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 ~~March 31,~~September 30, 2021

☐ 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)



Maryland			04-3516029
(State or Other Jurisdiction of Incorporation or Organization)			(IRS Employer Identification No.)

400 Centre Street, Newton, Massachusetts 02458

(Address of Principal Executive Offices) (Zip Code)

617-796-8387

(Registrant’s Telephone Number, Including Area Code):

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock

FVE

The 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 ~~May~~November 1, 2021: ~~31,675,843.~~31,750,204.

FIVE STAR SENIOR LIVING INC.

FORM 10-Q

~~March 31,~~September 30, 2021

Table of Contents


PART I	Financial Information	Page
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets – ~~March 31~~September ~~, 202~~1 30, 2021 and December 31, 20 202020	1
	Condensed Consolidated Statements of Operations – Three and Ni ne Months Ended ~~March~~ 3 1 ~~, 202~~1September 30, 2021 and 20 202020	2
	Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months Ended ~~March~~ 31 ~~, 202~~1September 30, 2021 and 20 202020	3
	Condensed Consolidated Statements of Shareholders' Equity – Three and Nine Months Ended September ~~Mar~~ch 31 ~~, 202~~1 30, 2021 and 20 202020	4
	Condensed Consolidated Statements of Cash Flows – ~~Three~~ Nine Months Ended ~~March~~September 3 1 ~~, 202~~1 30, 2021 and 20 202020	56
	Notes to Condensed Consolidated Financial Statements	67
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2025
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3346
Item 4.	Controls and Procedures	3346
	Warning Concerning Forward-Looking Statements	3447
PART II	Other Information	3852
Item 1.	Legal Proceedings	3852
Item 1A.	Risk Factors	3852
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3953
Item 6.	Exhibits	3953
	Signatures	4155

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.

This Quarterly Report on Form 10-Q includes our trademarks, such as “Five Star Senior Living”, “Bridge to Rediscovery” ~~and “Ageility~~, "Ageility Physical Therapy Solutions” and "Ageility" 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)~~

March 31, 2021 December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents $ 109,485 $ 84,351
Restricted cash and cash equivalents 23,717 23,877
Accounts receivable, net of allowance of $3,248 and $3,149, respectively 9,558 9,104
Due from related person 86,204 96,357
Debt and equity investments, of which $10,965 and $11,125 are restricted, respectively 19,528 19,961
Prepaid expenses and other current assets 22,376 28,658
Total current assets 270,868 262,308
Property and equipment, net 158,716 159,251
Operating lease right-of-use assets 27,040 18,030
Finance lease right-of-use assets 4,160 4,493
Restricted cash and cash equivalents 1,189 1,369
Restricted debt and equity investments 4,945 4,788
Equity investment of an investee, net 11 11
Other long-term assets 4,201 3,956
Total assets $ 471,130 $ 454,206
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 24,401 $ 23,454
Accrued expenses and other current liabilities 45,190 41,843
Accrued compensation and benefits 73,675 70,543
Accrued self-insurance obligations 28,155 31,355
Operating lease liabilities 2,230 2,567
Finance lease liabilities 824 808
Due to related persons 3,859 6,585
Mortgage note payable 394 388
Security deposits and current portion of continuing care contracts 338 365
Total current liabilities 179,066 177,908
Long-term liabilities:
Accrued self-insurance obligations 41,098 37,420
Operating lease liabilities 26,472 17,104
Finance lease liabilities 3,710 3,921
Mortgage note payable 6,682 6,783
Other long-term liabilities 474 538
Total long-term liabilities 78,436 65,766
Commitments and contingencies 0 0
Shareholders’ equity:
Common stock, par value $0.01: 75,000,000 shares authorized, 31,676,429 and 31,679,207 shares issued and outstanding, respectively 317 317
Additional paid-in-capital 460,113 460,038
Accumulated deficit (247,824) (251,139)
Accumulated other comprehensive income 1,022 1,316
Total shareholders’ equity 213,628 210,532
Total liabilities and shareholders' equity $ 471,130 $ 454,206


	September 30, 2021		December 31, 2020
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	80,188	$	84,351
Restricted cash and cash equivalents	23,615		23,877
Accounts receivable, net of allowance of $3,709 and $3,149, respectively	8,647		9,104
Due from related person	33,215		96,357
Debt and equity investments, of which $8,689 and $11,125 are restricted, respectively	19,498		19,961
Prepaid expenses and other current assets	19,990		28,658
Total current assets	185,153		262,308

Property and equipment, net	157,028		159,251
Operating lease right-of-use assets	9,452		18,030
Finance lease right-of-use assets	3,698		4,493
Restricted cash and cash equivalents	1,137		1,369
Restricted debt and equity investments	3,841		4,788
Equity investment of an investee, net	11		11
Other long-term assets	10,119		3,956
Total assets	$	370,439	$	454,206

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:

Accounts payable	$	16,440	$	23,454
Accrued expenses and other current liabilities	32,000		41,843
Accrued compensation and benefits	38,072		70,543
Accrued self-insurance obligations	30,461		31,355
Operating lease liabilities	417		2,567
Finance lease liabilities	856		808
Due to related persons	3,413		6,585
Mortgage note payable	409		388
Security deposits and current portion of continuing care contracts	303		365
Total current liabilities	122,371		177,908

Long-term liabilities:
Accrued self-insurance obligations	36,664		37,420
Operating lease liabilities	9,552		17,104
Finance lease liabilities	3,274		3,921
Mortgage note payable	6,473		6,783
Other long-term liabilities	338		538
Total long-term liabilities	56,301		65,766

Commitments and contingencies	0		0

Shareholders’ equity:
Common stock, par value $0.01: 75,000,000 shares authorized, 31,753,484 and 31,679,207 shares issued and outstanding, respectively	318		317
Additional paid-in-capital	460,798		460,038
Accumulated deficit	(270,330)		(251,139)
Accumulated other comprehensive income	981		1,316
Total shareholders’ equity	191,767		210,532
Total liabilities and shareholders' equity	$	370,439	$	454,206

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

Five Star Senior Living Inc.

Condensed Consolidated Statements of Operations

(amounts in thousands, except per share amounts)

(unaudited)


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020				2021		2020		2021		2020
REVENUES	REVENUES						REVENUES
Rehabilitation and wellness services	Rehabilitation and wellness services	$	19,553	$	21,384		Rehabilitation and wellness services	$	15,382	$	21,124	$	52,388	$	61,776
Senior living	Senior living	17,057		20,997			Senior living	16,320		18,525		49,755		59,112
Management fees	Management fees	13,850		17,051			Management fees	11,220		15,302		37,997		48,058
Total management and operating revenues	Total management and operating revenues	50,460		59,432			Total management and operating revenues	42,922		54,951		140,140		168,946
Reimbursed community-level costs incurred on behalf of managed communities	Reimbursed community-level costs incurred on behalf of managed communities	213,160		232,016			Reimbursed community-level costs incurred on behalf of managed communities	177,231		233,783		585,662		689,903
Other reimbursed expenses	Other reimbursed expenses	5,480		5,997			Other reimbursed expenses	5,678		6,589		27,750		19,003
Total revenues	Total revenues	269,100		297,445			Total revenues	225,831		295,323		753,552		877,852

Other operating income	Other operating income	7,793		0			Other operating income	—		—		7,795		1,499

OPERATING EXPENSES	OPERATING EXPENSES						OPERATING EXPENSES
Rehabilitation and wellness services expenses	Rehabilitation and wellness services expenses	16,210		17,501			Rehabilitation and wellness services expenses	13,536		16,716		45,414		50,361
Senior living wages and benefits	Senior living wages and benefits	12,013		9,800			Senior living wages and benefits	8,547		11,128		30,456		30,633
Other senior living operating expenses	Other senior living operating expenses	6,266		3,938			Other senior living operating expenses	7,184		7,407		22,418		20,246
Community-level costs incurred on behalf of managed communities	Community-level costs incurred on behalf of managed communities	213,160		232,016			Community-level costs incurred on behalf of managed communities	177,231		233,783		585,662		689,903
General and administrative	General and administrative	22,641		22,865			General and administrative	21,817		19,774		66,956		65,051
Restructuring expenses							Restructuring expenses	1,220		142		16,859		1,412
Depreciation and amortization	Depreciation and amortization	2,940		2,701			Depreciation and amortization	2,983		2,680		8,912		8,084
Total operating expenses	Total operating expenses	273,230		288,821			Total operating expenses	232,518		291,630		776,677		865,690

Operating income		3,663		8,624
Operating (loss) income							Operating (loss) income	(6,687)		3,693		(15,330)		13,661

Interest, dividend and other income	Interest, dividend and other income	84		339			Interest, dividend and other income	84		104		244		625
Interest and other expense	Interest and other expense	(463)		(382)			Interest and other expense	(507)		(379)		(1,379)		(1,170)
Unrealized gain (loss) on equity investments	Unrealized gain (loss) on equity investments	135		(1,462)			Unrealized gain (loss) on equity investments	22		435		555		(160)
Realized gain (loss) on sale of debt and equity investments		96		(21)
Realized gain on sale of debt and equity investments							Realized gain on sale of debt and equity investments	—		327		193		422
Loss on termination of leases	Loss on termination of leases	0		(22,899)			Loss on termination of leases	(3,277)		—		(3,277)		(22,899)
Income (loss) before income taxes	Income (loss) before income taxes	3,515		(15,801)			Income (loss) before income taxes	(10,365)		4,180		(18,994)		(9,521)
Provision for income taxes		(200)		(1,408)
Net income (loss)		$	3,315	$	(17,209)
(Provision) benefit for income taxes							(Provision) benefit for income taxes	164		(465)		(194)		(971)
Net (loss) income							Net (loss) income	$	(10,201)	$	3,715	$	(19,188)	$	(10,492)

Weighted average shares outstanding—basic	Weighted average shares outstanding—basic	31,530		31,448			Weighted average shares outstanding—basic	31,618		31,486		31,567		31,465
Weighted average shares outstanding—diluted	Weighted average shares outstanding—diluted	31,662		31,448			Weighted average shares outstanding—diluted	31,618		31,563		31,567		31,465

Net income (loss) per share—basic		$	0.11	$	(0.55)
Net income (loss) per share—diluted		$	0.10	$	(0.55)
Net (loss) income per share—basic							Net (loss) income per share—basic	$	(0.32)	$	0.12	$	(0.61)	$	(0.33)
Net (loss) income per share—diluted							Net (loss) income per share—diluted	$	(0.32)	$	0.12	$	(0.61)	$	(0.33)

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

Five Star Senior Living Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(dollars in thousands)

(unaudited)

Three Months Ended March 31,
2021 2020
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 $0 0 (10)
Other comprehensive (loss) income (294) 417
Comprehensive income (loss) $ 3,021 $ (16,792)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net (loss) income	$	(10,201)	$	3,715	$	(19,188)	$	(10,492)
Other comprehensive (loss) income:
Unrealized (loss) gain on debt investments, net of tax of $0	(67)		(20)		(317)		710
Realized gain on debt investments reclassified and included in net (loss) income, net of tax of $0	—		(290)		(18)		(303)
Other comprehensive (loss) income	(67)		(310)		(335)		407
Comprehensive (loss) income	$	(10,268)	$	3,405	$	(19,523)	$	(10,085)

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

Five Star Senior Living Inc.

Condensed Consolidated Statements of Shareholders’ Equity

(dollars in thousands)

(unaudited)


		Three Months Ended March 31, 2021												Three and Nine Months Ended September 30, 2021
		Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Shareholders' Equity			Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Shareholders' Equity
Balance at January 1, 2021	Balance at January 1, 2021	31,679,207	$	317	$	460,038	$	(251,139)	$	1,316	$	210,532	Balance at January 1, 2021	31,679,207	$	317	$	460,038	$	(251,139)	$	1,316	$	210,532
Comprehensive income (loss):	Comprehensive income (loss):												Comprehensive income (loss):
Net income	Net income	—	—		—		3,315		—		3,315		Net income	—	—		—		3,315		—		3,315
Unrealized loss on debt investments, net of tax	Unrealized loss on debt investments, net of tax	—	—		—		—		(294)		(294)		Unrealized loss on debt investments, net of tax	—	—		—		—		(294)		(294)

Total comprehensive income (loss)	Total comprehensive income (loss)	—	—		—		3,315		(294)		3,021		Total comprehensive income (loss)	—	—		—		3,315		(294)		3,021
Grants under share award plan and share-based compensation	Grants under share award plan and share-based compensation	—	—		76		—		—		76		Grants under share award plan and share-based compensation	—	—		76		—		—		76
Repurchases under share award plan		(2,778)	—		(1)		—		—		(1)
Repurchases and forfeitures under share award plan													Repurchases and forfeitures under share award plan	(2,778)	—		(1)		—		—		(1)
Balance at March 31, 2021	Balance at March 31, 2021	31,676,429	$	317	$	460,113	$	(247,824)	$	1,022	$	213,628	Balance at March 31, 2021	31,676,429	317		460,113		(247,824)		1,022		213,628
Comprehensive income (loss):													Comprehensive income (loss):
Net loss													Net loss	—	—		—		(12,302)		—		(12,302)
Unrealized gain on debt investments, net of tax													Unrealized gain on debt investments, net of tax	—	—		—		—		44		44
Realized gain on debt investments reclassified and included in net loss, net of tax													Realized gain on debt investments reclassified and included in net loss, net of tax	—	—		—		—		(18)		(18)
Total comprehensive income (loss)													Total comprehensive income (loss)	—	—		—		(12,302)		26		(12,276)
Grants under share award plan and share-based compensation													Grants under share award plan and share-based compensation	87,500	1		637		—		—		638
Repurchases and forfeitures under share award plan													Repurchases and forfeitures under share award plan	(2,801)	—		(13)		(3)		—		(16)
Balance at June 30, 2021													Balance at June 30, 2021	31,761,128	318		460,737		(260,129)		1,048		201,974
Comprehensive income (loss):													Comprehensive income (loss):
Net loss													Net loss	—	—		—		(10,201)		—		(10,201)
Unrealized (loss) on debt investments, net of tax													Unrealized (loss) on debt investments, net of tax	—	—		—		—		(67)		(67)

Total comprehensive loss													Total comprehensive loss	—	—		—		(10,201)		(67)		(10,268)
Grants under share award plan and share-based compensation													Grants under share award plan and share-based compensation	—	—		76		—		—		76
Repurchases and forfeitures under share award plan													Repurchases and forfeitures under share award plan	(7,644)	—		(15)		—		—		(15)
Balance at September 30, 2021													Balance at September 30, 2021	31,753,484	$	318	$	460,798	$	(270,330)	$	981	$	191,767

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, 2020 5,154,892 $ 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 shares 26,387,007 264 97,076 — — 97,340
Grants under share award plan and share-based compensation 4,000 — 81 — — 81
Repurchases under share award plan (3,564) — (1) — — (1)
Balance at March 31, 2020 31,542,335 $ 316 $ 459,606 $ (260,699) $ 1,386 $ 200,609

Five Star Senior Living Inc.

Condensed Consolidated Statements of Shareholders’ Equity

(dollars in thousands)

(unaudited)


	Three and Nine Months Ended September 30, 2020
	Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Shareholders' Equity
Balance at January 1, 2020	5,154,892	$	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 income (loss)	—	—		—		(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 shares	26,387,007	264		97,076		—		—		97,340
Grants under share award plan and share-based compensation	4,000	—		81		—		—		81
Repurchases and forfeitures under share award plan	(3,564)	—		(1)		—		—		(1)
Balance at March 31, 2020	31,542,335	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 loss, net of tax	—	—		—		—		(3)		(3)
Total comprehensive income	—	—		—		3,002		300		3,302
Grants under share award plan and share-based compensation	35,000	—		199		—		—		199
Repurchases and forfeitures under share award plan	(2,836)	—		(4)		—		—		(4)
Balance at June 30, 2020	31,574,499	316		459,801		(257,697)		1,686		204,106
Comprehensive (loss) income:
Net Income	—	—		—		3,715		—		3,715
Unrealized gain on debt investments, net of tax	—	—		—		—		(20)		(20)
Realized gain on debt investments reclassified and included in net loss, net of tax	—	—		—		—		(290)		(290)

Total comprehensive income (loss)	—	—		—		3,715		(310)		3,405
Grants under share award plan and share-based compensation	—	—		53		—		—		53
Repurchases under share award plan	(1,210)	—		(3)		—		—		(3)
Balance at September 30, 2020	31,573,289	$	316	$	459,851	$	(253,982)	$	1,376	$	207,561

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

Five Star Senior Living Inc.

Condensed Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

Three Months Ended March 31,
2021 2020
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 amortization 2,940 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 leases 0 22,899
Share-based compensation 75 80
Provision for losses on accounts receivables 260 510
Other non-cash expense adjustments, net 157 69
Changes in assets and liabilities:
Accounts receivable (714) 22,739
Due from related person 10,153 (15,391)
Prepaid expenses and other current assets 5,870 2,276
Accounts payable 947 (10,342)
Accrued expenses and other current liabilities 3,332 13,078
Accrued compensation and benefits 3,132 (16,180)
Due to related persons (2,726) (1,102)
Other current and long-term liabilities 316 (144)
Net cash provided by operating activities 26,826 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 equipment 0 2,725
Proceeds from sale of debt and equity investments 337 1,453
Net cash (used in) provided by investing activities (1,929) 577
CASH FLOW FROM FINANCING ACTIVITIES:
Costs related to issuance of common stock 0 (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 equivalents 24,794 5,390
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period 109,597 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 equivalents 23,717 24,290
Other restricted cash and cash equivalents 1,189 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), net 1 (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


	Nine Months Ended September 30,
	2021		2020
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss	$	(19,188)	$	(10,492)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	8,912		8,084
Unrealized (gain) loss on equity investments	(555)		160
Realized gain on sale of debt and equity investments	(193)		(422)
Lease terminations	(408)		22,899
Long-lived asset impairment	890		—
Share-based compensation	761		325
Provision for losses on accounts receivables	1,432		1,315
Other non-cash expense (income) adjustments, net	652		175
Changes in assets and liabilities:
Accounts receivable	(975)		23,120
Due from related person	63,142		(54,249)
Prepaid expenses and other current assets	2,175		(2,393)
Accounts payable	(7,014)		(8,897)
Accrued expenses and other current liabilities	(10,387)		46,126
Accrued compensation and benefits	(32,471)		32,096
Due to related persons	(3,172)		(2,048)
Other current and long term liabilities	(1,801)		6,241
Net cash provided by operating activities	1,800		62,040

CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of property and equipment	(7,350)		(4,132)
Purchases of debt and equity investments	(231)		(5,688)
Proceeds from sale of property and equipment	—		2,725
Distributions in excess of earnings from Affiliates Insurance Company	—		287
Proceeds from sale of debt and equity investments	2,035		9,078
Net cash (used in) provided by investing activities	(5,546)		2,270

CASH FLOW FROM FINANCING ACTIVITIES:
Costs related to issuance of common stock	—		(559)
Repayments of mortgage notes payable	(308)		(288)
Repayments of finance lease principal	(600)		—
Payment of employee tax obligations on withheld shares	(3)		—
Net cash used in financing activities	(911)		(847)

(Decrease) increase in cash and cash equivalents and restricted cash and cash equivalents	(4,657)		63,463
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period	109,597		56,979
Cash and cash equivalents and restricted cash and cash equivalents at end of period	$	104,940	$	120,442

Reconciliation of cash and cash equivalents and restricted cash and cash equivalents:
Cash and cash equivalents	$	80,188	$	95,779
Current restricted cash and cash equivalents	23,615		23,842
Other restricted cash and cash equivalents	1,137		821
Cash and cash equivalents and restricted cash and cash equivalents at end of period	$	104,940	$	120,442

Supplemental cash flow information:
Interest paid	$	597	$	363
Income taxes paid, net	436		40
Operating lease payments, including lease termination payment	6,388		2,620
Financing lease interest payments	255		—

Non-cash investing and financing activities:
Liabilities assumed related to issuance of our common stock	$	—	$	51,547
Real estate improvements in accrued, not paid	558		2,554
Right-of-use assets obtained in exchange for finance lease liabilities	—		4,515
Right-of-use assets obtained in exchange for operating lease liabilities	9,746		—

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

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 ~~March 31,~~September 30, 2021, we managed or operated ~~252~~179 senior living communities ~~located in 31 states with 29,265 living units, including 243 primarily~~(primarily independent and assisted living ~~communities~~communities) located in 29 states with ~~28,310~~22,768 living units, which include 374 continuing care retirement communities, or CCRCs, with ~~8,573~~625 living units ~~and 9 primarily skilled nursing facilities, or SNFs, with 955 living units.~~which will be transitioned to new operators. As of ~~March 31,~~September 30, 2021, we managed ~~228~~159 of these senior living communities ~~(26,963~~(20,669 living units), and we owned and operated 20 of these senior living communities (~~2,099~~ ~~living units) and we leased and operated 4 of these senior living communities (203~~(2,099 living units). Our ~~252~~179 senior living communities, as of ~~March 31,~~September 30, 2021, included ~~10,979~~10,628 independent living apartments, ~~15,329~~11,856 assisted living suites (which includes ~~3,220~~2,454 of our Bridge to Rediscovery memory care units) and ~~2,957~~284 skilled nursing facilities, or SNF, units. During the three months ended September 30, 2021 we transitioned the management of 69 senior living communities with approximately 4,800 living units to new operators pursuant to our April 9, 2021 Strategic Plan described below. No units were transitioned prior to June 30, 2021. On September 30, 2021, we terminated our lease on all 4 communities (with approximately 200 living units) previously leased from Healthpeak Properties Inc., or PEAK. The foregoing numbers exclude living units categorized as out of service.

Our rehabilitation and wellness services segment, which is primarily comprised of Five Star Rehabilitation and Wellness Services doing business as Ageility Physical Therapy Solutions, or Ageility, provides a comprehensive suite of rehabilitation, personal fitness, and wellness services at our senior living communities as well as at ~~outpatient clinics located at~~ unaffiliated senior living communities. As of ~~March 31,~~September 30, 2021, we operated 3710 inpatient rehabilitation and wellness services clinics in senior living communities owned by Diversified Healthcare Trust, or DHC, of which 2 of the communities are managed by ~~us.~~us and 8 of the communities were transitioned to new operators during the three months ended September 30, 2021. As of ~~March 31,~~September 30, 2021, we operated ~~215~~223 outpatient rehabilitation and wellness services clinics, of which ~~151~~122 were located at our managed ~~leased~~ and owned senior living communities and 64101 were located within senior living communities not owned ~~or leased~~ by us or managed on behalf of DHC.

Strategic Plan. On April 9, 2021, we announced a new strategic plan, or the Strategic Plan, ~~to reposition the Company's~~including to:

•Reposition our senior living management ~~business~~service offering to focus on larger independent living and assisted living ~~and memory care communities~~ as well as ~~stand-alone independent~~active adult communities and exit skilled nursing by transitioning 108 communities to new operators and closing approximately 1,500 SNF living units in retained CCRCs;

•Evolve through investment in an enhanced scalable corporate shared services center to support operations to deliver differentiated, customer focused resident experiences across segmented senior living service offerings, as well as through home health and ~~active adult~~concierge offerings. We are expanding our Ageility service line by introducing innovative fitness and personal training offerings to complement outpatient therapy, and home health services, including strength training, orthopedic rehabilitation, fall prevention, cognitive or memory enhancement, aquatic therapy, and general personal fitness and wellness programs; and

•Diversify with a focus on revenue diversification opportunities, including growing Ageility rehabilitation services and expanding ancillary services to provide choice based, financially flexible resident experience and reach customers outside of our senior living communities.

~~Pursuant~~During the nine months ended September 30, 2021, we made the following progress with respect to ~~our~~the Reposition phase of the Strategic ~~Plan, we intend to, among other things, (i) amend~~Plan:

•We and DHC amended our management arrangements on June 9, 2021; see Note 11 for additional information on the amendments to the management arrangements with DHC, ~~to transition 108~~

Five Star Senior Living Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

•DHC has entered into agreements for us to transition the management of an additional 35 senior living communities, with approximately ~~1,500~~2,100 living units, to new operators in the fourth quarter of 2021,

•Plan to close 1 community with approximately 100 living units,

•Closed all 1,532 SNF living units in 27 managed CCRCs, ~~that we will continue~~and began collaborating with DHC to ~~manage for DHC and (iii) close~~reposition these SNF units,

•Closed 27 of the 37 Ageility inpatient rehabilitation clinics ~~in certain transitioning communities.~~we planned to close, and

~~As part~~•For 6 Ageility inpatient rehabilitation clinics, we entered into agreements with the new operators to continue to operate those clinics for 12 months.

During the nine months ended September 30, 2021, we made the following progress with respect to the Evolve phase of the Strategic Plan:

•Implemented enhancements to our corporate technology infrastructure,

•Invested in critical areas of residential experience, including community wireless connectivity, resident transportation services, re-designed community common areas and resident units,

•Made enhancements to digital marketing infrastructure and implemented a labor management tool, and

•Standardized certain administrative functions through centralization efforts to enhance operating efficiency.

During the nine months ended September 30, 2021, we made the following progress with respect to the Diversify phase of the Strategic Plan:

•Opened 16 net new Ageility outpatient rehabilitation clinics, bringing our Ageility outpatient rehabilitation clinic total to 223, and

•Grew Ageility fitness revenues to $2,413 or a 41.1% increase over the same period in 2020.

In connection with the repositioning of our senior living management services, we expect to incur restructuring expenses of up to $19,000, approximately $13,000 of which we expect DHC will reimburse. These expenses are expected to include up to $7,500 of retention bonus payments, up to $8,700 of severance, benefits and transition expenses, and up to $2,800 of transaction expenses, of which we expect DHC to reimburse approximately $5,100, $7,200 and $700, respectively. For the three and nine months ended September 30, 2021, respectively, we recognized restructuring expenses of $1,220 and $16,859 related to the Strategic Plan ~~we have agreed~~which was partially offset by $813 and $12,344 of other reimbursed expenses related to ~~amend our management agreements with DHC.~~ the amounts to be reimbursed by DHC, respectively, for the three and nine months ended September 30, 2021. See Note 16 for summary of restructuring expenses and the corresponding liability.

See Notes 11, 16 and 1617 for more information on ~~our~~the Strategic Plan, the amendments to our management arrangements and our business arrangements with DHC.

See Note 17 for summary of further progress made on the repositioning of our senior living management services during October 2021.

Reclassifications. We have made reclassifications to the financial statements of prior periods to conform to the current period presentation. These reclassifications had no effect on net income (loss) or shareholders’ equity.

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, 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.

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 condensed consolidated 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. Significant estimates in our condensed consolidated financial statements relate to revenue recognition, including contractual allowances, the allowance for doubtful accounts, self-insurance reserves and estimates concerning our provision for income taxes or valuation allowance related to deferred tax assets.

Our actual results could differ from our estimates. We periodically review estimates and assumptions, and we reflect the effects of changes, if any, in the condensed consolidated financial statements in the period that they are determined.

There have been no changes to our significant accounting policies disclosed in our Annual Report, except for the additional disclosure noted below. See summary of significant accounting policies in our Annual Report.

Accounting for Costs Associated with Exit or Disposal Activities. A liability for costs associated with exit or disposal activities other than in a business combination, is recognized when the liability is incurred. The liability, recognized under Accounting Standards Codification, or ASC, 420, Exit or Disposal Cost Obligations and ASC 712, Compensation — Nonretirement Postemployment - special termination benefits, is measured at fair value, with adjustments for changes in estimated cash flows recognized in earnings. During the three and nine months ended September 30, 2021, costs were incurred related to the Strategic Plan. See Note 16 for summary of restructuring expenses and the corresponding liability.

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 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 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 expect this ASU will not have a material impact on our condensed consolidated financial statements.

Five Star Senior Living Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

3. Revenue and Other Operating Income

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 March 31, 2021							Three Months Ended September 30, 2021
		Senior Living			Rehabilitation and Wellness Services(3)		Total				Senior Living			Rehabilitation and Wellness Services (3)		Total
Private payer	Private payer	$	16,787		$	1,014	$	17,801		Private payer	$	16,032		$	293	$	16,325
Medicare and Medicaid programs	Medicare and Medicaid programs	270			11,549		11,819			Medicare and Medicaid programs	288			10,073		10,361
Other third-party payer programs	Other third-party payer programs	0			6,990		6,990			Other third-party payer programs	—			5,016		5,016
Management fees	Management fees	13,850		(1) (2)	0		13,850			Management fees	11,220		(1) (2)	—		11,220
Reimbursed community-level costs incurred on behalf of managed communities	Reimbursed community-level costs incurred on behalf of managed communities	213,160		(1)	0		213,160			Reimbursed community-level costs incurred on behalf of managed communities	177,231		(1) (2)	—		177,231
Other reimbursed expenses	Other reimbursed expenses	5,480		(1)	0		5,480			Other reimbursed expenses	5,678		(1) (4)	—		5,678
Total revenues	Total revenues	$	249,547		$	19,553	$	269,100		Total revenues	$	210,449		$	15,382	$	225,831

(1)Represents separate revenue ~~streams~~sources earned from ~~DHC.~~DHC; see Note 4 for discussion of Segment Information.

(2)~~As noted previously, in 2021 we~~ (i) We intend to ~~(i)~~ transition 108 senior living communities managed on behalf of DHC, with approximately 7,500 living units to new operators in 2021; of which 69 senior living communities with approximately 4,800 living units were transitioned to new operators during the three months ended September 30, 2021 and (ii) ~~close and reposition approximately 1,500 skilled nursing facility~~we closed 59 SNF units in 271 CCRC during the three months ended September 30, 2021 and closed an additional 1,473 SNF units in 26 CCRCs during the three months ended June 30, 2021 and are in the process of repositioning these units 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,~~September 30, 2021 ~~was $5,255.~~were $2,710. See Notes 1,11, 16 and 1617 for more information.

(3)~~As noted previously we~~ We expect to close 37an additional 10 Ageility inpatient rehabilitation ~~clinics during 2021.~~clinics. Revenue related to these clinics for the three months ended ~~March 31,~~September 30, 2021 was ~~$5,441.~~$1,508. See ~~Note~~Notes 1, 16 and 17 for more information.

(4) Includes $813 of restructuring expenses to be reimbursed by DHC for the three months ended September 30, 2021.


		Three Months Ended March 31, 2020							Three Months Ended September 30, 2020
		Senior Living			Rehabilitation and Wellness Services		Total				Senior Living			Rehabilitation and Wellness Services		Total
Private payer	Private payer	$	20,281		$	897	$	21,178		Private payer	$	18,347		$	1,296	$	19,643
Medicare and Medicaid programs	Medicare and Medicaid programs	716			9,570		10,286			Medicare and Medicaid programs	178			10,747		10,925
Other third-party payer programs	Other third-party payer programs	0			10,917		10,917			Other third-party payer programs	—			9,081		9,081
Management fees	Management fees	17,051		(1)	0		17,051			Management fees	15,302		(1)	—		15,302
Reimbursed community-level costs incurred on behalf of managed communities	Reimbursed community-level costs incurred on behalf of managed communities	232,016		(1)	0		232,016			Reimbursed community-level costs incurred on behalf of managed communities	233,783		(1)	—		233,783
Other reimbursed expenses	Other reimbursed expenses	5,997		(1)	0		5,997			Other reimbursed expenses	6,589		(1)	—		6,589
Total revenues	Total revenues	$	276,061		$	21,384	$	297,445		Total revenues	$	274,199		$	21,124	$	295,323

(1)Represents separate revenue ~~streams~~sources earned from DHC.


	Nine Months Ended September 30, 2021
	Senior Living			Rehabilitation and Wellness Services(3)		Total
Private payer	$	48,935		$	805	$	49,740
Medicare and Medicaid programs	820			31,433		32,253
Other third-party payer programs	—			20,150		20,150
Management fees	37,997		(1) (2)	—		37,997
Reimbursed community-level costs incurred on behalf of managed communities	585,662		(1) (2)	—		585,662
Other reimbursed expenses	27,750		(1) (4)	—		27,750
Total revenues	$	701,164		$	52,388	$	753,552

(1) Represents separate revenue sources earned from DHC; see Note 4 for discussion of Segment Information.

(2) (i) We intend to transition 108 senior living communities managed on behalf of DHC, with approximately 7,500 living units to new operators in 2021; of which 69 senior living communities with approximately 4,800 living units were transitioned to new operators during the three months ended September 30, 2021 and (ii) we closed 1,532 SNF units in 27 CCRCs during the nine months ended September 30, 2021 and are in the process of repositioning these units that we will continue to manage for DHC. The management fees we recognized related to these communities and units for the nine months ended September 30, 2021 were $12,329. See Notes 1,11, 16 and 17 for more information.

Five Star Senior Living Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

(3) 27 Ageility inpatient rehabilitation clinics were closed during the nine months ended September 30, 2021 and we expect to close an additional 10 Ageility inpatient rehabilitation clinics. Revenue related to these clinics for the nine months ended September 30, 2021 was $9,579. See Notes 1,16 and 17 for more information.

(4) Includes $12,344 of restructuring expenses to be reimbursed by DHC for the nine months ended September 30, 2021.


	Nine Months Ended September 30, 2020
	Senior Living			Rehabilitation and Wellness Services		Total
Private payer	$	57,921		$	3,407	$	61,328
Medicare and Medicaid programs	1,191			29,881		31,072
Other third-party payer programs	—			28,488		28,488
Management fees	48,058		(1)	—		48,058
Reimbursed community-level costs incurred on behalf of managed communities	689,903		(1)	—		689,903
Other reimbursed expenses	19,003		(1)	—		19,003
Total revenues	$	816,076		$	61,776	$	877,852

(1) Represents separate revenue sources 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, including certain reporting requirements. Other operating income includes income recognized for funds we have received pursuant to the Provider Relief Fund of the CARES Act for which we have determined that 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 or 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 during the period in which the estimated losses and 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 ~~$7,793~~$7,795 and $1,499 for the nine months ended September 30, 2021 and 2020, respectively, and none in the three months ended ~~March 31, 2021.~~September 30, 2021 and 2020. See Note 15 for more information.

4. Segment Information

We do not allocate assets to operating segments and, therefore, no asset information is provided for reportable segments. Certain of our general and administrative expenses incurred at our corporate office are deemed centralized services and allocated amongst operating segments. Centralized services are largely determined by job function and allocated by

~~Five Star Senior Living Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(dollar amounts in thousands, except per share amounts)~~

~~(unaudited)~~

percentage of 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 March 31, 2021
Senior
Living(1)
Rehabilitation and Wellness Services(2)
Corporate and Other Total
Revenues $ 249,547 $ 19,553 $ 0 $ 269,100
Other operating income 7,774 19 0 7,793
Operating expenses 237,957 16,338 18,935 273,230
Operating income 19,364 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 taxes 6,585 2,256 (5,326) 3,515
Provision for income taxes 0 0 (200) (200)
Net income (loss) $ 6,585 $ 2,256 $ (5,526) $ 3,315


	Three Months Ended September 30, 2021
	Senior Living (1)		Rehabilitation and Wellness Services (2)		Corporate and Other (3)		Total
Revenues	$	210,449	$	15,382	$	—	$	225,831

Operating expenses	200,570		13,349		18,599		232,518
Operating income (loss)	9,879		2,033		(18,599)		(6,687)
Allocated corporate and other costs	(10,388)		(770)		11,158		—
Other (loss) income, net	(3,202)		—		(476)		(3,678)
(Loss) income before income taxes	(3,711)		1,263		(7,917)		(10,365)
Benefit for income taxes	—		—		164		164
Net (loss) income	$	(3,711)	$	1,263	$	(7,753)	$	(10,201)

(1)~~As noted previously, in 2021 we~~ (i) We intend to ~~(i)~~ transition 108 senior living communities managed on behalf of DHC, with approximately 7,500 living units to new operators in 2021; of which 69 senior living communities with approximately 4,800 living units were transitioned to new operators during the three months ended September 30, 2021 and (ii) we closed 59 SNF units in 1 CCRC during the three months ended September 30, 2021 and closed an additional 1,473 SNF units in 26 CCRCs during the three months ended June 30, 2021 and are in the process of repositioning these units that we will continue to manage for DHC. See

Five Star Senior Living Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

Notes 1, 11, 16 and 17 for more information. As more fully described in Note 16, the senior living segment recognized $813 of restructuring expenses related to the Strategic Plan and $813 of other reimbursed expenses in the three months ended September 30, 2021.

(2) We expect to close an additional 10 Ageility inpatient rehabilitation clinics. See Notes 1,16 and ~~reposition~~17 for more information. As more fully described in Note 16, the rehabilitation and wellness services segment recognized $(310) of restructuring expenses related to the Strategic Plan in the three months ended September 30, 2021.

(3) As more fully described in Note 16, Corporate and Other recognized $717 of restructuring expenses related to the Strategic Plan in the three months ended September 30, 2021.


	Three Months Ended September 30, 2020
	Senior Living		Rehabilitation and Wellness Services		Corporate and Other		Total
Revenues	$	274,199	$	21,124	$	—	$	295,323
Other operating income	—		—		—		—
Operating expenses	260,077		16,833		14,720		291,630
Operating income (loss)	14,122		4,291		(14,720)		3,693
Allocated corporate and other costs	(13,657)		(1,052)		14,709		—
Other income (loss), net	(122)		—		609		487
Income before income taxes	343		3,239		598		4,180
Provision for income taxes	—		—		(465)		(465)
Net income	$	343	$	3,239	$	133	$	3,715


	Nine Months Ended September 30, 2021
	Senior Living (1)		Rehabilitation and Wellness Services (2)		Corporate and Other (3)		Total
Revenues	$	701,164	$	52,388	$	—	$	753,552
Other operating income	7,776		19		—		7,795
Operating expenses	671,991		47,204		57,482		776,677
Operating income (loss)	36,949		5,203		(57,482)		(15,330)
Allocated corporate and other costs	(34,811)		(2,621)		37,432		—
Other (loss) income, net	(2,557)		—		(1,107)		(3,664)
(Loss) income before income taxes	(419)		2,582		(21,157)		(18,994)
Provision for income taxes	—		—		(194)		(194)
Net (loss) income	$	(419)	$	2,582	$	(21,351)	$	(19,188)

(1) (i) We intend to transition 108 senior living communities managed on behalf of DHC, with approximately ~~1,500 skilled nursing facility~~7,500 living units to new operators in 2021; of which69 senior living communities with approximately 4,800 living units were transitioned to new operators during the three months ended September 30, 2021 and (ii) we closed 1,532 SNF units in 27 CCRCs during the nine months ended September 30, 2021 and are in the process of repositioning these units that we will continue to manage for DHC. See Notes 1, 11, 16 and 1617 for more information. As more fully described in Note 16, the senior living segment recognized $12,344 of restructuring expenses related to the Strategic Plan and $12,344 of other reimbursed expenses in the nine months ended September 30, 2021.

(2)~~As noted previously,~~ 27 Ageility inpatient rehabilitation clinics were closed during the nine months ended September 30, 2021 and we expect to close 37an additional 10 Ageility inpatient rehabilitation ~~clinics during~~clinics. See Notes 1, 16 and 17 for more information. As more fully described in Note16, the rehabilitation and wellness services segment recognized $1,410 of restructuring expenses related to the Strategic Plan in the nine months ended September 30, 2021. ~~See~~

(3) As more fully described in Note 16, ~~for more information.~~Corporate and Other recognized $3,105 of restructuring expenses related to the Strategic Plan in the nine months ended September 30, 2021.

Three Months Ended March 31, 2020
Senior
Living Rehabilitation and Wellness Services Corporate and Other Total
Revenues $ 276,061 $ 21,384 $ 0 $ 297,445
Operating expenses 255,619 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), net 41 0 (24,466) (24,425)
Income (loss) before income taxes 4,865 2,700 (23,366) (15,801)
Provision for income taxes 0 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)


	Nine Months Ended September 30, 2020
	Senior Living		Rehabilitation and Wellness Services		Corporate and Other		Total
Revenues	$	816,076	$	61,776	$	—	$	877,852
Other operating income	—		1,499		—		1,499
Operating expenses	766,415		50,708		48,567		865,690
Operating income (loss)	49,661		12,567		(48,567)		13,661
Allocated corporate and other costs	(43,448)		(3,094)		46,542		—
Other income (loss), net	(163)		—		(23,019)		(23,182)
(Loss) income before income taxes	6,050		9,473		(25,044)		(9,521)
Provision for income taxes	—		—		(971)		(971)
Net (loss) income	$	6,050	$	9,473	$	(26,015)	$	(10,492)

5. Property and Equipment, net

Property and equipment, net consist of the following:


	September 30, 2021		December 31, 2020
Land	$	12,155	$	12,155
Buildings, construction in process and improvements	202,897		202,679
Furniture, fixtures and equipment	61,551		60,713
Property and equipment, at cost	276,603		275,547
Less: accumulated depreciation	(119,575)		(116,296)
Property and equipment, net	$	157,028	$	159,251

On September 30, 2021, we terminated our lease on the 4 communities that we leased from PEAK. Under the terms of the termination agreements, we recorded a loss on lease termination of $3,277. Included in the calculation of the loss on lease termination was the derecognition of $1,173 of all property and equipment at the 4 previously leased communities. The loss was the aggregate of the lease termination fee of $3,100, other obligations of $548, legal transaction costs of $37, and the net derecogniton carrying amounts of our right of use asset of $16,055, leasehold improvements and other fixed assets of $1,173, and the remaining lease obligations of $17,636. See Note 11 for further information on our determination of the loss on termination of the 4 leased communities.

March 31, 2021 December 31, 2020
Land $ 12,155 $ 12,155
Buildings, construction in process and improvements 203,646 202,679
Furniture, fixtures and equipment 61,902 60,713
Property and equipment, at cost 277,703 275,547
Less: accumulated depreciation (118,987) (116,296)
Property and equipment, net $ 158,716 $ 159,251
On April 4, 2021, 1 of the 4 previously leased communities had a fire that caused extensive damage to the community. As a result, we recorded an impairment on certain furniture, fixtures and equipment and building improvements for the nine months ended September 30, 2021 of $890, which is recorded in other senior living expenses in the statement of operations. Insurance proceeds received for property damages to the previously leased community caused by the fire of $1,500 were subsequently transferred to PEAK.

We recorded depreciation expense relating to our property and equipment of ~~$2,691~~$2,692 and ~~$2,701~~$2,680 for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $8,082 and $8,084 for the nine months ended September 30, 2021 and 2020, respectively. In relation to the communities previously leased from PEAK, the disposal of fixed assets resulted in a decrease in accumulated depreciation of $4,803.

913

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

The following tables detail the changes in accumulated other comprehensive income (loss), net of tax, for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020:


		Three Months Ended March 31, 2021							Nine Months Ended September 30, 2021
		Equity Investment of an Investee		Investments		Accumulated Other Comprehensive Income			Equity Investment of an Investee		Investments		Accumulated Other Comprehensive Income
Balance at January 1, 2021	Balance at January 1, 2021	$	(175)	$	1,491	$	1,316	Balance at January 1, 2021	$	(175)	$	1,491	$	1,316
Unrealized loss on debt investments, net of tax	Unrealized loss on debt investments, net of tax	0		(294)		(294)		Unrealized loss on debt investments, net of tax	—		(317)		(317)
Balance at March 31, 2021		$	(175)	$	1,197	$	1,022
Realized gain on debt investments reclassified and included in net loss, net of tax								Realized gain on debt investments reclassified and included in net loss, net of tax	—		(18)		(18)
Balance at September 30, 2021								Balance at September 30, 2021	$	(175)	$	1,156	$	981


		Three Months Ended March 31, 2020							Nine Months Ended September 30, 2020
		Equity Investment of an Investee		Investments		Accumulated Other Comprehensive Income			Equity Investment of an Investee		Investments		Accumulated Other Comprehensive Income
Balance at January 1, 2020	Balance at January 1, 2020	$	(175)	$	2,838	$	2,663	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	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	0		(1,694)		(1,694)		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	Unrealized gain on debt investments, net of tax	0		427		427		Unrealized gain on debt investments, net of tax	—		710		710
Realized gain on debt investments reclassified and included in net loss, net of tax		0		(10)		(10)
Balance at March 31, 2020		$	(175)	$	1,561	$	1,386
Realized gain on debt investments reclassified and included in net income, net of tax								Realized gain on debt investments reclassified and included in net income, net of tax	—		(303)		(303)
Balance at September 30, 2020								Balance at September 30, 2020	$	(175)	$	1,551	$	1,376

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,~~ 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 income are determined on a specific identification basis.

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 $164 and provision for income taxes of ~~$200 and $1,408~~$194 for the three and nine months ended ~~March 31,~~September 30, 2021, respectively. We recognized a provision for income taxes of $465 and $971 for the three and nine months ended September 30, 2020, respectively. The ~~provision~~benefit for income taxes for the three months ended ~~March 31,~~September 30, 2021 isand the provision for income taxes for the nine months ended September 30, 2021 are related to state income taxes. The provision for income taxes for the three months ended ~~March 31,~~September 30, 2020 is related to state income taxes. The provision for income taxes for the nine months ended September 30, 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.

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. Net Income (Loss) Per Share~~

Basic net income per share is calculated by dividing net income (loss) by the weighted average number of outstanding common shares outstanding during the period. When applicable, net income (loss) per share—diluted reflects the more dilutive

1014

Five Star Senior Living Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

8. Net (Loss) Income Per Share

Basic net (loss) income per share is calculated by dividing net (loss) income by the weighted average number of outstanding common shares outstanding during the period. When applicable, net (loss) income per share—diluted reflects the more dilutive 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 net (loss) income ~~(loss)~~ per share (in thousands):


		Three Months Ended March 31,		Three Months Ended September 30,			Nine Months Ended September 30,
		2021	2020			2021	2020	2021	2020
Weighted average shares outstanding—basic	Weighted average shares outstanding—basic	31,530	31,448		Weighted average shares outstanding—basic	31,618	31,486	31,567	31,465
Effect of dilutive securities: unvested share awards	Effect of dilutive securities: unvested share awards	132	0		Effect of dilutive securities: unvested share awards	—	77	—	—
Weighted average shares outstanding—diluted (1)	Weighted average shares outstanding—diluted (1)	31,662	31,448		Weighted average shares outstanding—diluted (1)	31,618	31,563	31,567	31,465

(1) For the three months ended ~~March 31, 2020, 124~~September 30, 2021, 157 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. For the nine months ended September 30, 2021 and 2020, 146 and 108, respectively, of our unvested common shares were not included in the calculation of the net loss per share—diluted because to do so would have been antidilutive.

9. Fair Values of Assets and Liabilities

Recurring Fair Value Measures

The tables below present certain of our assets measured at fair value at ~~March 31,~~September 30, 2021 and December 31, 2020, categorized by the level of input used in the valuation of each asset.

As of March 31, 2021
Description Total Quoted 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 industry 1,376 1,376 0 0
Healthcare 492 492 0 0
Technology 801 801 0 0
Other 3,851 3,851 0 0
Total equity investments 12,463 6,520 5,943 0
Debt investments (5)

Industrial bonds 529 0 529 0
Technology bonds 1,443 0 1,443 0
Government bonds 7,123 7,123 0 0
Energy bonds 478 0 478 0
Financial bonds 1,330 0 1,330 0
Other 1,107 0 1,107 0
Total debt investments 12,010 7,123 4,887 0
Total investments 24,473 13,643 10,830 0
Total $ 50,704 $ 39,874 $ 10,830 $ 0


	As of September 30, 2021
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents (1)	$	26,378	$	26,378	$	—	$	—
Investments:
Total equity investments (2)	12,858		6,800		6,058		—







Total debt investments (3)	10,481		5,789		4,692		—







Total investments	23,339		12,589		10,750		—
Total	$	49,717	$	38,967	$	10,750	$	—


	As of December 31, 2020
Description	Total		Quoted 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	$	—	$	—
Investments:
Total equity investments (2)	12,439		6,465		5,974		—







Total debt investments (3)	12,310		7,301		5,009		—







Total investments	24,749		13,766		10,983		—
Total	$	51,040	$	40,057	$	10,983	$	—

_______________________________________

1115

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
Description Total Quoted 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 industry 1,348 1,348 0 0
Healthcare 477 477 0 0
Technology 765 765 0 0
Other 3,875 3,875 — 0
Total equity investments 12,439 6,465 5,974 0
Debt investments (5)

Industrial bonds 540 0 540 0
Technology bonds 1,471 0 1,471 0
Government bonds 7,301 7,301 0 0
Energy bonds 484 0 484 0
Financial bonds 1,359 0 1,359 0
Other 1,155 0 1,155 0
Total debt investments 12,310 7,301 5,009 0
Total investments 24,749 13,766 10,983 0
Total $ 51,040 $ 40,057 $ 10,983 $ 0

(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 ~~$22,531~~$22,278 and $22,837 of balances that were restricted at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. In addition to the cash equivalents of ~~$26,231~~$26,378 and $26,291 at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively, reflected above, there were cash balances of ~~$105,785~~$76,088 and $80,897 and restricted cash balances of ~~$2,375~~$2,474 and $2,409 at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively.

(2)The fair value of our equity investments is readily determinable. During the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and ~~March 31,~~ 2020, we received gross proceeds of ~~$337~~$741 and ~~$45,~~$3,141, respectively, in connection with the sales of equity investments and recorded gross realized gains totaling ~~$96~~$175 and ~~$0,~~$339, respectively, and gross realized losses totaling $0 and ~~$30,~~$219, 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 investment can be redeemed weekly.

~~(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.

~~(5)~~ As of ~~March 31,~~September 30, 2021, our debt investments, which are classified as available for sale, had a fair value of ~~$12,010~~$10,481 with an amortized cost of ~~$11,548;~~$10,060; the difference between the fair value and amortized cost amounts resulted from unrealized gains of ~~$462,~~$421, net of unrealized losses of ~~$36.~~$23. 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~~$6,874 and $8,395 of balances that were restricted as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively. At ~~March 31,~~September 30, 2021, 4 debt investments we held, with a fair value of ~~$778,~~$788, 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 financial conditions of the issuers of these investments remain strong with solid fundamentals as of ~~March 31,~~September 30, 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~~nine months ended ~~March 31,~~September 30, 2021 and 2020, we received gross proceeds of $0$1,294 and ~~$1,409,~~$5,938, respectively, in connection with the sales of debt investments and recorded gross realized gains totaling $0$18 and ~~$10,~~$302, respectively. There were no0 gross realized losses for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020, respectively. We record gains and losses on the sales of these investments using the specific identification method.

~~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 ~~March 31,~~September 30, 2021, by contractual maturity, are shown below.


		Amortized Cost		Fair Value			Amortized Cost		Fair Value
Due in one year or less	Due in one year or less	$	1,796	$	1,826	Due in one year or less	$	2,142	$	2,173
Due after one year through five years	Due after one year through five years	5,522		5,773		Due after one year through five years	4,019		4,219
Due after five years through ten years	Due after five years through ten years	4,230		4,411		Due after five years through ten years	3,899		4,089

Total	Total	$	11,548	$	12,010	Total	$	10,060	$	10,481

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 ~~three~~nine months ended ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2021 and December 31, 2020. The carrying value and fair value of our mortgage notes payable were ~~$7,076~~$6,882 and ~~$7,818,~~$7,772, respectively, as of ~~March 31,~~September 30, 2021 and $7,171 and $8,177, respectively, as of December 31, 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-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. On April 4, 2021, 1 of the 4 previously leased communities had a fire that caused extensive damage to the community. As a result, we deemed the recorded furniture, fixtures and equipment and building improvements at the community had no net recoverable value. We recorded an impairment equal to their carrying value in the nine months ended September 30, 2021 of $890, which is recorded in other senior living expenses in the statement of operations.

10. Indebtedness

Our $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 is June 12, ~~2021. On March 16, 2021, we exercised our option to extend the Credit Facility for one-year, until June 12, 2022, subject to payment of the extension fee and satisfaction of other conditions.~~2022.

Our Credit 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

Five Star Senior Living Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

rate, as defined in our Credit Agreement, plus 150 basis points per annum, on borrowings under our Credit Facility; the effective annual interest rate options, as of ~~March 31,~~September 30, 2021, were ~~2.61%~~2.58% 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. As of ~~March 31,~~September 30, 2021 and 2020, we had 0 borrowings outstanding under our Credit Facility. As of ~~March 31,~~September 30, 2021, we had letters of credit issued under the Credit Facility in an aggregate amount of ~~$2,442~~$792 and we had ~~$14,935~~$26,513 available for borrowings under our Credit Facility. We incurred aggregate interest expense related to our Credit Facility of ~~$253~~$108 and ~~$254~~$253 for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $566 and $792 for the nine months ended September 30, 2021 and 2020, respectively.

Our Credit Facility is secured by 11 senior living communities we own with a combined 1,236 living units owned by certain of our subsidiaries that guarantee our obligations under our Credit Facility. Our Credit Facility is also secured by these senior living communities' accounts receivable and related collateral. The amount of available borrowings under our Credit 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. Our Credit Facility provides for the acceleration of payment of all amounts outstanding under our Credit 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 ~~March 31,~~September 30, 2021, we had 76 irrevocable standby letters of credit outstanding, totaling ~~$29,292.~~$27,642. One of these letters of credit in the amount of $26,850, which secures our workers' compensation insurance program, is collateralized by approximately ~~$21,566~~$21,481 of cash equivalents and ~~$7,723~~$5,656 of debt and equity investments. This letter of credit expires in June ~~2021~~

~~Five Star Senior Living Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(dollar amounts in thousands, except per share amounts)~~

~~(unaudited)~~

2022 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,~~September 30, 2021, the cash equivalents collateralizing this letter of credit areclassified 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 65 irrevocable standby letters of credit outstanding at ~~March 31,~~September 30, 2021, totaling ~~$2,442,~~$792, which are issued under the Credit Facility, secure certain of our other obligations. AsThe termination of ~~May 5, 2021, these~~leases on our 4 leased communities resulted in our outstanding letters of credit ~~were~~being reduced by $728 in October 2021. The remaining letter of credit is scheduled to mature ~~between~~in June ~~2021~~2022 and ~~September 2021 and are~~is required to be renewed annually.

At ~~March 31,~~September 30, 2021, 1 of our senior living communities was encumbered by a mortgage 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 ~~March 31,~~September 30, 2021:


Balance as of March 31, 2021			Contractual Stated Interest Rate		Effective Interest Rate		Maturity Date	Monthly Payment		Lender
Balance as of September 30, 2021											Balance as of September 30, 2021		Contractual Stated Interest Rate		Effective Interest Rate		Maturity Date	Monthly Payment		Lender
$	7,297	(1)	6.20	%	6.70	%	September 2032	$	72	Federal Home Loan Mortgage Corporation	7,092	(1)	6.20	%	6.70	%	September 2032	$	72	Federal Home Loan Mortgage Corporation

(1) Contractual principal payments excluding unamortized discount ~~$221.~~$210.

We incurred interest expense, net of discount amortization, of ~~$122~~$119 and ~~$128~~$125 with respect to the mortgage note for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $359 and $378 for the nine months ended September 30, 2021 and 2020, respectively.

We believe we were in compliance with all applicable covenants under our Credit Facility and mortgage note as of ~~March 31,~~September 30, 2021.

11. Leases with DHC and Healthpeak Properties Inc. and Management Agreements with DHC

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

Five Star Senior Living Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

•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~~and a related omnibus ~~agreement, or collectively, the New Management Agreements;~~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 $75,000 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 issuances of $97,899 compared to the consideration of $75,000 paid by DHC. As of ~~March 31,~~September 30, 2020, DHC assumed $51,547 of our working capital liabilities. We received cash of $23,453 from DHC during ~~2020, subsequent to March 31,~~the nine months ended September 30, 2020; and

•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~~our applicable ~~New Management Agreements.~~management agreements with DHC.

We recognized transaction costs of ~~$1,095~~$142 and $1,412 related to the ~~Transaction Agreement~~2020 restructuring of our business arrangements with DHC for the three and nine months ended ~~March 31, 2020.~~September 30, 2020, respectively.

2021 Amendments to our Management Arrangements with DHC. As part of ~~our~~the implementation of the Strategic Plan, on June 9, 2021, we ~~have agreed to amend~~amended our management arrangements with DHC. See ~~Note~~ Notes 1,16 and 17 for additional information on ~~our~~the Strategic Plan. The principal changes to the management arrangements ~~will~~ include:

~~Five Star Senior Living Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(dollar amounts in thousands, except per share amounts)~~

~~(unaudited)~~

•we will cooperate with DHC in transitioning the management of 108 senior living communities with approximately 7,500 living units that we then managed, 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 iswas revised: (i) ~~extended 2 years~~ to ~~2025,~~not commence until 2025; (ii) the maximum amount of communities that may be terminated ~~will be~~was reduced to 10% (from 20%) of the total managed portfolio by revenue per ~~year~~year; and (iii) to provide that achieving less than 80% (from 90%) of budgeted earnings before interest, taxes, and depreciation and ~~taxes,~~amortization, or EBITDA, will be required to qualify as a ~~“Non Performing~~“Non-Performing Asset”, DHC will not be obligated to pay any termination fee to us if it exercises these termination rights;

•we will continue to manage for DHC 120 senior living communities we then managed for ~~DHC;~~it;

•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~~that we may earn in ~~our existing management agreements with DHC will be amended~~any calendar year for the senior living communities that we will continue to manage for DHC ~~such that there~~ will no longer be subject to 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 of the incentive fee and the incentive fee calculation will be reset pursuant to the terms of the management agreements as a result of expected capital projects DHC is planning in the next five years;

•~~DHC will assume control~~The RMR Group LLC, or RMR LLC, assumed oversight 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 existing management agreements with DHC ~~will be~~was extended by two years to December 31, 2036.

We and DHC entered into an amended and restated master management agreement for thesenior living communities that we will continue to manage for DHC and interim management agreements for the senior living communities that we and DHC agreed to transition to new operators. These agreements replaced our prior management and omnibus agreements with DHC. In addition, we delivered to DHC a related amended and restated guaranty agreement pursuant to which we will continue

Five Star Senior Living Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

to guarantee the payment and performance of each of our applicable subsidiary's obligations under the applicable management agreements.

During the three months ended September 30, 2021, we transitioned the management of 69 senior living communities with approximately 4,800 living units to new operators. As of September 30, 2021, DHC had entered into agreements for us to transition an additional 35 senior living communities with approximately 2,100 living units to new operators in 2021; of which 27 senior living communities with approximately 1,700 living units were transitioned to new operators in October 2021. In October 2021, DHC entered into agreements for us to transition 3 senior living communities with approximately 500 living units to new operators. During the nine months ended September 30, 2021, we closed all 1,532 SNF units within the 27 CCRC communities that we will continue to manage for DHC. We expect ~~that~~ the transition of management of the ~~108~~11 senior living communities and the ~~closure~~repositioning of ~~27 skilled nursing~~the 1,532 closed SNF units ~~will~~to be completed ~~before year end~~during the remainder of 2021. For the three and nine months ended ~~March 31,~~September 30, 2021, we recognized ~~$5,255~~$2,710 and $12,329, respectively, of management fees related to the management of these communities and units. See Note 17 for summary of progress made on the repositioning phase of the Strategic Plan in October 2021.

Senior Living Communities Leased from Healthpeak Properties, Inc.

As of ~~March 31,~~June 30, 2021, we leased 4 senior living communities under 1 lease with ~~Healthpeak Properties, Inc., or~~ PEAK. This lease is a “triple net” lease which requires that we pay all costs incurred in the operation of the communities, including the cost of insurance and real estate taxes, maintaining the communities, and indemnifying the landlord 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 PEAK of any of the 4 communities we ~~lease~~leased 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%.

On June 3, 2021, we entered into an operations transfer agreement to assist with the transfer of 3 of 4 communities that we leased from PEAK to new operators, subject to regulatory and other approvals. These 3 communities had 152 living units and had senior living revenues of $1,458 and $4,467 for the three and nine months ended September 30, 2021, respectively and lease expense of $538 and $1,622 for the three and nine months ended September 30, 2021, respectively.

On September 30, 2021, we terminated our lease on all 4 communities that we leased from PEAK. We recognized a $3,277 loss on lease termination for these communities during the three and nine months ended September 30, 2021. The loss was the aggregate ~~maximum~~of the lease termination fee ~~payable by us with respect to~~of $3,100, other obligations of $548, legal transaction costs of $37, and the ~~termination~~net derecognition carrying amounts of the ~~4 communities is capped at $3,100.~~ Company's right of use asset of $16,055, leasehold improvements and other fixed assets of $1,173, and the remaining lease obligations of $17,636.

On April 4, 2021, ~~one~~1 of the communities that we ~~lease~~leased from PEAK had a fire ~~which has~~that caused extensive damage and the ~~residents~~community has been out of service since that date. Insurance proceeds received for damage to the community of $1,500 were remitted to ~~be relocated. We believe our liability with respect to this event is limited to a $1,000 insurance deductible which we expect to recognize in the three months ended June~~PEAK as of September 30, 2021.

As of October 1, 2021 the PEAK communities are no longer part of our senior living operations.

Senior Living Communities Managed for the Account of DHC and its Related Entities. As of ~~March 31,~~September 30, 2021 and 2020, we managed ~~228~~159 and ~~244~~239 senior living communities, respectively, for the account of DHC. We earned management fees of ~~$12,910~~$10,418 and ~~$16,462~~$14,609 from the senior living communities we managed for the account of DHC for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $35,437 and $46,206 for the nine months ended September 30, 2021 and 2020, respectively. In addition, we earned fees for our management of capital expenditure projects at the communities we

~~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 ~~$834~~$702 and ~~$462~~$573 for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $2,251 and $1,479 for the nine months ended September 30, 2021 and 2020, respectively. These amounts are included in management fee revenue in our condensed consolidated statements of operations.

We also provide ancillary 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 ~~$5,441~~$960 and ~~$8,057~~$5,972 for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $9,031 and $19,843 for the nine months

Five Star Senior Living Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

ended September 30, 2021 and 2020, 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.

We earned management fees of ~~$106~~$100 and ~~$127~~$120 for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, $309 and $372 for the nine months ended September 30, 2021 and 2020, respectively, for management services at a part of a senior 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 closed 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.~~community. For the three and nine months ended ~~March 31,~~September 30, 2020, we recognized ~~$1,052~~$622 and $2,338 of management fees related to these ~~sold~~communities. During the nine months ended September 30, 2021, we closed 1,532 SNF units and are in the process of repositioning them. We will continue to manage the repositioned units for DHC. For the three months ended September 30, 2021 and 2020, we recognized $29 and $1,306 of management fee revenue related to these closed ~~communities.~~SNF units, respectively. For the nine months ended September 30, 2021 and 2020, we recognized $1,863 and $4,503 of management fee revenue related to these closed SNF units, respectively.

In the three months ended September 30, 2021 we transitioned the management of 69 senior living communities that we managed for DHC with approximately 4,800 living units to new operators. For the three months ended September 30, 2021 and 2020, we recognized $1,306 and $2,820 of management fee revenue related to these transitioned communities, respectively. For the nine months ended September 30, 2021 and 2020, we recognized $6,354 and $8,629 of management fee revenue related to these transitioned communities, respectively.

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 outpatient rehabilitation and wellness services clinics. We recognized rent expense of ~~$397~~$370 and ~~$294~~$392 for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $1,165 and $1,175 for the nine months ended September 30, 2021 and 2020, respectively, with respect to these leases.

12. Business Management Agreement with RMR LLC

RMR LLC, provides business management services to us pursuant to our business management and shared services agreement. We incurred aggregate fees and certain cost reimbursements payable to RMR LLC of ~~$1,804~~$1,550 and ~~$2,351~~$2,061 for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $5,149 and $6,535 for the nine months ended September 30, 2021 and 2020, 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 related 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, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc. Mr. 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~~Mr. 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~~those 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 March 31, 2021, 10,691,658 of our common shares, or 33.8% of our outstanding common shares. We manage for the account of DHC a substantial majority of the senior living communities we operate. 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. Included in accrued expenses and other current liabilities on our condensed

1620

Five Star Senior Living Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

DHC. DHC is currently our largest shareholder, owning, as of September 30, 2021, 10,691,658 of our common shares, or 33.7% of our outstanding common shares. We manage for the account of DHC a substantial majority of the senior living communities we operate. Mr. Portnoy is chair of the board of trustees and a managing trustee of DHC. Ms. Clark is a former managing trustee and the secretary of DHC. Included in accrued expenses and other current liabilities on our condensed consolidated balance sheets at ~~March 31,~~September 30, 2021 and December 31, 2020 are ~~$31,771~~$18,384 and $30,090, respectively, ~~which~~of expenses we incurred in connection with the senior living communities we manage for DHC. DHC will ~~be reimbursed by DHC~~reimburse us those amounts, and ~~are~~we have included those amounts in due from related person. See Note 11 for 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 for 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 ~~March 31,~~September 30, 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 ~~$477~~$518 and ~~$435~~$442 for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $1,554 and $1,302 for the nine months ended September 30, 2021 and 2020, which isamounts are included in general and administrative expenses. As a result of renewing this lease, we increased each of our right-of-use asset and lease 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 lease liability, which amounts were ~~$10,027~~$9,968 and $496 for the lease liability and ~~$9,964~~$9,452 and $452 for the right-of-use asset as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively, with respect to our headquarters lease, using an incremental borrowing rate of 3.9%. The right-of-use asset has been reduced by the amount of accrued lease payments, which amounts are not material to our condensed consolidated financial statements.

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

14. Commitments and 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. Loss 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,zero, is recorded; then, as information becomes known, the minimum loss amount is updated, as appropriate.

We were defendants in 2 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:~~included: (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 asserted 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 ofin Lefevre v. Five Star Quality Care, Inc., agreed, without admitting fault, to settle ~~their~~Ms. Lefevre's individual and PAGA claims. The settlement was approved by the court and final judgement on the settlement has been entered. ~~Payment~~The settlement amount was $3,062, of which $2,400 was allocated to us and $662 was allocated to DHC. The total settlement amount was paid on ~~the claims is expected to be made before the end of the second quarter of~~May 12, 2021. The settlement ~~effectively~~ extinguished 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

1721

Five Star Senior Living Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

~~to test compliance with applicable Medicare billing rules. As~~ d/b/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.~~Five Star Quality Care - CA, Inc. and FVE Managers, Inc. lawsuit. We ~~and DHC entered into a settlement agreement with the OIG effective January 5, 2021 and~~recognized our allocated amount for the settlement ~~amount was paid by DHC.~~as an expense in our condensed consolidated statements of operations during the second quarter of 2020.

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, or the Pandemic. The global spread of COVID-19 ~~has created significant volatility, uncertainty and~~caused economic disruption ~~worldwide.~~worldwide, and although conditions have significantly improved in the United States since the low points experienced, significant uncertainty regarding the Pandemic's ultimate duration, severity and near and long term impacts remain. 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 President of the United States declared the Pandemic a national emergency, effective as of March 1, 2020, or the National Emergency. The Pandemic has significantly disrupted, and will likely continue to disrupt, 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~~During 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,~~Personal Protective Equipment, or PPE, to be used at our senior living communities and rehabilitation and wellness clinics. At ~~March 31,~~September 30, 2021, ~~$8,773~~$6,159 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. InFor the ~~first quarter of~~three and nine months ended September 30, 2021, we deployed ~~$852~~$152 and $3,209, respectively, of PPE to senior living communities that we manage on behalf of DHC.

In response to the Pandemic, the United States enacted 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 Pandemic.

~~Under~~ We record any funds we receive pursuant to 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 areas other operating income. We did 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% of a provider's 2018 (or most recent complete tax year) gross receipts, regardless of the provider's payer mix.

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 a 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 recovered from providers after the enactment date be allocated based on financial losses and changes in operating expenses occurring in the third or fourth quarter of calendar year 2020. We recognized $7,793 asrecognize any other operating income for the three months ended ~~March 31,~~September 30, 2021 or 2020, and we recognized other operating income of $7,795 and $1,499 for the nine months ended September 30, 2021 and 2020, respectively, related to ~~General Distribution Funds~~funds we received pursuant to the CARES Act, primarily for our senior living communities for which we believe we have met the required terms and ~~conditions.~~conditions

The CARES Act ~~delays~~delayed the payment of certain 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~~were to be considered timely paid if 50% of the deferred amount iswas paid by December 31, 2021, and the remainder by December 31, 2022. As of ~~March 31, 2021 and~~ December 31, 2020, we deferred $27,593 of employer payroll taxes, which are included in accrued compensation and benefits in our condensed consolidated balance sheets

~~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, of which $22,194 ~~are required to be funded by us and~~ will be ~~reimbursed~~reimbursable to us by DHC pursuant to the ~~New Management Agreements~~management agreements and are included in due from related persons in our condensed consolidated balance ~~sheets.~~sheet at December 31, 2020. In September 2021, we paid the deferred amounts and received the amounts due from DHC.

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. On April 14, 2021, President Biden signed into law legislation that further extended the temporary suspension of the 2% Medicare Sequestration until December 31, 2021.

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 expect to apply an AMT credit refund of $554 for tax year 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. In lieu of requesting a 2019 AMT credit refund of $554, we applied the entire overpayment to 2020 and requested a refund of $454, with the balance of $100 applied to 2021.

16. ~~Subsequent Events~~Restructuring Expense

On April 9, 2021, we announced, as part of the Strategic Plan, ~~to reposition our~~the repositioning of the Company's senior living management business to focus on larger independent living, assisted living and memory care communities as well as ~~stand-alone~~stand-

Five Star Senior Living Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

alone independent living and active adult communities. We expect these transition activities to be substantially completed prior to December 31, 2021. See Notes 1, 11 and 17 for more information on the Strategic Plan and our business arrangements with DHC.

~~Pursuant~~During the nine months ended September 30, 2021, the following actions were taken pursuant to the repositioning phase of the Strategic Plan, ~~we intend to, among other things, (i) amend~~we:

•And DHC amended our management arrangements on June 9, 2021. See Note 11 for additional information regarding the amendments to the management arrangements with DHC,

•Closed all 1,532 SNF living units in 27 managed CCRCs, and began collaborating with DHC to ~~transition 108~~reposition these SNF units,

•Closed 27 of the 37 planned Ageility inpatient rehabilitation clinics,

•Recognized severance and ~~reposition 27 skilled nursing units,~~retention costs of $14,609, and

•Incurred other costs in connection 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~~the closure of communities and ~~(iv) eliminate certain positions~~units of $2,250.

A summary of the liabilities incurred combined with a reconciliation of the related components of the Strategic Plan restructuring expense recognized in the three and nine months ended September 30, 2021, follows, first by cost component and then by segment, the expenses are aggregated and reported in the line item Restructuring expenses in our ~~corporate, regional~~condensed consolidated statements of operations:


	Summary of Liabilities and Expenses as of and for the Three Months Ended September 30, 2021 (1)
Type of Expense:	Beginning Balance		Expenses Incurred		Payments		Ending Balance
Retention bonuses	$	2,495	$	875	$	1,793	$	1,577
Severance, benefits and transition expenses	3,494		(810)		1,475		1,209
Transaction expenses	738		1,155		1,441		452
Total	$	6,727	$	1,220	$	4,709	$	3,238

(1) No obligations related to the Strategic Plan were incurred in 2020. Accrued bonuses and ~~divisional teams~~other compensation are reported in the condensed consolidated balance sheet as ~~well~~part of Accrued compensation and benefits and accrued transaction expenses are reported as ~~impacted units~~part of Accrued expenses and ~~clinics. We expect~~other current liabilities in the condensed consolidated balance sheet.


	Summary of Liabilities and Expenses as of and for the Nine Months Ended September 30, 2021 (1)
Type of Expense:	Beginning Balance		Expenses Incurred		Payments		Ending Balance
Retention bonuses	$	—	$	6,480	$	4,903	$	1,577
Severance, benefits and transition expenses	—		8,129		6,920		1,209
Transaction expenses	—		2,250		1,798		452
Total	$	—	$	16,859	$	13,621	$	3,238

(1) No obligations related to ~~complete~~ the ~~transitions~~Strategic Plan were incurred in 2020. Accrued bonuses and ~~closures by~~other compensation are reported in the ~~end~~condensed consolidated balance sheet as part of ~~2021. See Note 11 for more information regarding our agreement~~Accrued compensation and benefits and accrued transaction expenses are reported as part of Accrued expenses and other current liabilities in the condensed consolidated balance sheet.

Five Star Senior Living Inc.

Notes to ~~amend our management agreements with DHC.~~Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)


	Summary of Liabilities and Expenses as of and for the Three Months Ended September 30, 2021 (1)
By Segment:	Beginning Balance		Expenses Incurred		Payments		Ending Balance
Senior Living	$	4,144	$	813	$	2,752	$	2,205
Rehabilitation and Wellness Services	576		(310)		266		—
Corporate and Other	2,007		717		1,691		1,033
Total	$	6,727	$	1,220	$	4,709	$	3,238

_______________________________________

(1) No obligations related to the Strategic Plan were incurred in 2020. Accrued bonuses and other compensation are reported in the condensed consolidated balance sheet as part of Accrued compensation and benefits and accrued transaction expenses are reported as part of Accrued expenses and other current liabilities in the condensed consolidated balance sheet.


	Summary of Liabilities and Expenses as of and for the Nine Months Ended September 30, 2021 (1)
By Segment:	Beginning Balance		Expenses Incurred		Payments		Ending Balance
Senior Living	$	—	$	12,344	$	10,139	$	2,205
Rehabilitation and Wellness Services	—		1,410		1,410		—
Corporate and Other	—		3,105		2,072		1,033
Total	$	—	$	16,859	$	13,621	$	3,238

In connection with ~~implementing~~ the ~~Strategic Plan,~~repositioning of our senior living management services, we expect to incur ~~non-recurring cash expenses~~restructuring obligations, recognized under ASC 420, Exit or Disposal Cost Obligations and ASC 712, Compensation-Nonretirement Postemployment Benefits-special termination benefits of up to ~~$20,500,~~$19,000, approximately ~~$15,000~~$13,000 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~~$8,700 of severance, benefits and transition expenses, and up to $2,800 of ~~restructuring~~transaction expenses, of which we expect DHC to reimburse approximately ~~$5,900, $7,500~~$5,100, $7,200 and ~~$1,600,~~$700, respectively. We

For the three and nine months ended September 30, 2021, respectively, we recognized ~~transaction costs~~restructuring expenses of ~~$250~~$1,220 and $16,859 related to the Strategic Plan which was partially offset by $813 and $12,344 of other reimbursed expenses related to the amounts to be reimbursed by DHC, respectively, for the three and nine months ended ~~March 31,~~September 30, 2021.

See Notes 1, 11 and 17 for more information on the Strategic Plan and our business arrangements with DHC.

17. Subsequent Events

In October 2021 we continued to make progress on the Strategic Plan as we transitioned 27 senior living communities (with approximately 1,700 living units) to new operators. In addition, in October 2021 DHC entered into agreements to transition the management of an additional 3 senior living communities (approximately 500 living units) to new operators.

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~~including to:

•Evolve through investment in an enhanced scalable corporate shared service center to support operations to deliver differentiated, customer focused resident experience across segmented senior living service offerings, as well as through home health and ~~active adult~~concierge offerings. We are expanding our Ageility service line by introducing innovative fitness and personal training offerings to complement outpatient therapy, and home health services, including strength training, orthopedic rehabilitation, fall prevention, cognitive or memory enhancement, aquatic therapy, and general personal fitness and wellness programs; and

~~Pursuant~~During the nine months ended September 30, 2021, we made the following progress with respect to the Reposition phase of the Strategic ~~Plan, we intend to, among other things, (i) amend~~Plan:

•We and DHC amended our management arrangements on June 9, 2021; see Note 11 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 amendment to the management arrangements with DHC, ~~to transition 108~~

•Transitioned the management of 69 senior living communities with approximately ~~7,500~~4,800 living units ~~that we currently manage for DHC,~~ to new operators, ~~(ii) close and reposition~~all of which occurred during the three months ended September 30, 2021. During October 2021, we transitioned the management of 27 ~~skilled nursing units,~~senior living communities with approximately ~~1,500~~1,700 living units to new operators, and DHC has entered into agreements for us to transition the management of an additional 11 senior living communities, with approximately 1,000 living units, to new operators in the fourth quarter of 2021. We plan to close one community with approximately 100 living units,

•Closed all 1,532 SNF living units in ~~community care retirement communities, or~~27 managed CCRCs, ~~we will continue~~and began collaborating with DHC to ~~manage for DHC, (iii) close~~reposition these SNF units,

•Closed 27 of the 37 Ageility inpatient rehabilitation clinics ~~in certain transitioning communities~~we planned to close, and ~~(iv) eliminate certain positions in~~

•For six of the Ageility inpatient rehabilitation clinics, we entered into agreements with the new operators to continue to operate those clinics for 12 months.

During the nine months ended September 30, 2021, we made the following progress with respect to the Evolve phase of the Strategic Plan:

•Implemented enhancements to our corporate ~~regional~~technology infrastructure,

•Invested in critical areas of residential experience, including community wireless connectivity, resident transportation services, re-designed community common areas and ~~divisional teams as well as impacted~~resident units,

•Made enhancements to digital marketing infrastructure and ~~clinics.~~implemented a labor management tool, and

•Standardized certain administrative functions through centralization efforts to enhance operating efficiency.

During the nine months ended September 30, 2021, we made the following progress with respect to the Diversify phase of the Strategic Plan:

•Opened 16 net new Ageility outpatient rehabilitation clinics, bringing our Ageility outpatient rehabilitation clinic total to 223, and

•Ageility fitness revenues grew to $2.4 million or a 41.1% increase over the same period in 2020.

In connection with ~~implementing~~ the ~~Strategic Plan,~~repositioning of our senior living management services, we expect to incur ~~non-recurring cash~~restructuring expenses of up to ~~$20.5~~$19.0 million, approximately ~~$15.0~~$13.0 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~~$8.7 million of severance, benefits and transition expenses, and up to $2.8 million of ~~restructuring~~transaction expenses, of which we expect DHC to reimburse approximately ~~$5.9~~$5.1 million, ~~$7.5~~$7.2 million and ~~$1.6~~$0.7 million, respectively. See Note 16 to the Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information on the expected restructuring costs.

During the three and nine months ended September 30, 2021, in connection with the implementation of the repositioning of our senior living management services, we incurred restructuring expenses of $1.2 million and $16.9 million, respectively; we expect DHC will reimburse approximately $0.8 million and $12.3 million of the obligations incurred during the three and nine months ended September 30, 2021, respectively. The obligations we incurred during the three months ended September 30, 2021 included $0.9 million of retention bonus payments, $(0.8) million of severance, benefits and transition expenses and $1.2 million of transaction expenses. The obligations we incurred during the nine months ended September 30, 2021 included $6.5 million of retention bonus payments, $8.1 million of severance, benefits and transition expenses and $2.3 million of transaction expenses.

We expect ~~to complete~~ the transitions and closures and repositioning contemplated by the Strategic Plan, or the Transition, to be substantially complete by the end of 2021. See Notes 1, 11, 16 and 1617 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,~~September 30, 2021 and the projected number of units to be operated after the Transition, ~~as if it had been completed as of January 1, 2021:~~or the Retained Portfolio:


		As of March 31, 2021	After Transition		Total	Retained
		Units (1)	Units (2)		Units (1)	Units (2)
Independent living	Independent living	10,979	10,421	Independent living	10,628	10,422
Assisted living	Assisted living	12,109	7,940	Assisted living	9,402	7,715
Alzheimer’s living		3,220	1,847
Memory care				Memory care	2,454	1,861
Skilled nursing	Skilled nursing	2,957	—	Skilled nursing	284	—
Total	Total	29,265	20,208	Total	22,768	19,998

(1)The units operated as of ~~March 31,~~September 30, 2021 include 2,099 owned ~~203~~and 20,669 managed and they exclude approximately 4,800 living units that we previously managed for DHC that we transitioned to new operators during the three months ended September 30, 2021 and approximately 200 living units at four leased ~~and 26,963 managed.~~communities for which the leases were terminated on September 30, 2021.

(2)~~As if the Transition had been completed on January 1, 2021, the units operated as of March 31, 2021 include~~ Includes 2,099 owned ~~203 leased,~~ and ~~17,906 managed.~~17,899 managed units.

Presented below is a summary of the communities, units, average occupancy, ~~spot~~month end occupancy, revenues and management fees for the communities we managed for DHC as of ~~March 31,~~and for the three and nine months ended September 30, 2021 and for the retained communities that we will continue to ~~be managed~~manage for DHC after the ~~Transition as if it had been completed as~~conclusion of ~~January 1, 2021~~the Reposition phase of the Strategic Plan (dollars in thousands):

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

As of March 31, 2021
Communities Units Average Occupancy Spot Occupancy
Community Revenues (1)
Management Fees
Independent and assisted living communities 182 17,435 69.6 % 70.0 % $ 149,385 $ 8,104
Continuing care retirement communities 37 8,573 70.1 % 71.0 % 94,740 4,948
Skilled nursing facilities 9 955 62.8 % 65.4 % 15,841 798
Total 228 26,963 69.5 % 70.2 % $ 259,966 $ 13,850
After Transition
Communities Units Average Occupancy Spot Occupancy
Community Revenues (1)
Management Fees (2)
Independent and assisted living communities 91 12,012 70.7 % 71.3 % $ 104,221 $ 5,689
Continuing care retirement communities 29 5,894 76.8 % 76.9 % 54,057 2,891
Skilled nursing facilities — — — % — % — —
Total 120 17,906 72.7 % 73.2 % $ 158,278 $ 8,580
~~_______________________________________~~


	As of and for the three months ended September 30, 2021
	Communities	Units	Average Occupancy	Month End Occupancy	Community Revenues (1)		Management Fees (2)(3)
Independent and assisted living communities (5)	155	20,044	72.5%	74.2%	$	184,996	$	9,944
Continuing care retirement communities (5)	4	625	68.1%	61.6%	17,015		881
Skilled nursing facilities	—	—	67.4%	—%	8,149		395
Total	159	20,669	72.2%	73.8%	$	210,160	$	11,220

	Retained
	Communities	Units	Average Occupancy	Month End Occupancy	Community Revenues (1)		Management Fees (4)
Independent and assisted living communities (5)	120	17,899	73.4%	74.6%	$	157,930	$	8,510
Continuing care retirement communities	—	—	—%	—%	—		—
Skilled nursing facilities	—	—	—%	—%	—		—
Total	120	17,899	73.4%	74.6%	$	157,930	$	8,510

(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) The 59 SNF units in one CCRC that were closed during the three months ended September 30, 2021, and are to be repositioned, had management fee revenue of $1 for the three months ended September 30, 2021.

(3) The 69 senior living communities with approximately 4,800 living units that were transitioned to new operators during the three months ended September 30, 2021, had management fee revenue of $1,306 for the three months ended September 30, 2021.

(4)Excludes management fee revenue of ~~$5.3 million~~$2,710 earned in the ~~quarter~~three months ended ~~March 31,~~September 30, 2021 related to (i) 108 senior living communities on behalf of DHC, with approximately 7,500 living units that are expected to be transitioned to new operators in 2021; of which 69 senior living communities with approximately 4,800 living units were transitioned to new operators during the three months ended September 30, 2021, and (ii) 59 SNF units in one CCRC that were closed during the three months ended September 30, 2021, and are to be repositioned in communities that we will continue to manage.

(5) During the three months ended September 30, 2021 we closed 59 SNF units in one CCRC. Due to these SNF unit closures, this community is no longer a CCRC and has been included in the community and unit totals and month end occupancy as an independent and assisted living community as of September 30, 2021. However, average occupancy, community revenues and management fees for this former CCRC is included in the CCRC totals for the three months ended September 30, 2021. The average occupancy, community revenues and management fees for this former CCRC for the three months ended September 30, 2021 were 74.7%, $4,439 and $233, respectively.


	As of and for the Nine Months Ended September 30, 2021
	Communities	Units	Average Occupancy	Month End Occupancy	Community Revenues (1)		Management Fees (2)(3)
Independent and assisted living communities (5)	155	20,044	70.3%	74.2%	$	435,575	$	23,441
Continuing care retirement communities (5)	4	625	71.0%	61.6%	238,116		12,544
Skilled nursing facilities	—	—	64.7%	—%	40,171		2,012
Total	159	20,669	70.3%	73.8%	$	713,862	$	37,997

	Retained
	Communities	Units	Average Occupancy	Month End Occupancy	Community Revenues (1)		Management Fees (4)
Independent and assisted living communities (5)	120	17,899	73.0%	74.6%	$	475,221	$	25,657
Continuing care retirement communities	—	—	—%	—%	—		—
Skilled nursing facilities	—	—	—%	—%	—		—
Total	120	17,899	73.0%	74.6%	$	475,221	$	25,657

(2) The 1,532 SNF units in 27 CCRCs that were closed during the nine months ended September 30, 2021 and are to be repositioned had management fee revenues of $1,863 for the nine months ended September 30, 2021.

(3) The 69 senior living communities with approximately 4,800 living units that were transitioned to new operators during the three months ended September 30, 2021, had management fee revenue of $6,354 for the nine months ended September 30, 2021.

(4) Excludes management fee revenue of $12,329 for the nine months ended September 30, 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 in 2021, of which 69 senior living communities with approximately 4,800 living units were transitioned to new operators as of September 30, 2021 and (ii) ~~approximately 1,500 skilled nursing facility~~1,532 SNF units ~~that are expected to be closed and repositioned~~ in 27 CCRCs that were closed during the nine months ended September 30, 2021 and are in the process of being repositioned that we will continue to manage for DHC.

(5) During the nine months ended September 30, 2021 we closed 1,532 SNF units in 27 CCRCs. Due to these SNF unit closures, these communities are no longer CCRCs and have been included in the community and unit totals and month end occupancy as independent and assisted living communities as of September 30, 2021. However, average occupancy, community revenues and management fees for those 27 former CCRCs are included in the CCRC

totals for the nine months ended September 30, 2021. The average occupancy, community revenues and management fees for these former CCRCs for the nine months ended September 30, 2021 were 72.2%, $197,912 and $10,495, respectively.

Following the ~~Transition,~~completion of the Reposition portion of the Strategic Plan we will continue to manage 120 senior living communities for DHC, representing ~~17,906~~17,899 living units as of September 30, 2021 and approximately ~~60%~~67.5% of our management fee revenues ~~as of March 31,~~for the nine months ended September 30, 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.~~operations and with other growth.

The 120 senior living communities that we will continue to manage for DHC after transitioning the ~~Transition~~108 communities, outperformed the total DHC managed portfolio (exclusive of the closed and pending ~~closing and~~ repositioning of approximately 1,500 ~~skilled nursing facility~~SNF living units in 27 of the CCRCs) for the ~~quarter~~three months ended ~~March 31,~~September 30, 2021 with approximately ~~400~~370 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, on September 30, 2021, we terminated our leases on the ~~landlord of our~~ four ~~leased senior living~~ communities with ~~203~~an aggregate of approximately 200 living units ~~is currently marketing these properties for sale and~~that we ~~are unlikely to~~leased. As of September 30, 2021, we no longer operate ~~these four communities long-term.~~units within leased communities.

Presented below is a summary of our Ageility rehabilitation clinics as of ~~March 31,~~and for the three and nine months ended September 30, 2021 and the number of clinics to be operated after the ~~Transition as if it had been completed as~~implementation of ~~January 1, 2021~~the Strategic Plan (dollars in thousands):


	As of and for the Three Months Ended September 30, 2021						Retained
	Number of Clinics	Total Revenue (3)		Average Revenue per Clinic		Adjusted EBITDA Margin	Number of Clinics	Total Revenue (1)(3)		Average Revenue per Clinic		Adjusted EBITDA Margin
Inpatient Clinics in DHC Communities	10	$	1,508	$	151	35.3%	—	$	—	$	—	—%
Outpatient Clinics in DHC Communities	91	7,936		87		11.3%	91	7,936		87		11.3%
Outpatient Clinics in Transition Communities (2)	45	1,776		39		16.2%	45	1,776		39		16.2%
Total Clinics at DHC Communities	146	11,220		77		15.3%	136	9,712		71		12.2%
Outpatient Clinics at Other Communities (4)	87	3,888		45		3.4%	87	3,888		45		3.4%
Total Clinics	233	$	15,108	$	65	12.2%	223	$	13,600	$	61	9.6%

As of March 31, 2021 After Transition
Number of Clinics
Total Revenue (3)
Average Revenue per Clinic Adjusted EBITDA Margin Number of Clinics
Total Revenue (1)(3)
Average Revenue per Clinic Adjusted EBITDA Margin
Inpatient Clinics in DHC Communities 37 $ 5,441 $ 147 26.1 % — $ — $ — — %
Outpatient Clinics in DHC Communities 91 7,734 85 15.3 % 91 7,734 85 15.3 %
Outpatient Clinics in Transition Communities(2)
44 1,863 42 18.5 % 44 1,863 42 18.5 %
Total Clinics at DHC Communities 172 15,038 87 19.6 % 135 9,597 71 15.9 %
Outpatient Clinics at Other Communities (4)
80 4,234 53 11.8 % 80 4,234 53 11.8 %
Total Clinics 252 $ 19,272 $ 76 17.9 % 215 $ 13,831 $ 64 14.6 %
~~_______________________________________~~

(1)Excludes revenue of ~~$5.4 million in~~$1,508 earned during the ~~quarter~~three months ended ~~March 31,~~September 30, 2021 for ten Ageility inpatient rehabilitation clinics which are expected to be closed as part of the Transition.

(2)As part of the Transition, the Company expects to transition 108 senior living communities managed on behalf of DHC to benew operators in 2021; of which 69 senior living communities were transitioned to new ~~operators.~~operators during the three months ended September 30, 2021. These communities have 4445 Ageility outpatient rehabilitation clinics, of which 29 clinics were within communities that had transitioned to a new operator as of September 30, 2021 and that we will continue to operate. The remaining 16 clinics, due to the transfer of the communities to a new ~~operator,~~operators, 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.~~ non-Company operated or managed communities and 15 outpatient clinics at communities we own.


	As of and for the Nine Months Ended September 30, 2021							Retained
	Number of Clinics	Total Revenue (3)		Average Revenue per Clinic			Adjusted EBITDA Margin	Number of Clinics	Total Revenue (1)(3)		Average Revenue per Clinic		Adjusted EBITDA Margin
Inpatient Clinics in DHC Communities	10	$	9,579	$		n/m	21.9%	—	$	—	$	—	—%
Outpatient Clinics in DHC Communities	91	24,028		264			13.1%	91	24,028		264		13.1%
Outpatient Clinics in Transition Communities (2)	45	5,600		124			17.3%	45	5,600		124		17.3%
Total Clinics at DHC Communities	146	39,207		269			15.8%	136	29,628		218		13.9%
Outpatient Clinics at Other Communities (4)	87	12,318		142			8.9%	87	12,318		142		8.9%
Total Clinics	233	$	51,525	$	221		14.2%	223	$	41,946	$	188	12.4%

n/m - not meaningful because the revenues include revenue earned from 37 inpatient clinics but at September 30, 2021 there were only ten inpatient clinics.

(1) Excludes revenue of $9,579 for the nine months ended September 30, 2021 for 27 Ageility inpatient rehabilitation clinics that were closed during the three months ended June 30, 2021 and an additional ten Ageility inpatient rehabilitation clinics which are expected to be closed.

(2)

As part of the Transition, the Company expects to transition 108 senior living communities managed on behalf of DHC to new operators in 2021; of which 69 senior living communities were transitioned to new operators during the three months ended September 30, 2021. These communities have 45 Ageility outpatient rehabilitation clinics, of which 29 clinics were within communities that had transitioned to a new operator as of September 30, 2021 and that we will continue to operate. The remaining 16 clinics, due to the transfer of the communities to new operators, may be subject to closure by the new operator.

2128

~~Item 2. Management’s Discussion~~

(3) Total Ageility revenue excludes home health care services, which are part of the rehabilitation and ~~Analysis of Financial Condition~~wellness services segment.

(4) Other communities includes outpatient clinics at non-Company operated or managed communities and ~~Results of Operations~~15 outpatient clinics at communities we own.

We expect the rehabilitation and wellness services segment to grow and diversify through our expanded emphasis on fitness and home health care services. Fitness offerings started as an extension of the rehabilitation product and, while representing only 5.5% of segment revenues for the three months ended September 30, 2021, fitness revenues increased by 34.8% to $0.8 million over the same period in 2020. For the nine months ended September 30, 2021, fitness revenues increased to $2.4 million or a 41.1% increase over the same period in 2020.

We currently expect to continue to evolve and diversify through growth of our ancillary rehabilitation and wellness service offerings, including rehabilitation and wellness services, by opening new clinics and expanding our fitness and other home-based service offerings within and outside of our senior living communities. Since January 1, 2019, we have opened 94 net new outpatient rehabilitation clinics, 17 of which were opened in 2020, and 16 of which were opened during the nine months ended September 30, 2021.

General Industry Trends

We believe that, in the United States, the current primary market for ~~senior living~~ services to older adults is focused on individuals age 80 and older. As a result of medical advances, adults are living longer and expanding their options as to where they choose to reside as they age. The aging of the Baby Boomers and their increasing life expectancy are leading to a fundamental demographic shift. The U.S. Census Bureau expects the 65+ population to grow by 30% to 73 million from 2020 to 2030, and by 69% to 95 million by 2060.

Due to these demographic trends, ~~in the last ten years the senior living industry evolved~~service providers are evolving to serve the growing number of older adults and we expect the demand for ~~senior living~~these services to increase in future years regardless of where the 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 its economic ~~recession.~~impact. 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 Pandemic has significantly disrupted and ~~likely will~~may continue to significantly disrupt the United States economy, our business and the senior living industry as a whole. The World Health Organization declared COVID-19 a pandemic in March 2020. From March 2020 through ~~May 1,~~October 31, 2021, there have been approximately ~~32.5~~45.6 million reported cases of COVID-19 in the United States and approximately ~~0.6~~0.7 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~~the Pandemic conditions have significantly improved in the United States from their low points. Commercial activities ~~are~~have been increasingly returning to pre-pandemic practices and operations as a result and 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 related 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 (iii) the impact on the U.S. economy that may result from the inability of other 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 us and our business, see Part I, Item 1, "Business--COVID Pandemic" and Part I, Item 1A, "Risk Factors", of our Annual Report.

On September 10, 2021, the Biden Administration announced that the HHS, through the Health Resources and Services Administration, or HRSA, is making $25.5 billion in new funding available for health care providers affected by the COVID-19 pandemic. This funding includes $8.5 billion in American Rescue Plan, or ARP, resources for providers who serve rural Medicaid, Children's Health Insurance Program, or CHIP, or Medicare patients, and an additional $17.0 billion for Provider Relief Fund, or PRF, Phase 4 for a broad range of providers who can document revenue loss and expenses associated with the Pandemic. We are exploring whether we may be eligible to receive funding under this program.

Consistent with the requirements included in the Coronavirus Response and Relief Supplemental Appropriations Act of 2020, PRF Phase 4 payments will be based on providers’ lost revenues and expenditures between July 1, 2020 and March 31, 2021. As part of the Biden Administration’s ongoing commitment to equity, and to support providers with the most need, PRF

Phase 4 will reimburse smaller providers – who tend to operate on thin margins and often serve vulnerable or isolated communities – for their lost revenues and COVID-19 expenses at a higher rate compared to larger providers. PRF Phase 4 will also include bonus payments for providers who serve Medicaid, CHIP, and/or Medicare patients, who tend to be lower income and have greater and more complex medical needs.

Vaccinations. Throughout the first 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 all communities and as of October 31, 2021 over 85% of our residents at our senior living communities had received a COVID-19 vaccine.

In September 2021, the Department of Labor’s Occupational Safety and Health Administration, or OSHA, announced that it is developing a rule that will require all employers with 100 or more employees to ensure their workforce is fully vaccinated or require any workers who remain unvaccinated to produce a negative test result on at least a weekly basis before coming to work. It is anticipated that OSHA will issue an Emergency Temporary Standard to implement this requirement. This requirement will impact over 80 million workers in private sector businesses with 100+ employees including the Company.

In addition, the Centers for Medicare & Medicaid Services, or CMS, is taking action to require COVID-19 vaccinations for workers in most health care settings that receive Medicare or Medicaid reimbursement, including but not limited to hospitals, dialysis facilities, ambulatory surgical settings, and home health agencies. This action builds on the vaccination requirement for nursing facilities previously announced by CMS on September 9, 2021, and will apply to nursing home staff as well as staff in hospitals and other CMS-regulated settings, including clinical staff, individuals providing services under arrangements, volunteers, and staff who are not involved in direct patient, resident, or client care. These requirements will apply to approximately 50,000 providers and cover a majority of health care workers across the country. Some facilities and states have begun to adopt hospital staff or health care sector vaccination mandates. This action will create a consistent standard across the country, while giving patients assurance of the vaccination status of those delivering care.

As previously announced, all team members who work in or visit our communities or Ageility clinics as part of their responsibilities were required to be fully vaccinated against COVID-19 by September 1, 2021. As of September 30, 2021, we were in compliance with this requirement.

Protective Measures for Residents and Team Members. Our residents and clients are part of a population that has been disproportionately affected by the Pandemic. 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. For further information regarding the protective measures we have taken for our residents, clients and team members over the last year, see the section captioned Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Industry Trends” in Part II, Item 7 of our 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.

Occupancy. As a result of the Pandemic, we experienced declines in average occupancy at our owned and leased senior living communities from ~~81.3%~~74.7% for the three months ended ~~March 31,~~September 30, 2020 to ~~68.3%~~69.9% for the three months ended ~~March 31,~~September 30, 2021. Consistent with occupancy declines experienced within our owned and leased portfolio, the senior living communities we manage on behalf of DHC also experienced average occupancy declines from ~~82.6%~~75.2% for the three months ended ~~March 31,~~September 30, 2020 to ~~69.5%~~72.2% for the three months ended ~~March 31,~~September 30, 2021. At ~~May 1,~~October 31, 2021, all of our senior living communities were accepting new residents in ~~at least one~~all of our service ~~line~~lines of business (independent living, assisted living ~~skilled nursing~~ or memory care). We expect that the impact of the widespread administration of ~~the widespread vaccination~~vaccinations for COVID-19 among our residents and team members will decrease the incidence of COVID-19 in our senior living ~~communities.~~communities and as of October 31, 2021 there were less than 20 confirmed cases among our over 18,000 residents. With the reduction of confirmed cases, we ~~expect~~have been able to ~~eventually cease~~significantly reduce and in some cases eliminate restrictions at our senior living communities, ~~and enable~~which has enabled us to shift our efforts to new admissions and resident programs. Despite the continued distribution of the COVID-19 vaccine, as a result of the ongoing

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

effects of the Pandemic, there is a possibility of continued or increased occupancy declines in the near term, due to possible surge of COVID variant viruses, current residents leaving our senior living communities, restrictions on new residents moving into and/or touring our 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~~may continue to incur significant costs to address the 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. Our labor costs have also increased as a result of rising health insurance costs caused by the Pandemic and by team members pursuing elective procedures they deferred or were not able to obtain during 2020 during the Pandemic. Although COVID-19 vaccinations have been made available to residents and team members at our senior living communities, we expect the increased costs associated with the Pandemic to continue ~~throughout the first half of 2021 and~~ for the reasonably foreseeable ~~future thereafter.~~future. 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 senior 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 management arrangements.

Results of Operations. We have experienced negative impacts on our operating results and on 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~~for the ~~first half of 2021.~~reasonably foreseeable future. We expect that widespread vaccination at our senior living communities will decrease the incidence of COVID-19 at 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, going forward, the amounts and type of revenue, expense and cash flow impacts resulting from the Pandemic will be dependent on a number of additional factors, 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, 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 Pandemic; and consumer confidence and the demand for our communities and services.

Senior Living Development. For ~~the past few~~several 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 occupancy. This has resulted in a significant increase in new senior living community inventory entering the market in recent 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 Pandemic, and the impact of the Pandemic may further impact new development, we expect that new inventory will enter the market in the near term due to the increased development of senior living communities in the past several years. That increase will continue to have a competitive effect on our business for at least the next few years; these challenges may be intensified as a result of the Pandemic and its impact on the ~~associated economic downturn.~~senior living community industry.

Labor Market. As noted above, in connection with the Pandemic, we incurred increased labor costs as a result of increased overtime pay for team members, increased costs associated with team member engagement and retention programs, such as meals for certain of our team members and bonuses to team members at our senior living communities and rehabilitation and wellness clinics, and increased health insurance and workers' compensation costs. In addition, we increased the rates paid to community based team members during 2021 in order to be competitive with the increasing rates in the market for these front line team members. We also increased staffing needs, for which we have entered into temporary staffing agreements with staffing agencies to accommodate staffing shortages due to a tight labor market in addition to quarantine protocols of our current staff that may have contracted or been potentially exposed to COVID-19. The market for skilled front line workers within and outside of the senior living industry continues to be very competitive, and the current demand for those workers remains strong.

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;~~agreement;

~~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, 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~~the Strategic Plan, we ~~have agreed to amend~~amended our management arrangements with DHC. For more information on the amendments to our management arrangements with DHC, see Note 11 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. For more information on the expected impact of the Strategic Plan, ~~on our management arrangements, and regarding our management agreements and other transactions, with DHC,~~ see Notes 1, 11, 16 and 1617 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Credit Facility

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, of which ~~$14.9~~$26.5 million was available for borrowing as of ~~March 31,~~September 30, 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.

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 certain of our skilled nursing and rehabilitation and wellness services. We derived approximately 4.3% and ~~3.6%~~3.5% of our consolidated revenues from these government-funded programs during the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020, respectively. Revenues from Medicare programs totaled ~~$11.5~~$31.4 million and ~~$10.1~~$29.9 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and ~~2020.~~2020, respectively. Revenues from Medicaid programs totaled ~~$0.3~~$0.9 million and ~~$0.6~~$1.2 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020, respectively. As our senior management services have been repositioning, the concentration of revenues derived from Medicare and Medicaid have become less of a percentage of our total revenue sources and will, principally, be earned in connection with our rehabilitation and wellness services.

Medicare and Medicaid revenues for skilled nursing, and rehabilitation and wellness services provide operating revenue at our rehabilitation clinics, and also at some of our senior living communities ~~(principally~~(historically, principally from our ~~SNF's), we~~former SNFs). We earn management fees based on these revenues.

In connection with the repositioning phase of the Strategic Plan, we ~~intend to transition 108~~transitioned 69 senior living communities managed on behalf of DHC, with approximately ~~7,500~~4,800 living units to new operators in the three months ended September 30, 2021. DHC has entered into agreements for us to transition 35 senior living communities managed on behalf of DHC, with approximately 2,100 living units, that we currently manage for DHC to new ~~operators.~~operators, of which 27 senior living communities with approximately 1,700 living units were transitioned to new operators in October 2021. If and when these transitions are completed, our interim management agreements with DHC for those communities have been and will ~~terminate.~~be terminated. In addition, we and DHC ~~intend to close~~closed and ~~reposition~~are in the process of repositioning all of our approximately 1,500 ~~skilled nursing facility~~SNF units in 27 ~~CCRCs that we will continue to manage for DHC.~~CCRCs. For the three and nine months ended ~~March 31,~~September 30, 2021, we recognized ~~$5.3~~$2.7 million and $12.3 million of management fees related to these senior living communities and ~~units.~~ units, respectively.

In ~~addition, in~~ connection with implementing the Strategic Plan, through September 30, 2021, we ~~intend to close~~have closed 27 of the 37 Ageility inpatient rehabilitation ~~clinics.~~clinics we intend to close. For six of the Ageility inpatient rehabilitation clinics, we have entered into agreements with the new operators to continue to operate those clinics for 12 months. For the three and nine months ended ~~March 31,~~September 30, 2021, we recognized ~~$5.4~~$1.5 million and $9.6 million of revenue related to ~~these clinics.~~all 37 inpatient clinics that were or will be closed, respectively.

For more information regarding the terms, conditions and ~~conditions~~progress of the Strategic Plan, please see Notes 1, 11, 16 and 1617 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

In addition, on September 30, 2021 we terminated the lease at our four leased communities with approximately 200 living units. One of the four leased communities with 51 living units had been out of service due to a fire on April 4, 2021. We

recognized $3.3 million of loss on termination of leases during the three and nine months ended September 30, 2021. For more information regarding the termination of leases, see Notes 5 and 11.

Federal and state governments have taken a number of actions to respond to the 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 Pandemic on operators of long-term care and senior living communities like us. Federal actions in response to the Pandemic that may impact our operations and financial performance include, but are not limited to, the following:

•On March 11, 2021, the American Rescue Plan Act of 2021, or ARPA, was signed into law. In addition to broad-based public and private financial relief, ARPA included a number of measures intended to assist the health care industry, including funding to support COVID-19 research, testing, and vaccination efforts. In addition, ARPA provided $450 million to support SNFs in protecting against ~~COVID-19;~~COVID-19: $200 million for the development and dissemination of COVID-19 prevention protocols in conjunction with quality improvement organizations; and $250 million to states and territories to deploy strike teams that can assist SNFs experiencing COVID-19 outbreaks. The ARPA temporarily

~~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~~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,~~October 31, 2021, approximately ~~82.1%~~97% of the U.S. population 65 years or older has received at least one dose of a COVID-19 vaccine, and ~~68.4%~~85% is fully vaccinated. As of ~~April 29,~~October 31, 2021, more than ~~143~~220 million people in the U.S., or ~~43.3%~~approximately 67% of the population, have received at least one dose of a COVID-19 vaccine, and over 99190 million people, or ~~30.0%~~58% of the population, is fully vaccinated. ~~Further, on April 6,~~

•On September 9, 2021 President Biden ~~directed~~announced a comprehensive, six-part strategy to combat COVID-19, aimed largely at vaccinating the approximately 25% of the eligible population who remain unvaccinated. The first part of his plan has numerous implications for private sector employers with 100 or more employees across all ~~states~~industries requiring employees to be vaccinated or tested weekly. Workers in most health care settings that receive Medicare or Medicaid reimbursement, including but not limited to hospitals, dialysis facilities, ambulatory surgical settings, and home health agencies, would be required to be vaccinated. Other parts of the plan addressed (1) protecting the vaccinated by, among other things, preparing for the administration of booster shots; (2) keeping schools safely open upthrough a number of safety measures; (3) increasing the availability of testing, (4) protecting the economy, including by streamlining the Paycheck Protection Program loan forgiveness program; and (5) improving care for those infected by COVID-19.

•On September 10, 2021, The U.S. Department of Health and Human Services, through the Health Resources and Services Administration, is making $25.5 billion in new funding in COVID-19 ~~vaccinations~~relief available to ~~all U.S. residents 18 years~~healthcare providers. Under this plan, Provider Relief Fund Phase 4 payments will be based on lost revenues and ~~older by April 19,~~expenditures between July 1, 2020, and March 31, 2021.

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 Pandemic are expected to last ~~throughout the National Emergency, the duration~~for an unknown period of ~~which is currently unknown.~~time. Additional measures may be taken ~~prior to and after the conclusion of the National Emergency~~ to alleviate the economic impact of the 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.

In addition to the responses to the Pandemic 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 Medicaid rates and federal payments to states for Medicaid programs.

For further information regarding federal actions in response to the Pandemic, government healthcare funding and regulation and their 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.

Results of Operations

We 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, 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 inpatient and outpatient clinics as well as home health and fitness services.

~~All~~For the three and nine months ended September 30, 2021, we recognized $2.7 million and $12.3 million, respectively, of ~~our operations~~management fee revenue related to the senior living communities and ~~assets are located in the United States, except~~units that we have managed for ~~the operations of our Cayman Islands organized captive insurance company subsidiary, which participates in our workers’ compensation, professional~~DHC and ~~general liability and certain automobile insurance programs.~~

~~As previously noted,~~have been or will be transitioned to other operators or will be closed 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.Plan. For the three and nine 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,~~September 30, 2021, we recognized rehabilitation and wellness services revenue of ~~$5.4~~$1.5 million and $9.6 million, respectively, related to the Ageility inpatient rehabilitation clinics ~~which~~that have been or will be ~~closed.~~closed pursuant to the Strategic Plan. 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,~~September 30, 2021 and 2020:

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

The following tables present a summary of our operations for the three months ended ~~March 31,~~September 30, 2021 and 2020 (dollars and visits in thousands, except ~~RevPAR)~~RevPAR and RevPOR):

Three Months Ended March 31, Increase/(Decrease)
2021 2020 Amount Percent
REVENUES
Rehabilitation and wellness services $ 19,553 $ 21,384 $ (1,831) (8.6) %
Senior living 17,057 20,997 (3,940) (18.8) %
Management fees 13,850 17,051 (3,201) (18.8) %
Total management and operating revenues 50,460 59,432 (8,972) (15.1) %
Reimbursed community-level costs incurred on behalf of managed communities 213,160 232,016 (18,856) (8.1) %
Other reimbursed expenses 5,480 5,997 (517) (8.6) %
Total revenues 269,100 297,445 (28,345) (9.5) %
Other operating income 7,793 — 7,793 n/m
OPERATING EXPENSES
Rehabilitation and wellness services expenses 16,210 17,501 (1,291) (7.4) %
Senior living wages and benefits 12,013 9,800 2,213 22.6 %
Other senior living operating expenses 6,266 3,938 2,328 59.1 %
Community-level costs incurred on behalf of managed communities 213,160 232,016 (18,856) (8.1) %
General and administrative 22,641 22,865 (224) (1.0) %
Depreciation and amortization 2,940 2,701 239 8.8 %
Total operating expenses 273,230 288,821 (15,591) (5.4) %
Operating income 3,663 8,624 (4,961) (57.5) %
Interest, dividend and other income 84 339 (255) (75.2) %
Interest and other expense (463) (382) (81) 21.2 %
Unrealized gain (loss) on equity investments 135 (1,462) 1,597 (109.2) %
Realized gain (loss) on sale of debt and equity investments 96 (21) 117 n/m
Loss on termination of leases — (22,899) 22,899 (100.0) %
Income (loss) before income taxes 3,515 (15,801) 19,316 (122.2) %
Provision for income taxes (200) (1,408) 1,208 (85.8) %
Net income (loss) $ 3,315 $ (17,209) $ 20,524 119.3 %
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 occupancy 68.3 % 81.3 % (13.0) % n/m
RevPAR (2)
$ 2,479 $ 2,930 $ (451) (15.4) %
Managed communities:
Number of communities (end of period) 228 244 (16) (6.6) %
Number of living units (end of period) (1)
26,963 28,960 (1,997) (6.9) %
Spot occupancy at March 31, 70.2 % 81.5 % (11.3) % n/m
Average occupancy 69.5 % 82.6 % (13.1) % n/m
RevPAR (2)
$ 3,213 $ 3,820 $ (607) (15.9) %
Rehabilitation and wellness services:
Number of inpatient clinics (end of period) (1)
37 41 (4) (9.8) %
Number of outpatient clinics (end of period) 215 203 12 5.9 %
Total clinics 252 244 8 3.3 %


	Three Months Ended September 30,						Increase/(Decrease)
	2021 (1)			2020 (1)			Amount		Percent
REVENUES
Rehabilitation and wellness services	$	15,382		$	21,124		$	(5,742)	(27.2)	%
Senior living	16,320			18,525			(2,205)		(11.9)	%
Management fees	11,220			15,302			(4,082)		(26.7)	%
Total management and operating revenues	42,922			54,951			(12,029)		(21.9)	%
Reimbursed community-level costs incurred on behalf of managed communities	177,231			233,783			(56,552)		(24.2)	%
Other reimbursed expenses	5,678			6,589			(911)		(13.8)	%
Total revenues	225,831			295,323			(69,492)		(23.5)	%



OPERATING EXPENSES
Rehabilitation and wellness services expenses	13,536			16,716			(3,180)		(19.0)	%
Senior living wages and benefits	8,547			11,128			(2,581)		(23.2)	%
Other senior living operating expenses	7,184			7,407			(223)		(3.0)	%
Community-level costs incurred on behalf of managed communities	177,231			233,783			(56,552)		(24.2)	%
General and administrative	21,817			19,774			2,043		10.3	%
Restructuring expenses	1,220			142			1,078		n/m
Depreciation and amortization	2,983			2,680			303		11.3	%
Total operating expenses	232,518			291,630			(59,112)		(20.3)	%

Operating (loss) income	(6,687)			3,693			(10,380)		n/m

Interest, dividend and other income	84			104			(20)		(19.2)	%
Interest and other expense	(507)			(379)			(128)		33.8	%
Unrealized gain (loss) on equity investments	22			435			(413)		(94.9)	%
Realized gain on sale of debt and equity investments	—			327			(327)		(100.0)	%
Loss on termination of leases	(3,277)			—			(3,277)		n/m
Income (loss) before income taxes	(10,365)			4,180			(14,545)		n/m
(Provision) benefit for income taxes	164			(465)			629		n/m
Net (loss) income	$	(10,201)		$	3,715		$	(13,916)	n/m

Owned and leased communities:
Number of communities (end of period)	20			24			(4)		(16.7)	%
Number of living units (end of period)	2,099			2,312			(213)		(9.2)	%
Month end occupancy at September 30,	72.9		%	73.0		%	(10 bps)		(0.1)	%
Average occupancy	69.9		%	74.7		%	(480 bps)		(6.4)	%
RevPAR (2)	$	2,411		$	2,665		$	(254)	(9.5)	%
RevPOR (3)	$	3,375		$	3,492		$	(117)	(3.4)	%

Managed communities:
Number of communities (end of period)	159			239			(80)		(33.5)	%
Number of living units (end of period)	20,669			28,232			(7,563)		(26.8)	%
Month end occupancy at September 30,	73.8		%	74.0		%	(20 bps)		(0.3)	%
Average occupancy	72.2		%	75.2		%	(300 bps)		(4.0)	%
RevPAR (2)	$	3,046		$	3,420		$	(374)	(10.9)	%
RevPOR (3)	$	4,129		$	4,447		$	(318)	(7.2)	%

Rehabilitation and wellness services:
Average revenue per outpatient clinic	$	61		$	71		$	(10)	(14.1)	%
Number of visits at outpatient clinics	147			155			(8)		(5.2)	%
Number of inpatient clinics (end of period)	10			40			(30)		(75.0)	%
Number of outpatient clinics (end of period)	223			209			14		6.7	%
Total clinics	233			249			(16)		(6.4)	%

_______________________________________
n/m - not meaningful

~~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 in 2021; of which 69 senior living communities with approximately 4,800 living units were transitioned to new operators during the three months ended September 30, 2021, (ii) ~~approximately 1,500 skilled nursing facility~~1,532 SNF units ~~that are expected to be closed and repositioned~~ in 27 CCRCs that were closed during the six months ended September 30, 2021 and are in the process of being repositioned that we will continue to manage for DHC and (iii) 3727 Ageility inpatient rehabilitation clinics ~~operating in certain transitioning communities~~that were closed during the three months ended June 30, 2021 and an additional ten Ageility inpatient rehabilitation clinics that are expected to be

closed. In addition, the ~~landlord~~summary of ~~the~~operations includes all four leased communities ~~included in~~with approximately 200 living units where 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.~~leases were terminated on September 30, 2021.

(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,~~September 30, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.

(3) RevPOR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of occupied units for the period, divided by the number of months in the period. Amounts for the three months ended September 30, 2021 and 2020 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~~July 1, 2020, excluding those communities, units and clinics tothat have been or will be transitioned or closed ~~in 2021~~ per the Strategic ~~Plan)~~Plan as well as the four leased communities where the leases were terminated on September 30, 2021):


		Three Months Ended March 31,						Increase/(Decrease)						Three Months Ended September 30,						Increase/(Decrease)
		2021(3)			2020(3)			Amount			Percent			2021 (4)			2020 (4)			Amount		Percent
REVENUES	REVENUES												REVENUES
Rehabilitation and wellness services	Rehabilitation and wellness services	$	12,813		$	12,788		$	25		0.2	%	Rehabilitation and wellness services	$	13,294		$	14,664		$	(1,370)	(9.3)	%
Senior living	Senior living	17,057			20,330			(3,273)			(16.1)	%	Senior living	14,829			16,457			(1,628)		(9.9)	%
Management fees	Management fees	8,580			9,629			(1,049)			(10.9)	%	Management fees	8,510			9,035			(525)		(5.8)	%
Other operating income		7,793			—			7,793			n/m

OPERATING EXPENSES	OPERATING EXPENSES												OPERATING EXPENSES
Rehabilitation and wellness services expenses	Rehabilitation and wellness services expenses	11,093			11,649			(556)			(4.8)	%	Rehabilitation and wellness services expenses	11,907			12,131			(224)		(1.8)	%
Senior living wages and benefits	Senior living wages and benefits	12,013			9,509			2,504			26.3	%	Senior living wages and benefits	7,768			9,914			(2,146)		(21.6)	%
Other senior living operating expenses	Other senior living operating expenses	6,266			1,542			4,724			306.4	%	Other senior living operating expenses	5,763			5,976			(213)		(3.6)	%

Owned and leased communities:
Owned communities:													Owned communities:
Number of communities (end of period)	Number of communities (end of period)	24			24			—			—	%	Number of communities (end of period)	20			20			—		—	%
Number of living units (end of period) (1)	Number of living units (end of period) (1)	2,302			2,312			(10)			(0.4)	%	Number of living units (end of period) (1)	2,099			2,108			(9)		(0.4)	%
Spot occupancy at March 31,		68.2		%	80.3		%	(12.1)		%	n/m
Month end occupancy at September 30,													Month end occupancy at September 30,	72.9		%	73.7		%	(80 bps)		(1.1)	%
Average occupancy	Average occupancy	68.3		%	81.3		%	(13.0)		%	n/m		Average occupancy	70.4		%	75.1		%	(470 bps)		(6.3)	%
RevPAR (2)	RevPAR (2)	$	2,479		$	2,930		(451)			(15.4)	%	RevPAR (2)	$	2,354		$	2,602		$	(248)	(9.5)	%
RevPOR (3)													RevPOR (3)	$	3,270		$	3,388		$	(118)	(3.5)	%

Managed communities:	Managed communities:												Managed communities:
Number of communities (end of period)	Number of communities (end of period)	120			120			—			—	%	Number of communities (end of period)	120			120			—		—	%
Number of living units (end of period) (1)	Number of living units (end of period) (1)	17,906			17,932			(26)			(0.1)	%	Number of living units (end of period) (1)	17,899			17,929			(30)		(0.2)	%
Spot occupancy at March 31,		73.2		%	85.6		%	(12.4)		%	n/m
Month end occupancy at September 30,													Month end occupancy at September 30,	74.6		%	77.0		%	(240 bps)		(3.1)	%
Average occupancy	Average occupancy	72.7		%	86.0		%	(13.3)		%	n/m		Average occupancy	73.4		%	78.5		%	(510 bps)		(6.5)	%
RevPAR (2)	RevPAR (2)	$	2,946		$	3,471		(525)			(15.1)	%	RevPAR (2)	$	2,941		$	3,139		$	(198)	(6.3)	%
RevPOR (3)													RevPOR (3)	$	3,922		$	3,942		$	(20)	(0.5)	%

Rehabilitation and wellness services:	Rehabilitation and wellness services:												Rehabilitation and wellness services:
Average revenue per outpatient clinic													Average revenue per outpatient clinic	$	65		$	72		$	(7)	(9.7)	%
Number of visits at outpatient clinics													Number of visits at outpatient clinics	141			150			(9)		(6.0)	%
Number of inpatient clinics (end of period)	Number of inpatient clinics (end of period)	—			—			—			—	%	Number of inpatient clinics (end of period)	—			—			—		—	%
Number of outpatient clinics (end of period)	Number of outpatient clinics (end of period)	184			184			—			—	%	Number of outpatient clinics (end of period)	199			199			—		—	%
Total clinics	Total clinics	184			184			—			—	%	Total clinics	199			199			—		—	%

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. Amounts for the three months ended ~~March 31,~~September 30, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.

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

(4)The three months ended ~~March 31,~~September 30, 2021 and 2020 include data for 2420 owned ~~and leased~~ senior living communities, 120 managed senior living communities and ~~184~~199 rehabilitation clinics that we have continuously owned ~~continuously leased~~ or ~~continuously~~ managed since ~~January~~July 1, 2020. Per the Strategic Plan the summary of operations for comparable communities and clinics excludes (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 in 2021; of which 69 senior living communities with approximately 4,800 living units were transitioned to new operators in the three months ended September 30, 2021, (ii) ~~approximately 1,500 skilled nursing facility~~1,532 SNF units ~~that are expected to be closed and repositioned~~ in 27 CCRCs that were closed during the six months ended September 30, 2021 and are in the process of being repositioned that we will continue to manage for DHC and (iii) 3727 Ageility inpatient rehabilitation clinics ~~operating in certain transitioning communities,~~that were closed during the six months ended September 30, 2021 and an additional ten Ageility inpatient rehabilitation clinics that are expected to be closed. In addition, the ~~landlord of the~~comparable communities also excludes all four leased communities ~~included in~~with approximately 200 living units where the ~~24 owned and~~leases were terminated on September 30, 2021, including one leased ~~senior~~community with 51 living ~~communities data above is currently marketing these properties for sale and it is unlikely~~units that ~~we will operate these four communities long-term.~~

~~Item 2. Management’s Discussion and Analysis~~has been out of ~~Financial Condition and Results of Operations~~service due to a fire on April 4, 2021.

~~Three Months Ended March 31, 2021, Compared to Three Months Ended March 31, 2020~~

The following is a discussion of our operating results for the three months ended ~~March 31,~~September 30, 2021 compared to the three months ended ~~March 31,~~September 30, 2020.

Rehabilitation and wellness services. The decrease in rehabilitation and wellness services ~~revenues~~revenue is primarily due to ~~a significant reduction~~the closure of 27 inpatient ~~clinic visits~~clinics as well as disruptions due to employee turnover as a result of the ~~Pandemic,~~vaccination mandate, with a decrease in inpatient revenues of $4.5 million and outpatient revenues of $1.4 million. The reduction of inpatient revenue is primarily associated with the closure of 27 inpatient clinics during the three months ended June 30, 2021 in accordance with the Strategic Plan. Our fitness services continued to expand during the quarter and partially offset by the ~~growth~~declines from our inpatient closures with an increase in revenue of ~~our business, including realizing~~$0.2 million from these services. We also realized the full quarter impact of 1711 net new outpatient rehabilitation clinics opened during the ~~year~~six months ended ~~December 31, 2020,~~June 30, 2021, as well as opening 8five net new outpatient rehabilitation clinics during the three months ended ~~March 31,~~September 30, 2021. ~~There was a slight increase~~The decrease in rehabilitation and wellness services revenues at our comparable ~~clinics.~~clinics is due to a decrease in outpatient visits in the 2021 period.

Senior living revenues. The decrease in senior living revenues ~~and~~is primarily due to the decline in average occupancy from 74.7% for the three months ended September 30, 2020 to 69.9% for the three months ended September 30, 2021 caused by the Pandemic as move-out rates exceeded move-in rates. The decline in demand was due to the marketplace reluctance to relocate to senior living communities during the Pandemic. In addition, one of our leased communities was out of service due to a fire on April 4, 2021 which resulted in a decline in revenue attributable to that community of $0.4 million. The decrease in senior living revenues at our comparable communities are primarily due to the decline in average occupancy from ~~81.3%~~75.1% for the three months ended September 30, 2020 to ~~68.3%~~70.4% for the three months ended September 30, 2021 caused by the Pandemic as move-out rates exceeded move-in rates, resulting from the decline in demand due to the increased scrutiny of COVID-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~~ongoing impacts of the Pandemic ~~which~~and progress made on the Strategic Plan including the transitioning of the management of approximately 4,800 living units to new operators in the three months ended September 30, 2021 and the closure of approximately 1,500 SNF units in the nine months ended September 30, 2021. The ongoing impacts of the Pandemic resulted in a decline in average occupancy in our managed communities from ~~82.6% to 69.5% as well as due to $1.1 million of management fees recognized~~75.2% for the three months ended ~~March 31,~~September 30, 2020 ~~related~~ to 972.2% for the three months ended September 30, 2021. The transitioning of the management of approximately 4,800 living units to new operators resulted in a decrease in management fees of $1.5 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The closure of approximately 1,500 SNF units resulted in a decrease in management fees of $1.3 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. In addition, revenue declines were impacted by the nine senior living communities sold and 7seven senior living communities closed by DHC in 2020 that we previously managed ~~partially offset by an increase in construction~~which reduced management fees ~~we earn on construction projects we manage.~~by $0.6 million from the three months ended September 30, 2020. 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 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 decrease in reimbursed community-level costs incurred on behalf of managed communities was primarily due to the 9nine senior living communities sold and 7seven senior living communities closed in ~~2020.~~2020 and progress made on the Strategic Plan including the transitioning of the management of approximately 4,800 living units to new operators in the three months ended September 30, 2021 and the closure of approximately 1,500 SNF units in the nine months ended September 30, 2021. Additionally, there was an overall reduction in community-level costs incurred at the senior living communities we continue to manage, as other operating expenses such as wages, dietary costs, employee travel and entertainment and professional service fees ~~and other costs that~~ were impacted by continued occupancy declines due to the ~~Pandemic, including wages, dietary costs and~~Pandemic. These reductions were offset, in part, by increases in repairs and maintenance, ~~which offset increases in costs related to our enhanced infectious disease~~marketing, resident activities and ~~prevention protocols related to the Pandemic.~~recruiting.

Other reimbursed expenses. Other reimbursed expenses represent reimbursements that arise from certain centralized services we provide pursuant to ~~the New Management Agreements.~~our management agreements with DHC. The decrease in other reimbursed expenses was due to a ~~reduction~~decrease in expenses that could be reimbursed due to the transition of communities in the ~~centralized services provided as a result~~quarter partially offset by reimbursements related to restructuring expenses in the three months ended September 30, 2021 of ~~reduced headcount support, to meet the needs as a result of continued occupancy declines at our managed communities.~~$0.8 million.

~~Other operating income~~. ~~Other operating income represents funds received and recognized under the Provider Relief Fund of the CARES Act General Fund Distribution.~~

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

Rehabilitation and wellness services expenses. The decrease in rehabilitation and wellness services expenses is primarily due to ~~a reduction~~the closure of ~~labor costs due to reduced visits at our~~27 inpatient clinics in the three months ended June 30, 2021 in accordance with the Strategic Plan as well as employee turnover as a result of the ~~Pandemic,~~vaccination mandate. This was partially offset by the growth of our ~~business, including realizing~~fitness services, home health visits and other expanded outpatient services. We also realized the full quarter impact of 1711 net new outpatient rehabilitation clinics opened during the ~~year~~six months ended ~~December 31, 2020~~June 30, 2021, as well as opening 8five net new outpatient rehabilitation clinics during the three months ended ~~March 31,~~September 30, 2021. The decrease in rehabilitation and wellness services expenses at our comparable communities was due to a ~~reduction of~~decrease in labor costs due to ~~reduced~~decreased outpatient visits ~~as a result of~~during the ~~Pandemic.~~three months ended September 30, 2021 when compared to the same quarter in the prior year.

Senior living wages and benefits. The ~~increase~~decrease in senior living wages and benefits is primarily due to ~~increased~~decreased medical insurance and workers compensation costs that are related to the Pandemic. The ~~increase~~decrease in medical insurance and workers compensation costs have been partially offset by increases in contract labor costs. The decrease in senior living wages and benefits at our comparable communities is primarily due to ~~increased~~decreased medical insurance costs that are related to 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 costs. The ~~increase~~decrease in other senior living operating expenses is primarily due to ~~increased~~a decrease in self-insurance obligations and ~~increased~~decreased costs related to COVID-19 testing supplies, disposable food supplies, infectious disease prevention cleaning, sanitation and labor as a result of the Pandemic. The ~~increase~~decrease in other senior living operating expenses at our comparable communities is primarily due to decreased costs associated with our

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

self-insurance obligations as well as ~~increases~~decreases in costs related to COVID-19 testing supplies, disposable food supplies, infectious disease prevention cleaning, sanitation and labor as a result of Pandemic.

General and administrative. The ~~decrease~~increase in general and administrative expenses was ~~not meaningful.~~primarily due to increases in marketing expenses and professional fees as we focused on growth of our core business to rebound from the Pandemic as well as investments in shared services infrastructure as part of the Evolve phase of our Strategic Plan.

Restructuring expenses.The increase was primarily due to severance and retention costs related to the Strategic Plan.

Depreciation and amortization. The increase in depreciation and amortization is primarily due to amortization expense incurred on our equipment finance lease, which was entered into during the fourth quarter of 2020.

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 due to declines in interest rates during 2021.

Interest and other expense. Interest and other expense consists primarily of deferred financing fees and commitment fees related to our credit facility, ~~and~~ interest on our finance leases and our mortgage note.

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

Loss on termination of leases. Loss on termination of leases for the three months ended September 30, 2021 represents a $3.3 million loss on the lease termination for four communities. These costs include a $3.1 million lease termination fee, the write off of the remaining net assets at the communities including property and equipment and the remaining right of use assets, less the remaining recorded lease liability and the remaining obligation under the insurance deductible for a fire that occurred at one of the four leased communities.

(Provision) benefit for income taxes.For the three months ended September 30, 2021 and 2020, we recognized a benefit for income taxes of $0.2 million and a provision for income taxes of $0.5 million, respectively. The benefit for income taxes for the three months ended September 30, 2021 is related to a decrease to the annual projection for state income taxes. The provision for income taxes for the three months ended September 30, 2020 is related to state income taxes.

Key Statistical Data For the Nine Months Ended September 30, 2021 and 2020:

The following tables present a summary of our operations for the nine months ended September 30, 2021 and 2020 (dollars and visits in thousands, except RevPAR and RevPOR):

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


	Nine Months Ended September 30,						Increase/(Decrease)
	2021 (1)			2020 (1)			Amount		Percent
REVENUES
Rehabilitation and wellness services	$	52,388		$	61,776		$	(9,388)	(15.2)	%
Senior living	49,755			59,112			(9,357)		(15.8)	%
Management fees	37,997			48,058			(10,061)		(20.9)	%
Total management and operating revenues	140,140			168,946			(28,806)		(17.1)	%
Reimbursed community-level costs incurred on behalf of managed communities	585,662			689,903			(104,241)		(15.1)	%
Other reimbursed expenses	27,750			19,003			8,747		46.0	%
Total revenues	753,552			877,852			(124,300)		(14.2)	%

Other operating income	7,795			1,499			6,296		n/m


OPERATING EXPENSES
Rehabilitation and wellness services expenses	45,414			50,361			(4,947)		(9.8)	%
Senior living wages and benefits	30,456			30,633			(177)		(0.6)	%
Other senior living operating expenses	22,418			20,246			2,172		10.7	%
Community-level costs incurred on behalf of managed communities	585,662			689,903			(104,241)		(15.1)	%
General and administrative	66,956			65,051			1,905		2.9	%
Restructuring expenses	16,859			1,412			15,447		n/m
Depreciation and amortization	8,912			8,084			828		10.2	%
Total operating expenses	776,677			865,690			(89,013)		(10.3)	%

Operating (loss) income	(15,330)			13,661			(28,991)		n/m

Interest, dividend and other income	244			625			(381)		(61.0)	%
Interest and other expense	(1,379)			(1,170)			(209)		17.9	%
Unrealized gain (loss) on equity investments	555			(160)			715		n/m
Realized gain on sale of debt and equity investments	193			422			(229)		(54.3)	%
Loss on termination of leases	(3,277)			(22,899)			19,622		(85.7)	%
Income (loss) before income taxes	(18,994)			(9,521)			(9,473)		n/a
Provision for income taxes	(194)			(971)			777		(80.0)	%
Net loss	$	(19,188)		$	(10,492)		$	(8,696)	82.9	%

Owned and leased communities:
Number of communities (end of period)	20			24			(4)		(16.7)	%
Number of living units (end of period)	2,099			2,312			(213)		(9.2)	%
Month end occupancy at September 30,	72.9		%	73.0		%	(10 bps)		(0.1)	%
Average occupancy	68.8		%	78.1		%	(930 bps)		(11.9)	%
RevPAR (2)	$	2,439		$	2,803		$	(364)	(13.0)	%
RevPOR (3)	$	3,509		$	3,538		$	(29)	(0.8)	%

Managed communities:
Number of communities (end of period)	159			239			(80)		(33.5)	%
Number of living units (end of period)	20,669			28,232			(7,563)		(26.8)	%
Month end occupancy at September 30,	73.8		%	74.0		%	(20 bps)		(0.3)	%
Average occupancy	70.3		%	78.9		%	(860 bps)		(10.9)	%
RevPAR (2)	$	3,120		$	3,607		$	(487)	(13.5)	%
RevPOR (3)	$	4,388		$	4,507		$	(119)	(2.6)	%

Rehabilitation and wellness services:
Average revenue per outpatient clinic	$	188		$	195		$	(7)	(3.6)	%
Number of visits at outpatient clinics	452			432			20		4.6	%
Number of inpatient clinics (end of period)	10			40			(30)		(75.0)	%
Number of outpatient clinics (end of period)	223			209			14		6.7	%
Total clinics	233			249			(16)		(6.4)	%

n/m - not meaningful

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 in 2021; of which 69 senior living communities with approximately 4,800 living units were transitioned to new operators during the three months ended September 30, 2021, (ii) 1,532 SNF units in 27 CCRCs that were closed during the nine months ended September 30, 2021 and are in the ~~first~~process of being repositioned that we will continue to manage for DHC and (iii) 27 Ageility inpatient rehabilitation clinics that were closed during the nine months ended September 30, 2021 and an additional ten Ageility inpatient rehabilitation clinics that are expected to be closed. In addition, the summary of operations includes all four leased communities with approximately 200 living units where the leases were terminated on September 30, 2021.

(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 nine months ended September 30, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.

(3) RevPOR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of occupied units for the period, divided by the number of months in the period. Amounts for the nine months ended September 30, 2021 and 2020 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 or managed since January 1, 2020), excluding those communities, units and clinics that have been or will be transitioned or closed per the Strategic Plan as well as all four leased communities where the leases were terminated on September 30, 2021):


	Nine Months Ended September 30,						Increase/(Decrease)
	2021 (4)			2020 (4)			Amount		Percent
REVENUES
Rehabilitation and wellness services	$	38,810		$	39,426		$	(616)	(1.6)	%
Senior living	44,923			51,583			(6,660)		(12.9)	%
Management fees	25,657			27,927			(2,270)		(8.1)	%
Other operating income	6,980			829			6,151		n/m

OPERATING EXPENSES
Rehabilitation and wellness services expenses	34,058			34,375			(317)		(0.9)	%
Senior living wages and benefits	27,764			27,339			425		1.6	%
Other senior living operating expenses	17,237			16,122			1,115		6.9	%

Owned communities:
Number of communities (end of period)	20			20			—		—	%
Number of living units (end of period) (1)	2,099			2,108			(9)		(0.4)	%
Month end occupancy at September 30,	72.9		%	73.7		%	(80 bps)		(1.1)	%
Average occupancy	69.2		%	78.1		%	(890 bps)		(11.4)	%
RevPAR (2)	$	2,377		$	2,718		$	(341)	(12.5)	%
RevPOR (3)	$	3,397		$	3,430		$	(33)	(1.0)	%

Managed communities:
Number of communities (end of period)	120			120			—		—	%
Number of living units (end of period) (1)	17,899			17,929			(30)		(0.2)	%
Month end occupancy at September 30,	74.6		%	77.0		%	(240 bps)		(3.1)	%
Average occupancy	73.0		%	82.4		%	(940 bps)		(11.4)	%
RevPAR (2)	$	2,949		$	2,944		$	5	0.2	%
RevPOR (3)	$	3,996		$	3,523		$	473	13.4	%

Rehabilitation and wellness services:
Average revenue per outpatient clinic	$	208		$	211		$	(3)	(1.4)	%
Number of visits at outpatient clinics	412			406			6		1.5	%
Number of inpatient clinics (end of period)	—			—			—		—	%
Number of outpatient clinics (end of period)	182			182			—		—	%
Total clinics	182			182			—		—	%

n/m - not meaningful

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

(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 nine months ended September 30, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.

(3) RevPOR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of occupied units for the period, divided by the number of months in the period. Amounts for the nine months ended September 30, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.

(4) The nine months ended September 30, 2021 and 2020 include data for 20 owned senior living communities, 120 managed senior living communities and 182 rehabilitation clinics that we have continuously owned or managed since January 1, 2020. Per the Strategic Plan the summary of operations for comparable communities and clinics excludes (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 in 2021; of which 69 senior living communities with approximately 4,800 living units were transitioned to new operators during the three months ended September 30, 2021, (ii) 1,532 SNF units in 27 CCRCs that were closed during the nine months ended September 30, 2021 and are in the process of being repositioned that we will continue to manage for DHC and (iii) 27 Ageility inpatient rehabilitation clinics that were closed in the nine months ended September 30, 2021 and an additional ten Ageility inpatient rehabilitation clinics that are expected to be closed. In addition, the comparable communities also excludes all four leased communities with approximately 200 living units where the leases were terminated on September 30, 2021, including one leased community with 51 living units that has been out of service due to a fire on April 4, 2021.

The following is a discussion of our operating results for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Rehabilitation and wellness services.The decrease in rehabilitation and wellness services revenues is primarily due to a decrease in outpatient revenues of $0.4 million and inpatient revenues of $10.3 million. The reduction of inpatient revenue is primarily associated with the closure of 27 inpatient clinics during the nine months ended September 30, 2021 in accordance with the Strategic Plan. Our fitness services continued to expand during the nine months and offset the declines from our inpatient closures with an increase in revenue of $0.7 million. We also realized the full nine month impact of 17 net new outpatient rehabilitation clinics opened during the year ended December 31, 2020 and the partial period impact of eight net new outpatient rehabilitation clinics opened during the three months ended March 31, 2021, three net new outpatient rehabilitation clinics opened during the three months ended June 30, 2021 and five net new outpatient rehabilitation clinics opened during the three months ended September 30, 2021. There was a decrease in rehabilitation and wellness services revenues at our comparable clinics due to decreased revenue per visit in the current year.

Senior living revenues.The decrease in senior living revenues are primarily due to the decline in average occupancy from 78.1% for the nine months ended September 30, 2020 to 68.8% for the nine months ended September 30, 2021 caused by the Pandemic as move-out rates exceeded move-in rates. The decline in demand was due to the marketplace reluctance to relocate to senior living communities during the Pandemic. In addition, one of our leased communities was out of service due to a fire on April 4, 2021, which resulted in a decline in revenue attributable to that community of $0.9 million. The decrease in senior living revenues at our comparable communities are primarily due to the decline in average occupancy from 78.1% for the nine months ended September 30, 2020 to 69.2% for the nine months ended September 30, 2021 caused by 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 ongoing impacts of the Pandemic and progress made on the Strategic Plan including the transitioning of the management of approximately 4,800 living units to new operators in the nine months ended September 30, 2021 and the closure of approximately 1,500 SNF units in the nine months ended September 30, 2021. The ongoing impacts of the Pandemic resulted in a decline in average occupancy in our managed communities from 78.9% for the nine months ended September 30, 2020 to 70.3% for the nine months ended September 30, 2021. The transitioning of the management of approximately 4,800 living units to new operators resulted in a decrease in management fees of $1.5 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The closure of approximately 1,500 SNF units resulted in a decrease in management fees of $2.2 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. In addition, revenue declines were impacted by the nine senior living communities sold and seven senior living communities closed by DHC in 2020 that we previously managed which reduced management fees by $2.3 million from the nine months ended September 30, 2020. 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 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 decrease in reimbursed community-level costs incurred on behalf of managed communities was primarily due to the nine senior living communities sold and seven senior living communities closed in 2020 and progress made on the Strategic Plan including the transitioning of the management of approximately 4,800 living units to new operators in the nine months ended September 30, 2021 and the closure of approximately 1,500 SNF units in the nine months ended September 30, 2021. Additionally, there was an overall reduction in community-level costs incurred at the senior living communities we continue to manage as other operating expenses such as wages and dietary costs were impacted by continued occupancy declines due to the Pandemic. These reductions were offset, in part, by increases in repairs and maintenance, marketing, resident activities and health insurance.

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

Other reimbursed expenses. Other reimbursed expenses represent reimbursements that arise from certain centralized services we provide pursuant to our management agreements with DHC. The increase in other reimbursed expenses was due to reimbursements related to restructuring expenses in the nine months ended September 30, 2021 of $12.3 million which was partially offset by a decrease in expenses that are reimbursable.

Other operating income. Other operating income represents funds received and recognized under the Provider Relief Fund of the CARES Act General Fund Distribution.

Rehabilitation and wellness services expenses.The decrease in rehabilitation and wellness services expenses is primarily due to the closure of 27 inpatient clinics in the nine months ended September 30, 2021 in accordance with the Strategic Plan. This was partially offset by the growth of fitness services, home health visits and other expanded outpatient services. We also realized the full nine month impact of 17 net new outpatient rehabilitation clinics opened during the year ended December 31, 2020 and the partial period impact of eight net new outpatient rehabilitation clinics opened during the three months ended March 31, 2021, three net new outpatient rehabilitation clinics opened during the three months ended June 30, 2021 and five net new outpatient rehabilitation clinics opened during the three months ended September 30, 2021. The decrease in rehabilitation and wellness services expenses at our comparable communities was due to a decrease in outpatient visits during the nine months ended September 30, 2021.

Senior living wages and benefits.The decrease in senior living wages and benefits is primarily due to decreased costs in the current quarter for medical insurance and workers compensation costs. The increase in senior living wages and benefits at our comparable communities is primarily due to increased labor costs due to market conditions.

Other senior living operating expenses.Other senior living operating expenses are comprised of utilities, housekeeping, dietary, repairs and maintenance, insurance and other community-level costs. The increase in other senior living operating expenses is primarily due to increased self-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 Pandemic. In addition, in 2021, we recognized a $0.9 million long lived asset impairment related to a community that was damaged by a fire. The increase in other senior living operating expenses at our comparable communities is primarily due to costs associated with our self-insurance obligations as well as increases in repairs and maintenance and marketing.

General and administrative.The increase in general and administrative expenses was primarily due to an increase in marketing expenses and professional fees as we focused on growth of our core business to rebound from the Pandemic as well as investments in shared services infrastructure as part of the Evolve phase of our Strategic Plan.

Restructuring expenses.The increase was primarily due to severance and retention costs related to the Strategic Plan.

Depreciation and amortization.The increase in depreciation and amortization is primarily due to amortization expense incurred on our equipment finance lease, which was entered into during the fourth quarter of 2020.

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 due to declines in interest rates during 2021.

Interest and other expense.Interest and other expense consists primarily of deferred financing fees and commitment fees related to our credit facility, interest on our finance leases and our mortgage note.

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 gains and losses on investments.

Loss on termination of leases. Loss on termination of leases for the nine months ended September 30, 2021 represents a $3.3 million loss on the lease termination for four communities. These costs include a $3.1 million lease termination fee, the write off of the remaining net assets at the communities including property and equipment and the remaining right of use assets, less the remaining recorded lease liability and the remaining obligations under the insurance deductible for a fire that occurred at one of the four leased communities. Loss on termination of leases in the nine months ended September 30, 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.

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

Provision for income taxes. For the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020, we recognized a provision for income taxes of $0.2 million and ~~$1.4~~$1.0 million, respectively. The provision for income taxes for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 is related to state income taxes. The provision for income taxes for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 is related to federal income taxes, partially offset by a federal ~~AMT~~alternative minimum tax credit refund benefit and a federal benefit related to lease termination expense, plus state income taxes, including a state valuation allowance.

Liquidity and Capital Resources

We require cash to fund our operating expenses, to make capital expenditures and to service our debt obligations. As of ~~March 31,~~September 30, 2021, we had ~~$109.5~~$80.2 million of unrestricted cash and cash equivalents. As of ~~March 31,~~September 30, 2021, our restricted cash and cash equivalents included ~~$21.6~~$21.5 million of bank term deposits in our captive insurance company.

As of ~~March 31,~~September 30, 2021 and December 31, 2020, we had current assets of ~~$270.9~~$185.2 million and $262.3 million, respectively, and current liabilities of ~~$179.1~~$122.4 million and $177.9 million, respectively.

On January 1, 2020, in connection with the 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. DHC provided to us $75.0 million by assuming certain of our working capital liabilities and through cash payments as consideration for the Share Issuances.

The following table presents selected data on our continuing operations from our condensed consolidated statements of cash flows for the periods presented (dollars in thousands):


		Three Months Ended March 31,									Nine Months Ended September 30,
Net cash provided by (used in)	Net cash provided by (used in)	2021		2020		$ Change		% Change		Net cash provided by (used in)	2021		2020		$ Change		% Change
Operating Activities	Operating Activities	$	26,826	$	5,467	$	21,359	390.7	%	Operating Activities	$	1,800	$	62,040	$	(60,240)	(97.1)	%
Investing Activities	Investing Activities	(1,929)		577		(2,506)		(434.3)	%	Investing Activities	(5,546)		2,270		(7,816)		(344.3)	%
Financing Activities	Financing Activities	(103)		(654)		551		(84.3)	%	Financing Activities	(911)		(847)		(64)		7.6	%
Increase in cash and cash equivalents and restricted cash and cash equivalents		24,794		5,390		19,404		360.0	%
(Decrease) increase in cash and cash equivalents and restricted cash and cash equivalents										(Decrease) increase in cash and cash equivalents and restricted cash and cash equivalents	(4,657)		63,463		(68,120)		(107.3)	%
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period	Cash and cash equivalents and restricted cash and cash equivalents at beginning of period	109,597		56,979		52,618		92.3	%	Cash and cash equivalents and restricted cash and cash equivalents at beginning of period	109,597		56,979		52,618		92.3	%
Cash and cash equivalents and restricted cash and cash equivalents at end of period	Cash and cash equivalents and restricted cash and cash equivalents at end of period	$	134,391	$	62,369	$	72,022	115.5	%	Cash and cash equivalents and restricted cash and cash equivalents at end of period	$	104,940	$	120,442	$	(15,502)	(12.9)	%

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

Operating Activities

The ~~increase~~decrease in cash flows provided by operating activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 compared to the same period in 2020 is primarily due to ~~an increase~~a decrease in ~~net income for~~cash flows due to a change in accrued compensation and benefits of $64.6 million, a change in accrued expenses and other current liabilities of $56.5 million and a reduction in the ~~period, which included $7.8 million received and recognized under the CARES Act as other operating income, and~~change in accounts receivable of $24.1 million. This was partially offset by reduction of cash flows due to change in amounts due from related person of ~~$25.5~~$117.4 million, ~~partially offset by reduction~~the change from net income to a net loss for the 2021 period and $6.3 million in ~~change~~funds received during the 2021 period under the CARES Act. As a result of transitioning the management of certain communities in connection with the Strategic Plan, we will see reductions in accounts receivable, ~~of $23.5 million.~~accrued payroll and accrued expenses previously recognized while managing those communities.

Investing Activities

~~The increase in cash~~Cash flows used in investing activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2021, increased as compared to the same period in 2020 is primarily due to increased investments of property and equipment of $3.2 million for owned communities and shared services infrastructure as part of the Evolve phase of the Strategic Plan and a decrease in proceeds from the sale of property and equipment to DHC of $2.7 million.

Financing Activities

The ~~decrease~~decline in net cash used in financing activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2021, compared to the same period in 2020 is primarily due to ~~$0.6 million~~repayments of finance lease principal in ~~fees paid~~the current period partially offset by costs incurred in 2020 ~~period~~related to the issuance of common stock in ~~connection with~~ the ~~Share Issuances.~~prior year period.

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

Capital Expenditures

During the ~~three~~nine months ended ~~March 31,~~September 30, 2021, we invested ~~$2.0~~$7.1 million primarily in our 24 owned ~~and leased~~ senior living communities and rehabilitation and wellness services clinics. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, we invested ~~$1.8~~$3.3 million primarily 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.~~our management agreements with DHC.

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,~~our management agreements with DHC, 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 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 Pandemic on our liquidity. We currently expect to use cash on 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,~~our management agreements with DHC, and fixed debt obligations, as well as investments in diversifying our service offerings to diversify our revenue ~~streams.~~sources. DHC funds the operating and capital expenses for the senior living communities we manage for DHC. 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 Pandemic. A long, protracted and extensive decline in economic ~~recession~~conditions or adverse market conditions in the senior living industry may cause a decline in financing availability and increased costs for financings.

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. We self-insure a large portion of these costs. We also self-insure for auto 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.~~our management agreements with DHC. Further, our health insurance and workers compensation costs have increased as a result of the Pandemic, as well as team members now pursuing elective procedures that had been deferred or they were not able to obtain during the Pandemic. These increased costs may continue in the future. We also 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~~leased had a fire which has caused extensive damage and the residents of the community to be relocated. ~~The Company has~~We have insurance on this community with a deductible of ~~$1 million, which is expected~~$1.0 million. Insurance proceeds received for property damages to ~~be incurred related~~the previously leased community caused by the fire were subsequently transferred to ~~this community.~~PEAK.

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

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

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 Facility ~~currently~~ matures ~~in June 2021, however~~ on ~~March 16, 2021, we exercised our option to extend the Credit Facility for one-year, until~~ June 12, ~~2022, subject to payment of the extension fee and satisfaction of other conditions.~~2022. We are required to pay interest on borrowings under our Credit 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, plus 150 basis points per annum. The annual interest rate options as of ~~March 31,~~September 30, 2021 were ~~2.61%~~2.58% 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. No principal repayment is due until maturity.

Our Credit Facility is secured by 11 senior living communities with a combined 1,236 living units owned by certain of our subsidiaries that guarantee our obligations under our Credit Facility. Our Credit Facility is also secured by these senior living communities' accounts receivable and related collateral. The amount of available borrowings under our Credit 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. Our Credit Facility provides for acceleration of payment of all amounts outstanding under our Credit Facility upon the occurrence and continuation of certain events of default, including a change of

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

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 ~~March 31,~~September 30, 2021, we had ~~seven~~six irrevocable standby letters of credit outstanding, totaling ~~$29.3~~$27.6 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~~$21.5 million of cash equivalents and ~~$7.7~~$5.7 million of debt and equity investments. This letter of credit expires in June ~~2021~~2022 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,~~September 30, 2021, the cash equivalents collateralizing this letter of credit are 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 ~~six~~five irrevocable standby letters of credit outstanding at ~~March 31,~~September 30, 2021, totaling ~~$2.4~~$0.8 million, which are issued under the credit facility, secure certain of our other obligations. AsThe termination of ~~May 5, 2021, these~~leases on our four leased communities resulted in our outstanding letters of credit ~~are~~being reduced by $0.7 million in October 2021. The remaining letter of credit is scheduled to mature ~~between~~in June ~~2021~~2022 and ~~September 2021 and are~~is required to be renewed annually.

We also have a mortgage note as of ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2021.

As of ~~March 31,~~September 30, 2021, we had no borrowings outstanding under our Credit Facility, ~~and $2.4~~$0.8 million in letters of credit issued under our Credit Facility, ~~and $14.9~~$26.5 million available for borrowing under our Credit Facility, and ~~$7.1~~$6.9 million outstanding on the mortgage note. As of ~~March 31,~~September 30, 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 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 2021 Annual Meeting of Stockholders and our other filings with the SEC. In addition, see the section captioned "Risk Factors" in our Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.

~~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.

3245

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 ~~March 31,~~September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3346

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 duration ~~severity~~ and ~~geographic reach~~severity of the Pandemic, and its impact on our and DHC's business, results, operations and liquidity, and the impact of the Pandemic on the senior living industry in general,

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

•The execution of the Strategic Plan and our expectations regarding the related timing, costs, savings and benefits,

•Our expectations for the operation and performance of the business following implementation of the Strategic Plan,

•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 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,~~Strategic Plan, 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 ~~centers,~~services,

•Our expectations of the types of services seniors will demand and 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, and

•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~~

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

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

control. 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, delays in supply chain and price inflation,

•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,

•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,

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

•Acts of terrorism, outbreaks of so-called pandemics or other human-made or natural disasters beyond our control, and

•The effects of the implementation of ~~our~~the 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~~deliver senior living ~~communities~~management 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 or other owners for additional senior living ~~communities that DHC owns or may acquire in the future.~~communities. However, we cannot be sure that we will enter into any additional management arrangements, ~~with DHC,~~

•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 team member turnover 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~~the 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~~remaining 12 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~~successfully reposition the ~~27 skilled nursing~~1,532 SNF units that have been closed to other types of units,

◦We may not be able to close the ten remaining Ageility inpatient rehabilitation clinics operating in ~~our CCRCs that we will continue to manage for DHC,~~some transitioning communities, 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~~We cannot be sure that the terms of our new management arrangements with DHC will achieve the ~~changes~~anticipated benefit on our operating results,

•Our expectation that our rehabilitation and wellness services segment will grow may not be realized or any growth it does achieve may not be profitable or produce the benefits we expect,

•The out performance of our Retained Portfolio realized for the quarter ending September 30, 2021 compared to the ~~management arrangements described~~total DHC managed portfolio for that period may not be achieved 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,future periods,

•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 customers or 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 business,

•Customers who pay for our services with their private resources may become unable to afford our services, resulting in 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 customers are still experiencing budgetary constraints and may lower the Medicare, Medicaid and other rates they pay 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 efforts to mitigate the continued effects of the Pandemic may not be sufficient,

•We expect that the Pandemic ~~will~~may 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 Pandemic, coupled with general market conditions prior to the Pandemic,

•We may be unable to repay or refinance our debt obligations when they become due,

•At ~~March 31,~~September 30, 2021, we had ~~$109.5~~$80.2 million of unrestricted cash and cash equivalents. As of ~~March 31,~~September 30, 2021, we had no borrowings under our Credit Facility, letters of credit issued under the Credit Facility in an aggregate amount of ~~$2.4~~$0.8 million and ~~$14.9~~$26.5 million available for borrowing under our 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 the most recent, and in prior periods, and we 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~~ Pandemic ~~and resulting economic conditions~~ has adversely impacted usour business and ~~will likely~~is expected to 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~~the stated interest rate because of other fees and expenses associated with our Credit Facility,

•The amount of available borrowings under our Credit 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. Accordingly, the available borrowings under our Credit Facility at any time may be less than $65.0 ~~million.~~million as it was as of September 30, 2021. Also, the availability of borrowings under our Credit 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 Pandemic and ~~the current~~ economic conditions, may significantly limit our access 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 have entered into, or may enter into, may not be satisfied and our applicable acquisitions or sales, and any related management arrangements we may expect to enter into or exit, 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 senior living communities that we own, lease or manage, that we, our landlord or DHC may seek to sell, on acceptable terms or we may incur losses in connection with any such sales,

•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~~management 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.

Currently, unexpected results could occur due to many different circumstances, some of which are beyond our control, such as acts of terrorism, natural disasters, global climate change, pandemics, epidemics and other widespread illnesses, including the COVID-19 pandemic, 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.

3751

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, 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 this Quarterly Report on Form 10-Q, 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.

We ~~intend to pursue the Strategic Plan, but we~~ may be unable to implement itthe Strategic Plan 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~~we and DHC amended our management arrangements ~~with DHC~~ to facilitate the transition of 108 senior living communities that we ~~currently manage~~managed for DHC to new operators, ~~(ii) close~~ and we intend to (i) reposition 1,532 SNF units that were closed in 27 ~~skilled nursing units in~~CCRCs pursuant to the ~~CCRCs~~Strategic Plan and that we will continue to manage for DHC, ~~(iii)~~(ii) close 37the remaining ten Ageility inpatient rehabilitation clinics in certain transitioning communities and ~~(iv)~~(iii) 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 agreed 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 of the senior living communities to other operators or to reposition ~~or close skilled nursing~~SNF 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 remains subject to various risks, including, among others, the highly competitive nature of the senior living industry; medical advances and health and wellness services that allow some potential residents to defer the time when they require the services available at our senior living communities; significant regulatory requirements imposed on our business; and other factors. Many of these factors are beyond our control. In addition, the costs of implementing the Strategic 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, even 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 an adverse impact on our business and financial results.

In connection with the Strategic Plan, through September 30, 2021, we have eliminated approximately 1,200 staff and management positions. When completed, we intend to eliminate approximately ~~150,~~140, or ~~38.5%~~35.9% of the positions in our corporate, regional and divisional teams and approximately ~~1,180,~~1,200, or ~~8.3%~~8.6%, of the positions in our communities and clinics. This reduction in force may result in the loss 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 may not comply with accounting, legal and regulatory requirements and may not be able to pursue 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.

The substantial majority of the senior living communities that we operate are owned by DHC and our business is substantially dependent on our relationship with DHC.

Our business is substantially dependent upon our continued relationship with DHC. Of the ~~252~~179 senior living communities we ~~currently operate, 228~~operated at September 30, 2021, 159 are owned by ~~DHC, and we manage all of those senior living communities pursuant to the New Management Agreements.~~DHC. In connection with the Strategic Plan, we ~~intend~~and DHC amended our management agreements to ~~among other things, amend~~facilitate the ~~New Management Agreements to~~ transition of 108 senior living communities that we ~~currently manage~~managed for DHC to new operators and ~~close~~we closed, and ~~reposition 27 skilled nursing~~are in the process of, repositioning approximately 1,500 SNF units in ~~the~~27 CCRCs that we will continue to manage for DHC. The transition of management of 108 senior living communities that we ~~currently manage~~managed for DHC to other operators as well as the closing and repositioning of the ~~skilled nursing~~SNF units will result in lower operating revenues and may have 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 expect to transition to new operators, have 4445 Ageility outpatient rehabilitation clinics, of which 29 clinics were within communities that had transitioned to a new operator as of September 30, 2021 and that we will continue to operate. The remaining 16 clinics, due to the transfer of the communities to a new ~~operator~~operators, may be subject to ~~closure.~~closure by the new operator.

DHC may terminate ~~the New Management Agreements~~our management agreements in certain circumstances, including if the EBITDA we generate at our managed senior living communities does not exceed target levels or for our uncured material breach. The loss of ~~the New Management Agreements~~our 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 sure that we will enter into the these amendments, or that we will realize the benefits we expect from these amendments if we 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,~~September 30, 2021:


Calendar Month	Calendar Month	Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs		Calendar Month	Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 2021		10	$	8.15	—	$	—
September 2021								September 2021	70	$	4.38	—	$	—
Total	Total	10	$	8.15	—	$	—	Total	70	$	4.38	—	$	—

(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 connection 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 close of trading on Nasdaq on the purchase date.

Item 6. Exhibits

Incorporated by Reference
Exhibit
Number
Description Form Exhibit Number File Number Filing Date Filed
Herewith
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.)
10-Q 3.1 001-16817 11/6/2019
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.)
10-K 3.6 001-16817 3/3/2017
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.)
10-Q 4.1 001-16817 11/6/2019
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.)
8-K 10.1 001-16817 10/6/2016
31.1
Rule 13a-14(a) Certification of Chief Executive Officer. (Filed herewith.)
10-Q 31.1 X

Incorporated by Reference

Exhibit

Number

Description

Form

Exhibit Number

File Number

Filing Date

Filed
Herewith

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.)

10-Q

3.1

001-16817

11/6/2019

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.)

10-K

3.6

001-16817

3/3/2017

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.)

10-Q

4.1

001-16817

11/6/2019

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.)

8-K

10.1

001-16817

10/6/2016

31.1

Rule 13a-14(a) Certification of Chief Executive Officer. (Filed herewith.)

10-Q

31.1

31.2

Rule 13a-14(a) Certification of Chief Financial Officer. (Filed herewith.)

10-Q

31.2

32.1

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. (Furnished herewith.)

10-Q

32.1

3953

Incorporated by Reference
Exhibit
Number
Description Form Exhibit Number File Number Filing Date Filed
Herewith
31.2
Rule 13a-14(a) Certification of Chief Financial Officer. (Filed herewith.)
10-Q 31.2 X
32.1
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. (Furnished herewith.)
10-Q 32.1 X
99.1
Second Amendment to Lease, dated as of February 24, 2021, between ABP Borrower Inc. (as successor to 400 Centre Street LLC) and the Company. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2020).
10-K 99.4 001-16817 2/25/2021
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.
X
101.SCH XBRL Taxonomy Extension Schema Document. (Filed herewith.)
X
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.)
X
101.DEF XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.)
X
101.LAB XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.)
X
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.)
X
104 Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).
X

Incorporated by Reference

Exhibit

Number

Description

Form

Exhibit Number

File Number

Filing Date

Filed
Herewith

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).

4054

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.

			/s/ Katherine E. Potter
			Katherine E. Potter
			President and Chief Executive Officer
			(Principal Executive Officer)
			Dated: ~~May 5,~~November 3, 2021


			/s/ Jeffrey C. Leer
			Jeffrey C. Leer
			Executive Vice President, Chief Financial Officer and Treasurer
			(Principal Financial ~~Officer and Principal Accounting~~ Officer)
			Dated: ~~May 5,~~November 3, 2021


			/s/ Stephen R. Geiger
			Stephen R. Geiger
			Chief Accounting Officer
			(Principal Accounting Officer)
			Dated: November 3, 2021

4155


	March 31, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	109,485	$	84,351
Restricted cash and cash equivalents	23,717		23,877
Accounts receivable, net of allowance of $3,248 and $3,149, respectively	9,558		9,104
Due from related person	86,204		96,357
Debt and equity investments, of which $10,965 and $11,125 are restricted, respectively	19,528		19,961
Prepaid expenses and other current assets	22,376		28,658
Total current assets	270,868		262,308

Property and equipment, net	158,716		159,251
Operating lease right-of-use assets	27,040		18,030
Finance lease right-of-use assets	4,160		4,493
Restricted cash and cash equivalents	1,189		1,369
Restricted debt and equity investments	4,945		4,788
Equity investment of an investee, net	11		11
Other long-term assets	4,201		3,956
Total assets	$	471,130	$	454,206

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:

Accounts payable	$	24,401	$	23,454
Accrued expenses and other current liabilities	45,190		41,843
Accrued compensation and benefits	73,675		70,543
Accrued self-insurance obligations	28,155		31,355
Operating lease liabilities	2,230		2,567
Finance lease liabilities	824		808
Due to related persons	3,859		6,585
Mortgage note payable	394		388
Security deposits and current portion of continuing care contracts	338		365
Total current liabilities	179,066		177,908

Long-term liabilities:
Accrued self-insurance obligations	41,098		37,420
Operating lease liabilities	26,472		17,104
Finance lease liabilities	3,710		3,921
Mortgage note payable	6,682		6,783

Other long-term liabilities	474		538
Total long-term liabilities	78,436		65,766

Commitments and contingencies	0		0

Shareholders’ equity:
Common stock, par value $0.01: 75,000,000 shares authorized, 31,676,429 and 31,679,207 shares issued and outstanding, respectively	317		317
Additional paid-in-capital	460,113		460,038
Accumulated deficit	(247,824)		(251,139)
Accumulated other comprehensive income	1,022		1,316
Total shareholders’ equity	213,628		210,532
Total liabilities and shareholders' equity	$	471,130	$	454,206


	Three Months Ended March 31, 2021
	Senior Living(1)		Rehabilitation and Wellness Services(2)		Corporate and Other		Total
Revenues	$	249,547	$	19,553	$	0	$	269,100
Other operating income	7,774		19		0		7,793
Operating expenses	237,957		16,338		18,935		273,230
Operating income	19,364		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 taxes	6,585		2,256		(5,326)		3,515
Provision for income taxes	0		0		(200)		(200)
Net income (loss)	$	6,585	$	2,256	$	(5,526)	$	3,315