, 2020, weWe believe we were in compliance with all applicable covenants under our credit facilityCredit Facility and mortgage note.note as of March 31, 2021.

On April 1, 2019, we obtained from DHC a $25,000 credit facility in connection with the Restructuring Transactions. The DHC credit facility matured and was terminated on January 1, 2020, in connection with the completion of the Restructuring Transactions. There were no borrowings outstanding under the DHC credit facility at the time of such termination and we did not borrow any funds under the DHC credit facility during its term.

11. Leases with DHC and Healthpeak Properties Inc. and Management Agreements with DHC
    
As2020 Restructuring of December 31, 2019, we leased 166 senior living communities from DHC pursuant to 5 master leases and we managed for DHC's account 78 senior living communities pursuant to management agreements. Effective as of January 1, 2020, we restructured our business arrangements with DHC as further described below, and after giving effect to the Restructuring Transactions, all the senior living communities owned by DHC that we operate are pursuant to management agreements. As of June 30, 2020, we managed 241 senior living communities for the account of DHC pursuant to the New Management Agreements.

Restructuring our Business Arrangements with DHC. Pursuant to the Transaction AgreementEffective as of the Conversion Time:January 1, 2020:

•our 5 then existing master leases with DHC as well as our then existing management and pooling agreements with DHC were terminated and replaced with new management agreements for all those senior living communities, together with a related omnibus agreement, or collectively, the New Management Agreements;


19

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)

we completed the Share Issuances pursuant to which •we issued 10,268,158 of our common shares to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019; and

•as consideration for the Share Issuances,share issuances, DHC provided to us $75,000 by assuming certain of our working capital liabilities and through cash payments; we recognized $22,899 in loss on termination of leases, representing the excess of the fair value of the Share Issuancesshare issuances of $97,899 compared to the consideration of $75,000 paid by DHC. As of June 30,March 31, 2020, DHC assumed $51,547 of our working capital liabilities as part of the $75,000 it provided to us for the Share Issuances.liabilities. We received cash of $23,453 from DHC during the three months ended June 30, 2020.

2020, subsequent to March 31, 2020; and
Also pursuant to the Transaction Agreement: (1) commencing February 1, 2019, the aggregate amount of monthly minimum rent payable to DHC by us under our master leases with DHC was reduced to $11,000, subject to adjustment, and subsequently reduced in accordance with the Transaction Agreement as a result of DHC’s subsequent sales of certain of the leased senior living communities, and no additional rent was payable to DHC by us from such date through the Conversion Time; and (2) as of April 1, 2019, DHC purchased from us •$49,155 of unencumbered Qualifying PP&E (as defined in the Transaction Agreement) related to DHC's senior living communities leased and operated by us.

In accordance with ASC Topic 842, the reduction in the monthly minimum rent payable to DHC under our then- existing master leases with DHC pursuant to the Transaction Agreement was determined to be a modification of these master leases, and we reassessed the classification of these master leases based on the modified terms and determined that these master leases continued to be classified as long-term operating leases until certain contingent events were achieved. The remaining contingent events were achieved and accordingly, we remeasured the lease liability and right of use asset recorded in our condensed consolidated balance sheets as of December 31, 2019, to zero.

Pursuant to the New Management Agreements, we receive a management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement for our direct costs and expenses related to such communities. Commencing with the 2021 calendar year, we may receive an annual incentive fee equal to 15% of the amount by which the annual EBITDA, of all communities on a combined basis exceeds the target EBITDA for all communities on a combined basis for such calendar year, provided that in no event shall the incentive fee be greater than 1.5% of the gross revenues realized at 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%.

The New Management Agreements expire in 2034, subject to our right to extend them for 2 consecutive five-year terms if we achieve certain performance targets for the combined managed communities portfolio, unless earlier terminated or timely notice of nonrenewal is delivered. The New Management Agreements provide DHC with the right to terminate any New Management Agreement for a community that does not earn 90% of the target EBITDA for such community for two consecutive calendar years or in any two of three consecutive calendar years, with the measurement period commencing January 1, 2021 (and the first termination not possible until the beginning of calendar year 2023); provided DHC may not in any calendar year terminate communities representing more than 20% of the combined revenues for all communities for the calendar year prior to such termination. Pursuant to a guaranty agreement dated as of January 1, 2020, made by us in favor of DHC’s applicable subsidiaries, we have guaranteed the payment and performance of each of our applicable subsidiary’s obligations under the applicable New Management Agreements.

We recognized transaction costs of $175 and $1,133$1,095 related to the Transaction Agreement for the three months ended June 30, 2020 and 2019, respectively, and $1,270 and $8,808March 31, 2020.

2021 Amendments to our Management Arrangements with DHC. As part of our Strategic Plan, we have agreed to amend our management arrangements with DHC. See Note 16 for the six months ended June 30, 2020 and 2019, respectively.

Senior Living Communities Formerly Leased from DHC. Prioradditional information on our Strategic Plan. The principal changes to the Conversion Time, we were DHC's largest tenant and DHC was our largest landlord. Under our prior master leases with DHC, we paid DHC annual rent plus percentage rent equal to 4.0% of the increase in gross revenues at the applicable senior living communities over base year gross revenues as specified in the applicable lease. Pursuant to the Transaction Agreement, we were no longer required to pay any additional rent to DHC beginning February 1, 2019.management arrangements will include:

14
Our total rent expense under all of our leases with DHC was $32,490 and $86,272 for the three and six months ended June 30, 2019, respectively, which amount included estimated percentage rent of $0 and $1,547 for the three and six months

20

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)

ended June 30, 2019, respectively. Pursuant•we will cooperate with DHC in transitioning the management of 108 senior living communities with approximately 7,500 living units, to other third party managers without payment of any termination fee to us;
•DHC will no longer have the right to sell up to an additional $682,000 of senior living communities managed by us and terminate our management of those communities without payment of a termination fee to us upon sale;
•DHC's ability to terminate the management agreement is (i) extended 2 years to 2025, (ii) the maximum amount of communities that may be terminated will be reduced to 10% (from 20%) of the total managed portfolio by revenue per year and (iii) achieving less than 80% (from 90%) of budgeted earnings before interest, taxes, depreciation and taxes, or EBITDA, will be required to qualify as a “Non Performing Asset”,
•we will continue to manage 120 senior living communities for DHC;
•we will close and reposition the 27 skilled nursing units in CCRC communities that we will continue to manage with approximately 1,500 living units;
•the incentive fee calculation included in our existing management agreements with DHC will be amended for the senior living communities that we will continue to manage for DHC such that there will no longer be a cap placed on any incentive fee we earn in any calendar year and that any senior living communities that are undergoing a major renovation or repositioning will be excluded from the calculation and reset pursuant to the Transaction Agreement,terms of the management agreements as a result of expected capital projects DHC is planning in the next five years;
•DHC will assume control of major community renovation or repositioning activities at the senior living communities that we will continue to manage for DHC; and
•the term of our rent payableexisting management agreements with DHC will be extended by two years to DHC was reduced by a totalDecember 31, 2036.
We expect that the transition of $13,840 in aggregate for Februarymanagement of the 108 senior living communities and March 2019 and we did not pay such amount to DHC. However, as the Transaction Agreement was not entered into until April 1, 2019, our rent expense forclosure of 27 skilled nursing units will be completed before year end 2021. For the three months ended March 31, 2019 was not adjusted for2021, we recognized $5,255 of management fees related to the rent reduction for Februarymanagement of these communities and March 2019. Instead, the rent reduction for February and March 2019 was determined to be a lease inducement, for which a liability for the $13,840 was recorded as a reduction of the right of use asset on our condensed consolidated balance sheets asunits.

Senior Living Communities Leased from Healthpeak Properties, Inc. As of March 31, 2019, and was amortized as2021, we leased 4 senior living communities under 1 lease with Healthpeak Properties, Inc., or PEAK. This lease is a reduction of rent expense over the remaining terms of our master leases.

As of December 31, 2019, we had 0 outstanding rent obligation to DHC.

Our previously existing leases with DHC were “triple net” leases,lease which generally required us torequires that we pay rentall costs incurred in the operation of the communities, including the cost of insurance and all property operating expenses, to obtain, maintainreal estate taxes, maintaining the communities, and comply with all applicable permits and licenses necessary to operateindemnifying the leased communities, to indemnify DHC fromlandlord for any liability which may arise from the operations during the lease term. We recognized rent expense for this lease for actual rent paid plus or minus a straight-line adjustment for scheduled minimum rent increases, which were not material to our condensed consolidated financial statements. The right-of-use asset balance has been decreased for the amount of accrued lease payments, which amounts are not material to our condensed consolidated financial statements.

On March 8, 2021, we entered into a second amendment to our master lease with PEAK, pursuant to which we agreed to pay a lease termination fee upon the sale by reasonPEAK of its ownershipany of the 4 communities we lease in an amount equal to the difference between: (i) the net present value of the allocated minimum rate payments that would otherwise have been payable with respect to that community for the period beginning on the sale date and ending on April 30, 2023 (discounted at 9%) and (ii) the net present value of the reinvestment returns of the net proceeds from the sale of the community (discounted at 9%), and assuming such net proceeds are reinvested for the period commencing on the sale date and ending on April 30, 2023 at a rate of 5.5%. The aggregate maximum termination fee payable by us with respect to the termination of the 4 communities is capped at $3,100. On April 4, 2021, one of the communities that we lease from PEAK had a fire which has caused extensive damage and the residents of the community to maintain the communities atbe relocated. We believe our expense,liability with respect to remove and dispose of hazardous substances at the communities in compliance with applicable laws andthis event is limited to maintaina $1,000 insurance on the communities for DHC’s and our benefit.

Priordeductible which we expect to the Transaction Agreement, under our previously existing leases with DHC, we could request that DHC purchase certain improvements to the leased communities in return for increases in annual rent in accordance with a formula specifiedrecognize in the applicable lease. Pursuant to the Transaction Agreement, the $56,342 and $78,920, respectively, of capital improvements to the leased communities that we sold to DHC during the three and six months ended June 30, 2019, did not result in increased rent.2021.


In accordance with ASC Topic 840, Leases, the sale and leaseback transaction we completed in June 2016 with DHC qualified for sale-leaseback accounting and we classified the related lease as an operating lease. Accordingly, the gain generated from the sale of $82,644 was deferred and was being amortized as a reduction of rent expense over the initial term of the related lease. Upon our adoption of ASC Topic 842 on January 1, 2019, we recorded a cumulative effect adjustment through retained earnings of $67,473, eliminating our remaining deferred gain.

Senior Living Communities Managed for the Account of DHC and its Related Entities. As of June 30,March 31, 2021 and 2020, and 2019, we managed 241228 and 77244 senior living communities, respectively, for the account of DHC. We earned management fees of $15,135$12,910 and $3,802$16,462 from the senior living communities we managed for the account of DHC for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $31,597 and $7,521 for the six months ended June 30, 2020 and 2019, respectively. In addition, we earned fees for our management of capital expenditure projects at the communities we
15

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
managed for the account of DHC of $444$834 and $153$462 for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $906 and $346 for the six months ended June 30, 2020 and 2019, respectively. These amounts are included in management fee revenue in our condensed consolidated statements of operations. In connection with the completion of the Restructuring Transactions, effective as of January 1, 2020, we and DHC terminated the long-term management and pooling agreements and replaced them with the New Management Agreements, the terms of which are discussed above.

We also provide certain otherancillary services to residents at some of the senior living communities we manage for the account of DHC, such as rehabilitation and wellness services. At senior living communities we manage for the account of DHC where we provide rehabilitation and wellness services on an outpatient basis, the residents, third party payers or government programs pay us for those rehabilitation and wellness services. At senior living communities we manage for the account of DHC where we provide inpatient rehabilitation and wellness services, DHC generally pays us for these services and charges for such services are included in amounts charged to residents, third party payers or government programs. We earned revenues of $5,814$5,441 and $1,513$8,057 for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $13,871 and $3,188 for the six months ended June 30, 2020 and 2019, respectively, for rehabilitation and wellness services we provided at senior living communities we manage for the account of DHC and that are payable by DHC. These amounts are included in rehabilitation and wellness services in our condensed consolidated statements of operations. Consistent with our historical accounting for these services at our managed communities, the revenues earned at these clinics that were previously located at senior living communities that we leased from DHC but as of the Conversion Time, we now manage, no longer constitute intercompany revenues and thus will not be eliminated in consolidation and will be recognized and reported as rehabilitation and wellness services revenues in our condensed consolidated statements of operations.

We earned management fees of $126$106 and $69$127 for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $253 and $140 for the six months ended June 30, 2020 and 2019, respectively, for management services at a part of a senior

21

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)

living community DHC subleases to an affiliate, which amounts are included in management fee revenues in our condensed consolidated statements of operations.

In 2020, DHC sold 9 senior living communities that we previously managed. Upon completion of these sales, our management agreements with DHC with respect to those communities were terminated. In addition, in 2020, DHC also closed 7 additional senior living communities and 1 building in 1 community. While those closed communities and building are no longer being operated as senior living communities, we continue to manage the related back-office operations and empty communities. For the three months ended March 31, 2020, we recognized $1,052 of management fees related to these sold and closed communities.

Ageility Clinics Leased from DHC.We lease space from DHC at certain of the senior living communities that we manage for DHC. We use this leased space for inpatient and outpatient rehabilitation and wellness services clinics. We recognized rent expense of $488$397 and $782$294 for the three and six months ended June 30,March 31, 2021 and 2020, respectively, with respect to these leases.

12. Business Management Agreement with RMR LLC

The RMR Group LLC, or RMR LLC provides us certain services pursuant to a business management agreement. Pursuantservices to us pursuant to our business management agreement with RMR LLC, weand shared services agreement. We incurred aggregate fees and certain cost reimbursements payable to RMR LLC of $2,123$1,804 and $2,409$2,351 for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $4,474 and $4,774 for the six months ended June 30, 2020 and 2019, respectively, which amounts include reimbursements for our share of RMR LLC’s costs for providing our internal audit function.respectively. These amounts are included in general and administrative expenses in our condensed consolidated statements of operations.

For further information about our relationship with RMR LLC, see our Annual Report.

13. Related Person Transactions

We have relationships and historical and continuing transactions with DHC, RMR LLC and others affiliated withrelated to them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors and officers who are also our Directors or officers. The RMR Group Inc., or RMR Inc., is the managing member of RMR LLC. The Chair of our Board and one of our Managing Directors, Adam D. Portnoy, asis the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc. andMr. Portnoy is also a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. Jennifer B. Clark, our other Managing Director and our Secretary, also serves as a managing director and the executive vice president, general counsel and secretary of RMR Inc., an officer and employee of RMR LLC and an officer of ABP Trust. Certain of our officers, and DHC’s officers, are also officers and employees of RMR LLC. Some of our Independent Directors also serve as independent trustees or independent directors of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy serves as the chair of the boards of trustees or boards of directors of several of these public companies and as a managing director or managing trustee of these companies. Other officers of RMR LLC, including Ms. Clark, serve as managing trustees or managing directors of certain of these companies.

DHC. DHC is currently our largest shareholder, owning, as of June 30, 2020,March 31, 2021, 10,691,658 of our common shares, or 33.9%33.8% of our outstanding common shares. We manage for the account of DHC a substantial majority of the senior living communities we operate. RMR LLC provides management services to both us and DHC and Adam Portnoy is chair of the board of trustees and a managing trustee of DHC. Jennifer Clark is a managing trustee and the secretary of DHC. Effective as of January 1,Included in accrued expenses and other current liabilities on our condensed
16

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
consolidated balance sheets at March 31, 2021 and December 31, 2020 we completed the Restructuring Transactions, pursuant toare $31,771 and $30,090, respectively, which we restructured our existing business arrangements with DHC.will be reimbursed by DHC and are included in due from related person. See Note 11for more information regarding our relationships, agreements and transactions with DHC and certain parties related to it and us.

RMR LLC. We have an agreement with RMR LLC to provide business management services to us. See Note 12 for more information regarding our relationship with RMR LLC. RMR also provides management services to DHC.

ABP Trust. ABP Trust and its subsidiaries, owned 1,972,783 of our common shares, representing 6.2% of our outstanding common shares as of June 30, 2020.March 31, 2021.

We lease our headquarters from a subsidiary of ABP Trust. On February 24, 2021, we and the ABP Trust subsidiary renewed the lease through December 31, 2031. The annual lease payment will range from $1,026 to $1,395 over the period of the lease. The lease also provides us with an improvements allowance from ABP Trust not to exceed $2,667. Our rent expense for our headquarters, including utilities and real estate taxes that we pay as additional rent, was $424$477 and $451$435 for the three months ended June 30,March 31, 2021 and 2020, respectively, which is included in general and 2019, respectively,administrative expenses. As a result of renewing this lease, we increased each of our right-of-use asset and $859lease liability noted below on our condensed consolidated balance sheets by $9,746 to reflect the terms of the amendment. We recognized a right-of-use asset and $971lease liability, which amounts were $10,027 and $496 for the six months ended June 30, 2020 and 2019, respectively. The adoption of ASC Topic 842 resulted in the recognition of a lease liability and right of use$9,964 and $452 for the right-of-use asset which amount was $982 and $1,901 as of June 30,March 31, 2021 and December 31, 2020, and 2019, respectively, with respect to our headquarters lease, using an incremental borrowing rate of 4.4%3.9%. The right of useright-of-use asset has been reduced by the amount of accrued lease payments, which amounts are not material to our condensed consolidated financial statements.


22

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)


AIC. Until its dissolution on February 13, 2020, we, ABP Trust, DHC and 4 other companies to which RMR LLC provides management services owned AIC in equal amounts. Certain of our Directors and certain trustees or directors of the other AIC shareholders served on the board of directors of AIC.

We and the other AIC shareholders historically participated in a combined property insurance program arranged and insured or reinsured in part by AIC. The policies under that program expired on June 30, 2019, and we and the other AIC shareholders elected not to renew the AIC property insurance program; we have instead purchased standalone property insurance coverage from unrelated third-party insurance providers.

At June 30, 2020 and December 31, 2019, our investment in AIC had a carrying value of $11 and $298, respectively. These amounts are presented as equity investment of an investee in our condensed consolidated balance sheets. In June 2020, we received $287 in connection with AIC's dissolution. We did not recognize any income related to our investment in AIC for the three or six months ended June 30, 2020, and recognized income of $130 and $534 for the three and six months ended June 30, 2019, respectively, which amounts are presented as equity in earnings of an investee in our condensed consolidated statements of operations. Our other comprehensive income for the three and six months ended June 30, 2019, includes our proportionate part of unrealized gains (losses) on securities that are owned by AIC related to our investment in AIC.

Retirement and Separation Arrangements. In connection with their respective retirements, we entered into retirement agreements with our former officers, Bruce J. Mackey Jr. and Richard A. Doyle. Additionally, we entered into a separation agreement with our former Senior Vice President, Senior Living Operations, R. Scott Herzig. Pursuant to these agreements, we made cash payments of $600 and $510 to Mr. Mackey and Mr. Herzig, respectively, in January 2019, and made cash payments of $260 to Mr. Doyle in each of June 2019 and January 2020. In addition, we made release and transition payments to Mr. Mackey, in cash, totaling $136 and $268 for the three and six months ended June 30, 2019, respectively, and to Mr. Doyle, in cash, totaling $7 for the three and six months ended June 30, 2019. The full severance costs for Messrs. Mackey and Herzig were recorded during the fourth quarter of 2018 and the full severance cost for Mr. Doyle was recorded during the second quarter of 2019, as they met the criteria in ASC Topic 420, Exit or Disposal Cost Obligations.

For further information about these and other such relationships and certain other related person transactions, see our Annual Report.

14. Legal ProceedingsCommitments and Claims

Contingencies

We have been, are currently, and expect in the future to be involved in claims, lawsuits, and regulatory and other government audits, investigations and proceedings arising in the ordinary course of our business, some of which may involve material amounts. Also, the defense and resolution of these claims, lawsuits, and regulatory and other government audits, investigations and proceedings may require us to incur significant expense. We account for claims and litigation losses in accordance with ASC Topic 450, Contingencies, or ASC Topic 450. Under ASC Topic 450, lossLoss contingency provisions are recorded for probable and estimable losses at our best estimate of a loss or, when a best estimate cannot be made, at our estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment and are refined as additional information becomes known. Accordingly, we are often initially unable to develop a best estimate of loss and therefore the estimated minimum loss amount, which could be 0, is recorded; then, as information becomes known, the minimum loss amount is updated, as appropriate. A minimum or best estimate amount may be increased or decreased when events result in a changed expectation.


We arewere defendants in two2 lawsuits filed by former employees in California. The first lawsuit, Lefevre v. Five Star Quality Care, Inc. was filed in San Bernardino County Superior Court in May 2015 and the second lawsuit, Mandviwala v. Five Star Quality Care, Inc. d/b/a Five Star Quality Care - CA, Inc. and FVE Managers, Inc., our wholly owned subsidiary, was filed in Orange County Superior Court in July 2015. The claims asserted against us in the similar, though not identical, complaints include: (i) failure to pay all wages due, (ii) failure to pay overtime, (iii) failure to provide meal and rest breaks, (iv) failure to provide itemized, printed wage statements, (v) failure to keep accurate payroll records and (vi) failure to reimburse business expenses. Both plaintiffs assertasserted causes of action on behalf of themselves and on behalf of other similarly situated employees, including causes of action pursuant to the California Labor Code Private Attorney General Act, or PAGA.

On July 10, 2020, the parties of Lefevre v. Five Star Quality Care, Inc., agreed, without admitting fault, to settle their individual and PAGA claims. The settlement remains subject to a final definitive settlement agreement and towas approved by the court and regulatory approvals.final judgement on the settlement has been entered. Payment on the claims is expected to be made before the end of the second quarter of 2021. The settlement will effectively extinguishextinguished the Mandviwala v. Five Star Quality Care, Inc. d/b/a Five Star Quality Care - CA, Inc. and FVE Managers, Inc. lawsuit. Our share of the settlement amount of $2,473 was recognized on our condensed consolidated statements of operations during the third quarter of 2020.

As a result of routine monitoring protocols that are a part of our compliance program activities related to Medicare billing, we discovered potentially inadequate documentation at a SNF that we manage on behalf of DHC. This monitoring was not initiated in response to any specific complaint or allegation, but was monitoring of the type that we periodically undertake
23
17

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)

Quality Care - CA, Inc. and FVE Managers, Inc. lawsuit. We recognized $2,473 in other senior living operating expenses relatedto test compliance with applicable Medicare billing rules. As a result of this discovery, we, along with DHC made a voluntary disclosure to HHS, Office of the Inspector General, or the OIG, pursuant to the OIG's Provider Self-Disclosure Protocol. We and DHC entered into a settlement of these claims duringagreement with the three months ended June 30, 2020.OIG effective January 5, 2021 and the settlement amount was paid by DHC.

15. COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the disease caused by the novel coronavirus SARS-CoV-2, or COVID-19, a pandemic.pandemic, or the Pandemic. The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption worldwide. Governments in affected regions have implemented and may continue to implement, safety precautions, including quarantines, travel restrictions, business closures and other public safety measures. On March 13, 2020, the pandemic was declared a national emergency by the President of the United States declared the Pandemic a national emergency, effective as of March 1, 2020, and itor the National Emergency. The Pandemic has significantly disrupted, and will likely will continue to significantly disrupt, the United States economy, our business and the senior living industry as a whole. We cannot predict whether the relief provided by the CARES Act together with any additional funds under the other Provider Relief Fund or other programs that we may receive will be sufficient to offset the financial losses caused by the Pandemic, but we expect they will not be.

In connection with the Pandemic, we have experienced occupancy declines, increased labor costs and increased costs related to COVID-19 testing, medical and sanitation supplies and certain other costs. Additionally, we have purchased personal protective equipment, or PPE, to be used at our senior living communities and rehabilitation and wellness clinics. At March 31, 2021, $8,773 of PPE for future use was included in prepaid expenses and other current assets in our condensed consolidated balance sheets. PPE that is deployed to senior living communities that we manage on behalf of DHC is reimbursable to us by DHC. In the first quarter of 2021, we deployed $852 of PPE to senior living communities that we manage on behalf of DHC.

In response to the COVID-19 pandemic,Pandemic, the CARES Act was enacted on March 27, 2020. The CARES Act, among other things, provides billions of dollars of relief to certain individuals and businesses suffering from the impact of the COVID-19 pandemic.Pandemic.

Under the CARES Act, a Provider Relief Fund was established for allocation by HHS and was further supplemented by the Consolidated Appropriations Act, 2021 on December 27, 2020. The terms and conditions of the Provider Relief Fund require that the funds are utilized to compensate for lost revenues that are attributable to the Pandemic and for eligible costs to prevent, prepare for and respond to the Pandemic that are not covered by other sources. In addition Provider Relief Funds recipients are subject to other terms and conditions, including certain reporting requirements. Any funds not used in accordance with the terms and conditions must be returned to HHS.

On April 10, 2020, HHS began to distribute these funds, or the Phase 1 General Distribution, to healthcare providers who received Medicare fee-for-service reimbursement in 2018 and 2019. Each healthcare provider's allocation of the Phase 1 General Distribution was determined based on 2.0%2% of a provider's 2018 (or most recent complete tax year) gross receipts, regardless of the provider's payer mix. We

On June 9, 2020, HHS announced additional distributions from the Provider Relief Fund, or Phase 2 General Distributions, including the Medicaid and Children's Health Insurance Program, or the Medicaid and CHIP Targeted Distribution. HHS stated that it would disburse a payment that, at a minimum, is equal to 2% of reported total revenue from patient care to eligible providers serving Medicaid and CHIP beneficiaries. Providers who had not yet received $1,720 ina disbursement from the Phase 1 General Distribution were eligible for the Medicaid and CHIP Targeted Distribution.

Information on future allocations of the Provider Relief Fund are not yet known, though the statute requires that no less than 85% of unobligated balances of the fund and funds for rehabilitationrecovered from providers after the enactment date be allocated based on financial losses and wellness services clinics and home health operations that participatechanges in Medicare asoperating expenses occurring in the third or fourth quarter of June 30,calendar year 2020. We recognized $1,499$7,793 as other operating income for the three months ended March 31, 2021 related to General Distribution fundsFunds primarily for our senior living communities for which we believe we have met the required terms and conditions for the three and six months ended June 30, 2020, and $221 of funds for which we have not yet met the required terms and conditions were included in accrued expenses and other current liabilities in the condensed consolidated financial statements at June 30, 2020.conditions.

On May 22, 2020, HHS announced that Provider Relief Funds would be available to SNFs with six or more certified beds that have been impacted by the COVID-19 pandemic, or the Targeted SNF Distribution. We received $4,715 in Targeted SNF Distribution funds primarily related to SNFs that we previously leased from DHC during 2018 and 2019 and we are evaluating whether we are eligible to retain these funds. In the event we determine we are not eligible to retain the funds received, we will remit the funds to HHS by August 20, 2020. We included the amount of these funds in accrued expenses and other current liabilities in our condensed consolidated financial statements at June 30, 2020.

The terms and conditions of the General Distribution and Targeted SNF Distribution require that the funds are utilized to compensate for lost revenues that are attributable to the COVID-19 pandemic and for eligible costs to prevent, prepare for and respond to the COVID-19 pandemic that are not covered by other sources. In addition, the funds may be utilized for building or constructing temporary structures to expand capacity for COVID-19 patient care to provide healthcare services to non-COVID-19 patients in a separate area from where COVID-19 patients are being treated. Further, fund recipients are required to be participating in Medicare at the time of distribution and are subject to certain other terms and conditions, including quarterly reporting requirements. In addition, the General Distribution requires fund recipients to have billed Medicare during 2019 and to continue to provide care after January 31, 2020 for diagnosis, testing or care for individuals with possible or actual cases of COVID-19. Any funds not used in accordance with the terms and conditions, must be returned to HHS.

The CARES Act also delays the payment of required federal tax deposits for certain payroll taxes, including the employer's share of Old-Age, Survivors, and Disability Insurance Tax, or Social Security, employment taxes, incurred between March 27, 2020 and December 31, 2020. Amounts will be considered timely paid if 50% of the deferred amount is paid by December 31, 2021, and the remainder by December 31, 2022. As of June 30,March 31, 2021 and December 31, 2020, we have deferred $8,784$27,593 of employer payroll taxes, of which $7,055 are required to be funded by us and will be reimbursed by DHC pursuant to the New Management Agreements, and are included in other long-term liabilitiesaccrued compensation and benefits in theour condensed consolidated financial statements.balance sheets,

18
The Sequestration Transparency Act of 2012 subjected all Medicare fee-for-service payments to a 2% sequestration reduction, or the 2% Medicare Sequestration. The CARES Act temporarily suspends the 2% Medicare Sequestration for the period from May 1, 2020 to December 31, 2020, which will benefit our rehabilitation and wellness services segment and the

24

Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)

of which $22,194 are required to be funded by us and will be reimbursed by DHC pursuant to the New Management Agreements and are included in due from related persons in our condensed consolidated balance sheets.

The Sequestration Transparency Act of 2012 subjected all Medicare fee-for-service payments to a 2% sequestration reduction, or the 2% Medicare Sequestration. The CARES Act temporarily suspended the 2% Medicare Sequestration for the period from May 1, 2020 to March 31, 2021 which benefited our rehabilitation and wellness services segment and the senior living communities we manage in the form of increased rates for services provided and the management fees we earn from these communities as a result. Increases in rates are recognized in revenue in the period services are provided.

The Tax Cuts and Jobs Act of 2017 repealed the AMT and allowed corporations to fully offset regular tax liability with AMT credits. Any remaining AMT credit amount became refundable incrementally from tax years 2018 through 2021. The CARES Act accelerates the refund schedule, permitting corporate taxpayers to claim the refund in full in either tax year 2018 or 2019. We intendexpect to claimapply an AMT credit refund of $554 for tax year 2019.2019 to our 2021 tax return, as we do not have a federal tax liability to utilize the refund against our the 2020 tax return.

16. Subsequent Events

On April 9, 2021, we announced the Strategic Plan to reposition our senior living management business to focus on larger independent living, assisted living and memory care communities as well as stand-alone independent living and active adult communities.

Pursuant to the Strategic Plan, we intend to, among other things, (i) amend our management arrangements with DHC to transition 108 senior living communities, with approximately 7,500 living units, that we currently manage for DHC, to new operators, (ii) close and reposition 27 skilled nursing units, with approximately 1,500 living units, in CCRCs we will continue to manage for DHC, (iii) close 37 Ageility inpatient rehabilitation clinics in certain transitioning communities and (iv) eliminate certain positions in our corporate, regional and divisional teams as well as impacted units and clinics. We expect to complete the transitions and closures by the end of 2021. See Note 11 for more information regarding our agreement to amend our management agreements with DHC.

In connection with implementing the COVID-19 pandemic,Strategic Plan, we have experienced occupancy declines, increased laborexpect to incur non-recurring cash expenses of up to $20,500, approximately $15,000 of which we expect DHC will reimburse. These expenses are expected to include up to $7,500 of retention bonus payments, up to $10,200 of severance, benefits and transition expenses, and up to $2,800 of restructuring expenses, of which we expect DHC to reimburse approximately $5,900, $7,500 and $1,600, respectively. We recognized transaction costs and increased costsof $250 related to medical and sanitation supplies and certain other costs. Additionally, we have purchased $8,118 of personal protective equipment, or PPE,the Strategic Plan for future use at the senior living communities we manage or operate.three months ended March 31, 2021.

We cannot predict the extent and duration of the COVID-19 pandemic or the severity and duration of its economic impact, but we expect it will be substantial. We also cannot predict the extent the relief provided by the CARES Act will offset the financial losses caused by the COVID-19 pandemic, or if we will receive additional funds under the other Provider Relief Fund or other programs, but we expect it will not make us whole.


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19



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report.

Strategic Plan.On April 9, 2021, we announced a new strategic plan, or the Strategic Plan, to reposition our senior living management business to focus on larger independent living, assisted living and memory care communities as well as stand-alone independent living and active adult communities.

Pursuant to the Strategic Plan, we intend to, among other things, (i) amend our management arrangements with DHC to transition 108 senior living communities, with approximately 7,500 living units, that we currently manage for DHC, to new operators, (ii) close and reposition 27 skilled nursing units, with approximately 1,500 living units, in community care retirement communities, or CCRCs, we will continue to manage for DHC, (iii) close 37 Ageility inpatient rehabilitation clinics in certain transitioning communities and (iv) eliminate certain positions in our corporate, regional and divisional teams as well as impacted units and clinics.

In connection with implementing the Strategic Plan, we expect to incur non-recurring cash expenses of up to $20.5 million, approximately $15.0 million of which we expect DHC will reimburse. These expenses are expected to include up to $7.5 million of retention bonus payments, up to $10.2 million of severance, benefits and transition expenses, and up to $2.8 million of restructuring expenses, of which we expect DHC to reimburse approximately $5.9 million, $7.5 million and $1.6 million, respectively.

We expect to complete the transitions and closures contemplated by the Strategic Plan, or the Transition, by the end of 2021. See Notes 1, 11 and 16 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on the Strategic Plan.

Presented below is a summary of the units we operated (owned, leased and managed) as of March 31, 2021 and the projected number of units to be operated after the Transition, as if it had been completed as of January 1, 2021:

As of March 31, 2021After Transition
Units (1)
Units (2)
Independent living10,97910,421
Assisted living12,1097,940
Alzheimer’s living3,2201,847
Skilled nursing2,957—
Total29,26520,208

(1)    The units operated as of March 31, 2021 include 2,099 owned, 203 leased, and 26,963 managed.
(2)    As if the Transition had been completed on January 1, 2021, the units operated as of March 31, 2021 include 2,099 owned, 203 leased, and 17,906 managed.

Presented below is a summary of the communities, units, average occupancy, spot occupancy, revenues and management fees for the communities we managed for DHC as of March 31, 2021 and for the communities to be managed for DHC after the Transition as if it had been completed as of January 1, 2021 (dollars in thousands):
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


As of March 31, 2021
CommunitiesUnitsAverage OccupancySpot Occupancy
Community Revenues (1)
Management Fees
Independent and assisted living communities18217,43569.6 %70.0 %$149,385 $8,104 
Continuing care retirement communities378,57370.1 %71.0 %94,740 4,948 
Skilled nursing facilities995562.8 %65.4 %15,841 798 
Total22826,96369.5 %70.2 %$259,966 $13,850 
After Transition
CommunitiesUnitsAverage OccupancySpot Occupancy
Community Revenues (1)
Management Fees (2)
Independent and assisted living communities9112,01270.7 %71.3 %$104,221 $5,689 
Continuing care retirement communities295,89476.8 %76.9 %54,057 2,891 
Skilled nursing facilities——— %— %— — 
Total12017,90672.7 %73.2 %$158,278 $8,580 
_______________________________________
(1)    Represents the revenues of the senior living communities we manage on behalf of DHC. Managed senior living communities' revenues do not represent our revenues, and are included to provide supplemental information regarding the operating results and financial condition of the communities from which we earn management fees.
(2)    Excludes management fee revenue of $5.3 million in the quarter ended March 31, 2021 related to (i) 108 senior living communities managed on behalf of DHC, with approximately 7,500 living units, that are expected to be transitioned to new operators and (ii) approximately 1,500 skilled nursing facility units that are expected to be closed and repositioned in 27 CCRCs that we will continue to manage for DHC.

Following the Transition, we will continue to manage 120 senior living communities for DHC, representing 17,906 living units and approximately 60% of our management fee revenues as of March 31, 2021, and to operate our existing owned portfolio of 20 communities with approximately 2,100 living units. We expect to partially offset the resulting revenue loss from fees we earn from the 108 transitioning senior living communities with expense reductions to right-size operations.

The 120 senior living communities that we will continue to manage for DHC after the Transition outperformed the total DHC managed portfolio (exclusive of the pending closing and repositioning of approximately 1,500 skilled nursing facility units in 27 of the CCRCs) for the quarter ended March 31, 2021 with approximately 400 basis points higher operating margin and earnings before interest, taxes, depreciation and amortization, or EBITDA, margin.

In addition to the Transition of 108 managed communities owned by DHC, the landlord of our four leased senior living communities with 203 living units is currently marketing these properties for sale and we are unlikely to operate these four communities long-term.

Presented below is a summary of our Ageility rehabilitation clinics as of March 31, 2021 and the number of clinics to be operated after the Transition as if it had been completed as of January 1, 2021 (dollars in thousands):

As of March 31, 2021After Transition
Number of Clinics
Total Revenue (3)
Average Revenue per ClinicAdjusted EBITDA MarginNumber of Clinics
Total Revenue (1)(3)
Average Revenue per ClinicAdjusted EBITDA Margin
Inpatient Clinics in DHC Communities37$5,441 $147 26.1 %—$— $— — %
Outpatient Clinics in DHC Communities917,734 85 15.3 %917,734 85 15.3 %
Outpatient Clinics in Transition Communities(2)
441,863 42 18.5 %441,863 42 18.5 %
     Total Clinics at DHC Communities17215,038 87 19.6 %1359,597 71 15.9 %
Outpatient Clinics at Other Communities (4)
804,234 53 11.8 %804,234 53 11.8 %
     Total Clinics252$19,272 $76 17.9 %215$13,831 $64 14.6 %
_______________________________________
(1)    Excludes revenue of $5.4 million in the quarter ended March 31, 2021 for inpatient clinics, which are expected to be closed as part of the Transition.
(2)    As part of the Transition, the Company expects 108 senior living communities managed on behalf of DHC to be transitioned to new operators. These communities have 44 Ageility outpatient rehabilitation clinics, which, due to the transfer to a new operator, may be subject to closure by the new operator.
(3)    Total Ageility revenue excludes home health care services, which are part of the rehabilitation and wellness services segment.
(4)    Other communities includes 16 outpatient clinics at owned communities.




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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


General Industry Trends

We believe that, in the United States, the current primary market for senior living services is focused towardson individuals age 80 and older and that, based on demographic studies, the fastest-growing age population is over 85. Also, asolder. As a result of medical advances, adults are living longer and expanding their options as to where they choose to reside as they age. Due to these demographic trends, we expect the demand for senior living services to increase in future years. However, in the last ten years as the senior living industry evolved to serve the growing number of older adults it has also faced operational challenges such as workforce shortages and low retention, occupancy pressures, challenges relatedwe expect the demand for senior living services to new technology andincrease in future years regardless of where the increasing desire for a differentiated customer experience. Recently,older adults may reside. More recently, the senior living industry has been materially adversely impacted by the disease caused by the novel coronavirus SARS-CoV-2, or COVID-19, and the resulting pandemic, or the Pandemic, and resulting economic recession. As we continuously evaluate market opportunities related to older adults, we are cognizant of the demographic trends and projections that indicate that the age 65 and older demographic will represent the largest growth population in the United States over the next decade and beyond. We believe that increased longevity, coupled with evolving consumer preferences, will heighten demand for physical and recreational activities, as well as lifestyle-enhancing services, as older adults seek quality of life, ongoing engagement, and sustained independence.

COVID-19 Pandemic

The COVID-19 pandemicPandemic has significantly disrupted and likely will continue to significantly disrupt the United States economy, our business and the senior living industry as a whole. States and municipalities across the United StatesThe World Health Organization declared COVID-19 a pandemic in March 2020. From March 2020 through May 1, 2021, there have been re-opening their economies and easing certain restrictions they had previously implemented in response to the COVID-19 pandemic, often in stages that are phased in over time. Recently, economic data has indicated that the United States economy has improved since the lowest periods experienced in March and April 2020. However, certain areas of the United States have experienced increased numbersapproximately 32.5 million reported cases of COVID-19 infections following the re-openings of their economies and easing of restrictions and, in some cases, certain states have required a second round of closings of certain business activity and imposed other restrictions in response. It is unclear whether the increases in the number of infections will continue and amplify or whether any so-called “second wave” of COVID-19 infections will be experienced in the United States and approximately 0.6 million related deaths, which have disproportionately impacted older adults like our residents and clients.

The U.S. economy has been growing as COVID-19 vaccinations are increasingly administered and commercial activities are increasingly returning to pre-pandemic practices and operations because of recent and expected future government spending on relief from the Pandemic, infrastructure and other matters. However, there remains uncertainty as to the ultimate duration and severity of the Pandemic on commercial activities, including risks that may arise from (i) mutations or elsewhererelated strains of the virus, (ii) the ability to successfully administer vaccinations to a sufficient number of persons or attain immunity to the virus by natural or other means to achieve herd immunity, and if so, what(iii) the impact on the U.S. economy that may result from the inability of that would beother countries to administer vaccinations to their citizens or their citizens' ability to otherwise achieve immunity to the virus. For further information and risks relating to the Pandemic on human healthus and safety,our business, see Part I, Item 1, "Business--COVID Pandemic" and Part I, Item 1A, "Risk Factors", of our Annual Report.

Vaccinations. Throughout the economy, thefirst quarter of 2021, we coordinated multiple vaccination clinics for our residents and team members in all service lines of business at no cost to those individuals. As of May 1, 2021, we had completed all vaccination clinics scheduled at communities and over 85% of our residents at our senior living industrycommunities had received a COVID-19 vaccine.

Protective Measures for Residents and our business.

Team Members. Our residents and clients are older adultspart of a population that tend to have more chronic medical conditions thanhas been disproportionately affected by the general population. Those with pre-existing medical conditions are at a disproportionate risk of serious illness or death, or both, if they contract COVID-19. In addition, ourPandemic. Our team members who work in our communities may be at a higher risk of contracting or spreading COVID-19 due to the nature of their work environment when caring for our residents and clients. Our highest priority is maintaining the health and well-being of our residents, clients and team members. As a result, we continue to monitor, evaluate and adjust our plans to address the impact to our business. WeFor further information regarding the protective measures we have among other steps:

restricted access totaken for our senior living communities to essential visitorsresidents, clients and team members and only reopened communities when it was determined safe to do so in accordance with applicable federal, state and local regulations and guidelines, and our internal criteria;

temporarily closed all of our Ageility clinics for in-person services and eased restrictions when it was determined safe to do so and in accordance with federal, state and local regulations;

enhanced infectious disease prevention and control policies, procedures and protocols;

provided additional and enhanced training to team members at all levels ofover the organization;

worked with vendors to provide adequate supplies and PPE to our senior living communities and Ageility clinics;

deferredlast year, see the payment of $8.8 million of payroll taxes as permitted by the CARES Act, of which $1.7 million will not be reimbursable from DHC; and

effectively transitioned to virtual sales and marketing activities and thoughtfully proceeded with resident move-ins, when appropriate.

In addition, we have taken actions to safeguard and support our team members, residents and communities including:

provided free meals to team members;

provided COVID-19 emergency leave to team members, including paid leave to team members if they were exposed to or tested positive for COVID-19 and offered flexible work schedules;

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Item 2.section captioned Management’s Discussion and Analysis of Financial Condition and Results of Operations




offered free COVID-19 testing to team members;

recognized and rewarded team members with bonusesOperations—General Industry Trends” in addition to our total rewards package;

promoted access to mental health services and other benefits to support team members' mental and physical well-being;

hosted virtual all-hands meetings to communicate our policies, procedures and guidelines related to COVID-19 response and re-opening efforts and to ensure team members are supported with assistance and guidance;

implemented new virtual group activities for residents that allow for engagement while maintaining social distancing;

expanded effective communication channels to residents and communities;

provided devices and connectivity options for interaction with family members, virtual programming opportunities and distance learning; and

focused on learning and development opportunities.

We have also been impacted by mandatory work from home orders directed by local governments in the jurisdictions in which we operate. However, essential work exemptions permit certainPart II, Item 7 of our team members to work to meet the needs of our residents and clients at our communities and clinics. Our team members at our corporate office have generally been able to work and support our needs remotely, and we have provided them with appropriate information technology, including notebook computers, smart phones, computer applications, information technology security applications and technical support. For those team members at our corporate office designated to perform essential on-site functions, we have implemented enhanced cleaning protocols and social distancing guidelines to reduce the possibility of our team members gathering in groups and in close proximity to each other, for the purpose of mitigating the potential for spreading COVID-19 infections. Included among these protocols and measures are focusing on sanitizing high touch points in common areas and restrooms, closing all conference rooms, shutting down certain building amenities, limiting staff interactions, reducing non-essential building services and staff and reducing the frequency of trash removal. Effective as of July 13, 2020, our corporate office was re-opened in compliance with state and local guidelines and restrictions.Annual Report.

We continue to monitor regulations and guidance from federal, state and local governments and agencies and will adapt and update our policies and procedures to continue to prioritize the health and safety of our residents, clients and team members.


In connection withOccupancy. As a result of the COVID-19 pandemic,Pandemic, we experienced declines in average occupancy at our owned and leased senior living communities from 81.3% as offor the three months ended March 31, 2020 to 78.3% as of June 30, 2020.68.3% for the three months ended March 31, 2021. Consistent with occupancy declines experienced within our owned and leased portfolio, the senior living communities managedwe manage on behalf of DHC also experienced average occupancy declines from 82.6% as offor the three months ended March 31, 2020 to 78.7% as of June 30, 2020. Additionally, per certain regulatory requirements in conjunction with our own policies and procedures, we may ban or limit admissions to and tours69.5% for the three months ended March 31, 2021. At May 1, 2021, all of our senior living communities were accepting new residents in at least one service line of business (independent living, assisted living, skilled nursing or memory care). We expect that the impact of the administration of the widespread vaccination for COVID-19 among our residents and team members will decrease the incidence of COVID-19 in our senior living communities. With the reduction of confirmed cases, we expect to eventually cease restrictions at our senior living communities, and enable us to shift our efforts to new admissions and resident programs. Despite the continued distribution of the COVID-19 vaccine, as a precautionary measure. We expectresult of the ongoing
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


effects of the Pandemic, there is a possibility of continued occupancy declines forin the reasonably foreseeable future,near term, due to current residents leaving our senior living communities, and bans or limitationsrestrictions on new residents moving into and/or touring our communities. senior living communities and the possibility that older adults will forego or delay moving into senior living communities because of perceived safety issues associated with the Pandemic.Our revenues are largely dependent on occupancy at our senior living communities and any decline in occupancy adversely impacts our revenues, unless we are able to offset those lost revenues with increased rates we charge our residents and clients or other sources of increased revenues.

Expenses.We have also incurred and will continue to incur significant costs to address the COVID-19 pandemic,Pandemic, which principally include costs associated with PPE, testing supplies, professional services costs, agreements with laboratories to provide COVID-19 testing to our residents and team members that were not otherwise covered by government payer or third-party insurance sources and disposable food supplies as well as increased sanitation and janitorial supplies and increased labor costs. WeOur labor costs have for example, entered into temporary staffing agreements with staffing agencies in orderalso increased as a result of rising health insurance costs caused by the Pandemic. Although COVID-19 vaccinations have been made available to supply additional workers in the event that ourresidents and team members contract COVID-19. Weat our senior living communities, we expect these increasingthe increased costs associated with the Pandemic to continue throughout the third quarterfirst half of 20202021 and for the reasonably foreseeable future. The COVID-19 pandemic has also disruptedfuture thereafter. We incur these costs for our owned and leased senior living communities, rehabilitation and wellness services clinics and corporate and regional operations. Although DHC is responsible for these costs at the global supply chain, including manysenior living communities we manage for DHC, increases in these costs would reduce EBITDA realized at these communities and, hence, negatively impact our ability to earn, and the amount of, any incentive fees, as well as possibly impact other aspects of our medical and technological suppliers, due to factory closures and reduced manufacturing output. We believe that our current supplies and supplies we currently have on order should be sufficient to support our needs for the remainder of 2020. We have undertaken efforts to mitigate potential future impacts on the supply chain by increasing our stock of critical materials to meet our expected increased needs through the remainder of 2020 and by identifying and engaging alternative suppliers. We continue to be alert to the potential for disruptions that could arise from COVID-19, and remain in close contact with our suppliers.management arrangements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations




Operations.We have experienced negative impacts on our operating results of operations, cash flows and financial conditionon the operating results for those communities we manage for DHC as a result of the Pandemic, and we expect those negative impacts to continue at least through the first half of 2021. We expect that widespread vaccination at our senior living communities will decrease the incidence of COVID-19 pandemic. Theat those communities and will eventually decrease our costs and the negative impacts of the Pandemic on our operating results and the operating results for those communities we manage for DHC. Despite the approval and increasing availability of several COVID-19 vaccines, goingforward, the amounts and type of revenue, expense and cash flow impacts resulting from the COVID-19 pandemicPandemic will be dependent on a number of additional factors, including,including: the speed, depth, geographic reach and duration of the spread of the disease; the distribution, availability and effectiveness of therapeutic treatments and testing for COVID-19 to our residents, clients and team members; the legal, regulatory and administrative developments that occur;occur, including the availability of governmental financial and regulatory relief to businesses; our infectious disease control and prevention efforts; the duration and severity of the economic downturn in response to the COVID-19 pandemic;Pandemic; consumer confidence and the demand for our communities and services.

Additionally, continuation or deepening of the current economic downturn, other direct and indirect impacts of the COVID-19 pandemic, softness in the U.S. housing market, higher unemployment, lower levels of consumer confidence, stock market volatility and/or changes in demographics will adversely affect the ability of older adults and their families to afford our services.


Senior Living Development.For the past few years prior to the Pandemic, increased access to capital and continued low interest rates appear to have encouraged increased senior living development, particularly in areas where existing senior living communities have historically experienced high occupancies.occupancy. This has resulted in a significant increase in new senior living community inventory entering the market in recent years. years, increasing competitive pressures on us, particularly in certain of our geographic markets.Although new development had been slowing prior to the onset of the COVID-19 pandemic,Pandemic, and the impact of the COVID-19 pandemic and the economic slowdownPandemic may further impact new development, we expect that new inventory will enter the recent increasemarket in newthe near term due to the increased development of senior living communities prior toin the COVID-19 pandemicpast several years. That increase will continue to have a competitive effect. The new senior living community inventory has increased competitive pressureseffect on us, particularly in certain of our geographic markets, and we expect these challenges to continuebusiness for at least the next few years, andyears; these pressureschallenges may be intensified as a result of the COVID-19 pandemicPandemic and the associated economic downturn.

During most of 2019 and the first quarter of 2020, low unemployment, the competitive labor market and, in certain jurisdictions, increased minimum wages, caused employment costs to increase, including for salaries, wages and benefits, such as health care benefit coverage, for our team members, which increased our operating expenses and negatively impacted our financial results.Labor Market. As noted above, in connection with the COVID-19 pandemic,Pandemic, we are incurringincurred increased labor costs as a result of increased overtime pay for team members, covering additional shifts and increased costs associated with employeeteam member engagement and retention programs, such as free meals for certain of our team members and bonuses totaling $0.3 million to team members at our senior living communities and clinics.rehabilitation and wellness clinics, and increased health insurance and workers' compensation costs. We also have increased staffing needs, for which we have entered into temporary staffing agreements with staffing agencies and costs associated with increased PPE requirementsto accommodate staffing shortages due to the COVID-19 pandemic. Beginning in the year ended 2019, wequarantine protocols of our current staff that may have increased our investments in our workforce and we are continuingcontracted or been potentially exposed to focus on enhancing our competitiveness in the marketplace with respect to cash compensation and other benefits.COVID-19.

Transaction Agreement with DHC

On April 1, 2019, we entered into the Transaction Agreement with DHC to restructure our business arrangements with DHC, pursuant to which, effective as of January 1, 2020:

•our five then existing master leases with DHC as well as our then existing management and pooling agreements with DHC were terminated and replaced with new management agreements for all those senior living communities, together with a related omnibus agreement, or collectively, the New Management Agreements;

we effected the Share Issuances pursuant to which
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


•we issued 10,268,158 of our common shares to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019;2019, or, together, the Share Issuances; and

•as consideration for the Share Issuances, DHC provided to us $75.0 million by assuming certain of our working capital liabilities and through cash payments.

As part of our Strategic Plan, we have agreed to amend our management arrangements with DHC. For more information on the expected impact of the Strategic Plan on our management arrangements, and regarding our leases and management agreements and other transactions, with DHC, see Notes 1, 11 and 1116 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Credit FacilitiesFacility

We have a $65.0 million secured revolving credit facility with a syndicate of lenders that is available for us to use for general business purposes.purposes, of which $14.9 million was available for borrowing as of March 31, 2021.

For more information regarding our credit facility and our irrevocable standby letters of credit, see Note 10 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
    

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



Our Revenues

Our revenues are derived from the services we provide to residents at our senior living communities and to older adults through our rehabilitation and wellness services clinics, and these revenues are our primary source of cash to fund our operating expenses, including capital expenditures at the senior living communities we own or lease and principal and interest payments on our debt.

At some of our senior living communities and our rehabilitation and wellness services clinics, Medicare and Medicaid programs provide operating revenues for skilled nursing and rehabilitation and wellness services. We derived approximately 3.5%4.3% and 23.0%3.6% of our consolidated revenues from these government-funded programs during the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively. Our netRevenues from Medicare revenuesprograms totaled $19.1$11.5 million and $59.8$10.1 million during the sixthree months ended June 30, 2020March 31, 2021 and 2019, respectively. Our net2020. Revenues from Medicaid revenuesprograms totaled $1.0$0.3 million and $66.9$0.6 million during the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively. Our net Medicare and Medicaid revenues have declined significantly as a resultfor skilled nursing, and rehabilitation and wellness services provide operating revenue at our rehabilitation clinics, and also at some of the Restructuring Transactions pursuant to which we now manage the SNFs that we previously leased from DHC. However, although the amount of net Medicare and Medicaid revenues that we recognize declined as a result, Medicare and Medicaid revenues still comprise a significant part of the revenues generated at these SNFs andour senior living communities (principally our SNF's), we earn management fees based on these revenues.

In connection with the Strategic Plan, we intend to transition 108 senior living communities managed on behalf of DHC, with approximately 7,500 living units, that we currently manage for DHC to new operators. If and when these transitions are completed, our management agreements with DHC for those communities will terminate. In addition, we and DHC intend to close and reposition approximately 1,500 skilled nursing facility units, in 27 CCRCs that we will continue to manage for DHC. For the three months ended March 31, 2021, we recognized $5.3 million of management fees related to these senior living communities and units. In addition, in connection with the Strategic Plan, we intend to close 37 Ageility inpatient rehabilitation clinics. For the three months ended March 31, 2021, we recognized $5.4 million of revenue related to these clinics.

For more information regarding the terms and conditions of the Strategic Plan, please see Notes 1, 11 and 16 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Federal and state governments have taken a number of actions to respond to the COVID-19 pandemic.Pandemic. Certain of these actions may increase our operational costs or reduce our revenue, while others are designed to alleviate the adverse operational and financial consequences related to the COVID-19 pandemicPandemic on operators of long-term care and senior living facilitiescommunities like us. Federal actions in response to the COVID-19 pandemicPandemic that may impact our operations and financial performance include, but are not limited to, the following:

•On May 8, 2020,March 11, 2021, the Centers for Medicare & Medicaid Services,American Rescue Plan Act of 2021, or CMS, published an interim final rule that set forth new COVID-19 reporting requirements for SNFs, among other requirements. Under the interim final rule, SNFs are requiredARPA, was signed into law. In addition to electronically submit weekly reports to the Centers for Disease Controlbroad-based public and Prevention, or CDC, which must include data onprivate financial relief, ARPA included a number of measures intended to assist the health care industry, including suspected or confirmedfunding to support COVID-19 infections among residents and staff, total deaths and COVID-19 deaths among residents and staff, ventilator capacity and supplies, resident beds and census, access to COVID-19research, testing, and staffing shortages. Such information will be shared with CMS and may be publicly reported. The interim rule also imposes requirements onvaccination efforts. In addition, ARPA provided $450 million to support SNFs to promptly notify residents, family members and representatives of confirmed or suspected COVID-19 cases in the facility. Facilities may face enforcement action, including civil monetary penalties, for failure to comply with these new reporting requirements.

The Secretary of HHS has continued to waive certain Medicare requirements applicable to long-term care facilities, including SNFs. On May 11, 2020, CMS issued a number of additional waivers to health care providers in response to the COVID-19 pandemic. These additional waivers include: (1) a waiver that would allow hospitals to establish SNF beds, allowing patients that would otherwise be transferred to a post-acute care facility to remain in hospitals; (2) waivers and modifications of life safety code requirements for SNFs to permit use and storage of alcohol-based hand sanitizers, relax quarterly fire drill requirements and permit temporary construction of walls and barriers between patients; and (3) modification of feeding assistant training requirements to reduce the number of required training hours. These waivers are retroactive to March 1, 2020, and are in effect through the end of the national emergency declared by the President of the United States of America as of that date, or the National Emergency.

On May 18, 2020, CMS issued recommendations to state and local officialsprotecting against COVID-19; $200 million for the reopeningdevelopment and dissemination of SNFs. CMS recommends a phased approachCOVID-19 prevention protocols in conjunction with quality improvement organizations; and $250 million to the relaxation of SNF restrictions that relies on a number of factors, including whether COVID-19 cases are increasing or declining in the geographic area and at SNFs, the adequacy of staffing, supplies and access to COVID-19 testing, as well as local hospital capacity. These guidelines are not binding for states and some states may be more aggressive in permitting the reopening ofterritories to deploy strike teams that can assist SNFs while others may take a more conservative approach to the relaxation of SNF restrictions.

Under the CARES Act, a $175.0 billion Provider Relief Fund was established for allocation by HHS. During April 2020, HHS distributed $50.0 billion in General Distributions.experiencing COVID-19 outbreaks. The allocation methodology was based on 2% of that provider's 2018 (or most recent complete tax year) gross receipts, regardless of the provider's payer mix. Only providers who received an initial General Distribution are eligible for an additional General Distribution, and, if the initial General Distribution payment received by the provider was determined to be at least 2.0% of the provider's annual patient revenue, the provider is not eligible for an additional General Distribution. We received $1.7 million under the $50.0 billion General Distribution funds for rehabilitation and wellness services clinics and home health operations that participate in Medicare during the six months ended June 30, 2020.


ARPA temporarily
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



increased the Federal Medical Assistance Percentage specifically for the provision of home- and community -based services, or HCBS, which include home health care services and rehabilitative services, by ten points from April 1, 2021 through March 31, 2022, provided states maintain state spending levels as of April 1, 2021. ARPA further specified that states must use the enhanced funds to “implement, or supplement the implementation of, one or more activities to enhance, expand, or strengthen” Medicaid HCBS.

•The Federal government, in coordination with the states, has continued its COVID-19 vaccination efforts. According to the CDC’s COVID Data Tracker, as of April 29, 2021, approximately 82.1% of the U.S. population 65 years or older has received at least one dose of a COVID-19 vaccine, and 68.4% is fully vaccinated. As of April 29, 2021, more than 143 million people in the U.S., or 43.3% of the population, have received at least one dose of a COVID-19 vaccine, and over 99 million people, or 30.0% of the population, is fully vaccinated. Further, on May 22, 2020, HHS announced that approximately $4.9 billion of Targeted SNF Distribution funds would be availableApril 6, 2021, President Biden directed all states to SNFs with six or more certified beds that have been impactedopen up COVID-19 vaccinations to all U.S. residents 18 years and older by the COVID-19 pandemic. We received $4.7 million in Targeted SNF Distribution funds primarily related to SNFs that we previously leased from DHC during 2018 and 2019 and we are evaluating whether we are eligible to retain these funds. In the event we determine we are not eligible to retain the funds received, we will remit the funds to HHS by August 20, 2020.April 19, 2021.

On May 22, 2020, the HHS Office of Inspector General, or OIG, announced its updated work plan, which features several SNF-focused items, including: (1) reviews of on-site surveys of nursing homes by state survey administrators during the COVID-19 pandemic, focusing on infection control and serious complaints; (2) audits of nursing home infection prevention and control programs; (3) oversight of nursing home staffing levels; and (4) a review of actions by state long-term care ombudsmen and state survey agencies to investigate and address involuntary discharges and transfers from nursing homes. In addition, on May 26, 2020, OIG announced a COVID-19 Response Strategic Plan, which will allow OIG to identify, monitor and target potential fraud, waste and abuse affecting HHS programs and beneficiaries that may arise out of COVID-19 response and recovery programs. We cannot predict whether and to what extent increased oversight of SNFs by OIG and the COVID-19 response and recovery programs may impact our operations and financial performance.

On June 1, 2020, CMS announced enhanced enforcement for SNFs with violations of infection control practices. Specifically, CMS has increased enforcement, including civil monetary penalties, for facilities with persistent infection control violations, and will be imposing enforcement actions on lower-level deficiencies to ensure they are addressed. CMS is also instituting additional on-site surveys of SNFs with previous COVID-19 outbreaks and will perform on-site surveys of any SNF with new COVID-19 suspected and confirmed cases.

On June 9, 2020, HHS announced additional distributions from the Provider Relief Fund, including the $15.0 billion Medicaid and Children's Health Insurance Program programs, or the Medicaid and CHIP Targeted Distribution. HHS stated that it would disburse a payment that, at a minimum, is equal to 2.0% of reported gross revenue from patient care to eligible providers serving Medicaid and CHIP beneficiaries. Providers who had not yet received a disbursement from the initial General Distribution are eligible for the Medicaid and CHIP Targeted Distribution. We have submitted applications to receive Medicaid and CHIP Targeted Distributions related to our owned and leased communities.
For more information regarding the terms and conditions of the General Distribution and the Targeted SNF Distribution, as well as other considerations related to the COVID-19 pandemic, see Note 15 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

In addition to federal measures, many states have taken actions to waive or modify healthcare laws or regulations and Medicaid reimbursement rules. Both state and federal waivers and other temporary actions in response to the COVID-19 pandemicPandemic are expected to last throughout the National Emergency, the duration of which is currently unknown. Additional measures may be taken prior to and after the conclusion of the National Emergency to alleviate the economic impact of the COVID-19 pandemic.Pandemic. Governmental responses to COVID-19 are rapidly evolving, and it is not yet known what the duration or impact of such responses will be. As noted above, we have experienced, and expect to continue to experience, continued declines in occupancy in our senior living communities as a result of efforts to control the risks posed by the COVID-19 pandemic and the further full impact of these efforts is unclear. Further, we have incurred costs and will continue to incur costs, which may be significant, to address COVID-19, which include incremental supply costs, preventative and responsive costs and additional labor costs.

In response to a rising number of complaints and lawsuits against senior living communities, state Attorneys General, including the Attorneys General of Pennsylvania, New York, New Jersey, Florida and New Mexico, recently announced efforts to increase scrutiny of long-term care facilities. While these investigations and initiatives have been related to the COVID-19 pandemic, they have focused on a broad range of alleged misconduct that extends beyond facility responses to the pandemic, including both civil and criminal theories of liability related to patient abuse and neglect, consumer fraud and false advertising and Medicaid fraud. Initiatives often include the establishment or enhancement of mechanisms for reporting fraud, abuse or neglect. We currently operate or manage communities in all five of these states, but we cannot predict whether and to what extent increased scrutiny by state Attorneys General may impact our operations and financial performance. Further, the risk of future private party litigation in the senior living industry is expected to increase as a result of the COVID-19 pandemic and its impact.

In addition to the responses to the COVID-19 pandemicPandemic discussed above, shifting policy priorities, the current and projected federal budget deficit, other federal spending priorities and challenging fiscal conditions in some states, there have been numerous recent legislative and regulatory actions or proposed actions with respect to federal Medicare rates, state

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



Medicaid rates and federal payments to states for Medicaid programs. We cannot currently predict the type and magnitude of the potential Medicare and Medicaid policy changes, rate changes or other changes that may be implemented, but we believe that some of these changes will cause these government-funded healthcare programs to fail to provide rates that match our increasing expenses, and that such changes may be material and adverse to our operations and to our future financial results of operations.

For further information regarding federal actions in response to the Pandemic, government healthcare funding and regulation and thetheir possible impact on us and our business, revenues and operations, see Note 15 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Reporting on Form 10-Q and the sections captioned “Business—Government Regulation and Reimbursement” in Part I, Item I and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Revenues” in Part II, Item 7 of our Annual Report and the section captioned “Management's Discussion and Analysis of Financial Condition and Results of Operations—Our Revenues” in Part I, Item 2 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.Report.

Results of Operations

As of June 30, 2020, we operatedWe operate in two reportable segments: (1) senior living and (2) rehabilitation and wellness services. In the senior living segment, we manage for the account of others and operate for our own account, respectively, independent living communities, assisted living communities, continuing care retirement communities,CCRCs, SNFs and an active adult community that are subject to centralized oversight and provide housing and services to older adults. Included in the results of the assisted living communities and CCRCs are memory care living units specializing in the care of those with Alzheimer's.In the rehabilitation and wellness services reporting segment, we provide a comprehensive suite of rehabilitation and wellness services, including physical, occupational, speech and other specialized therapy services, in the inpatient setting and in outpatient clinics.clinics as well as home health and fitness services.

All of our operations and assets are located in the United States, except for the operations of our Cayman Islands organized captive insurance company subsidiary, which participates in our workers’ compensation, professional and general liability and certain automobile insurance programs.

As previously noted, pursuant to the Strategic Plan, we intend to, among other things, (i) amend our management arrangements with DHC to transition 108 senior living communities, with approximately 7,500 living units, that we currently manage for DHC to new operators, (ii) close and reposition 27 skilled nursing units, with approximately 1,500 living units, in CCRCs that we will continue to manage for DHC and (iii) close 37 Ageility inpatient rehabilitation clinics operating in certain transitioning communities. For the three months ended March 31, 2021, we recognized $5.3 million of management fees related to these senior living communities and units. For the three months ended March 31, 2021, we recognized rehabilitation and wellness services revenue of $5.4 million related to the Ageility inpatient rehabilitation clinics which will be closed. The information in the Key Statistical Data table below includes those communities, units and clinics in the results reported.

Key Statistical Data For the Three Months Ended March 31, 2021 and 2020:

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



Key Statistical Data For the Three Months Ended June 30, 2020 and 2019:
The following tables present a summary of our operations for the three months ended June 30,March 31, 2021 and 2020 and 2019 (dollars in thousands, except per unit amounts)RevPAR):
 Three Months Ended June 30, Increase/(Decrease) Three Months Ended March 31,Increase/(Decrease)
 2020 2019 Amount Percent20212020AmountPercent
REVENUES        REVENUES
Rehabilitation and wellness servicesRehabilitation and wellness services$19,553 $21,384 $(1,831)(8.6)%
Senior living $19,590
 $263,008
 $(243,418) (92.6)%Senior living17,057 20,997 (3,940)(18.8)%
Management fees 15,705
 4,024
 11,681
 290.3 %Management fees13,850 17,051 (3,201)(18.8)%
Rehabilitation and wellness services 19,268
 11,488
 7,780
 67.7 %
Total management and operating revenues 54,563
 278,520
 (223,957) (80.4)% Total management and operating revenues50,460 59,432 (8,972)(15.1)%
Reimbursed community-level costs incurred on behalf of managed communities 224,104
 77,219
 146,885
 190.2 %Reimbursed community-level costs incurred on behalf of managed communities213,160 232,016 (18,856)(8.1)%
Other reimbursed expenses 6,417
 —
 6,417
 n/m
Other reimbursed expenses5,480 5,997 (517)(8.6)%
Total revenues 285,084
 355,739
 (70,655) (19.9)% Total revenues269,100 297,445 (28,345)(9.5)%
Other operating income 1,499
 —
 1,499
 n/m
Other operating income7,793 — 7,793 n/m
Total revenues and other operating income 286,583
 355,739
 (69,156) (19.4)%
        
OPERATING EXPENSES        OPERATING EXPENSES
Rehabilitation and wellness services expensesRehabilitation and wellness services expenses16,210 17,501 (1,291)(7.4)%
Senior living wages and benefits 9,705
 137,259
 (127,554) (92.9)%Senior living wages and benefits12,013 9,800 2,213 22.6 %
Other senior living operating expenses 8,331
 71,301
 (62,970) (88.3)%Other senior living operating expenses6,266 3,938 2,328 59.1 %
Rehabilitation and wellness services expenses 15,451
 9,265
 6,186
 66.8 %
Community-level costs incurred on behalf of managed communities 224,104
 77,219
 146,885
 190.2 %Community-level costs incurred on behalf of managed communities213,160 232,016 (18,856)(8.1)%
General and administrative 23,567
 20,548
 3,019
 14.7 %General and administrative22,641 22,865 (224)(1.0)%
Rent 1,378
 33,262
 (31,884) (95.9)%
Depreciation and amortization 2,703
 2,941
 (238) (8.1)%Depreciation and amortization2,940 2,701 239 8.8 %
Loss on sale of senior living communities —
 101
 (101) (100.0)%
Long-lived asset impairment —
 112
 (112) (100.0)%
Total operating expenses 285,239
 352,008
 (66,769) (19.0)%Total operating expenses273,230 288,821 (15,591)(5.4)%
        
Operating income (loss) 1,344
 3,731
 (2,387) (64.0)%
Operating incomeOperating income3,663 8,624 (4,961)(57.5)%
        
Interest, dividend and other income 182
 415
 (233) (56.1)%Interest, dividend and other income84 339 (255)(75.2)%
Interest and other expense (409) (906) 497
 (54.9)%Interest and other expense(463)(382)(81)21.2 %
Unrealized gain (loss) on equity investments 867
 (38) 905
 n/m
Unrealized gain (loss) on equity investments135 (1,462)1,597 (109.2)%
Realized gain on sale of debt and equity investments 116
 144
 (28) (19.4)%
        
Income before income taxes and equity in earnings of an investee 2,100
 3,346
 (1,246) (37.2)%
Benefit for income taxes 902
 705
 197
 27.9 %
Equity in earnings of an investee —
 130
 (130) (100.0)%
Net income $3,002
 $4,181
 $(1,179) (28.2)%
Realized gain (loss) on sale of debt and equity investmentsRealized gain (loss) on sale of debt and equity investments96 (21)117 n/m
Loss on termination of leasesLoss on termination of leases— (22,899)22,899 (100.0)%
Income (loss) before income taxesIncome (loss) before income taxes3,515 (15,801)19,316 (122.2)%
Provision for income taxesProvision for income taxes(200)(1,408)1,208 (85.8)%
Net income (loss)Net income (loss)$3,315 $(17,209)$20,524 119.3 %
        
Owned and leased communities:        Owned and leased communities:    
Number of communities (end of period) 24
 205
 (181) (88.3)%Number of communities (end of period)24 24 — — %
Number of living units (end of period) (1)
 2,312
 21,912
 (19,600) (89.4)%
Number of living units (end of period) (1)
2,302 2,312 (10)(0.4)%
Occupancy % 78.3% 83.0% (4.7)% n/m
Spot occupancy at March 31,Spot occupancy at March 31,68.2 %80.3 %(12.1)%n/m
Average occupancyAverage occupancy68.3 %81.3 %(13.0)%n/m
RevPAR (2)
 $2,813
 $3,984
 $(1,171) (29.4)%
RevPAR (2)
$2,479 $2,930 $(451)(15.4)%
Managed communities:Managed communities:    
Number of communities (end of period)Number of communities (end of period)228 244 (16)(6.6)%
Number of living units (end of period) (1)
Number of living units (end of period) (1)
26,963 28,960 (1,997)(6.9)%
Spot occupancy at March 31,Spot occupancy at March 31,70.2 %81.5 %(11.3)%n/m
Average occupancyAverage occupancy69.5 %82.6 %(13.1)%n/m
RevPAR (2)
RevPAR (2)
$3,213 $3,820 $(607)(15.9)%
Rehabilitation and wellness services:Rehabilitation and wellness services:    
Number of inpatient clinics (end of period) (1)
Number of inpatient clinics (end of period) (1)
37 41 (4)(9.8)%
Number of outpatient clinics (end of period)Number of outpatient clinics (end of period)215 203 12 5.9 %
Total clinicsTotal clinics252 244 8 3.3 %
_______________________________________
n/m - not meaningful
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



(1)    The summary of operations includes (i) 108 senior living communities managed on behalf of DHC, with approximately 7,500 living units, that are expected to be transitioned to new operators, (ii) approximately 1,500 skilled nursing facility units that are expected to be closed and repositioned in 27 CCRCs that we will continue to manage for DHC and (iii) 37 Ageility inpatient rehabilitation clinics operating in certain transitioning communities that are expected to be closed. In addition, the landlord of the four leased communities included in the 24 owned and leased senior living communities data above is currently marketing these properties for sale and it is unlikely that we will operate these four communities long-term.
  Three Months Ended June 30, Increase/(Decrease)
  2020 2019 Amount Percent
         
Managed communities:        
Number of communities (end of period) 241
 77
 164
 213.0 %
Number of living units (end of period) (1)
 28,348
 10,084
 18,264
 181.1 %
Occupancy % 78.7% 85.4% (6.7)% n/m
RevPAR (2)
 $3,644
 $3,600
 $44
 1.2 %
         
Rehabilitation and wellness services:  
    
  
Number of inpatient clinics 40
 45
 (5) (11.1)%
Number of outpatient clinics 206
 142
 64
 45.1 %
Total clinics 246
 187
 59
 31.6 %
(2)    RevPAR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of available units for the period, divided by the number of months in the period. Amounts for the three months ended March 31, 2021 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.

Comparable Communities and Clinics

Comparable communities (senior living communities and rehabilitation and wellness services clinics that we have continually owned, continuously leased or continuously managed since January 1, 2020, excluding those communities, units and clinics to be transitioned or closed in 2021 per the Strategic Plan):

 Three Months Ended March 31,Increase/(Decrease)
2021(3)
2020(3)
AmountPercent
REVENUES
Rehabilitation and wellness services$12,813 $12,788 $25 0.2 %
Senior living17,057 20,330 (3,273)(16.1)%
Management fees8,580 9,629 (1,049)(10.9)%
Other operating income7,793 — 7,793 n/m
OPERATING EXPENSES
Rehabilitation and wellness services expenses11,093 11,649 (556)(4.8)%
Senior living wages and benefits12,013 9,509 2,504 26.3 %
Other senior living operating expenses6,266 1,542 4,724 306.4 %
Owned and leased communities:
Number of communities (end of period)24 24 — — %
Number of living units (end of period) (1)
2,302 2,312 (10)(0.4)%
Spot occupancy at March 31,68.2 %80.3 %(12.1)%n/m
Average occupancy68.3 %81.3 %(13.0)%n/m
RevPAR (2)
$2,479 $2,930 (451)(15.4)%
Managed communities:
Number of communities (end of period)120 120 — — %
Number of living units (end of period) (1)
17,906 17,932 (26)(0.1)%
Spot occupancy at March 31,73.2 %85.6 %(12.4)%n/m
Average occupancy72.7 %86.0 %(13.3)%n/m
RevPAR (2)
$2,946 $3,471 (525)(15.1)%
Rehabilitation and wellness services:
Number of inpatient clinics (end of period)— — — — %
Number of outpatient clinics (end of period)184 184 — — %
Total clinics184 184 — — %

n/m - not meaningful
(1)    Includes only living units categorized as in service. As a result, the number of living units may change from period to period for reasons other than the acquisition or disposition of senior living communities.
(2)RevPAR, or average monthly senior living revenue per available unit, is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of available units for the period, divided by the number of months in the period.
Comparable communities (senior living communities and rehabilitation and wellness services clinics that we have continuously owned, continuously leased or continuously managed since April 1, 2019) results are listed below. The number of comparable communities represent a minority of the senior living communities we operated since April 1, 2019 as a result of the changes in our business arrangements for senior living communities that we operate that are owned by DHC pursuant to the Restructuring Transactions (dollars in thousands, except per unit amounts):

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



  Three Months Ended June 30, Increase/(Decrease)
  2020 2019 Amount Percent
REVENUES        
Senior living $19,516
 $20,766
 $(1,250) (6.0)%
Management fees 5,033
 3,845
 1,188
 30.9 %
Rehabilitation and wellness services 15,690
 11,099
 4,591
 41.4 %
Reimbursed community-level costs incurred on behalf of managed communities 66,893
 70,391
 (3,498) (5.0)%
Other operating income 1,042
 —
 1,042
 n/m
Senior living wages and benefits 10,070
 9,891
 179
 1.8 %
Other senior living operating expenses 5,181
 3,194
 1,987
 62.2 %
Rehabilitation and wellness services expenses 12,672
 8,814
 3,858
 43.8 %
Rent 1,141
 981
 160
 16.3 %
         
Owned and leased communities:        
Number of communities (end of period) 24
 24
 —
 — %
Number of living units (end of period) (1)
 2,312
 2,312
 —
 — %
Occupancy % 78.3% 81.3% (3.0)% n/m
RevPAR (1)(2)
 $2,813
 $2,993
 (180) (6.0)%
         
Managed communities:        
Number of communities (end of period) 75
 75
 —
 — %
Number of living units (end of period) (1)
 9,689
 9,616
 73
 0.8 %
Occupancy % 80.1% 86.1% (6.0)% n/m
RevPAR (1)(2)
 $3,398
 $3,603
 (205) (5.7)%
         
Rehabilitation and wellness services:        
Number of inpatient clinics 40
 40
 —
 — %
Number of outpatient clinics 133
 133
 —
 — %
Total clinics 173
 173
 —
 — %
n/m - not meaningful
(1) Includes only living units categorized as in service. As a result, the number of living units may change from period to period for reasons other than the acquisition or disposition of senior living communities.
(2)    RevPAR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of available units for the period, divided by the number of months in the period.
The following is a discussion of our operating results Amounts for the three months ended June 30, 2020 compared toMarch 31, 2021 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
(3)    The three months ended June 30, 2019.

Senior living revenues.The decrease in senior living revenues is primarily due to the conversion of our formerlyMarch 31, 2021 and 2020 include data for 24 owned and leased senior living communities, to120 managed senior living communities pursuant to the Transaction Agreement, effectiveand 184 rehabilitation clinics that we have continuously owned, continuously leased or continuously managed since January 1, 2020. The decrease inPer the Strategic Plan the summary of operations for comparable communities and clinics excludes (i) 108 senior living revenues at our comparable communities was primarily duemanaged on behalf of DHC, with approximately 7,500 living units, that are expected to be transitioned to new operators, (ii) approximately 1,500 skilled nursing facility units, that are expected to be closed and repositioned in 27 CCRCs that we will continue to manage for DHC and (iii) 37 Ageility inpatient rehabilitation clinics operating in certain transitioning communities, that are expected to be closed. In addition, the decreaselandlord of the four leased communities included in occupancythe 24 owned and RevPAR caused by the COVID-19 pandemic as move-out rates accelerated at a faster pace than move-in rates due to state and company-wide policies to restrict admissions to those communities impacted with a confirmed case of COVID-19.
Management fees. The increase in management fees is primarily due to the conversion of our formerly leased senior living communities to manageddata above is currently marketing these properties for sale and it is unlikely that we will operate these four communities pursuant to the Transaction Agreement. Management fees increased $10.3 million due to the increase in senior living communities we manage for the account of DHC from 77 to 241. The remaining increase is primarily due to the New Management Agreements, under which we receive a management fee equal to 5% of the gross revenues realized at senior living communities managed and 3% of the costs of construction projects we manage for the account of DHC. Prior to the Transaction Agreement, our management fee for 46 previously managed communities was equal to 3% of the gross revenues realized at those senior living communities and 3% of the costs of construction projects we managed for the account of DHC. This was partially offset by a decline in gross revenues and reductions in construction projects at the senior living communities we manage caused by the COVID-19 pandemic as we implemented infectious disease protocols that limitedlong-term.

27
34

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



Three Months Ended March 31, 2021, Compared to Three Months Ended March 31, 2020
non-essential visitors from entering
The following is a discussion of our communities as well as pausing admissions to mitigateoperating results for the spread of the COVID-19 virus within the communities we operate. The increase in management fees at our comparable communities was primarily duethree months ended March 31, 2021 compared to the two percentage point rate increase from the New Management Agreements and the construction management fee that we began earning on construction projects we manage effective January 1, 2020, partially offset by a decline in gross revenues and construction projects at the senior living communities we manage caused by the COVID-19 pandemic.three months ended March 31, 2020.

Rehabilitation and wellness services. The increasedecrease in rehabilitation and wellness services revenues is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement and opening of new clinics, offset by declines in revenues caused by the COVID-19 pandemic as clinics remained closed as part of our infectious disease protocols and services were provided to resident units only, which impacted the number of patients we could treat on a daily basis. Rehabilitation and wellness services revenues for the three months ended June 30, 2019 excluded $6.7 million related to inpatient clinics at communities we previously leased from DHC. Prior to the effective date of the Transaction Agreement, this revenue was eliminated in consolidation pursuant to GAAP. The remaining increase was primarily due to 64 net new clinics we opened from July 1, 2019 to June 30, 2020. These increases were offset by asignificant reduction of inpatient clinic visits and temporary closures of clinics as a result of the COVID-19 pandemic. ThePandemic, partially offset by the growth of our business, including realizing the full quarter impact of 17 net new outpatient rehabilitation clinics opened during the year ended December 31, 2020, as well as opening 8 net new outpatient rehabilitation clinics during the three months ended March 31, 2021. There was a slight increase in rehabilitation and wellness services revenues at our comparable clinics.

Senior living revenues.The decrease in senior living revenues and the decrease in senior living revenues at our comparable communities wasare primarily due to the conversiondecline in average occupancy from 81.3% to 68.3% caused by the Pandemic as move-out rates exceeded move-in rates, resulting from the decline in demand due to the increased scrutiny of our formerly leasedCOVID-19 spread amongst residents and staff within senior living communities and marketplace reluctance to relocate to other senior living communities during the Pandemic.
Management fees. The decrease in management fees is due to declines in gross revenues at the senior living communities we manage, primarily caused by the impact of the Pandemic, which resulted in a decline in average occupancy in our managed communities pursuantfrom 82.6% to 69.5% as well as due to $1.1 million of management fees recognized for the Transaction Agreementthree months ended March 31, 2020 related to 9 senior living communities sold and the change7 senior living communities closed by DHC in how those revenues are accounted for as a result,2020 that we previously managed, partially offset by aan increase in construction management fees we earn on construction projects we manage. The decrease in management fees at our comparable senior living communities was primarily due to the decline in gross revenues at the senior living communities we manage caused by Pandemic related declines in average occupancy in the COVID-19 pandemic.2021 period, partially offset by an increase in construction management fees we earn on construction projects we manage.

Reimbursed community-level costs incurred on behalf of managed communities. The increasedecrease in reimbursed community-level costs incurred on behalf of managed communities was primarily due to the conversion of our formerly leased9 senior living communities to managed communities pursuant to the Transaction Agreement, resulting in the increase insold and 7 senior living communities managed for the account of DHC. Thisclosed in 2020. Additionally, there was partially offset by a declinean overall reduction in community-level costs incurred at the senior living communities we continue to manage, resulting from the COVID-19 pandemic. The decrease in reimbursed community-level costs incurred on behalf of managed communities at our comparable communities was due to lower community-level costs, includingas other operating expenses such as travel and entertainment, professional service fees and other costs that were impacted by continued occupancy declines due to the COVID-19 pandemic such as labor, foodPandemic, including wages, dietary costs and certain housekeeping services.

Other reimbursed expenses. Other reimbursed expenses represent reimbursements that arise from certain centralized services we provide pursuant to the New Management Agreements.

Other operating income.Other operating income represents revenues recognized for funds received under the Provider Relief Fund of the CARES Act related to rehabilitation and wellness services for which we have determined we comply with the associated terms and conditions that permit us to retain these funds.

Senior living wages and benefits.The decrease in senior living wages and benefits is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement. Senior living wages and benefits related to communities previously leased to DHC are reimbursed community-level costs incurred on behalf of managed communities effective January 1, 2020, pursuant to the New Management Agreements. The increase in senior living wages and benefits at our comparable communities is primarily due to bonuses and ongoing benefits packages provided to team members.
Other senior living operating expenses.Other senior living operating expenses are comprised of utilities, housekeeping, dietary, repairs and maintenance, insurance and community-level administrative costs. The decreasewhich offset increases in other senior living operating expenses is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement, partially offset by increased legal costs, increased insurance costs and increased costs related to testing supplies, disposable food supplies,our enhanced infectious disease and prevention cleaning, sanitation and labor as a result of the COVID-19 pandemic. Other senior living operating expensesprotocols related to communities previously leased to DHC are reimbursed community-level costs incurred on behalf of managed communities effective January 1, 2020, pursuant to the New Management Agreements. The increase in other senior living operating expenses at our comparable communities is primarily due to increased legal costs, increased insurance costs and increased costs related to testing supplies, disposable food supplies, infectious disease prevention cleaning, sanitation and labor as a result of the COVID-19 pandemic.

Rehabilitation and wellness services expenses.The increase in rehabilitation and wellness services expenses is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement and growth of our business. Rehabilitation and wellness services expenses for the three months ended June 30, 2019 excluded $6.7 million related to inpatient clinics at communities we previously leased from DHC. Prior to the effective date of the Transaction Agreement, these expenses were eliminated in consolidation pursuant to GAAP. This increase

35

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



was partially offset by a reduction of labor costs due to reduced visits and temporary closures of clinics as a result of the COVID-19 pandemic.

General and administrative.The increase in general and administrative expenses is primarily due to increased costs for certain centralized services we provide pursuant to the New Management Agreements, increased professional services costs and severance costs related to a reduction in workforce.

Rent.The decrease in rent expense is due to the termination of our master leases for the senior living communities that we previously leased from DHC, which were replaced with the New Management Agreements, pursuant to the Transaction Agreement. Rent for comparable communities increased primarily due to increases in rent at certain of our rehabilitation and wellness services clinics.

Depreciation and amortization.The decrease in depreciation and amortization is primarily due to the disposition of assets during 2019.

Loss on sale of senior living communities. A loss on sale of senior living communities of $0.1 million was recognized during the three months ended June 30, 2019 for the sale of three SNFs to a third party.

Long-lived asset impairment.For the three months ended June 30, 2019, we recognized a long-lived asset impairment of $0.1 million to reduce the carrying value of certain of our long-lived assets to their estimated fair values.
Interest, dividend and other income.The decrease in interest, dividend and other income is primarily due to decreased amounts of interest earned on our cash and cash equivalents.

Interest and other expense.The decrease in interest and other expense is primarily due to a decrease in borrowings under our credit facility during the three months ended June 30, 2020. We did not borrow any funds under our credit facility during the three months ended June 30, 2020.
Unrealized gain (loss) on equity investments.Unrealized gain (loss) on equity investments represents adjustments made to our investments in equity securities to record amounts at fair value.

Realized gain on sale of debt and equity investments.Realized gain on sale of debt and equity investments represents our realized gain on investments. 

Benefit for income taxes.For the three months ended June 30, 2020 and 2019, we recognized a benefit for income taxes of $0.9 million and $0.7 million, respectively. The benefit for income taxes for the three months ended June 30, 2020 is related to a decrease to our cumulative federal and state income taxes through June 30, 2020. The benefit for income taxes for the three months ended June 30, 2019 is related to a decrease to our cumulative federal and state income taxes through June 30, 2019.
Equity in earnings of an investee.Equity in earnings of an investee represents our proportionate share of earnings from our investment in AIC, which was dissolved on February 13, 2020.

Key Statistical Data For the Six Months Ended June 30, 2020 and 2019:

The following tables present a summary of our operations for the six months ended June 30, 2020 and 2019 (dollars in thousands, except per unit amounts):



36

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



  Six Months Ended
June 30,		 Increase/(Decrease)
  2020 2019 Amount Percent
REVENUES        
Senior living $40,587
 $529,171
 $(488,584) (92.3)%
Management fees 32,756
 8,007
 24,749
 309.1 %
Rehabilitation and wellness services 40,652
 22,260
 18,392
 82.6 %
     Total management and operating revenues 113,995
 559,438
 (445,443) (79.6)%
Reimbursed community-level costs incurred on behalf of managed communities 456,120
 151,824
 304,296
 200.4 %
Other reimbursed expenses 12,414
 —
 12,414
 n/m
  Total revenues 582,529
 711,262
 (128,733) (18.1)%
Other operating income 1,499
 —
 1,499
 n/m
Total revenues and other operating income 584,028
 711,262
 (127,234) (17.9)%
         
OPERATING EXPENSES        
Senior living wages and benefits 19,505
 273,637
 (254,132) (92.9)%
Other senior living operating expenses 11,573
 146,967
 (135,394) (92.1)%
Rehabilitation and wellness services expenses 32,471
 17,619
 14,852
 84.3 %
Community-level costs incurred on behalf of managed communities 456,120
 151,824
 304,296
 200.4 %
General and administrative 46,432
 47,050
 (618) (1.3)%
Rent 2,555
 87,804
 (85,249) (97.1)%
Depreciation and amortization 5,404
 11,106
 (5,702) (51.3)%
Loss on sale of senior living communities —
 101
 (101) (100.0)%
Long-lived asset impairment —
 3,260
 (3,260) (100.0)%
Total operating expenses 574,060
 739,368
 (165,308) (22.4)%
         
Operating income (loss) 9,968
 (28,106) 38,074
 n/m
         
Interest, dividend and other income 521
 571
 (50) (8.8)%
Interest and other expense (791) (1,812) 1,021
 (56.3)%
Unrealized (loss) gain on equity investments (595) 328
 (923) n/m
Realized gain on sale of debt and equity investments 95
 236
 (141) (59.7)%
Loss on termination of leases (22,899) —
 (22,899) n/m
         
Loss before income taxes and equity in earnings of an investee (13,701) (28,783) 15,082
 (52.4)%
Provision for income taxes (506) (785) 279
 (35.5)%
Equity in earnings of an investee —
 534
 (534) (100.0)%
Net loss $(14,207) $(29,034) $14,827
 (51.1)%
         
Owned and leased communities:        
Number of communities (end of period) 24
 205
 (181) (88.3)%
Number of living units (end of period) (1)
 2,312
 21,912
 (19,600) (89.4)%
Occupancy % 79.8% 83.0% (3.2)% n/m
RevPAR (2)
 $2,872
 $3,990
 $(1,118) (28.0)%
         
Managed communities:        
Number of communities (end of period) 241
 77
 164
 213.0 %
Number of living units (end of period) (1)
 28,348
 10,084
 18,264
 181.1 %
Occupancy % 80.7% 85.8% (5.1)% n/m
RevPAR (2)
 $3,733
 $3,643
 $90
 2.5 %
         
Rehabilitation and wellness services:        
Number of inpatient clinics 40
 45
 (5) (11.1)%
Number of outpatient clinics 206
 142
 64
 45.1 %
Total clinics 246
 187
 59
 31.6 %

37

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



n/m - not meaningful
(1) Includes only living units categorized as in service. As a result, the number of living units may change from period to period for reasons other than the acquisition or disposition of senior living communities.Pandemic.
(2)
RevPAR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of available units for the period, divided by the number of months in the period.

Comparable communities (senior living communities and rehabilitation and wellness services clinics that we have continuously owned, continuously leased or continuously managed since January 1, 2019) results are listed below. The number of comparable communities represent a minority of the senior living communities we operated since January 1, 2019 as a result of the changes in our business arrangements for senior living communities that we operate that are owned by DHC pursuant to the Restructuring Transactions (dollars in thousands, except per unit amounts):
  Six Months Ended June 30, Increase/(Decrease)
  2020 2019 Amount Percent
REVENUES        
Senior living $39,847
 $41,245
 $(1,398) (3.4)%
Management fees 10,165
 7,514
 2,651
 35.3 %
Rehabilitation and wellness services 32,051
 20,895
 11,156
 53.4 %
Reimbursed community-level costs incurred on behalf of managed communities 133,770
 135,673
 (1,903) (1.4)%
Other operating income 1,021
 —
 1,021
 n/m
Senior living wages and benefits 19,578
 19,298
 280
 1.5 %
Other senior living operating expenses 6,024
 8,833
 (2,809) (31.8)%
Rehabilitation and wellness services expenses 25,827
 16,244
 9,583
 59.0 %
Rent 2,078
 1,910
 168
 8.8 %
         
Owned and leased communities:        
Number of communities (end of period) 24
 24
 —
 — %
Number of living units (end of period) (1)
 2,312
 2,312
 —
 — %
Occupancy % 79.8% 81.4% (1.6)% n/m
RevPAR (1)(2)
 $2,872
 $2,973
 $(101) (3.4)%
         
Managed communities:        
Number of communities (end of period) 74
 74
 —
 — %
Number of living units (end of period) (1)
 9,371
 9,298
 73
 0.8 %
Occupancy % 82.5% 86.6% (4.1)% n/m
RevPAR (1)(2)
 $3,514
 $3,654
 $(140) (3.8)%
         
Rehabilitation and wellness services:        
Number of inpatient clinics 40
 40
 —
 — %
Number of outpatient clinics 124
 124
 —
 — %
Total clinics 164
 164
 —
 — %
n/m - not meaningful
(1) Includes only living units categorized as in service. As a result, the number of living units may change from period to period for reasons other than the acquisition or disposition of senior living communities.
(2) RevPAR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of available units for the period, divided by the number of months in the period.

The following is a discussion of our operating results for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Senior living revenues. The decrease in senior living revenues is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement, effective January 1, 2020. The decrease in senior living revenues at our comparable communities was primarily due to the decrease in occupancy and RevPAR caused by the COVID-19 pandemic as move-out rates accelerated at a faster pace than move-in rates due to state and company-wide policies to restrict admissions at those communities impacted with a confirmed case of COVID-19.
Management fees. The increase in management fees is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement. Management fees increased $21.4 million

38

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



due to the increase in senior living communities we manage for the account of DHC from 77 to 241. The remaining increase is primarily due to the New Management Agreements, under which we receive a management fee equal to 5% of the gross revenues realized at senior living communities managed and 3% of the costs of construction projects we manage for the account of DHC. Prior to the Transaction Agreement, our management fee for 46 previously managed communities was equal to 3% of the gross revenues realized at those senior living communities and 3% of the costs of construction projects we managed for the account of DHC. This was partially offset by a decline in gross revenues and reductions in construction projects at the senior living communities we manage caused by the COVID-19 pandemic as we implemented infectious disease protocols that limited non-essential visitors from entering our communities as well as pausing admissions to mitigate the spread of the COVID-19 virus within the communities we operate. The increase in management fees at our comparable communities was primarily due to the two percentage point rate increase from the New Management Agreements and the construction management fee that we began earning on construction projects we manage effective January 1, 2020, partially offset by a decline in gross revenues and construction projects at the senior living communities we manage caused by the COVID-19 pandemic.

Rehabilitation and wellness services.The increase in rehabilitation and wellness services revenues is due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement and growth of our business. Rehabilitation and wellness services revenues for the six months ended June 30, 2019 excluded $13.6 million related to inpatient clinics at communities we previously leased from DHC. Prior to the effective date of the Transaction Agreement, this revenue was eliminated in consolidation pursuant to GAAP. The remaining increase was primarily due to 64 net new clinics opened from July 1, 2019 to June 30, 2020. These increases were offset by a reduction of visits and closures of clinics as a result of the COVID-19 pandemic as clinics remained closed as part of our infectious disease protocols and services were provided to resident units only, which reduced the number of patients we could treat on a daily basis. The increase in rehabilitation and wellness services revenues at our comparable communities was due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement and the change in how those revenues are accounted for as a result, partially offset by a decline in gross revenues caused by the COVID-19 pandemic.

Reimbursed community-level costs incurred on behalf of managed communities. The increase in reimbursed community-level costs incurred on behalf of managed communities was primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement, resulting in the increase in senior living communities managed for the account of DHC. This was partially offset by a decline in costs incurred at the senior living communities we manage resulting from the COVID-19 pandemic. The decrease in reimbursed community-level costs incurred on behalf of managed communities at our comparable communities was due to lower community-level costs, including travel and entertainment and other costs impacted by occupancy declines due to the COVID-19 pandemic such as labor, food and certain housekeeping services.

Other reimbursed expenses. Other reimbursed expenses represent reimbursements that arise from certain centralized services we provide pursuant to the New Management Agreements. The decrease in other reimbursed expenses was due to a reduction in the centralized services provided as a result of reduced headcount support, to meet the needs as a result of continued occupancy declines at our managed communities.

Other operating income.income. Other operating income represents revenues recognized for funds received and recognized under the Provider Relief Fund of the CARES Act related toGeneral Fund Distribution.

Rehabilitation and wellness services expenses.The decrease in rehabilitation and wellness services for which we have determined we comply withexpenses is primarily due to a reduction of labor costs due to reduced visits at our inpatient clinics as a result of the associated termsPandemic, partially offset by growth of our business, including realizing the full quarter impact of 17 net new outpatient rehabilitation clinics opened during the year ended December 31, 2020 as well as opening 8 net new outpatient rehabilitation clinics during the three months ended March 31, 2021. The decrease in rehabilitation and conditions that permit uswellness services expenses at our comparable communities was due to retain these funds.a reduction of labor costs due to reduced visits as a result of the Pandemic.

Senior living wages and benefits. The decreaseincrease in senior living wages and benefits is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuantincreased medical insurance and workers compensation costs related to the Transaction Agreement. Senior living wages and benefits related to communities previously leased to DHC are reimbursed community-level costs incurred on behalf of managed communities effective January 1, 2020, pursuant to the New Management Agreements.Pandemic. The increase in senior living wages and benefits at our comparable communities is primarily due to bonuses and ongoing benefits packages providedincreased medical insurance costs related to team members.the Pandemic.
 
Other senior living operating expenses. Other senior living operating expenses are comprised of utilities, housekeeping, dietary, repairs and maintenance, insurance and other community-level administrative costs. The decreaseincrease in other senior living operating expenses is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement, offset by increased legal costs, increased insurance costsself-insurance obligations and increased costs related to COVID-19 testing supplies, disposable food supplies, infectious disease prevention cleaning, sanitation and labor as a result of the COVID-19 pandemic. Other senior living operating expenses related to communities previously leased to DHC are reimbursed community-level costs incurred on behalf of managed communities effective January 1, 2020, pursuant to the New Management Agreements.Pandemic. The decreaseincrease in other senior living operating expenses at our comparable communities is primarily due to lower repairs and maintenance, reduction in consulting and other purchased service expensescosts associated with our

28
39

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



our 2019 strategic sourcing investment program and costs associated with our self-insurance obligations offset by increased legal costs, increased insurance costs and increasedas well as increases in costs related to COVID-19 testing supplies, disposable food supplies, infectious disease prevention cleaning, sanitation and labor as a result of the COVID-19 pandemic.

Pandemic.
Rehabilitation and wellness services expenses.
The increase in rehabilitation and wellness services expenses is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement and growth of our business. Rehabilitation and wellness services expenses for the six months ended June 30, 2019 excluded $13.6 million related to inpatient clinics at communities we previously leased from DHC. Prior to the effective date of the Transaction Agreement, these expenses were eliminated in consolidation pursuant to GAAP. The remaining increase was primarily due to 64 net new clinics we opened from July 1, 2019 to June 30, 2020. These increases were offset by a reduction of labor costs due to reduced visits and temporary closures of clinics as a result of the COVID-19 pandemic. The increase in rehabilitation and wellness services expenses at our comparable communities was due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement and the change for how those revenues are accounted for as a result, partially offset by a reduction of labor costs due to reduced visits and temporary closures of clinics as a result of the COVID-19 pandemic.
General and administrative. The decrease in general and administrative expenses is primarily due to a decrease of $7.5 million in transaction costs incurred in connection with the Restructuring Transactions, partially offset by increased costs for certain centralized services we provide pursuant to the New Management Agreements, increased professional services costs and severance costs related to a reduction in workforce.was not meaningful.

Rent.The decrease in rent expense is due to the termination of our master leases for the senior living communities that we previously leased from DHC, which were replaced with the New Management Agreements, pursuant to the Transaction Agreement. Rent for comparable communities increased primarily due to increases in rent at certain of our rehabilitation and wellness services clinics.
Depreciation and amortization. The decreaseincrease in depreciation and amortization is primarily due to the sale of approximately $110.0 million of fixed assets and improvements to DHC during 2019.

Lossamortization expense incurred on sale of senior living communities. A loss on sale of senior living communities of $0.1 millionour equipment finance lease, which was recognizedentered into during the six months ended June 30, 2019, in connection with the salefourth quarter of three SNFs to a third party.2020.

Long-lived asset impairment.For the six months ended June 30, 2019, we recognized a long-lived asset impairment of $3.3 million to reduce the carrying value of certain of our long-lived assets to their estimated fair values.

Interest, dividend and other income. The decrease in interest, dividend and other income is primarily due to decreased amounts of interest earned on our cash and cash equivalents.equivalents due to declines in interest rates during 2021.

Interest and other expense. The decrease in interestInterest and other expense is primarily dueconsists of deferred financing fees and commitment fees related to decreased amounts of interest incurred on borrowings under our credit facility compared to the six months ended June 30, 2019. We did not borrow any funds underand interest on our credit facility during the six months ended June 30, 2020.mortgage note.

Unrealized gain (loss) on equity investments.Unrealized gain (loss) gain on equity investments. Unrealized (loss) gain on equity investments represents adjustments made to our investments in equity securities to record amounts at fair value.

Realized gain (loss) on sale of debt and equity investmentsinvestments.. Realized gain (loss) on sale of debt and equity investments represents our realized gaingains and losses on investments.

Loss on termination of leases.Loss on termination of leases in the first quarter of 2020 represents the excess of the fair value of the Share Issuances of $97.9 million compared to the consideration of $75.0 million paid by DHC.

Provision for income taxestaxes.. For the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, we recognized a provision for income taxes of $0.5$0.2 million and $0.8$1.4 million, respectively. The provision for income taxes for the sixthree months ended June 30,March 31, 2021 is related to state income taxes. The provision for income taxes for the three months ended March 31, 2020 is related to federal income taxes, partially offset by a federal AMT credit refund benefit and a federal benefit related to lease termination expense, plus state income taxes, including a state valuation allowance. The provision for income taxes for the six months ended June 30, 2019 is related to our federal and state tax obligations.
 
Equity in earnings of an investee.Equity in earnings of an investee represents our proportionate share of earnings from our investment in AIC, which was dissolved on February 13, 2020.

40

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations




Liquidity and Capital Resources

We require cash to fund our operating expenses, and to make capital expenditures and to the extent not funded by DHC pursuant to the New Management Agreements.service our debt obligations. As of June 30, 2020,March 31, 2021, we had $76.1$109.5 million of unrestricted cash and cash equivalents. As of March 31, 2021, our restricted cash and cash equivalents including $4.7included $21.6 million of Targeted SNF Distribution funds related to SNFs that were previously leased by us from DHC during 2018 and 2019 and we are evaluating whether we are eligible to retain these funds. In the event we determine we are not eligible to retain the funds received, we will remit the funds to HHS by August 20, 2020. bank term deposits in our captive insurance company.

As of June 30, 2020March 31, 2021 and December 31, 2019,2020, we had current assets of $223.7$270.9 million and $143.4$262.3 million, respectively, and current liabilities of $145.5$179.1 million and $164.3$177.9 million, respectively.

In addition, onOn January 1, 2020, in connection with the Restructuring Transactions,Transaction Agreement, we issued 10,268,158 of our common shares to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019. As consideration for the Share Issuances, DHC provided to us $75.0 million by assuming certain of our working capital liabilities and through cash payments.payments as consideration for the Share Issuances.

The following is a summary of cash flowstable presents selected data on our continuing operations from operating, investing and financing activities, as reflected in our condensed consolidated statements of cash flows:flows for the periods presented (dollars in thousands):

Three Months Ended March 31,
Net cash provided by (used in)20212020$ Change% Change
Operating Activities$26,826 $5,467 $21,359 390.7 %
Investing Activities(1,929)577 (2,506)(434.3)%
Financing Activities(103)(654)551 (84.3)%
Increase in cash and cash equivalents and restricted cash and cash equivalents24,794 5,390 19,404 360.0 %
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period109,597 56,979 52,618 92.3 %
Cash and cash equivalents and restricted cash and cash equivalents at end of period$134,391 $62,369 $72,022 115.5 %




29

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


  Six Months Ended
June 30,
(in thousands) 2020 2019 $ Change % Change
     Net cash provided by operating activities $40,158
 $5,424
 $34,734
 640.4 %
     Net cash (used in) provided by investing activities (350) 56,705
 (57,055) n/m
     Net cash provided by (used in) financing activities 3,966
 (52,936) 56,902
 (107.5)%
Change in cash and cash equivalents and restricted cash and cash equivalents 43,774
 9,193
 34,581
 376.2 %
Restricted cash included in held for sale assets —
 (42) 42
 (100.0)%
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period 56,979
 51,258
 5,721
 11.2 %
Cash and cash equivalents and restricted cash and cash equivalents at end of period $100,753
 $60,409
 $40,344
 66.8 %
Operating Activities

The increase in cash flows provided by operating activities for the sixthree months ended June 30, 2020,March 31, 2021 compared to the same period in 20192020 is primarily due to an increase in net income for the Restructuring Transactions, including the receipt of $23.5period, which included $7.8 million of cash from DHC, deferral of payroll taxes of $8.8 million as permitted byreceived and recognized under the CARES Act as other operating income, and reduction of which $1.7amounts due from related person of $25.5 million, will not be reimbursable from DHC, and changespartially offset by reduction in working capital. change in accounts receivable of $23.5 million.

Investing Activities

The decreaseincrease in cash flows provided byused in investing activities for the sixthree months ended June 30, 2020,March 31, 2021, compared to the same period in 20192020 is primarily due to a decrease in proceeds earned from the sale of property and equipment to DHC of $76.2 million, partially offset by a$2.7 million.

Financing Activities

The decrease in net cash used in financing activities for the acquisition of property and equipment of $21.3 million during the sixthree months ended June 30, 2020,March 31, 2021, compared to the same period in 2019. The increase in net cash provided by financing activities for the six months ended June 30, 2020 compared to the same period in 2019 is primarily due to $0.6 million in fees paid in 2020 period in connection with the repayment of our outstanding borrowings onShare Issuances.

Capital Expenditures

During the revolving credit facility during the sixthree months ended June 30, 2019.March 31, 2021, we invested $2.0 million in our 24 owned and leased senior living communities and rehabilitation and wellness services clinics. During the three months ended March 31, 2020, we invested $1.8 million in our 24 owned and leased senior living communities and rehabilitation and wellness services clinics. DHC funds the capital expenditures at the senior living communities we manage for the account of DHC pursuant to the New Management Agreements.

We believe we have adequate financial resources from our existing cash flows from operations, together with cash on hand and amounts available under our credit facility to support our business for at least the next twelve months.Pandemic Liquidity Impact

Our liquidity and capital funding requirements depend on numerous factors, including our operating results, our capital expenditures to the extent not funded by DHC pursuant to the New Management Agreements, general economic conditions and the cost of capital. Shortfalls in cash flows from operating results or other principal sources of liquidity may have an adverse impact on our ability to execute on our strategy or to maintain appropriate capital spending levels. We believe we have adequate financial resources from our existing cash flows from operations, together with unrestricted cash on hand and amounts available under our credit facility (which we notified the lender that we intended to exercise our option to extend the maturity to June 2022), to support our business for at least the next twelve months.

We are closely monitoring the effect of the COVID-19 pandemicPandemic on our liquidity. We currently expect to use cash balanceson hand and cash flows from operations as well as our revolving credit facility to fund our future operations and capital expenditures, to the extent not funded or reimbursed by DHC pursuant to the New Management Agreements, and fixed debt obligations, as well as investments in diversifying our service offerings to diversify our revenue streams. DHC funds the operating and capital expenses for the senior living communities we manage for DHC. We may borrow funds from our credit facility from time to time. We intend to conduct our business in a manner that will afford us reasonable access to capital for investment and financing activities, but we cannot be certain that we will be able to successfully carry out this intention, particularly because of the uncertainty surrounding the duration and severity of the current economic impact resulting from the COVID-19 pandemic.Pandemic. A long, protracted and extensive economic recession or adverse market conditions in the senior living industry may cause a decline in financing

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



availability and increased costs for financings. Further, such conditions could also disrupt capital markets and limit our access to financing from public sources.

Insurance

Increases over time in the cost of insurance, especially professional and general liability insurance, workers’ compensation and employee health insurance, have had an adverse impact upon our results of operations. Although weWe self-insure a large portion of these costs, andcosts. We also require residents in our senior living communities to buy insurance directly or reimburse usself-insure for insurance that we purchase, ourauto insurance. Our costs have increased as a result of the higher costs that we incur to settle claims and to purchase insurance for claims in excess of the self-insured amounts, some of which related to the senior living communities we manage on behalf of DHC and are reimbursed to us by DHC pursuant to the New Management Agreements. Further, our health insurance and workers compensation costs have increased as a result of the Pandemic. These increased costs may continue in the future. We previously participated with other companies to which RMR LLC provides management services in a combined property insurance program through AIC. The policies under that program expired on June 30, 2019, and we and the other AIC shareholders elected not to renew the AIC property insurance program; we insteadalso have purchased property insurance coverage under DHC's policy with unrelated third party insurance providers. On April 4, 2021, one of the communities that we lease had a fire which has caused extensive damage and the residents of the community to be relocated. The Company has insurance on this community with a deductible of $1 million, which is expected to be incurred related to this community.

For more information about our existing insurance see “Business—Insurance” in Part I, Item I of our Annual Report.

Off-Balance Sheet Arrangements

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At June 30, 2020, we had seven irrevocable standby letters
Item 2. Management’s Discussion and Analysis of credit outstanding, totaling $29.3 million. OneFinancial Condition and Results of these letters of credit in the amount of $26.9 million, which secures our workers' compensation insurance program, is collateralized by approximately $21.5 million of cash equivalents and $6.9 million of debt and equity investments. This letter of credit expires in June 2021 and is automatically extended for one-year terms unless notice of nonrenewal is provided prior to the end of the applicable term. At June 30, 2020, the cash equivalents collateralizing this letter of credit, including accumulated interest, wereOperations
classified as short-term restricted cash and cash equivalents in our condensed consolidated balance sheets, and the debt and equity investments collateralizing this letter of credit are classified as short-term investments in our condensed consolidated balance sheets. The remaining six irrevocable standby letters of credit outstanding at June 30, 2020, totaling $2.4 million, secure certain of our other obligations. As of June 30, 2020, these letters of credit are scheduled to mature between September 2020 and June 2021 and are required by the beneficiaries to be renewed annually.


Debt Financings and Covenants

We have a $65.0 million secured revolving credit facility, or our Credit Facility, that is available for general business purposes. Our credit facilityCredit Facility currently matures in June 2021, and, subject tohowever on March 16, 2021, we exercised our payment of an extension fee and other conditions, we have the option to extend the stated maturity dateCredit Facility for one-year, until June 12, 2022, subject to payment of our credit facility for a one-year period.the extension fee and satisfaction of other conditions. We are required to pay interest on borrowings under our credit facilityCredit Facility at a rate of LIBOR plus a premium of 250 basis points per annum; or at a base rate, as defined in the credit agreement, governing our credit facility, plus 150 basis points per annum. The annual interest ratesrate options as of June 30, 2020,March 31, 2021 were 2.66%2.61% and 4.75%, respectively. We are also required to pay a quarterly commitment fee of 0.35% per annum on the unused portion of the available capacity under our credit facility.Credit Facility. No principal repayment is due until maturity.

Our credit facilityCredit Facility is secured by real estate mortgages on 11 senior living communities with a combined 1,2451,236 living units owned by certain of our subsidiaries that guarantee our obligations under our credit facility.Credit Facility. Our credit facilityCredit Facility is also secured by these subsidiaries’senior living communities' accounts receivable and related collateral. The amount of available borrowings under our credit facilityCredit Facility is subject to our having qualified collateral, which is primarily based on the value and operating performance of the communities securing our obligations under our credit facility.Credit Facility. Our credit facilityCredit Facility provides for acceleration of payment of all amounts outstanding under our credit facilityCredit Facility upon the occurrence and continuation of certain events of default, including a change of control of us, as defined in our credit agreement. Our credit agreement contains financial and other covenants, including those that restrict our ability to pay dividends or make other distributions to our shareholders in certain circumstances.

At June 30, 2020,March 31, 2021, we had seven irrevocable standby letters of credit outstanding, totaling $29.3 million. One of these letters of credit in the amount of $26.9 million, which secures our workers' compensation insurance program, is collateralized by approximately $21.6 million of cash equivalents and $7.7 million of debt and equity investments. This letter of credit expires in June 2021 and is automatically extended for one-year terms unless notice of nonrenewal is provided prior to the end of the applicable term. As of May 5, 2021, we have not received a notice of nonrenewal. We expect that our worker's compensation insurance program will require an increase in the amount of this letter of credit in June 2021. At March 31, 2021, the cash equivalents collateralizing this letter of credit areclassified as more fully described aboveshort-term restricted cash and cash equivalents in our condensed consolidated balance sheets, and the debt and equity investments collateralizing this letter of credit are classified as short-term restricted debt and equity investments in our condensed consolidated balance sheets. The remaining six irrevocable standby letters of credit outstanding at March 31, 2021, totaling $2.4 million, which are issued under the heading “—Off-Balance Sheet Arrangements.”credit facility, secure certain of our other obligations. As of May 5, 2021, these letters of credit are scheduled to mature between June 2021 and September 2021 and are required to be renewed annually.

We also have a mortgage note of $7.4 million as of June 30, 2020,March 31, 2021, that we assumed in connection with a previous acquisition of a senior living community. Payments of principal and interest are due monthly under this mortgage debt until maturity in September 2032. The annual interest rate on this mortgage debt was 6.20% as of June 30, 2020.March 31, 2021.

As of June 30, 2020,March 31, 2021, we had no borrowings outstanding under our credit facilityCredit Facility and $2.4 million in letters of credit issued under our credit facility,Credit Facility, and $51.8$14.9 million of availabilityavailable for further borrowing under our credit facility,Credit Facility, and we had $7.4

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



$7.1 million in an outstanding on the mortgage note. As of June 30, 2020,March 31, 2021, we believe we were in compliance with all applicable covenants under our debt agreements.

For more information regarding our debt financings and covenants, see Note 10 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Related Person Transactions

We have relationships and historical and continuing transactions with DHC, RMR LLC, ABP Trust and others related to them. For example: DHC is our former parent company, our former largest landlord, the owner of the senior living communities that we manage and our largest shareholder, owning as of June 30, 2020, 33.9% of our outstanding common shares, and with which we restructured our business arrangements as of January 1, 2020 pursuant to the Transaction Agreement; Adam Portnoy, the Chair of our Board of Directors and one of our Managing Directors, is the sole trustee, an officer and the controlling shareholder of ABP Trust and he is also a managing director and the president and chief executive officer of RMR Inc., an officer and employee of RMR LLC and the chair of the board of trustees and a managing trustee of DHC; Jennifer Clark, our other Managing Director and Secretary, is a managing director and the executive vice president, general counsel and secretary of RMR Inc., an officer of ABP Trust, an officer and employee of RMR LLC and a managing trustee and secretary of DHC; various services we require to operate our business are provided to us by RMR LLC pursuant to our business management agreement with RMR LLC and RMR LLC also provides management services to DHC and DHC’s officers are officers and employees of RMR LLC; RMR LLC employs our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer; Adam Portnoy, directly and indirectly through ABP Trust and its subsidiaries, is a significant stockholder of us, beneficially owning approximately 6.2% of our outstanding common shares as of June 30, 2020; a subsidiary of ABP Trust is also the landlord of our headquarters; and Adam Portnoy, through ABP Trust, is also the controlling shareholder of RMR Inc., which is the managing member of RMR LLC. We have relationships and historical and continuing transactions with other companies to which RMR LLC or its subsidiaries provide management services and some of which have directors, trustees or officers who are also directors, trustees or officers of us, DHC, RMR LLC or RMR Inc. and some of our Directors and officers serve as trustees, directors or officers of these companies.

For further information about these and other such relationships and related person transactions, see Notes 11, 12 and 13 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our Annual Report, our definitive Proxy Statement for our 20202021 Annual Meeting of ShareholdersStockholders and our other filings with the SEC. In addition, see the section captioned “Risk Factors” of"Risk Factors" in our Annual Report and in this Quarterly Report for a description of risks that may arise as a result of these and other related person transactions and relationships. Our filings with the SEC and copies of certain of our agreements with these related persons, including our prior leases, forms of management agreements and related pooling and omnibus agreements with DHC, the Transaction Agreement, our business management agreement with RMR LLC, and our headquarters lease with a subsidiary of ABP Trust, are available as exhibits to our filings with the SEC and accessible at the SEC’s website, www.sec.gov. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Seasonality

Revenues derived from our senior living and managed communities are subject to modest effects of seasonality, which we experience in certain regions more than others, due to weather patterns, geography and higher incidence and severity of flu and other illnesses during winter months. We do not expect these seasonal differences to cause material fluctuations in our revenues or operating cash flows. It is uncertain what the long-term survival, recurrence and resurgence of COVID-19 will be, including whether it will weaken, transform or otherwise become a common seasonal virus, which may change or amplify seasonal aspects and effects on our business.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk
Not applicable.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our management, including our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer, concluded that our disclosure controls and procedures are effective.
 
There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2020,March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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44



Warning Concerning Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever we use words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “will”, “may” and negatives or derivatives of these or similar expressions, we are making forward-looking statements. These forward-looking statements are based upon our present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Forward-looking statements in this Quarterly Report on Form 10-Q relate to various aspects of our business, including:
 
•The continued impactduration, severity and geographic reach of the COVID-19 pandemicPandemic, and its impact on our and DHC's business, results, operations and liquidity, and the impact of the COVID-19 pandemicPandemic on the senior living industry in general,

•The development, availability, effectiveness and impact of COVID-19 vaccines and therapeutic treatments on public health and safety, economic conditions, the senior living industry and our business,

•Our expectations regarding pent-up demand, impacts of information technology and our competitive advantages in the senior living industry,

•Our ability to attract and retain qualified and skilled employees, particularly at our senior living communities,

•Our ability to operate our senior living communities profitably,

•Our ability to grow revenues at the senior living communities we manage and to increase the fees we earn from managing senior living communities,

•Our expectation to focus our expansion activities on internal growth from our existing senior living communities and the clinics we operate and other ancillary services that we may provide,

•Our ability to increase the number of senior living communities we operate, excluding the loss of the communities pursuant to the Transition, and residents we serve, and to grow our other sources of revenues, including rehabilitation and wellness services and other services we may provide,

•Whether the aging U.S. population and increasing life spans of older adults will increase the demand for senior living communities and health and wellness service clinicscenters,

•Our expectations of the types of services seniors will demand and other healthcare related properties and services,our ability to satisfy those demands,

•Our ability to comply and to remain in compliance with applicable Medicare, Medicaid and other federal and state regulatory, rulemaking and rate setting requirements,

•Our belief regarding the adequacy of our existing cash flows from operations, unrestricted cash on hand and amounts available under our Credit Facility to support our business,

•Our expectations regarding the impact of seasonal differences on our revenues and operating cash flows,

•Our expectations that we will be able to pass through to our residents and clients costs we may incur from the impact of climate change,

•Our ability to sell communities we may offer for sale,

•Our ability to access or raise debt or equity capital,

•The steps expected to be taken in connection with our Strategic Plan and the timing, costs, savings and benefits related to such steps, and

Other matters.•Our expectations for the operation and performance of the business following implementation of our Strategic Plan.

Our actual results may differ materially from those contained in or implied by our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our
34


control. Risks,A summary of the risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, cash flows, liquidity and prospects include, but are not limited to: 

•The impact of conditions in the economy and the capital markets on us and our residents, clients and other customers,

•Competition within the senior living and other health and wellness related services businesses,

•Older adults delaying or forgoing moving into senior living communities or purchasing health and wellness services from us,

•Increases in our labor costs or in costs we pay for goods and services,

•Increases in tort and insurance liability costs,

•Our operating and debt leverage,

•Actual and potential conflicts of interest with our related parties, including our Managing Directors, DHC, RMR LLC, ABP Trust and others affiliated with them,

•Changes in Medicare or Medicaid policies and regulations or the possible future repeal, replacement or modification of these or other existing or proposed legislation or regulations, which could result in reduced Medicare or Medicaid rates, a failure of such rates to cover our costs or limit the scope or funding of either or both programs, or reductions in private insurance utilization and coverage,


45


•Delays or nonpayment of government payments to us,
•Compliance with, and changes to, federal, state and local laws and regulations that could affect our services or impose requirements, costs and administrative burdens that may reduce our ability to profitably operate our business,

•Our exposure to litigation and regulatory and government proceedings due to the nature of our business, including adverse determinations resulting from government reviews, audits and investigations and unanticipated costs to comply with legislative or regulatory developments,

Continued•Ongoing healthcare reform efforts, including continued efforts by third-party payers to reduce costs, and

•Acts of terrorism, outbreaks or continuations of public health crises, including COVID-19,so-called pandemics or other man-madehuman-made or natural disasters beyond our control.control, and

•The effects of the implementation of our Strategic Plan on our business and operations.

For example:

•Challenging conditions in the senior living industry continue to exist and our business and operations remain subject to substantial risks, many of which are beyond our control. As a result, our operations may not be profitable in the future and we may realize losses,

•We may not successfully execute our strategic growth and cost rationalization initiatives,

•Our ability to operate senior living communities or rehabilitation and wellness services clinics profitably and increase the revenues generated by us depends upon many factors, including our ability to integrate new communities and clinics into our existing operations, as well as some factors that are beyond our control, such as the demand for our services arising from economic conditions generally and competition from other providers of services to older adults. We may not be able to successfully integrate, operate, compete and profitably manage our senior living communities and rehabilitation and wellness services clinics,

•We expect to enter into additional management arrangements with DHC for additional senior living communities that DHC owns or may acquire in the future. However, we cannot be sure that we will enter any additional management arrangements with DHC,

35


•Our belief that the aging of the U.S. population and increasing life spans of older adults will increase demand for senior living communities and services may not be realized or may not result in increased demand for our services,

•Our investments in our workforce and continued focus on reducing our employeeteam member turnover level by enhancing our competitiveness in the marketplace with respect to cash compensation and other benefits, as well as our innovative efforts to attract talent, may not be successful and may not result in the benefits we expect to achieve through such investments,

•We may not be able to implement each aspect of our Strategic Plan by the end of 2021 or at all, for example:

◦We and DHC may not be able to identify and agree to terms with new operators or otherwise transition the 108 senior living communities that we currently manage for DHC to new operators, or the timing of such transitions may be delayed or may change,

◦We may not be able to close and reposition the 27 skilled nursing units in our CCRCs that we will continue to manage for DHC, or the timing of such closures and repositions may be delayed or may change,

•The costs of implementing the Strategic Plan may be more than we expect,

•We may not realize the benefits we anticipate from the Strategic Plan,

•We may not be able to achieve our objectives following implementation of the Strategic Plan, including partially offsetting the revenue loss from the senior living communities we intend to transition with expense reductions to right-size operations, on the anticipated timeline, or at all,

•Although our Board of Directors and DHC’s Board of Trustees, including our Independent Directors and DHC’s Independent Trustees, have agreed in principal to the terms of the changes to the management arrangements described in this Quarterly Report on Form 10-Q, definitive documentation related to these changes has not been entered into; therefore, the timing and terms of the management agreements may be delayed or may change,

•Our marketing initiatives may not succeed in increasing our occupancy and revenues, and they may cost more than any increased revenues they may generate,

•Our strategic investments to enhance efficiencies in, and benefits from, our purchasing of services may not be successful or generate the returns we expect,

•Circumstances that adversely affect the ability of older adults or their families to pay for our services, such as economic downturns, weakening housing market conditions, higher levels of unemployment among our residentscustomers or potential residents’their family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics generally could affect the revenues and profitability of our senior living communities,business,

Residents•Customers who pay for our services with their private resources may become unable to afford our services, resulting in decreased occupancy and decreased revenues at our senior living communities and rehabilitation and wellness services clinics and other ancillary services we provide,

•The various federal and state government agencies that pay us for the services we provide to some of our residentscustomers are still experiencing budgetary constraints and may lower the Medicare, Medicaid and other rates they pay us,us. On December 27, 2020, Medicare payments related to outpatient therapy were reduced by 3.5% as a result of the Consolidated Appropriations Act,

•Our preparation efforts in anticipationto mitigate the continued effects of continued COVID-19 pandemic challengesthe Pandemic may not be sufficient,

•We expect that the Pandemic will continue to adversely affect our business, operating results and financial condition, due to continual deterioration of occupancy at our senior living communities, staffing pressures and potential medical and food supply shortages as well as increased COVID-19 testing costs that may have an adverse effect on the operating costs of our senior living communities,

•We believe that our insurance costs may continue to rise as a result of claims or litigation associated with the COVID-19 pandemic,


Pandemic, coupled with general market conditions prior to the Pandemic,
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36



•We may be unable to repay or refinance our debt obligations when they become due,
•At June 30, 2020,March 31, 2021, we had $76.1$109.5 million of unrestricted cash and cash equivalents. As of June 30, 2020,March 31, 2021, we had no borrowings under our credit facility,Credit Facility, letters of credit issued under the Credit Facility in an aggregate amount of $2.4 million and $51.8$14.9 million available for borrowing under our credit facility.Credit Facility. In addition, we believe that we have adequate financial resources to fund our business for at least the next 12 months. However, we have incurred in prior periods and may continue to incur in future periods operating losses and we have a large accumulated deficit. Moreover, certain aspects of our operations and future growth opportunities that we may pursue in our business may require significant amounts of working cash and require us to make significant capital expenditures. Further, the impact of the COVID-19 pandemicPandemic and resulting economic conditions has adversely impacted us and will likely continue to do so. As a result, we may not have sufficient cash liquidity,
•Actual costs under our credit facility will be higher than LIBOR plus a premium because of other fees and expenses associated with our credit facility,Credit Facility,
•The amount of available borrowings under our credit facilityCredit Facility is subject to our having qualified collateral, which is primarily based on the value of the assets securing our obligations under our credit facility.Credit Facility. Accordingly, the availability ofavailable borrowings under our credit facilityCredit Facility at any time may be less than $65.0 million. Also, the availability of borrowings under our credit facilityCredit Facility is subject to our satisfying certain financial covenants and other conditions that we may be unable to satisfy,
•We intend to conduct our business in a manner that will afford us reasonable access to capital for investment and financing activities. However, we may not be able to successfully carry out this intention. Further, market disruptions, such as may be caused and continued by the COVID-19 pandemicPandemic and the current economic conditions, may significantly limit our availabilityaccess to capital,

•Our actions and approach to managing our insurance costs, including our operating an offshore captive insurance company and self-insuring with respect to certain liability matters, may not be successful and could result in our incurring significant costs and liabilities that we will be responsible for funding,

Contingencies in any applicable acquisition or sale agreements we or DHC have entered into, or may enter into, may not be satisfied and our and DHC’s applicable acquisitions or sales, and any related management arrangements we may expect to enter into, may not occur, may be delayed or the terms of such transactions or arrangements may change,

•We may be unable to meet collateral requirements related to our workers’ compensation insurance program for future policy years, which may result in increased costs for such insurance program,

We may not be able to sell communities that we own, and DHC may not be able to sell communities we manage, that we or DHC may seek to sell, on acceptable terms,

•We believe that our relationships with our related parties, including DHC, RMR LLC, ABP Trust and others affiliated with them may benefit us and provide us with competitive advantages in operating and growing our business. However, the advantages we believe we may realize from these relationships may not materialize, and

•Our senior living communities and rehabilitation and wellness services clinics are subject to extensive government regulation, licensure and oversight. We sometimes have regulatory issues in the operation of our senior living communities and rehabilitation and wellness services clinics and, as a result, some of our communities may periodically be prohibited from admitting new residents, or our license to continue operations at a community or clinic may be suspended or revoked. Also, operating deficiencies or a license revocation at one or more of our senior living communities or rehabilitation and wellness services clinics may have an adverse impact on our ability to operate, obtain licenses for, or attract residents or clients to, our other communities and clinics.

We expect that the COVID-19 pandemic will continue to adversely affect our business, operating results and financial condition, due to continual deterioration of occupancy of our senior living communities, staffing pressures and potential medical and food supply shortages that may have an adverse effect on our operating costs of our senior living facilities.

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Currently, unexpected results could occur due to many different circumstances, some of which are beyond our control, such as acts of terrorism, natural disasters, epidemics and other widespread illnesses, changed Medicare or Medicaid rates, new legislation, regulations or rulemaking affecting our business, or changes in capital markets or the economy generally.

The information contained elsewhere in this Quarterly Report on Form 10-Q or in our other filings with the SEC, including under the caption “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report, or incorporated herein or therein, identifies other important factors that could cause differences from our forward-looking statements. Our filings with the SEC are available on the SEC’s website at www.sec.gov.

You should not place undue reliance upon our forward-looking statements.

Except as required by law, we do not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.

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PART II. Other Information

Item 1. Legal Proceedings
 
Information on material developments in our legal proceedings is included in Note 14 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.


Item 1A. Risk Factors

Our business faces many risks, a number of which are described under the caption “Risk Factors” in our Annual Report. The COVID-19 pandemic and its aftermath may subject us to additional risks that areReport, as supplemented by the risk factors described below. The risks described in our Annual Report and below may not be the only risks we face. Other risks of which we are not yet aware, or that we currently believe are not material, may also materially and adversely impact our business operations or financial results. If any of the events or circumstances described in the risk factors contained in our Annual Report or described below occurs, our business, financial condition or results of operations could be adversely impacted and the value of an investment in our securities could decline. Investors and prospective investors should consider the risks described in our Annual Report, and below, and the information contained under the caption “Warning Concerning Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q before deciding whether to invest in our securities.

The COVID-19 pandemic has had,We intend to pursue the Strategic Plan, but we may be unable to implement it in a timely manner or at all, and it may not result in the benefits we expect.

On April 9, 2021, we announced the Strategic Plan to reposition our senior living management business to focus on larger independent living, assisted living and memory care communities as well as stand-alone independent living and active adult communities. Pursuant to the Strategic Plan, we intend to, among other things, (i) amend our management arrangements with DHC to transition 108 senior living communities that we currently manage for DHC to new operators, (ii) close and reposition 27 skilled nursing units in the CCRCs that we will continue to manage for DHC, (iii) close 37 Ageility inpatient rehabilitation clinics in certain transitioning communities and (iv) eliminate certain positions in our corporate, regional and divisional teams as well as impacted units and clinics.

Our Board of Directors and DHC’s Board of Trustees, including our Independent Directors and DHC's Independent Trustees, have a materially adverse affectagreed in principal to certain changes to the New Management Agreements necessary to implement the Strategic Plan. However, definitive documentation related to these changes has not been entered into; therefore, the timing and terms of these changes may be delayed or may change. We also may not be able to transition management to other operators or to reposition or close skilled nursing units before the year end 2021, as anticipated, or at all.

We believe the Strategic Plan will enable us to build on our operational strengths at larger senior living communities and stand-alone independent living and active adult communities while continuing to evolve our choice-based, financially flexible rehabilitation and wellness services. However, our business operations, financial resultsremains subject to various risks, including, among others, the highly competitive nature of the senior living industry; medical advances and liquidityhealth and its duration is unknown.

COVID-19 has been declared a pandemic bywellness services that allow some potential residents to defer the World Health Organization, andtime when they require the HHS Secretary has declared a public health emergency in the United States in response to the outbreak. COVID-19 has had a devastating impact on the global economy, including the U.S. economy, and has resulted in a global economic recession.

These conditions have had, and will likely continue to have, a material and adverse impact our business, results of operations and liquidity, including reducing occupancyservices available at our senior living communities, pressurescommunities; significant regulatory requirements imposed on revenue due to restrictions on admitting new residents, increasingour business; and other factors. Many of these factors are beyond our control. In addition, the costcosts of operations or necessitatingimplementing the closure of our facilities. Occupancy at our senior living communities has experienced continual declines during the COVID-19 pandemic so farStrategic Plan may be greater than we expect and we may be unable to offset such costs, as well as the revenue loss from the communities we intend to transition, through expense reductions to right-size operations. As a result, we may not achieve the benefits we expect, continuing declines over a sustained period of time will likelyeven if we implement the Strategic Plan.

In connection with the Strategic Plan, we intend to eliminate positions in our corporate, regional and divisional teams and impacted units and clinics, which may have a significantan adverse impact on our business and financial results. Although

In connection with the Strategic Plan, we have not experienced a significant changeintend to eliminate approximately 150, or 38.5% of the positions in our corporate, regional and divisional teams and approximately 1,180, or 8.3%, of the positions in our communities and clinics. This reduction in force may result in the ratesloss of institutional knowledge and expertise and the reallocation and combination of certain roles and responsibilities across the organization, which could adversely affect our operations and increase the risk that we charge residentsmay not comply with accounting, legal and regulatory requirements and may not be able to date as a resultpursue certain business opportunities. Our management may also need to divert attention away from our strategic and operational activities to manage these organizational changes. In addition, we may not achieve anticipated benefits from the reduction in force, including the expected cost savings and operational efficiencies.

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The substantial majority of the COVID-19 pandemic, that could change in the future if the pandemic continues or economic conditions worsen. We earn management fees based on a percentage of revenues generated at the senior living communities that we manage; therefore, declines in occupancy, without sufficient offsets from increased rates or other revenues,operate are owned by DHC and vice versa, have already and likely will continue to reduce the management fees we earn. In addition, the COVID-19 pandemic may further adversely impact our business by causing a temporary holdis substantially dependent on new residents, by disrupting or delaying production and delivery of materials we need to operate our relationship with DHC.

Our business is substantially dependent upon our continued relationship with DHC. Of the 252 senior living communities orwe currently operate, 228 are owned by causing staffing shortages in those communities. Additionally, the COVID-19 pandemic could significantly increase the operating costs for our senior living communities, including our need to increase staffing or pay overtime, to obtain PPE, to incorporate enhanced infection control measuresDHC, and to implement quarantines for residents. For the communities we manage on behalf of DHC, the operating costs would be borne by DHC. However, those costs may reduce the earningsall of those senior living communities and thereby reduce our abilitypursuant to earn incentive fees. Moreover, forthe New Management Agreements. In connection with the Strategic Plan, we intend to, among other things, amend the New Management Agreements to transition 108 senior living communities that we owncurrently manage for DHC to new operators and lease,close and reposition 27 skilled nursing units in the CCRCs that we would incur these costs, which would reduce our earnings from those communities. Finally, we believe that our insurance costs maywill continue to rise as a resultmanage for DHC. The transition of claims or litigation associated with the COVID-19 pandemic.

Our ability to operate ourmanagement of 108 senior living communities that we currently manage for DHC to other operators as well as the closing and repositioning of the skilled nursing units will result in lower operating revenues and may be negatively impacted ifhave an adverse impact on our relationship with DHC, each of which could harm our financial condition and ability to achieve our long-term growth initiatives. In addition, the 108 senior living communities that we are unableexpect to maintain or improve occupancy levels ortransition to secure the necessary staffing and supplies, staff illness, shortages of supplies due to supply chain or production challenges, or for other reasons. Additionally, downturns or stagnation in the U.S. housing market as a result of an economic downturnnew operators, have 44 Ageility outpatient rehabilitation clinics, which due to the COVID-19 pandemic and its aftermath could adversely affect the ability, or perceived ability, of seniorstransfer to afford the resident fees at our senior living communities as prospective residentsa new operator may use the proceeds from the sale of their homes to cover the cost of such fees.

In addition, the COVID-19 pandemic has significantly adversely impacted our Ageility business, resulting in our closing certain of our outpatient clinics for a temporary period. Additionally, we have significantly reduced the number of new clinics we plan to open during 2020. As a result, revenues from our Ageility business have declined and we expect those declines to continue as a result of the COVID-19 pandemic and the resulting economic conditions.


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We cannot predict the extent and duration of the COVID-19 pandemic or the severity and duration of its economic impact, but we expect it will be substantial. Further, the extent and strength of any economic recovery after the COVID-19 pandemic abates is uncertain and subject to various factors and conditions. Our business, operations and financial positionclosure.

DHC may continue to be negatively impacted afterterminate the COVID-19 pandemic abates and may remain at depressed levels compared to prior toNew Management Agreements in certain circumstances, including if the outbreak of the COVID-19 pandemic and those conditions may continue for an extended period.

Certain capital expenditures have been delayed due to COVID-19 restrictions, including capital expenditures at the senior living communitiesEBITDA we manage for DHC; these reductions may harm our competitive position and will result in our earning reduced construction management fees.    

Most of the senior living communities we operate are managed on behalf of DHC. DHC funds the operating and capital expenditures for those managed senior living communities. DHC announced it plans to continue investing essential capital in their senior living communities, but certain projects have been delayed and may continue to be delayed in the future due to community access restrictions and other state and local ordinances related to COVID-19 that may limit their ability to proceed with these projects on a timely basis. To the extent DHC defers capital expendituresgenerate at our managed senior living communities does not exceed target levels or for our uncured material breach. The loss of the applicable senior living communities mayNew Management Agreements with DHC, or a material change to their terms, could have a material adverse effect on our business, financial condition or results of operations. We expect to enter into amended management arrangements with DHC in connection with the Strategic Plan; however, we cannot be harmed competitivelysure that we will enter into the these amendments, or that we will realize the benefits we expect from these amendments if other senior living communitieswe do enter into them.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer purchases of equity securities.The following table provides information about our purchases of our equity securities during the quarter ended March 31, 2021:

Calendar Month
Number of Shares Purchased (1)
Average Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 202110 $8.15 — $— 
Total10 $8.15 — $— 

(1)    These common share withholdings and purchases were made to satisfy tax withholding and payment obligations of current and former employees and officers of us and of RMR LLC in those markets are newer or are undergoing enhanced capital improvements. In addition, we typically manage capital improvement projectsconnection with the vesting of awards of our common shares. We withheld and purchased these shares at their fair market value based upon the trading price of our common shares at the senior living communities we manage for DHC and DHC pays us fees basedclose of trading on a percentage of construction costs for managing those projects. A decline in capital improvement projects at the senior living communities we manage for DHC will result in our earning less construction management fees.

The high levels of infected COVID-19 patients and deaths at senior living communities and resulting negative publicity may have a long-term significant detrimental impactNasdaq on the senior living industry, including us, even if our senior living communities do not experience similar levels of COVID-19 infections and deaths as others in the industry.purchase date.

COVID-19 has proven to be particularly harmful to seniors and persons with other pre-existing health conditions. If the senior living industry continues to experience high levels of residents infected with COVID-19 and related deaths, and news accounts emphasize these experiences, seniors may delay or forgo moving into senior living communities or using other services provided by senior living operators. These trends could be realized across the senior living industry and not discriminate among owners and operators that have higher or lower levels of residents experiencing COVID-19 infections and related deaths. As a result, our senior living communities’ business and our results of operations may experience a long-term significant detrimental impact.

Item 6. Exhibits

Exhibit
Number
Description
3.1
Composite Copy of Articles of Amendment and Restatement, dated December 5, 2001, as amended to date. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019.)
3.2
Amended and Restated Bylaws of the Company, adopted March 3, 2017. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.)
4.1
Form of Common Stock Certificate. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019.)
4.2
Consent, Standstill, Registration Rights and Lock-Up Agreement, dated October 2, 2016, among the Company, ABP Trust, ABP Acquisition LLC, Barry M. Portnoy and Adam D. Portnoy. (Incorporated by reference to the Company’s Current Report on Form 8-K dated October 2, 2016.)
10.1
Five Star Senior Living Inc. Amended and Restated 2014 Equity Compensation Plan (+) (Incorporated by reference to the Company's Current Report on Form 8-K dated June 9, 2020.)
10.2
Summary of Director Compensation (+) (Incorporated by reference to the Company's Current Report on Form 8-K dated June 9, 2020.)

31.1
Rule 13a-14(a) Certification of Chief Executive Officer. (Filed herewith.)
31.2
Rule 13a-14(a) Certification of Chief Financial Officer. (Filed herewith.)
32.1
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. (Furnished herewith.)

Incorporated by Reference
Exhibit
Number
DescriptionFormExhibit NumberFile NumberFiling DateFiled
Herewith
3.110-Q3.1001-1681711/6/2019
3.210-K3.6001-168173/3/2017
4.110-Q4.1001-1681711/6/2019
4.28-K10.1001-1681710/6/2016
31.110-Q31.1X
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39



Incorporated by Reference
Exhibit
Number
DescriptionFormExhibit NumberFile NumberFiling DateFiled
Herewith
31.210-Q31.2X
32.110-Q32.1X
99.110-K99.4001-168172/25/2021
101.INSXBRL Instance Document- the instance document does not appear in the Interactive Date File because its XBRL tags are embedded within the Inline XBRL document.
X
101.SCHXBRL Taxonomy Extension Schema Document. (Filed herewith.)
X
101.CALXBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.)
X
101.DEFXBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.)
X
101.LABXBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.)
X
101.PREXBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.)
X
104Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).
X
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101.INS
XBRL Instance Document- the instance document does not appear in the Interactive Date File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH
XBRL Taxonomy Extension Schema Document. (Filed herewith.)

101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.)

101.DEF
XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.)

101.LAB
XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.)

101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.)

104
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).

+Management contract or compensatory plan or arrangement.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIVE STAR SENIOR LIVING INC.
FIVE STAR SENIOR LIVING INC.
/s/ Katherine E. Potter
Katherine E. Potter
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 6, 2020May 5, 2021
/s/ Jeffrey C. Leer
Jeffrey C. Leer
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
Dated: August 6, 2020
/s/ Ellen E. Snow
Ellen E. Snow
Chief Accounting Officer
( and Principal Accounting Officer)
Dated: August 6, 2020May 5, 2021


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