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 ~~September 30, 2021~~March 31, 2022

☐ 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~~ALERISLIFE 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~~ALR

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 ~~November 1, 2021: 31,750,204.~~April 29, 2022: 32,550,895.

~~FIVE STAR SENIOR LIVING~~ALERISLIFE INC.

FORM 10-Q

~~September 30, 2021~~March 31, 2022

Table of Contents


PART I	Financial Information	Page
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets – ~~September~~ ~~30, 2021~~March 31, 2022 and December 31, ~~2020~~2021	1
	Condensed Consolidated Statements of Operations – Three ~~and~~ Ni ne Months Ended ~~September~~ ~~30,~~March 31, 2022 and 2021 ~~and 2020~~	2
	Condensed Consolidated Statements of Comprehensive (Loss) Income ~~(Loss)~~ – Three ~~and~~ ~~Nine~~Months Ended ~~September~~ ~~30,~~March 31, 2022 and 2021 ~~and 2020~~	3
	Condensed Consolidated Statements of Shareholders' Equity – Three ~~and~~ ~~Nine~~Months Ended ~~September~~ ~~30,~~March 31, 2022 and 2021 ~~and 2020~~	4
	Condensed Consolidated Statements of Cash Flows – ~~Nine~~Three Months Ended ~~September~~ ~~30,~~March 31, 2022 and 2021 ~~and 2020~~	65
	Notes to Condensed Consolidated Financial Statements	76
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2519
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4631
Item 4.	Controls and Procedures	4631
	Warning Concerning Forward-Looking Statements	4732
PART II	Other Information	5236
Item 1.	Legal Proceedings	5236
Item 1A.	Risk Factors	5236

Item 2.5.	~~Unregistered Sales of Equity Securities and Use of Proceeds~~Other Information	5336
Item 6.	Exhibits	5337
	Signatures	5538

References in this Quarterly Report on Form 10-Q to the Company, ~~Five Star,~~AlerisLife, we, us or our include ~~Five Star Senior Living~~AlerisLife Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context indicates otherwise.

This Quarterly Report on Form 10-Q includes our registered trademarks, such as “Five Star Senior Living”, “Bridge to Rediscovery”, "Ageility Physical Therapy Solutions” and "Ageility" which are our property and are protected under applicable intellectual property laws. Our trademark application for "AlerisLife" is currently pending. 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~~AlerisLife Inc.

Condensed Consolidated Balance Sheets

(dollars in thousands, except per share amounts)


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
ASSETS	ASSETS	(unaudited)				ASSETS	(unaudited)
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	80,188	$	84,351	Cash and cash equivalents	$	88,054	$	66,987
Restricted cash and cash equivalents	Restricted cash and cash equivalents	23,615		23,877		Restricted cash and cash equivalents	25,129		24,970
Accounts receivable, net of allowance of $3,709 and $3,149, respectively		8,647		9,104
Accounts receivable, net						Accounts receivable, net	9,414		9,244
Due from related person	Due from related person	33,215		96,357		Due from related person	48,717		41,664
Debt and equity investments, of which $8,689 and $11,125 are restricted, respectively		19,498		19,961
Debt and equity investments, of which $7,062 and $7,609 are restricted, respectively						Debt and equity investments, of which $7,062 and $7,609 are restricted, respectively	17,835		19,535
Prepaid expenses and other current assets	Prepaid expenses and other current assets	19,990		28,658		Prepaid expenses and other current assets	22,479		24,433
Total current assets	Total current assets	185,153		262,308		Total current assets	211,628		186,833

Property and equipment, net	Property and equipment, net	157,028		159,251		Property and equipment, net	160,170		159,843
Operating lease right-of-use assets	Operating lease right-of-use assets	9,452		18,030		Operating lease right-of-use assets	6,123		9,197
Finance lease right-of-use assets	Finance lease right-of-use assets	3,698		4,493		Finance lease right-of-use assets	3,236		3,467
Restricted cash and cash equivalents	Restricted cash and cash equivalents	1,137		1,369		Restricted cash and cash equivalents	995		982
Restricted debt and equity investments	Restricted debt and equity investments	3,841		4,788		Restricted debt and equity investments	3,635		3,873
Equity investment of an investee, net		11		11

Other long-term assets	Other long-term assets	10,119		3,956		Other long-term assets	10,683		12,082
Total assets	Total assets	$	370,439	$	454,206	Total assets	$	396,470	$	376,277

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:

Accounts payable	Accounts payable	$	16,440	$	23,454	Accounts payable	$	11,868	$	37,516
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	32,000		41,843		Accrued expenses and other current liabilities	36,830		31,488
Accrued compensation and benefits	Accrued compensation and benefits	38,072		70,543		Accrued compensation and benefits	31,087		34,295
Accrued self-insurance obligations	Accrued self-insurance obligations	30,461		31,355		Accrued self-insurance obligations	28,950		31,739
Operating lease liabilities	Operating lease liabilities	417		2,567		Operating lease liabilities	476		699
Finance lease liabilities	Finance lease liabilities	856		808		Finance lease liabilities	889		872
Due to related persons	Due to related persons	3,413		6,585		Due to related persons	4,332		3,879
Mortgage note payable		409		388
Security deposits and current portion of continuing care contracts		303		365
Current portion of debt						Current portion of debt	422		419
Total current liabilities	Total current liabilities	122,371		177,908		Total current liabilities	114,854		140,907

Long-term liabilities:	Long-term liabilities:					Long-term liabilities:
Accrued self-insurance obligations	Accrued self-insurance obligations	36,664		37,420		Accrued self-insurance obligations	34,050		34,744
Operating lease liabilities	Operating lease liabilities	9,552		17,104		Operating lease liabilities	6,190		9,366
Finance lease liabilities	Finance lease liabilities	3,274		3,921		Finance lease liabilities	2,821		3,050
Mortgage note payable		6,473		6,783
Long-term debt						Long-term debt	66,770		6,364
Other long-term liabilities	Other long-term liabilities	338		538		Other long-term liabilities	247		256
Total long-term liabilities	Total long-term liabilities	56,301		65,766		Total long-term liabilities	110,078		53,780

Commitments and contingencies	Commitments and contingencies	0		0		Commitments and contingencies	0		0

Shareholders’ equity:	Shareholders’ equity:					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
Common stock, par value $0.01: 75,000,000 shares authorized, 32,550,895 and 32,662,649 shares issued and outstanding, respectively						Common stock, par value $0.01: 75,000,000 shares authorized, 32,550,895 and 32,662,649 shares issued and outstanding, respectively	326		327
Additional paid-in-capital	Additional paid-in-capital	460,798		460,038		Additional paid-in-capital	461,468		461,298
Accumulated deficit	Accumulated deficit	(270,330)		(251,139)		Accumulated deficit	(290,794)		(281,064)
Accumulated other comprehensive income	Accumulated other comprehensive income	981		1,316		Accumulated other comprehensive income	538		1,029
Total shareholders’ equity	Total shareholders’ equity	191,767		210,532		Total shareholders’ equity	171,538		181,590
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	370,439	$	454,206	Total liabilities and shareholders' equity	$	396,470	$	376,277

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

~~Five Star Senior Living~~AlerisLife Inc.

Condensed Consolidated Statements of Operations

(amounts in thousands, except per share amounts)

(unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
REVENUES
Rehabilitation and wellness services $ 15,382 $ 21,124 $ 52,388 $ 61,776
Senior living 16,320 18,525 49,755 59,112
Management fees 11,220 15,302 37,997 48,058
Total management and operating revenues 42,922 54,951 140,140 168,946
Reimbursed community-level costs incurred on behalf of managed communities 177,231 233,783 585,662 689,903
Other reimbursed expenses 5,678 6,589 27,750 19,003
Total revenues 225,831 295,323 753,552 877,852
Other operating income — — 7,795 1,499
OPERATING EXPENSES
Rehabilitation and wellness services expenses 13,536 16,716 45,414 50,361
Senior living wages and benefits 8,547 11,128 30,456 30,633
Other senior living operating expenses 7,184 7,407 22,418 20,246
Community-level costs incurred on behalf of managed communities 177,231 233,783 585,662 689,903
General and administrative 21,817 19,774 66,956 65,051
Restructuring expenses 1,220 142 16,859 1,412
Depreciation and amortization 2,983 2,680 8,912 8,084
Total operating expenses 232,518 291,630 776,677 865,690
Operating (loss) income (6,687) 3,693 (15,330) 13,661
Interest, dividend and other income 84 104 244 625
Interest and other expense (507) (379) (1,379) (1,170)
Unrealized gain (loss) on equity investments 22 435 555 (160)
Realized gain on sale of debt and equity investments — 327 193 422
Loss on termination of leases (3,277) — (3,277) (22,899)
Income (loss) before income taxes (10,365) 4,180 (18,994) (9,521)
(Provision) benefit for income taxes 164 (465) (194) (971)
Net (loss) income $ (10,201) $ 3,715 $ (19,188) $ (10,492)
Weighted average shares outstanding—basic 31,618 31,486 31,567 31,465
Weighted average shares outstanding—diluted 31,618 31,563 31,567 31,465
Net (loss) income per share—basic $ (0.32) $ 0.12 $ (0.61) $ (0.33)
Net (loss) income per share—diluted $ (0.32) $ 0.12 $ (0.61) $ (0.33)


	Three Months Ended March 31,
	2022		2021
REVENUES
Lifestyle services	$	14,139	$	19,553
Residential	15,386		17,057
Residential management fees	8,932		13,850
Total management and operating revenues	38,457		50,460
Reimbursed community-level costs incurred on behalf of managed communities	130,936		213,160
Other reimbursed expenses	3,750		5,480
Total revenues	173,143		269,100

Other operating income	42		7,793


OPERATING EXPENSES
Lifestyle services expenses	13,221		16,210
Residential wages and benefits	8,627		12,013
Other residential operating expenses	7,349		6,266
Community-level costs incurred on behalf of managed communities	130,936		213,160
General and administrative	18,192		22,641

Depreciation and amortization	3,163		2,940
Total operating expenses	181,488		273,230

Operating (loss) income	(8,303)		3,663

Interest, dividend and other income	80		84
Interest and other expense	(1,032)		(463)
Unrealized (loss) gain on equity investments	(632)		135
Realized (loss) gain on sale of debt and equity investments	(45)		96
Gain on termination of lease	279		—
(Loss) income before income taxes	(9,653)		3,515
Provision for income taxes	(77)		(200)
Net (loss) income	$	(9,730)	$	3,315

Weighted average shares outstanding—basic	31,787		31,530
Weighted average shares outstanding—diluted	31,787		31,662

Net (loss) income per share—basic	$	(0.31)	$	0.11
Net (loss) income per share—diluted	$	(0.31)	$	0.10

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

~~Five Star Senior Living~~AlerisLife Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income ~~(Loss)~~

(dollars in thousands)

(unaudited)

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)


	Three Months Ended March 31,
	2022		2021
Net (loss) income	$	(9,730)	$	3,315
Other comprehensive (loss) income:
Unrealized loss on debt investments, net of tax of $0	(494)		(294)
Realized loss on debt investments reclassified and included in net (loss) income, net of tax of $0	3		—
Other comprehensive loss	(491)		(294)
Comprehensive (loss) income	$	(10,221)	$	3,021

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

~~Five Star Senior Living~~AlerisLife Inc.

Condensed Consolidated Statements of Shareholders’ Equity

(dollars in thousands)

(unaudited)

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
Balance at January 1, 2021 31,679,207 $ 317 $ 460,038 $ (251,139) $ 1,316 $ 210,532
Comprehensive income (loss):
Net income — — — 3,315 — 3,315
Unrealized loss on debt investments, net of tax — — — — (294) (294)
Total comprehensive income (loss) — — — 3,315 (294) 3,021
Grants under share award plan and share-based compensation — — 76 — — 76
Repurchases and forfeitures under share award plan (2,778) — (1) — — (1)
Balance at March 31, 2021 31,676,429 317 460,113 (247,824) 1,022 213,628
Comprehensive income (loss):
Net loss — — — (12,302) — (12,302)
Unrealized gain on debt investments, net of tax — — — — 44 44
Realized gain on debt investments reclassified and included in net loss, net of tax — — — — (18) (18)
Total comprehensive income (loss) — — — (12,302) 26 (12,276)
Grants under share award plan and share-based compensation 87,500 1 637 — — 638
Repurchases and forfeitures under share award plan (2,801) — (13) (3) — (16)
Balance at June 30, 2021 31,761,128 318 460,737 (260,129) 1,048 201,974
Comprehensive income (loss):
Net loss — — — (10,201) — (10,201)
Unrealized (loss) on debt investments, net of tax — — — — (67) (67)
Total comprehensive loss — — — (10,201) (67) (10,268)
Grants under share award plan and share-based compensation — — 76 — — 76
Repurchases and forfeitures under share award plan (7,644) — (15) — — (15)
Balance at September 30, 2021 31,753,484 $ 318 $ 460,798 $ (270,330) $ 981 $ 191,767


	Three Months Ended March 31, 2022
	Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Shareholders' Equity
Balance at January 1, 2022	32,662,649	$	327	$	461,298	$	(281,064)	$	1,029	$	181,590

Net loss	—	—		—		(9,730)		—		(9,730)
Unrealized loss on debt investments, net of tax	—	—		—		—		(494)		(494)
Realized loss on debt investments reclassified and included in net loss, net of tax	—	—		—		—		3		3

Grants under share award plan and share-based compensation	—	—		193		—		—		193
Repurchases and forfeitures under share award plan	(111,754)	(1)		(23)		—		—		(24)
Balance at March 31, 2022	32,550,895	$	326	$	461,468	$	(290,794)	$	538	$	171,538


	Three Months Ended March 31, 2021
	Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Shareholders' Equity
Balance at January 1, 2021	31,679,207	$	317	$	460,038	$	(251,139)	$	1,316	$	210,532

Net income	—	—		—		3,315		—		3,315
Unrealized loss on debt investments, net of tax	—	—		—		—		(294)		(294)

Grants under share award plan and share-based compensation	—	—		76		—		—		76
Repurchases and forfeitures under share award plan	(2,778)	—		(1)		—		—		(1)
Balance at March 31, 2021	31,676,429	$	317	$	460,113	$	(247,824)	$	1,022	$	213,628

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

~~Five Star Senior Living~~AlerisLife Inc.

Condensed Consolidated Statements of ~~Shareholders’ Equity~~Cash Flows

(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


	Three Months Ended March 31,
	2022		2021
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income	$	(9,730)	$	3,315
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization	3,163		2,940
Unrealized loss (gain) on equity investments	632		(135)
Realized loss (gain) on sale of debt and equity investments	45		(96)


Share-based compensation	169		75
Provision for losses on accounts receivables	178		260
Other non-cash (income) expense adjustments, net	(111)		157
Changes in assets and liabilities:
Accounts receivable	(348)		(714)
Due from related person	(7,053)		10,153
Prepaid expenses and other current assets	3,190		5,870
Accounts payable	(22,430)		947
Accrued expenses and other current liabilities	5,530		3,332
Accrued compensation and benefits	(3,208)		3,132
Due to related persons	453		(2,726)
Other current and long term liabilities	(3,548)		512
Net cash (used in) provided by operating activities	(33,068)		27,022

CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of property and equipment	(6,403)		(2,136)
Purchases of debt and equity investments	—		(130)


Proceeds from sale of debt and equity investments	667		337
Net cash used in investing activities	(5,736)		(1,929)

CASH FLOW FROM FINANCING ACTIVITIES:

Net proceeds from borrowings	60,364		—
Repayments of borrowings	(109)		(103)
Repayments of finance lease principal	(212)		(196)

Net cash provided by (used in) financing activities	60,043		(299)

Increase in cash and cash equivalents and restricted cash and cash equivalents	21,239		24,794
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period	92,939		109,597
Cash and cash equivalents and restricted cash and cash equivalents at end of period	$	114,178	$	134,391

Reconciliation of cash and cash equivalents and restricted cash and cash equivalents:
Cash and cash equivalents	$	88,054	$	109,485
Current restricted cash and cash equivalents	25,129		23,717
Other restricted cash and cash equivalents	995		1,189
Cash and cash equivalents and restricted cash and cash equivalents at end of period	$	114,178	$	134,391

Supplemental cash flow information:
Interest paid	$	677	$	203

Operating lease payments	256		969
Financing lease interest payments	73		89

Non-cash investing and financing activities:

Change in accrued capital	$	3,391	$	(20)

Right-of-use assets obtained in exchange for operating lease liabilities	(2,958)		9,746

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)~~

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~~AlerisLife Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

1. Basis of Presentation and Organization

General. AlerisLife Inc., collectively with its consolidated subsidiaries, the Company, we, us or our, is a holding company incorporated in Maryland and substantially all of our business is conducted by our 2 segments: (i) our residential segment through our Five Star Senior Living, or Five Star brand and (ii) our lifestyle services segment primarily through our brands Ageility Physical Therapy Solutions and Ageility Fitness, or collectively Ageility, as well as Windsong Home Health. The accompanying condensed consolidated financial statements of ~~Five Star Senior Living Inc. and its subsidiaries~~the Company are unaudited. Certain information and disclosures required by the rules and regulations of the Securities and Exchange Commission, or the 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 ~~September 30, 2021,~~March 31, 2022, through our residential segment, we owned and operated or managed, ~~or operated 179~~140 senior living communities ~~(primarily independent and assisted living communities)~~ located in 2928 states with ~~22,768~~19,999 living units, which include 4 continuing care retirement communities, or CCRCs, with 625 living units which will be transitioned to new operators. As of September 30, 2021, we managed 159 of these senior living communities (20,669 living units) and we owned and operated 20 of these senior living communities (2,099 living units). Our 179 senior living communities, as of September 30, 2021, included 10,628including 10,423 independent living apartments ~~11,856~~and 9,576 assisted living suites, ~~(which~~which includes ~~2,454~~1,861 of our Bridge to Rediscovery memory care ~~units) and 284 skilled nursing facilities, or SNF,~~ units. ~~During the three months ended September 30, 2021 we transitioned the management~~We managed 120 of 69these 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(17,899 living units) ~~previously leased from Healthpeak Properties Inc.,~~for Diversified Healthcare Trust, or ~~PEAK.~~DHC, and owned 20 of these senior living communities (2,100 living units). The foregoing numbers exclude living units categorized as out of service.

Our ~~rehabilitation and wellness~~lifestyle 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 lifestyle services including Ageility rehabilitation ~~personal~~and fitness, Windsong Home Health and ~~wellness~~other home based, concierge services at ~~our~~ senior living communities we own and operate or manage as well as at unaffiliated senior living communities. As of ~~September 30, 2021, we~~March 31, 2022, Ageility operated 10 inpatient rehabilitation ~~and wellness services~~ clinics in senior living communities owned by ~~Diversified Healthcare Trust, or~~ DHC ~~of which 2 of the communities~~that are ~~managed~~not operated by ~~us and 8 of the communities were transitioned to new operators during the three months ended September 30, 2021.~~Five Star. As of ~~September 30, 2021, we~~March 31, 2022, Ageility operated ~~223~~201 outpatient rehabilitation ~~and wellness services~~ clinics, of which ~~122~~106 were located at ~~our managed and owned~~Five Star operated senior living communities and ~~101~~95 were located within senior living communities not ~~owned~~operated by ~~us or managed on behalf of DHC.~~

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

•~~Reposition~~ our senior living management service offering to focus on larger independent living and assisted living as well as 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 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.

~~During the nine months ended September 30, 2021, we made the following progress with respect to the Reposition phase of the Strategic 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,~~

•~~Transitioned the management of 69 senior living communities with approximately 4,800 living units to new operators, all of which occurred during the three months ended September 30, 2021,~~

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 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, and began collaborating with DHC to reposition these SNF units,~~

•~~Closed 27 of the 37 Ageility inpatient rehabilitation clinics we planned to close, and~~

•~~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 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 September 30, 2021. See Note 16 for summary of restructuring expenses and the corresponding liability.

~~See Notes 11, 16 and 17 for more information on 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.~~Star.

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,~~and implicit price concessions, 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.~~Report. See ~~summary~~Note 2 to our Consolidated Financial Statements included in Part IV, Item 15 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

AlerisLife Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

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 currently 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 September 30, 2021
Senior Living
Rehabilitation and Wellness Services (3)
Total
Private payer $ 16,032 $ 293 $ 16,325
Medicare and Medicaid programs 288 10,073 10,361
Other third-party payer programs — 5,016 5,016
Management fees 11,220 (1) (2) — 11,220
Reimbursed community-level costs incurred on behalf of managed communities 177,231 (1) (2) — 177,231
Other reimbursed expenses 5,678 (1) (4) — 5,678
Total revenues $ 210,449 $ 15,382 $ 225,831


	Three Months Ended March 31, 2022
	Residential			Lifestyle Services		Total
Private payer	$	15,110		$	94	$	15,204
Medicare and Medicaid programs	253			9,241		9,494
Other third-party payer programs	23			4,804		4,827
Residential management fees	8,932		(1)	—		8,932
Reimbursed community-level costs incurred on behalf of managed communities	130,936		(1)	—		130,936
Other reimbursed expenses	3,750		(1)	—		3,750
Total revenues	$	159,004		$	14,139	$	173,143

(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 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. The management fees we recognized related to these communities and units for the three months ended September 30, 2021 were $2,710. See Notes 1,~~11, 16 and 17 for more information.~~

~~(3)~~ We expect to close an additional 10 Ageility inpatient rehabilitation clinics. Revenue related to these clinics for the three months ended September 30, 2021 was $1,508. See 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 September 30, 2020
Senior Living Rehabilitation and Wellness Services Total
Private payer $ 18,347 $ 1,296 $ 19,643
Medicare and Medicaid programs 178 10,747 10,925
Other third-party payer programs — 9,081 9,081
Management fees 15,302 (1) — 15,302
Reimbursed community-level costs incurred on behalf of managed communities 233,783 (1) — 233,783
Other reimbursed expenses 6,589 (1) — 6,589
Total revenues $ 274,199 $ 21,124 $ 295,323

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


		Nine Months Ended September 30, 2021							Three Months Ended March 31, 2021
		Senior Living			Rehabilitation and Wellness Services(3)		Total				Residential			Lifestyle Services		Total
Private payer	Private payer	$	48,935		$	805	$	49,740		Private payer	$	16,787		$	257	$	17,044
Medicare and Medicaid programs	Medicare and Medicaid programs	820			31,433		32,253			Medicare and Medicaid programs	270			11,549		11,819
Other third-party payer programs	Other third-party payer programs	—			20,150		20,150			Other third-party payer programs	—			7,747		7,747
Management fees		37,997		(1) (2)	—		37,997
Residential management fees										Residential management fees	13,850		(1)	—		13,850
Reimbursed community-level costs incurred on behalf of managed communities	Reimbursed community-level costs incurred on behalf of managed communities	585,662		(1) (2)	—		585,662			Reimbursed community-level costs incurred on behalf of managed communities	213,160		(1)	—		213,160
Other reimbursed expenses	Other reimbursed expenses	27,750		(1) (4)	—		27,750			Other reimbursed expenses	5,480		(1)	—		5,480
Total revenues	Total revenues	$	701,164		$	52,388	$	753,552		Total revenues	$	249,547		$	19,553	$	269,100

(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.~~

107

~~Five Star Senior Living~~AlerisLife 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.~~Act and other government grants. 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 ~~$7,795~~$42 and ~~$1,499~~$7,793 for ~~the nine months ended September 30, 2021 and 2020, respectively, and none in~~ the three months ended ~~September 30,~~March 31, 2022 and 2021, respectively.

The below table provides the funds we received and ~~2020. See Note 15~~income we recognized for ~~more information.~~the three months ended March 31, 2022 and 2021 by program.


	March 31, 2022				March 31, 2021
	Received		Recognized		Received		Recognized
General Distribution Funds


Phase 3	$	—	$	—	$	7,724	$	7,724
State Programs	42		42		69		69

Total	$	42	$	42	$	7,793	$	7,793

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 percentage of ~~total revenue.~~ each community's and clinic's gross revenues. 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 September 30, 2021									Three Months Ended March 31, 2022
		Senior Living (1)		Rehabilitation and Wellness Services (2)		Corporate and Other (3)		Total			Residential		Lifestyle Services		Corporate and Other		Total
Revenues	Revenues	$	210,449	$	15,382	$	—	$	225,831	Revenues	$	159,004	$	14,139	$	—	$	173,143

Other operating income										Other operating income	42		—		—		42
Operating expenses	Operating expenses	200,570		13,349		18,599		232,518		Operating expenses	152,891		13,334		15,263		181,488
Operating income (loss)	Operating income (loss)	9,879		2,033		(18,599)		(6,687)		Operating income (loss)	6,155		805		(15,263)		(8,303)
Allocated corporate and other costs	Allocated corporate and other costs	(10,388)		(770)		11,158		—		Allocated corporate and other costs	(6,190)		(707)		6,897		—
Other (loss) income, net		(3,202)		—		(476)		(3,678)
Other loss, net										Other loss, net	(713)		—		(637)		(1,350)
(Loss) income before income taxes	(Loss) income before income taxes	(3,711)		1,263		(7,917)		(10,365)		(Loss) income before income taxes	(748)		98		(9,003)		(9,653)
Benefit for income taxes		—		—		164		164
Provision for income taxes										Provision for income taxes	—		—		(77)		(77)
Net (loss) income	Net (loss) income	$	(3,711)	$	1,263	$	(7,753)	$	(10,201)	Net (loss) income	$	(748)	$	98	$	(9,080)	$	(9,730)

~~(1)~~ (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 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

118

~~Five Star Senior Living~~AlerisLife 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.


	Three Months Ended March 31, 2021
	Residential		Lifestyle Services		Corporate and Other		Total
Revenues	$	249,547	$	19,553	$	—	$	269,100
Other operating income	7,774		19		—		7,793
Operating expenses	237,957		16,338		18,935		273,230
Operating income (loss)	19,364		3,234		(18,935)		3,663
Allocated corporate and other costs	(12,657)		(978)		13,635		—
Other loss, net	(122)		—		(26)		(148)
Income (loss) before income taxes	6,585		2,256		(5,326)		3,515
Provision for income taxes	—		—		(200)		(200)
Net income (loss)	$	6,585	$	2,256	$	(5,526)	$	3,315

~~(2)~~ ~~We expect to close an additional 10 Ageility inpatient rehabilitation clinics. See Notes 1,~~16 and 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 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. See Notes 1, 11, 16 and 17 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)~~ 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. See Notes 1, 16 and 17 for more information. As more fully described in Note~~16, 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.~~

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

~~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			March 31, 2022		December 31, 2021
Land	Land	$	12,155	$	12,155	Land	$	12,155	$	12,155
Buildings, construction in process and improvements	Buildings, construction in process and improvements	202,897		202,679		Buildings, construction in process and improvements	208,762		207,333
Furniture, fixtures and equipment	Furniture, fixtures and equipment	61,551		60,713		Furniture, fixtures and equipment	64,189		62,606
Property and equipment, at cost	Property and equipment, at cost	276,603		275,547		Property and equipment, at cost	285,106		282,094
Less: accumulated depreciation	Less: accumulated depreciation	(119,575)		(116,296)		Less: accumulated depreciation	(124,936)		(122,251)
Property and equipment, net	Property and equipment, net	$	157,028	$	159,251	Property and equipment, net	$	160,170	$	159,843

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.

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 ~~$2,692~~$2,685 and ~~$2,680~~$2,691 for the three months ended ~~September 30,~~March 31, 2022 and 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.~~

~~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~~Accumulated other comprehensive income ~~(loss), net~~ of ~~tax, for the nine months ended September 30,~~$538 and $1,029 as of March 31, 2022 and December 31, 2021, ~~and 2020:~~

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

Nine Months Ended September 30, 2020
Equity
Investment of an
Investee Investments Accumulated
Other
Comprehensive
Income
Balance at January 1, 2020 $ (175) $ 2,838 $ 2,663
Cumulative effect adjustment to beginning accumulated deficit and accumulated other comprehensive income in connection with a reclassification of equity investments previously classified as debt investments — (1,694) (1,694)
Unrealized gain on debt investments, net of tax — 710 710
Realized gain on debt investments reclassified and included in net income, net of tax — (303) (303)
Balance at September 30, 2020 $ (175) $ 1,551 $ 1,376

~~Accumulated other comprehensive income~~respectively, 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 which dissolved on February 13, 2020.~~tax. The cost of debt investments sold and for which realized gains and losses are reclassified and included in net income (loss) 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.

7. Income Taxes

We recognized a ~~benefit for income taxes of $164 and~~ provision for income taxes of ~~$194 for the three~~$77 and nine months ended 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 benefit for income taxes$200 for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and the provision for income taxes for the nine months ended September 30, 2021 are related to state income taxes.~~respectively. The provision for income taxes for the three months ended ~~September 30, 2020~~March 31, 2022 and 2021 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 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.

~~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.

AlerisLife Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

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 per share (in thousands):


		Three Months Ended September 30,		Nine Months Ended September 30,			Three Months Ended March 31,
		2021	2020	2021	2020		2022	2021
Weighted average shares outstanding—basic	Weighted average shares outstanding—basic	31,618	31,486	31,567	31,465	Weighted average shares outstanding—basic	31,787	31,530
Effect of dilutive securities: unvested share awards	Effect of dilutive securities: unvested share awards	—	77	—	—	Effect of dilutive securities: unvested share awards	—	132
Weighted average shares outstanding—diluted (1)	Weighted average shares outstanding—diluted (1)	31,618	31,563	31,567	31,465	Weighted average shares outstanding—diluted (1)	31,787	31,662

(1) For the three months ended ~~September 30, 2021, 157~~March 31, 2022, 1,017 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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, categorized by the level of input used in the valuation of each asset.


		As of September 30, 2021									As of March 31, 2022
Description	Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		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)	Cash equivalents (1)	$	26,378	$	26,378	$	—	$	—	Cash equivalents (1)	$	49,852	$	49,852	$	—	$	—
Investments:	Investments:									Investments:
Total equity investments (2)	Total equity investments (2)	12,858		6,800		6,058		—		Total equity investments (2)	11,895		6,102		5,793		—

Total debt investments (3)	Total debt investments (3)	10,481		5,789		4,692		—		Total debt investments (3)	9,575		4,338		5,237		—

Total investments	Total investments	23,339		12,589		10,750		—		Total investments	21,470		10,440		11,030		—
Total	Total	$	49,717	$	38,967	$	10,750	$	—	Total	$	71,322	$	60,292	$	11,030	$	—


		As of December 31, 2020									As of December 31, 2021
Description	Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		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)	Cash equivalents (1)	$	26,291	$	26,291	$	—	$	—	Cash equivalents (1)	$	26,417	$	26,417	$	—	$	—
Investments:	Investments:									Investments:
Total equity investments (2)	Total equity investments (2)	12,439		6,465		5,974		—		Total equity investments (2)	13,033		6,980		6,053		—

Total debt investments (3)	Total debt investments (3)	12,310		7,301		5,009		—		Total debt investments (3)	10,375		4,612		5,763		—

Total investments	Total investments	24,749		13,766		10,983		—		Total investments	23,408		11,592		11,816		—
Total	Total	$	51,040	$	40,057	$	10,983	$	—	Total	$	49,825	$	38,009	$	11,816	$	—

_______________________________________

~~Five Star Senior Living Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

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

~~(unaudited)~~

(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 ~~$22,278~~$23,611 and ~~$22,837~~$23,546 of balances that were restricted at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. In addition to the cash equivalents of ~~$26,378~~$49,852 and ~~$26,291~~$26,417 at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively, reflected above, there were cash balances of ~~$76,088~~$61,813 and ~~$80,897~~$64,116 and restricted cash balances of ~~$2,474~~$2,513 and ~~$2,409~~$2,406 at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

(2) The fair value of our equity investments is readily determinable. During the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ we received gross proceeds of ~~$741~~$481 and ~~$3,141,~~$337, respectively, in connection with the sales of equity investments and recorded gross realized gains totaling ~~$175~~$0 and ~~$339,~~$96, respectively, and gross realized losses totaling $0$42 and ~~$219,~~$0, respectively.

(3) As of ~~September 30, 2021,~~March 31, 2022, our debt investments, which are classified as available for sale, had a fair value of ~~$10,481~~$9,575 with an amortized cost of ~~$10,060;~~$9,773; the difference between the fair value and amortized cost amounts resulted from net unrealized losses of $198, inclusive of unrealized gains of ~~$421, net of unrealized losses of $23.~~$51. As of December 31, ~~2020,~~2021, our debt investments had a fair value of ~~$12,310~~$10,375 with an amortized cost of ~~$11,554;~~$10,079; the difference between the fair value and amortized cost amounts resulted from net unrealized gains of ~~$756,~~$296, net of unrealized losses of ~~$4.~~$10. Debt investments include ~~$6,874~~$6,386 and ~~$8,395~~$6,907 of

AlerisLife Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

balances that were restricted as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. At ~~September 30, 2021, 4~~March 31, 2022, 69 debt investments we held, with a fair value of ~~$788,~~$5,055, had been in a loss position for less than 12 months and ~~we did not hold any~~1 of the debt investments we held, with a fair value of $51, had been 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 ~~September 30, 2021,~~March 31, 2022, 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 ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ we received gross proceeds of ~~$1,294~~$204 and ~~$5,938,~~$0, respectively, in connection with the sales of debt investments and recorded gross realized ~~gains totaling $18~~losses of $3 and ~~$302, respectively. There were 0~~ gross realized ~~losses for~~gains of $0 during the ~~nine~~three months ended ~~September 30, 2021 and 2020, respectively.~~March 31, 2022. We record gains and losses on the sales of these investments using the specific identification method.

The amortized cost basis and fair value of available for sale debt securities at ~~September 30, 2021,~~March 31, 2022, 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	$	2,142	$	2,173	Due in one year or less	$	1,398	$	1,407
Due after one year through five years	Due after one year through five years	4,019		4,219		Due after one year through five years	3,743		3,729
Due after five years through ten years	Due after five years through ten years	3,899		4,089		Due after five years through ten years	3,552		3,435

Due after ten years						Due after ten years	1,080		1,004
Total	Total	$	10,060	$	10,481	Total	$	9,773	$	9,575

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 ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, 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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. The carrying value and fair value of our ~~mortgage notes payable were $6,882~~debt was $67,192 and ~~$7,772,~~$67,142, respectively, as of ~~September 30, 2021~~March 31, 2022 and ~~$7,171~~$6,783 and ~~$8,177,~~$7,689, respectively, as of December 31, ~~2020, and~~2021. These are categorized in Level 3 of the fair value hierarchy. We estimate the fair value of our ~~mortgage note payable~~debt 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 and 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~~For 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 ninethree months ended ~~September 30,~~March 31, 2022 and 2021 ~~of $890, which is recorded in other senior living expenses in the statement of operations.~~there were no non-recurring fair value adjustments related to long-lived assets.

10. Indebtedness

~~Our $65,000~~On January 27, 2022, certain of our subsidiaries entered into a credit and security agreement, or the Credit Agreement, with MidCap Funding VIII Trust as administrative agent and a lender, or MidCap. Under the terms of the Credit Agreement, we entered into a $95,000 senior secured ~~revolving credit facility,~~term loan, or the Loan, $63,000 of which was funded upon effectiveness of the Credit ~~Facility,~~Agreement, including approximately $3,200 in closing costs. The remaining proceeds include $12,000 for capital improvements at AlerisLife owned communities and an opportunity for another $20,000 that is ~~governed~~available to us upon achieving certain financial targets. Certain of our subsidiaries are borrowers under the Credit Agreement and we and one of our subsidiaries provided a payment guarantee of up to $40,000 of the obligations under the Credit Agreement as well as non-recourse carve-outs. The guaranty is evidenced by a ~~credit agreement~~Guaranty and Security Agreement, or the Guaranty Agreement, made by us and one of our subsidiaries in favor of MidCap. Pursuant to the Guaranty Agreement, our subsidiary granted MidCap a security interest on all of the assets of the subsidiary. The Guaranty Agreement requires us and our subsidiary to comply with ~~a syndicate of lenders.~~various covenants, including restricting our ability to make distributions to shareholders. The Loan is secured by real estate mortgages on 14 senior living communities owned by us, our assets and certain related collateral. The maturity date of ~~our Credit Facility~~the Loan is ~~June 12, 2022.~~

~~Our Credit Facility is available~~January 27, 2025. Subject to the payment of an extension fee of 35 basis points and meeting certain other conditions, we may elect to extend the stated maturity date of the Loan for ~~general business purposes, including acquisitions, and provides for the issuance of letters of credit.~~2 one year periods. We are required to pay interest on outstanding amounts at aan annual base rate of ~~LIBOR~~the Secured Overnight Financing Rate, or SOFR, plus a ~~premium~~term SOFR adjustment of ~~250~~11 basis points ~~per annum,~~(subject to a minimum base rate of 50 basis points) plus 450 basis points. The Credit Agreement requires interest only payments for the first two years and requires mandatory prepayment of the Loan on account of certain events of default. Voluntary prepayments made within 18 months of the effective date of the Loan will be subject to a prepayment fee, equal to the greater of the present value of remaining interest payments or ~~at a base~~0.50% of the outstanding balance of the Loan as of the date of prepayment. The Loan may

1611

~~Five Star Senior Living~~AlerisLife Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

thereafter be voluntarily prepaid without premium or penalty. The Company will be required to pay an exit fee between 1.0% and 1.5%, subject to the conditions set forth in the Credit Agreement, upon any prepayment of the Loan, which would be in addition to any prepayment fees that may be payable. The Loan provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, including a change of control of us, as defined in the Credit Agreement. The default rate of interest is 5.0% per annum in excess of the rate otherwise payable under the Credit Agreement. The Credit Agreement also contains a number of financial and other covenants including covenants that restrict the borrowers' ability to incur indebtedness or to pay or make distributions under certain circumstances and requires us to maintain certain financial ratios. The Credit Agreement also contains certain representations and warranties and reporting obligations. The annual interest rate on the Loan as of March 31, 2022 was 5.0%. We incurred aggregate interest expense related to our Loan of $715 for the three months ended March 31, 2022.

The Loan replaced our $65,000 secured revolving credit facility, the Credit Facility, which was governed by a credit agreement with a syndicate of lenders, and was scheduled to expire on June 12, 2022, before it was terminated on January 27, 2022. No borrowings were outstanding under the Credit Facility at the time we entered into the Credit Agreement. Our Credit Facility was available for general business purposes, including acquisitions, and provided for the issuance of letters of credit. We were required to pay interest at an annual rate of LIBOR plus a premium of 250 basis points per annum, or at a base rate, as defined in our ~~Credit Agreement,~~credit agreement, plus 150 basis points per annum, on borrowings under our Credit ~~Facility; the effective annual interest rate options, as of September 30, 2021,~~Facility. We were ~~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 September 30, 2021 and 2020, we~~We also had ~~0 borrowings outstanding under our Credit Facility. As of September 30, 2021, we had letters~~a letter of credit issued under the Credit Facility ~~in an aggregate amount of $792 and~~which was terminated when we ~~had $26,513 available for borrowings under our~~replaced the Credit ~~Facility.~~Facility with the Loan. We incurred aggregate interest expense related to our Credit Facility of ~~$108~~$28 and $253 for the three months ended ~~September 30,~~March 31, 2022 and 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 September 30, 2021, we had 6 irrevocable standby letters of credit outstanding, totaling $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 $21,481 of cash equivalents and $5,656 of debt and equity investments. This letter of credit expires in JuneMarch 31, 2022, and is automatically extended for one-year terms unless notice of nonrenewal is provided prior to the end of the applicable term. At 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 5 irrevocable standby letters of credit outstanding at September 30, 2021, totaling $792, which are issued under the Credit Facility, secure certain of our other obligations. The termination of leases on our 4 leased communities resulted in our outstanding letters of credit being reduced by $728 in October 2021. The remaining letter of credit is scheduled to mature in June 2022 and is required to be renewed annually.

~~At 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 ~~September 30, 2021:~~March 31, 2022:


Balance as of September 30, 2021			Contractual Stated Interest Rate		Effective Interest Rate		Maturity Date	Monthly Payment		Lender
Balance as of March 31, 2022											Balance as of March 31, 2022		Contractual Stated Interest Rate		Effective Interest Rate		Maturity Date	Monthly Payment		Lender Type
$	7,092	(1)	6.20	%	6.70	%	September 2032	$	72	Federal Home Loan Mortgage Corporation	6,877	(1)	6.20	%	6.70	%	September 2032	$	72	Federal Home Loan Mortgage Corporation

(1) Contractual principal payments excluding unamortized discount ~~$210.~~of $195.

We incurred interest expense, net of discount amortization, of ~~$119~~$115 and ~~$125~~$122 with respect to the mortgage note for the three months ended ~~September 30, 2021~~March 31, 2022 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 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:~~

1712

~~Five Star Senior Living~~AlerisLife 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~~As of March 31, 2022, the required principal payments due during the next five years and ~~pooling agreements with DHC were terminated and replaced with new management agreements and a related omnibus agreement;~~

•~~we issued 10,268,158~~thereafter under the terms of our ~~common shares~~mortgage note and Loan are as follows:


Year	Mortgage Principal Payment		Loan Principal Payment		Total
2022	$	331	$	—	$	331
2023	469		—		469
2024	498		1,191		1,689
2025	531		61,809		62,340
2026	565		—		565
Thereafter	4,483		—		4,483
Total	6,877		63,000		69,877

Less: Unamortized net discount and issuance costs	(195)		(2,490)		(2,685)
Total debt	6,682		60,510		67,192

Less: Current portion of debt	(422)		—		(422)
Long-term debt	$	6,260	$	60,510	$	66,770

At March 31, 2022, we had 1 irrevocable standby letter of credit outstanding, totaling $26,850. This letter of credit, which secures our workers' compensation insurance program, is collateralized by $22,919 of cash equivalents and $4,311 of debt and equity investments. This letter of credit expires in June 2022 and is automatically extended for one-year terms unless notice of nonrenewal is provided prior 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 excessend of the ~~fair value~~applicable term. At March 31, 2022, 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 ~~share issuances~~debt and equity investments collateralizing this letter of ~~$97,899 compared to the consideration of $75,000 paid by DHC. As of September 30, 2020, DHC assumed $51,547 of~~credit are classified as short-term restricted debt and equity investments in our ~~working capital liabilities. We received cash of $23,453 from DHC during 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 our applicable management agreements with DHC.condensed consolidated balance sheets.

We ~~recognized transaction costs~~believe we were in compliance with all applicable covenants under our Loan and mortgage note as of ~~$142 and $1,412 related to~~March 31, 2022.

11. Management Agreements with DHC

We manage for DHC most of the ~~2020 restructuring of our business arrangements with DHC for the three and nine months ended September 30, 2020, respectively.~~senior living communities that we operate.

2021 Amendments to our Management Arrangements with DHC. As part of the implementation of the ~~Strategic Plan,~~repositioning of our residential management business, on June 9, 2021, we and DHC entered into an amended and restated master management agreement, or the Master Management Agreement, for thesenior living communities that we 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 ~~arrangements~~and omnibus agreements with DHC. ~~See Notes 1,~~16In addition, we delivered to DHC a related amended and ~~17 for additional information on~~restated guaranty agreement pursuant to which we will continue to guarantee the ~~Strategic Plan.~~payment and performance of each of our applicable subsidiary's obligations under the applicable management agreements. The principal changes to the management arrangements include:

•~~we will~~We agreed to cooperate with DHC ~~in transitioning~~to transition the ~~management of 108~~operations for 107 senior living communities owned by DHC with approximately ~~7,500~~7,400 living units that we then managed to other third party managers and to close 1 senior living community with approximately 100 living units, without payment of any termination fee to us;

•DHC ~~will~~ no longer ~~have~~has 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 was revised: (i) to not commence until 2025; (ii) the maximum ~~amount~~number of communities that may be terminated was reduced to 10% (from 20%) of the total managed portfolio by revenue per year; and (iii) to provide that achieving less than 80% ~~(from~~(rather than 90%) of budgeted earnings before interest, taxes, and depreciation and amortization, or EBITDA, will be required to qualify as a “Non-Performing Asset” DHC will not be obligated to pay any termination fee to us if it exercises these termination rights;

AlerisLife Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

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

•~~we will close and reposition~~We closed the 27 skilled nursing units in CCRC communities that we ~~will~~ continue to manage with approximately 1,500 living units and are in the process of repositioning those units;

•the incentive fee that we may earn in any calendar year for the senior living communities that we ~~will~~ continue to manage for DHC will no longer be subject to a cap 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;

•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 was extended by two years to December 31, 2036.

See Note 1 to our Consolidated Financial Statements included in Part IV, Item 15 of our Annual Report for additional information.

Pursuant to the Master Management Agreement, we receive a management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement for our direct costs and expenses related to such communities. We also receive 3% of construction costs for construction projects we manage at the senior living communities we managed. We may also receive an annual incentive fee equal to 15% of the amount by which the annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of all senior living communities on a combined basis exceeds the target EBITDA for all senior living communities on a combined basis for such calendar year. The target EBITDA for those communities on a combined basis is increased annually based on the greater of the annual increase of the Consumer Price Index, or CPI, or 2%, plus 6% of any capital investments funded at the managed communities on a combined basis in excess of the target capital investment. Unless otherwise agreed, the target capital investment increases annually based on the greater of the annual increase of CPI or 2%. Any senior living communities that are undergoing a major renovation or repositioning are excluded from the calculation of the incentive fee.

The Master Management Agreement expires in 2036, subject to our right to extend for 2 consecutive five year terms if we achieve certain performance targets for the combined managed communities portfolio, unless earlier terminated. Pursuant to the Master Management Agreement, beginning in 2025, DHC ~~entered into~~will have the right to terminate up to 10% of the senior living communities, based on total revenues per year for failure to meet 80% of a target EBITDA for the applicable period.

~~n amended and restated master~~

As part of the repositioning of our residential management ~~agreement for~~ business, we transitioned the management of 107 senior living communities that we ~~will continue to manage~~managed 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~~7,400 living units to new operators ~~in 2021;~~during the third and fourth quarters of ~~which 27~~2021. We closed 1 senior living ~~communities~~community with approximately ~~1,700~~100 living units ~~were transitioned to new operators~~that we managed for DHC 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.~~February 2022. During the ~~nine months~~year ended ~~September 30,~~December 31, 2021, we closed all 1,532 SNF units within the 27 CCRC communities that we will reposition and continue to manage for DHC. ~~We expect the transition of management of the 11 senior living communities and the repositioning of the 1,532 closed SNF units to be completed during the remainder of 2021.~~ For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021, we recognized ~~$2,710 and $12,329, respectively,~~$5,255 of residential 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 ~~June 30,~~March 31, 2022 and 2021, we leased 4 senior living communities under 1 lease with PEAK. 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 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 datemanaged 120 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 of the lease termination fee of $3,100, other obligations of $548, legal transaction costs of $37, and the net derecognition carrying amounts of the 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, 1 of the communities that we leased from PEAK had a fire that caused extensive damage and the community has been out of service since that date. Insurance proceeds received for damage to the community of $1,500 were remitted to 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 September 30, 2021 and 2020, we managed 159 and 239~~228 senior living communities, respectively, for ~~the account of~~ DHC. We earned residential management fees of ~~$10,418~~$8,042 and ~~$14,609~~$12,910 from the senior living communities we managed for ~~the account of~~ DHC for the three months ended ~~September 30,~~March 31, 2022 and 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 managed for ~~the account of~~ DHC of ~~$702~~$790 and ~~$573~~$834 for the three months ended ~~September 30,~~March 31, 2022 and 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 residential management ~~fee revenue~~fees in our condensed consolidated statements of operations.

We also provide ~~ancillary~~lifestyle 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~~previously managed for ~~the account of~~ DHC where we currently provide or previously provided 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 ~~$960~~$1,916 and ~~$5,972~~$5,441 for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively, ~~and $9,031 and $19,843~~ for ~~the nine months~~lifestyle services we provided at senior living

1914

~~Five Star Senior Living~~AlerisLife 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~~previously managed for ~~the account of~~ DHC and that ~~are~~were payable by DHC. These amounts are included in ~~rehabilitation and wellness~~lifestyle services revenues in our condensed consolidated statements of operations.

We earned residential management fees of $100 and ~~$120~~$106 for the three months ended ~~September 30,~~March 31, 2022 and 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 residential management ~~fee revenues~~fees in our condensed consolidated statements of operations.

~~In 2020, DHC sold 9~~

12.Senior Living Communities Leased from Healthpeak Properties, Inc.

We previously leased 4 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 senior living community. For the three and nine months ended September 30, 2020, we recognized $622 and $2,338 of management fees related to these communities. During the nine months endedfrom Healthpeak Properties, Inc., or PEAK. On 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~~PEAK terminated our lease 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 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~~all 4 communities that we ~~managed for DHC with~~leased from PEAK. These 4 communities had approximately ~~4,800~~200 living units ~~to new operators. For the three months ended September 30, 2021~~ and ~~2020, we recognized $1,306~~had residential revenues of $1,882 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 ~~$370 and $392~~$726 for the three months ended ~~September 30,~~March 31, 2021.

As of October 1, 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.~~PEAK communities were no longer part of our residential operations. For further information about our PEAK lease termination, see Note 11 included in Part IV, Item 15 of our Annual Report.

~~12.~~13. 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 ~~$1,550~~$1,225 and ~~$2,061~~$1,804 for the three months ended ~~September 30,~~March 31, 2022 and 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 Note 14 included in Part IV, Item 15 of our Annual Report.

~~13.~~14. Related Person Transactions

We have relationships and historical and continuing transactions with DHC, RMR, ~~LLC~~ABP Trust 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.~~RMR. 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~~, the chair of the board, a managing director, ~~and~~ the president and chief executive officer of RMR Inc. and an officer and employee of ~~RMR LLC.~~RMR. 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.~~RMR. 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. Mr. Portnoy serves as the chair of the boards ~~of trustees or boards of directors~~ and as a managing director or managing trustee of those companies. Other officers of RMR, ~~LLC,~~ including Ms. Clark, serve as managing trustees or managing directors of certain of these companies. In addition, officers of RMR and RMR Inc. serve as our officers and officers of other companies to which RMR or its subsidiaries provide management services.

~~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,~~March 31, 2022, 10,691,658 of our common shares, or ~~33.7%~~32.8% of our outstanding common shares. We manage for ~~the account of~~ DHC ~~a substantial majority~~most of the senior living communities we operate. RMR provides management services to both us and DHC and Mr. Portnoy is the 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 and accrued compensation and benefits on our condensed consolidated balance sheets are $21,807 and $20,716, respectively, at ~~September 30, 2021~~March 31, 2022, and $20,345 and $22,619, respectively, at December 31, ~~2020~~2021 that will be or were subsequently, as applicable, reimbursed by DHC and are ~~$18,384 and $30,090, respectively,~~included in due from related person.

We lease space from DHC at certain of ~~expenses we incurred in connection with~~ the senior living communities that we manage for DHC. ~~DHC will reimburse us those amounts,~~We use this leased space for Ageility outpatient rehabilitation clinics. We recognized rent expense of $322 and ~~we have included those~~$397 for the three months ended March 31, 2022 and 2021, respectively, with respect to these leases.

AlerisLife Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in ~~due from related person.~~ thousands, except per share amounts)

(unaudited)

See Note 11 for more information regarding our relationships, agreements and transactions with DHC and certain parties related to it and us.

~~RMR LLC.~~RMR. We have an agreement with RMR ~~LLC~~ for RMR ~~LLC~~ to provide business management services to us. See Note 1213 for more information regarding our ~~relationship~~management agreement with ~~RMR LLC.~~RMR.

Adam D. Portnoy and ABP Trust.Adam D. Portnoy and ABP Trust and its subsidiaries owned ~~1,972,783~~approximately 2,017,615 of our common shares, representing 6.2% of our outstanding common shares, as of ~~September 30, 2021.~~March 31, 2022.

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~~As of the date of that renewal, the annual lease ~~payment will~~payments were scheduled to range from $1,026 to $1,395 over the ~~period~~term of the lease. ~~The lease also provides us with an improvements allowance from~~On January 10, 2022, we and the ABP Trust ~~not~~subsidiary further amended the lease, which reduced the leased space from approximately 41,000 square feet to ~~exceed $2,667.~~approximately 30,000 square feet. Commencing on July 1, 2022, the annual lease payments will range from $770 to $1,007 over the term of the lease. As a result of the 2022 amendment of the lease, we decreased our right-of-use asset and lease liability by $2,958 and $3,237, respectively, in the three months ended March 31, 2022 to reflect the terms of the amendment using a current incremental borrowing rate of 5.6%. Our rent expense for our headquarters, including utilities and real estate taxes that we pay as additional rent, was ~~$518~~$476 and ~~$442~~$477 for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively, ~~and $1,554 and $1,302 for the nine months ended September 30, 2021 and 2020,~~ which amounts 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 ~~$9,968~~$6,123 and ~~$496~~$9,197 for the right-of-use asset and $6,666 and $10,065 for the lease liability ~~and $9,452 and $452 for the right-of-use asset~~ as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020, respectively, with respect to our headquarters lease, using an incremental borrowing rate of 3.9%.~~2021, respectively. 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.

Retirement and Separation Arrangements.In connection with her retirement, on November 22, 2021, we entered into a letter agreement with Margaret Wigglesworth, our former Executive Vice President and Chief Operating Officer. Pursuant to the letter agreement, Ms. Wigglesworth continued to serve as the Executive Vice President and Chief Operating Officer through November 22, 2021, and continued to serve as our employee through December 31, 2021. Pursuant to the letter agreement, we paid Ms. Wigglesworth her current cash salary and benefits through December 31, 2021. In addition, subject to the satisfaction of certain other conditions, we made a cash payment of $404 to Ms. Wigglesworth in January 2022.

For further information about these and other such relationships and certain other related person transactions, see Note 15 included in Part IV, Item 15 of our Annual Report.

~~14.~~15. 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 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~~In July 2021, we became aware of a potential issue with respect to completion of a form at one of the ~~second lawsuit, Mandviwala v. Five Star Quality Care, Inc. d/b/~~SNFs we previously managed for DHC. As 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~~result of this discovery, we have made a voluntary self-disclosure to the similar, though not identical, complaints 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 causesOffice of ~~action on behalf~~the Inspector General of ~~themselves and on behalf of other similarly situated employees, including causes of action~~HHS, or OIG, pursuant to the ~~California Labor Code Private Attorney General Act,~~OIG's Provider Self-Disclosure Protocol. We submitted our initial disclosure to the OIG in January 2022 for costs we incurred or ~~PAGA.~~expect to incur as a result of this matter, including estimated OIG imposed penalties, totaling $392. $209 of this amount was recorded to general and administrative expenses in our consolidated statements of operations in 2021, and $183, which was an obligation of DHC, will be reimbursed by DHC and is included in due from related person.

~~On July 10, 2020,~~In connection with our arrangement with Compass Group, we are obligated to repay amounts totaling $488 and $1,156, respectively, for incentives and transition costs incurred for the ~~parties in Lefevre v. Five Star Quality Care, Inc., agreed, without admitting fault,~~20 communities that had been transitioned as of March 31, 2022, of which $443 and $893, respectively, would be reimbursable by DHC, if we terminate the agreement prior to ~~settle Ms. Lefevre's individual and PAGA claims. The settlement was approved~~the end of its initial term. We expect the majority of the remaining communities to transition by the ~~court and final judgement on~~end of the settlement has been entered. 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 May 12, 2021. The settlement extinguished the Mandviwala v. Five Star Quality Care, Inc.fiscal year.

2116

~~Five Star Senior Living~~AlerisLife Inc.

Notes to Condensed Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

(unaudited)

d/b/a Five Star Quality Care - CA, Inc. and FVE Managers, Inc. lawsuit. We recognized our allocated amount for the settlement as an expense in our condensed consolidated statements of operations during the second quarter of 2020.

16. Self-Insurance Reserves

~~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 caused economic disruption worldwide,We partially self-insure up to certain limits for workers’ compensation, professional and ~~although conditions have significantly improved in the United States since the low points experienced, significant uncertainty regarding the Pandemic's ultimate duration, severity~~general liability and ~~near~~automobile insurance programs through an offshore captive insurance company subsidiary. Claims that exceed these limits are reinsured up to contractual limits 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.

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, or PPE, to be used at our senior living communities and rehabilitation and wellness clinics. At September 30, 2021, $6,159 of PPEreserves for ~~future use was~~these programs are included in ~~prepaid expenses and other current assets~~accrued self-insurance obligations 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. For the three and nine months ended September 30, 2021, we deployed $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 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. We record any funds we receive pursuant to the CARES Act as other operating income. We did not recognize any other operating income for the three months ended 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 funds we received pursuant to the CARES Act, primarilyfully self-insure all health-related claims for our ~~senior living communities for which we believe we have met the required terms~~covered employees and ~~conditions~~

The CARES Act delayed the payment of certain required federal tax deposits for 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 were to be considered timely paid if 50% of the deferred amount was paid by December 31, 2021, and the remainder by December 31, 2022. As of December 31, 2020, we deferred $27,593 of employer payroll taxes, whichreserves are included in accrued compensation and benefits in our ~~condensed~~ consolidated balance sheets as of December 31, 2020, of which $22,194 will be reimbursable to us by DHC pursuant to the management agreements and are included in due from related persons in our condensed consolidated balance sheet at December 31, 2020. In September 2021, we paid the deferred amounts and received the amounts due from DHC.sheets.

~~The Sequestration Transparency Act~~As 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~~2022 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.~~2021, we accrued reserves of $69,808 and $73,174, respectively, under these programs, of which $34,050 and $34,744 is classified as long-term liabilities. As of March 31, 2022 and December 31, 2021, we recorded $2,411 and $2,686, respectively, of estimated amounts receivable from the reinsurance companies under these programs.

~~The Tax Cuts~~At March 31, 2022 our workers' compensation insurance program was secured by an irrevocable standby letter of credit totaling $26,850 and ~~Jobs Act~~collateralized by $22,919 of ~~2017 repealed the AMT~~cash equivalents 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$4,311 of ~~$554 for tax year 2019~~debt and equity investments.

See Note 2 to our ~~2021 tax return, as we do not have a federal tax liability to utilize the refund against~~Consolidated Financial Statements included in Part IV, Item 15 of our ~~2020 tax return. In lieu of requesting a 2019 AMT credit refund of $554, we applied the entire overpayment to 2020~~Annual Report for further information on our critical accounting estimates and ~~requested a refund of $454, with the balance of $100 applied to 2021.~~judgment involved in determining our self-insurance obligations.

~~16.~~17. Restructuring Expense

On April 9, 2021, we announced ~~as part of the Strategic Plan,~~in connection with the repositioning of the Company's ~~senior living~~residential management business toour focus on larger independent living, assisted living and memory care communities as well as ~~stand-~~stand-alone independent living and active adult communities. These transition activities were substantially completed prior to December 31, 2021.

A summary of the liabilities incurred combined with a reconciliation of the related components of restructuring expense recognized in the three months ended March 31, 2022, follows, first by cost component and then by segment, the expenses are aggregated and reported in the line item general and administrative expenses in our condensed consolidated statements of operations:


	Summary of Liabilities and Expenses as of and for the Three Months Ended March 31, 2022 (1)
Type of Expense:	Beginning Balance		Expenses Incurred		Payments		Ending Balance
Retention bonuses	$	1,005	$	(20)	$	652	$	333
Severance, benefits and transition expenses	1,437		(174)		1,124		139
Transaction expenses	488		40		62		466
Total	$	2,930	$	(154)	$	1,838	$	938

(1) No obligations related to the restructuring were incurred in 2022. The activity in 2022 relates to adjustments made to those obligations that were incurred in 2021 and recognized under ASC 420, Exit or Disposal Cost Obligations, and ASC 712, Compensation-Nonretirement Postemployment Benefits-special termination benefits. 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 Three Months Ended March 31, 2022 (1)
By Segment:	Beginning Balance		Expenses Incurred		Payments		Ending Balance
Residential	$	2,541	$	—	$	1,708	$	833

Corporate and Other	389		(154)		130		105
Total	$	2,930	$	(154)	$	1,838	$	938

_______________________________________

2217

~~Five Star Senior Living~~AlerisLife 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.

~~During the nine months ended September 30, 2021, the following actions were taken pursuant to the repositioning phase of the Strategic Plan, we:~~18. Subsequent Event

•Katherine E. Potter resigned as our President and Chief Executive Officer effective April 30, 2022. Ms. Potter will remain with the Company as an employee through ~~And DHC amended our management arrangements on June 9, 2021. See Note 11 for additional information regarding the amendments~~December 31, 2022in order to ~~the management arrangements with DHC,~~assist in transitioning her duties and responsibilities.

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

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

•~~Transitioned the management of 69 senior living communities with approximately 4,800 living units to new operators, all of which occurred during the three months ended September 30, 2021,~~

•~~Recognized severance and retention costs of $14,609, and~~

•~~Incurred other costs in connection with the closure of communities and 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 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 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)
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

~~Five Star Senior Living Inc.~~

~~Notes to 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
~~_______________________________________~~

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 Ms. Potter’s resignation, the ~~repositioning~~Company entered into a separation agreement with Ms. Potter on May 2, 2022. Under the separation agreement, the Company will pay Ms. Potter $12 per month from May 2022 until December 31, 2022 and will pay her a lump sum cash payment in the amount of ~~our senior living management services, we expect to incur restructuring obligations, recognized under ASC 420, Exit or Disposal Cost Obligations~~$483 in May 2022. Provided that Ms. Potter signs and ~~ASC 712, Compensation-Nonretirement Postemployment Benefits-special termination benefits~~does not revoke a release 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~~claims, 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~~subject to the ~~Strategic Plan which was partially offset by $813~~satisfaction of certain other conditions, on December 31, 2022, the Company will make an additional cash payment to Ms. Potter in the amount of $483 and ~~$12,344~~will fully accelerate the vesting of ~~other reimbursed expenses related~~any unvested common shares of the Company previously awarded to Ms. Potter as of December 31, 2022, unless that date is accelerated pursuant to the ~~amounts to be reimbursed by DHC, respectively, for the three and nine months ended 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.

separation agreement.

2418

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, or Quarterly Report, and with our Annual Report on Form 10-K, or Annual Report.

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

•~~Reposition~~ ~~our senior living management service offering to focus on larger independent living~~Summary of Communities and ~~assisted living as well as 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 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 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

~~During the nine months ended September 30, 2021, we made the following progress with respect to the Reposition phase of the Strategic 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,

•Transitioned the management of 69 senior living communities with approximately 4,800 living units to new operators, all of which occurred during the three months ended September 30, 2021. During October 2021, we transitioned the management of 27 senior living communities with approximately 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 27 managed CCRCs, and began collaborating with DHC to reposition these SNF units,~~

•~~Closed 27 of the 37 Ageility inpatient rehabilitation clinics we planned to close, and~~

•~~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 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~~

•~~Ageility fitness revenues grew to $2.4 million 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 $19.0 million, approximately $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 $8.7 million of severance, benefits and transition expenses, and up to $2.8 million of transaction expenses, of which we expect DHC to reimburse approximately $5.1 million, $7.2 million and $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 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 17 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.Outpatient Rehabilitation Clinics

Presented below is a summary of the units ~~we operated (owned~~owned and ~~managed)~~managed by us as of ~~September 30, 2021 and the projected number of units to be operated after the Transition, or the Retained Portfolio:~~March 31, 2022:

Total Retained
Units (1)
Units (2)
Independent living 10,628 10,422
Assisted living 9,402 7,715
Memory care 2,454 1,861
Skilled nursing 284 —
Total 22,768 19,998


						Total
						Units (1)
Independent living						10,423
Assisted living						7,715
Memory care						1,861
Total						19,999

(1) The units operated as of ~~September 30, 2021~~March 31, 2022 include ~~2,099 owned and 20,669 managed and they exclude approximately 4,800~~2,100 in Five Star senior living ~~units~~communities that we ~~previously~~own and 17,899 in Five Star senior living communities we 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 communities for which the leases were terminated on September 30, 2021.

~~(2)~~ ~~Includes 2,099 owned and 17,899 managed units.~~DHC.

Presented below is a summary of the communities, units, average occupancy, ~~month~~quarter end occupancy, revenues and residential management fees for the Five Star senior living communities we ~~managed~~manage for DHC, as of and for the three ~~and nine~~ months ended ~~September 30, 2021 and for the retained communities that we will continue to manage for DHC after the conclusion of the Reposition phase of the Strategic Plan~~March 31, 2022 (dollars in thousands):


		As of and for the three months ended September 30, 2021									As of and for the three months ended March 31, 2022
		Communities	Units	Average Occupancy	Month End Occupancy	Community Revenues (1)		Management Fees (2)(3)			Communities	Units	Average Occupancy	Quarter End Occupancy	Community Revenues (1)		Management Fees
Independent and assisted living communities ~~(5)~~	Independent and assisted living communities ~~(5)~~	155	20,044	72.5%	74.2%	$	184,996	$	9,944	Independent and assisted living communities ~~(5)~~	120	17,899	74.1%	74.6%	$	162,552	$	8,932
Continuing care retirement communities (5)		4	625	68.1%	61.6%	17,015		881
Skilled nursing facilities		—	—	67.4%	—%	8,149		395
Total	Total	159	20,669	72.2%	73.8%	$	210,160	$	11,220	Total	120	17,899	74.1%	74.6%	$	162,552	$	8,932

		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 Five Star senior living communities from which we earn residential 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 $2,710 earned in the three months ended 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

~~(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 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) 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.

~~(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 completion of the Reposition portion of the Strategic Plan we will continue to manage 120 senior living communities for DHC, representing 17,899 living units as of September 30, 2021 and approximately 67.5% of our management fee revenues 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 and with other growth.

The 120 senior living communities that we will continue to manage for DHC after transitioning the 108 communities, outperformed the total DHC managed portfolio (exclusive of the closed and pending repositioning of approximately 1,500 SNF living units in 27 of the CCRCs) for the three months ended September 30, 2021 with approximately 370 basis points higher operating margin.

In addition to the Transition of 108 managed communities owned by DHC, on September 30, 2021, we terminated our leases on the four communities with an aggregate of approximately 200 living units that we leased. As of September 30, 2021, we no longer operate units within leased communities.

Presented below is a summary of our Ageility outpatient rehabilitation clinics we operated as of and for the three ~~and nine~~ months ended ~~September 30, 2021 and the number of clinics to be operated after the implementation of the Strategic Plan~~March 31, 2022 (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 and for the Three Months Ended March 31, 2022
	Number of Clinics	Total Revenue (1)(3)		Caseload as a % of census (4)		EBITDA Margin
Outpatient Clinics in Five Star Managed Communities, owned by DHC	91	$	7,300	25.5	%	4.6%
Outpatient Clinics at AlerisLife Owned Communities	15	761		27.9	%	2.5%
Outpatient Clinics at Other Communities (2)	95	3,985		21.6	%	0.6%
Total Outpatient Clinics	201	$	12,046	23.8	%	3.2%

(1)Excludes revenue of ~~$1,508~~$1,916 earned during the three months ended ~~September 30, 2021~~March 31, 2022 for ten Ageility inpatient rehabilitation ~~clinics which are expected to be closed as part of the Transition.~~clinics.

(2) ~~As part of the Transition, the Company expects to transition 108~~Other communities include outpatient rehabilitation clinics at senior living communities not owned or 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.~~us.

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

(4) ~~Other communities includes outpatient clinics~~Caseload as a percentage of census represents the number of Ageility customers divided by total census at ~~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~~where 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.are located.

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

~~(4)~~ ~~Other communities includes outpatient clinics at non-Company operated or managed communities and 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 revenue through growth of our ~~ancillary rehabilitation and wellness~~lifestyle service offerings, including ~~rehabilitation and wellness services, by~~ opening new outpatient rehabilitation clinics and expanding our fitness and other home-based service offerings within and outside of ~~our~~Five Star senior living communities. ~~Since~~Fitness offerings started as an extension of Ageility's outpatient rehabilitation services and, while representing only 6.2% of segment revenues for the three months ended March 31, 2022, fitness revenues increased to $0.9 million, or by 20.2% when compared to the same period in 2021 when it represented 3.7% of segment revenue. With respect to outpatient rehabilitation clinics, since January 1, ~~2019,~~2021 we have opened 9411 net new Ageility outpatient rehabilitation clinics, 1715 of which were opened in ~~2020, and 16~~2021 (exclusive of ~~which~~the closure of 17 Ageility outpatient rehabilitation clinics in December 2021 in Five Star senior living communities that were ~~opened during the nine months ended September 30, 2021.~~transitioned to new operators or closed).

Table of C ontents

General Industry Trends

We believe that, in the United States, the current primary market for services to older adults is focused on individuals age 8075 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~~age profile shows a 17.8% rise in the ~~65+ population~~75+ demographic in the last ten years. This is expected to ~~grow~~rise even more significantly by ~~30% to 73 million from 2020 to~~ 2030 ~~and~~(as evidenced by ~~69% to 95 million by 2060.~~the aging boomers in the 65-74 age category)(1).

Due to these demographic trends, service providers are evolving to serve the growing number of older adults and we expect the demand for 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 novel coronavirus SARS-CoV-2, or COVID-19, and the resulting pandemic, or the Pandemic, and its economic 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 may continue to significantly disrupt the United States economy, our business and the~~ senior living industry ~~as a whole. The World Health Organization declared~~has been materially adversely impacted by the novel coronavirus SARS-CoV-2, or COVID-19, aand the resulting pandemic, ~~in March 2020. From March 2020 through October 31, 2021, there have been approximately 45.6 million reported cases of COVID-19 in~~or the ~~United States~~Pandemic, and ~~approximately 0.7 million related deaths, which have disproportionately impacted older adults like our residents and clients.~~

its economic impact. The U.S. economy has been growing as the Pandemic conditions have significantly improved in the United States from their low points. Commercial activities have been increasingly returning to ~~pre-pandemic~~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, that may develop from time to time, (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~~"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.~~Occupancy. 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 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 have experienced overall declines in average occupancy at our owned and leased senior living ~~communities~~communities. However, with the recent improvement to Pandemic conditions, we have experienced near-term increases in average occupancy from ~~74.7%~~68.3% for the three months ended ~~September 30, 2020~~March 31, 2021 to ~~69.9%~~71.0% for the three months ended ~~September 30, 2021.~~March 31, 2022. Consistent with ~~occupancy declines experienced within~~ our owned and leased portfolio, the senior living communities we manage ~~on behalf of~~for DHC also have experienced average occupancy ~~declines~~increases in average occupancy from ~~75.2%~~69.5% for the three months ended ~~September 30, 2020~~March 31, 2021 to ~~72.2%~~74.1% for the three months ended ~~September 30, 2021. At October~~March 31, 2021, all of our senior living communities were accepting new residents in all of our service lines of business (independent living, assisted living or memory care). We expect that the impact of the widespread administration of vaccinations for COVID-19 among our residents and team members will decrease the incidence of COVID-19 in our senior living communities and as of October 31, 2021 there were less than 20 confirmed cases among our over 18,000 residents. 2022.

With the reduction of ~~confirmed~~COVID-19 cases, we have been able to significantly reduce ~~and in some cases~~or eliminate restrictions at our senior living communities, 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 effects of the Pandemic, there is a possibility of ~~continued or increased~~further 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~~these 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 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~~been negatively impacted as a result of increased usage of temporary labor and increased labor costs for community based team member's due to market conditions, as well as rising health insurance costs caused by the Pandemic and by team members pursuing elective procedures ~~they~~that had been deferred or they were not able to obtain during ~~2020 during~~ the Pandemic. ~~Although COVID-19 vaccinations~~The Pandemic has also disrupted and continues to disrupt the global supply chain, including many of our medical and technological suppliers, due to factory closures and reduced manufacturing output. We believe that our current supplies and supplies we currently have ~~been made available~~on order should be sufficient to ~~residents and team members at~~support our ~~senior living communities, we expect the increased costs associated with the Pandemic to continue~~needs for the reasonably foreseeable future. We have undertaken efforts to mitigate potential future impacts on the supply chain by increasing our stock of critical materials to meet our expected increased needs for the reasonably foreseeable future and by identifying and engaging alternative suppliers.

1) Source: Bureau of labor statistics, 2021.

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We continue to be alert to the potential for disruptions that could arise from the Pandemic and remain in close contact with our suppliers. Both labor costs and the costs of supplies and materials have been negatively impacted by the recent rise in inflation, and we expect these increased costs to continue to impact our results of operations for the foreseeable 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 earnings before interest, taxes, depreciation and amortization, or 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. Although, as noted above, conditions have improved from the lows experienced during the Pandemic, the senior living industry continues to be negatively impacted by the Pandemic, and ~~we expect those negative impacts to continue for the reasonably foreseeable future. We expect that widespread vaccination~~business at our owned and managed senior living communities and clinics continues to be below pre-Pandemic levels. Although we are cautiously optimistic that our business and operating results will ~~decrease the incidence of COVID-19 at those communities~~continue to improve if and ~~will eventually decrease our costs and the negative impacts of~~as the Pandemic onwanes, we expect that it may take an extended period for our ~~operating results~~business to return to pre-Pandemic levels, if at all, and ~~the operating results~~our business remains subject to decline if Pandemic conditions worsen or for ~~those communities we manage for DHC. Despite the approval and increasing availability of several COVID-19 vaccines, going~~other reasons. 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 new variants or surges 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.

More recently, an increase in labor costs due to worker shortages as well as a general increase in costs due to rising inflation have resulted in negative impacts on our operating results and on the operating results for those communities we manage for DHC. We also expect that other direct and indirect impacts of the Pandemic, lower levels of consumer confidence, stock market volatility and/or changes in demographics could adversely affect the ability of older adults and their families to afford our services.

Senior Living Development. ~~For several~~In the years prior to the Pandemic, increased access to capital and continued ~~low interest~~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~~impacted new development, we expect that the new inventory ~~will enter~~that entered 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 continue to be intensified as a result of the Pandemic and its impact on the 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, weWe have 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 have increased staffing needs at the communities we operate, for which we ~~have entered into~~continue to use temporary staffing ~~agreements~~through our arrangements 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.~~market. 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. As of March 31, 2022, there are approximately 11.3 million(1) jobs available in the United States, with only approximately 6.0 million(1) available workers. Our current rate of open positions is approximately 16.0%, a rate which will continue to result in increased expenses from temporary staffing and overtime and may restrict our ability to fully operate our senior living communities.

~~Transaction Agreement~~Management Arrangements 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;

•~~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 the ~~Strategic Plan,~~repositioning of our residential management business, we and DHC amended our management ~~arrangements with DHC.~~arrangements. 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, see Notes 1, 11, 16 and 17 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report ~~on Form 10-Q.~~or "Properties--Our Leases and Management Agreements with DHC" in Part I, Item 2 and Notes 1 and 10 included in Part IV, Item 15 of our Annual Report.

~~Credit Facility~~

~~We have~~

1) Source: Bureau of labor statistics, 2021.

Table of C ontents

Debt Financing

On January 27, 2022, we entered into a $95.0 million senior secured term loan, or the Loan, $63.0 million of which was funded upon effectiveness of a credit and security agreement, or the Credit Agreement, that we entered into with MidCap Funding VIII Trust, or MidCap, including approximately $3.2 million in closing costs. Upon entering into the Loan, our $65.0 million secured revolving ~~credit~~ facility, or our Credit Facility, that we had with a syndicate of lenders ~~that is~~and was available for us to use for general business purposes, ~~of which $26.5 million~~ was ~~available for borrowing as of September 30, 2021.~~

terminated. At March 31, 2022, we had one mortgage note outstanding totaling $6.9 million. For more information ~~regarding~~about the Loan, our ~~credit facility~~previous 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.~~Report.

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~~lifestyle services, 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.

Medicare and Medicaid programs provide operating revenues for lifestyle services and certain of our former skilled nursing ~~and rehabilitation and wellness services.~~facility, or SNF units. We derived approximately ~~4.3%~~5.5% and ~~3.5%~~4.3% of our consolidated revenues from these government-funded programs during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. Revenues from Medicare programs totaled ~~$31.4~~$9.2 million and ~~$29.9~~$11.5 million during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. Revenues from Medicaid programs totaled ~~$0.9~~$0.3 million and ~~$1.2~~$0.3 million during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. As the repositioning of our ~~senior management~~residential services ~~have~~has been ~~repositioning,~~completed, 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~~lifestyle 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 (historically, principally from our former SNFs). We earn management fees based on these revenues.

In connection with the repositioning ~~phase~~ of ~~the Strategic Plan,~~our residential management business, we transitioned 69107 senior living communities managed ~~on behalf of~~for DHC, with approximately ~~4,800~~7,400 living units to new operators ~~in the three months ended September 30, 2021. DHC has entered into agreements for us to transition 35~~and closed one senior living ~~communities managed on behalf of DHC,~~community with approximately ~~2,100~~100 living units, that we currently manage for DHC to new 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 be terminated.units. In addition, we and DHC closed and are in the process of repositioning all ~~of our approximately 1,500~~1,532 SNF living units in 27 managed continuing care retirement communities, or CCRCs. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021, we recognized ~~$2.7~~$5.3 million ~~and $12.3 million~~ of residential management fees related to these senior living communities and ~~units, respectively.~~

~~In connection with implementing the Strategic Plan, through September 30, 2021,~~units. Through March 31, 2022, we ~~have~~also closed 27 of the 37 Ageility inpatient rehabilitation ~~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.~~clinics. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021, we recognized ~~$1.5 million and $9.6~~$5.4 million of revenue related to all 37 inpatient rehabilitation clinics. For the three months ended March 31, 2022, we recognized $1.9 million revenue related to the ten inpatient rehabilitation clinics ~~that were or will be closed, respectively.~~we continue to operate.

Effective September 30, 2021, we terminated our lease for four communities with approximately 200 living units. These four communities had approximately 200 living units and had residential revenues of $1.9 million for the three months ended March 31, 2021. For more information regarding the ~~terms, conditions and progress~~termination of ~~the Strategic Plan, please~~these leases, see ~~Notes 1, 11, 16 and 17~~Note 12 to our condensed consolidated financial statements in Part I, Item 1I 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.~~Report.

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

•The Federal government, in coordination with the states, has continued its COVID-19 vaccination efforts. According to the CDC’s COVID Data Tracker, as of October 31, 2021, approximately 97% of the U.S. population 65 years or older has received at least one dose of a COVID-19 vaccine, and 85% is fully vaccinated. As of October 31, 2021, more than 220 million people in the U.S., or approximately 67% of the population, have received at least one dose of a COVID-19 vaccine, and over 190 million people, or 58% of the population, is fully vaccinated.

•On September 9, 2021 President Biden 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 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 through 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 relief available to healthcare providers. Under this plan, Provider Relief Fund Phase 4 payments will be based on lost revenues and 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 for an unknown period of time. Additional measures may be taken 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~~residential and (2) ~~rehabilitation and wellness~~lifestyle services. In the ~~senior living~~residential segment, we manage for ~~the account of~~ others and operate, ~~for our own account,~~ respectively, primarily independent living communities and 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.~~units. In the ~~rehabilitation and wellness~~lifestyle 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.

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021, we recognized ~~$2.7~~$5.3 million ~~and $12.3 million, respectively,~~ of residential management ~~fee revenue~~fees related to the senior living communities and units that we ~~have~~previously managed for DHC, ~~and~~that have been ~~or will be~~ transitioned to other operators or ~~will be~~were closed pursuant to the ~~Strategic Plan.~~repositioning of our residential management business. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022

Table of C ontents

and 2021 we recognized ~~rehabilitation and wellness~~lifestyle services revenue of ~~$1.5~~$1.9 million and ~~$9.6~~$5.4 million, respectively, related to the ~~Ageility~~ inpatient rehabilitation ~~clinics that have been or will be closed pursuant to the Strategic Plan.~~clinics. The information in the Key Statistical Data table below includes those communities, units and clinics in the results reported.

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

Key Statistical Data For the Three Months Ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:

The following tables present a summary of our operations for the three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (dollars and visits in thousands, except RevPAR and RevPOR):

Table of C ontents


		Three Months Ended September 30,						Increase/(Decrease)					Three Months Ended March 31,						Increase/(Decrease)
		2021 (1)			2020 (1)			Amount		Percent			2022			2021(2)			Amount		Percent
REVENUES	REVENUES											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)	%
Lifestyle services												Lifestyle services	$	14,139		$	19,553		$	(5,414)	(27.7)	%
Residential												Residential	15,386			17,057			(1,671)		(9.8)	%
Residential management fees												Residential management fees	8,932			13,850			(4,918)		(35.5)	%
Total management and operating revenues	Total management and operating revenues	42,922			54,951			(12,029)		(21.9)	%	Total management and operating revenues	38,457			50,460			(12,003)		(23.8)	%
Reimbursed community-level costs incurred on behalf of managed communities	Reimbursed community-level costs incurred on behalf of managed communities	177,231			233,783			(56,552)		(24.2)	%	Reimbursed community-level costs incurred on behalf of managed communities	130,936			213,160			(82,224)		(38.6)	%
Other reimbursed expenses	Other reimbursed expenses	5,678			6,589			(911)		(13.8)	%	Other reimbursed expenses	3,750			5,480			(1,730)		(31.6)	%
Total revenues	Total revenues	225,831			295,323			(69,492)		(23.5)	%	Total revenues	173,143			269,100			(95,957)		(35.7)	%

Other operating income												Other operating income	42			7,793			(7,751)		(99.5)	%

OPERATING EXPENSES	OPERATING EXPENSES											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)	%
Lifestyle services expenses												Lifestyle services expenses	13,221			16,210			(2,989)		(18.4)	%
Residential wages and benefits												Residential wages and benefits	8,627			12,013			(3,386)		(28.2)	%
Other residential operating expenses												Other residential operating expenses	7,349			6,266			1,083		17.3	%
Community-level costs incurred on behalf of managed communities	Community-level costs incurred on behalf of managed communities	177,231			233,783			(56,552)		(24.2)	%	Community-level costs incurred on behalf of managed communities	130,936			213,160			(82,224)		(38.6)	%
General and administrative	General and administrative	21,817			19,774			2,043		10.3	%	General and administrative	18,192			22,641			(4,449)		(19.7)	%
Restructuring expenses		1,220			142			1,078		n/m

Depreciation and amortization	Depreciation and amortization	2,983			2,680			303		11.3	%	Depreciation and amortization	3,163			2,940			223		7.6	%
Total operating expenses	Total operating expenses	232,518			291,630			(59,112)		(20.3)	%	Total operating expenses	181,488			273,230			(91,742)		(33.6)	%

Operating (loss) income	Operating (loss) income	(6,687)			3,693			(10,380)		n/m		Operating (loss) income	(8,303)			3,663			(11,966)		n/m

Interest, dividend and other income	Interest, dividend and other income	84			104			(20)		(19.2)	%	Interest, dividend and other income	80			84			(4)		(4.8)	%
Interest and other expense	Interest and other expense	(507)			(379)			(128)		33.8	%	Interest and other expense	(1,032)			(463)			(569)		n/m
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
Unrealized (loss) gain on equity investments												Unrealized (loss) gain on equity investments	(632)			135			(767)		n/m
Realized (loss) gain on sale of debt and equity investments												Realized (loss) gain on sale of debt and equity investments	(45)			96			(141)		n/m
Gain on termination of lease												Gain on termination of lease	279			—			279		n/m
(Loss) income before income taxes												(Loss) income before income taxes	(9,653)			3,515			(13,168)		n/m
Provision for income taxes												Provision for income taxes	(77)			(200)			123		(61.5)	%
Net (loss) income	Net (loss) income	$	(10,201)		$	3,715		$	(13,916)	n/m		Net (loss) income	$	(9,730)		$	3,315		$	(13,045)	n/m

Owned and leased communities:	Owned and leased communities:											Owned and leased communities:
Number of communities (end of period)	Number of communities (end of period)	20			24			(4)		(16.7)	%	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)	%
Number of living units (end of period) (1)												Number of living units (end of period) (1)	2,100			2,302			(202)		(8.8)	%
Quarter end occupancy at March 31,												Quarter end occupancy at March 31,	72.1		%	68.2		%	390 bps		5.7	%
Average occupancy	Average occupancy	69.9		%	74.7		%	(480 bps)		(6.4)	%	Average occupancy	71.0		%	68.3		%	270 bps		4.0	%
RevPAR (2)		$	2,411		$	2,665		$	(254)	(9.5)	%
RevPOR (3)		$	3,375		$	3,492		$	(117)	(3.4)	%
RevPAR (3)												RevPAR (3)	$	2,443		$	2,479		$	(36)	(1.5)	%
RevPOR (4)												RevPOR (4)	$	3,444		$	3,630		$	(186)	(5.1)	%

Managed communities:	Managed communities:											Managed communities:
Number of communities (end of period)	Number of communities (end of period)	159			239			(80)		(33.5)	%	Number of communities (end of period)	120			228			(108)		(47.4)	%
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)	%
Number of living units (end of period) (1)												Number of living units (end of period) (1)	17,899			26,963			(9,064)		(33.6)	%
Quarter end occupancy at March 31,												Quarter end occupancy at March 31,	74.6		%	70.2		%	440 bps		6.3	%
Average occupancy	Average occupancy	72.2		%	75.2		%	(300 bps)		(4.0)	%	Average occupancy	74.1		%	69.5		%	460 bps		6.6	%
RevPAR (2)		$	3,046		$	3,420		$	(374)	(10.9)	%
RevPOR (3)		$	4,129		$	4,447		$	(318)	(7.2)	%
RevPAR (3)												RevPAR (3)	$	3,027		$	3,213		$	(186)	(5.8)	%
RevPOR (4)												RevPOR (4)	$	4,084		$	4,623		$	(539)	(11.7)	%

Rehabilitation and wellness services:
Average revenue per outpatient clinic		$	61		$	71		$	(10)	(14.1)	%
Lifestyle services:												Lifestyle services:
Caseload as a % of Census (5)												Caseload as a % of Census (5)	23.8		%	26.8		%	(300) bps		(11.2)	%
Number of visits at outpatient clinics	Number of visits at outpatient clinics	147			155			(8)		(5.2)	%	Number of visits at outpatient clinics	144			149			(5)		(3.4)	%
Number of inpatient clinics (end of period)	Number of inpatient clinics (end of period)	10			40			(30)		(75.0)	%	Number of inpatient clinics (end of period)	10			37			(27)		(73.0)	%
Number of outpatient clinics (end of period)	Number of outpatient clinics (end of period)	223			209			14		6.7	%	Number of outpatient clinics (end of period)	201			215			(14)		(6.5)	%
Total clinics	Total clinics	233			249			(16)		(6.4)	%	Total clinics	211			252			(41)		(16.3)	%

_______________________________________
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) The following were included in the summary of operations ~~includes~~for the three months ended March 31, 2021 that were not included for the three months ended March 31, 2022 (i) ~~108~~107 senior living communities managed ~~on behalf of~~for DHC with approximately ~~7,500~~7,400 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 one senior living community with approximately 100 living units that we managed for DHC that was closed in February 2022, (ii) 1,532 SNF

Table of C ontents

units that were closed in 27 CCRCs ~~that were closed~~ during ~~the six months ended September 30,~~ 2021 ~~and~~which are in the process of being repositioned ~~that~~and which we will continue to manage for DHC, ~~and~~ (iii) 27 Ageility inpatient rehabilitation clinics that were closed during ~~the three months ended June 30,~~ 2021, ~~and an additional ten~~(iv) 17 Ageility ~~inpatient~~outpatient rehabilitation clinics, that ~~are expected~~were closed during 2021 in senior living communities that were transitioned to be

~~closed. In addition, the summary of operations includes all~~a new operator or closed and (v) four leased communities with approximately 200 living units where the ~~leases were~~lease was terminated ~~on September 30,~~during 2021.

~~(2)~~(3) 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~~Data for the three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ exclude income received by senior living communities under the Provider Relief Fund of the Coronavirus Aid, Relief, and Economic Security Act, or CARES ~~Act.~~Act, and other governmental grants.

~~(3)~~(4) 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~~Data for the three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ exclude income received by senior living communities under the Provider Relief Fund of the CARES ~~Act.~~Act and other governmental grants.

(5) Caseload as a percentage of census represents the number of Ageility customers divided by total census at the senior living communities where the Ageility outpatient rehabilitation clinics are located.

Comparable Communities and Outpatient Clinics

Comparable communities and outpatient rehabilitation clinics (senior living communities and outpatient rehabilitation ~~and wellness services~~ clinics that we have continually ~~owned~~operated or managed since ~~July~~January 1, ~~2020,~~2021, excluding ~~those communities, units~~inpatient rehabilitation clinics) results for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, are listed below (dollars in thousands, except RevPOR and ~~clinics that have been or will be transitioned or closed per the Strategic Plan as well as the four leased communities where the leases were terminated on September 30, 2021)~~RevPAR):

Three Months Ended September 30, Increase/(Decrease)
2021 (4)
2020 (4)
Amount Percent
REVENUES
Rehabilitation and wellness services $ 13,294 $ 14,664 $ (1,370) (9.3) %
Senior living 14,829 16,457 (1,628) (9.9) %
Management fees 8,510 9,035 (525) (5.8) %
OPERATING EXPENSES
Rehabilitation and wellness services expenses 11,907 12,131 (224) (1.8) %
Senior living wages and benefits 7,768 9,914 (2,146) (21.6) %
Other senior living operating expenses 5,763 5,976 (213) (3.6) %
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 70.4 % 75.1 % (470 bps) (6.3) %
RevPAR (2)
$ 2,354 $ 2,602 $ (248) (9.5) %
RevPOR (3)
$ 3,270 $ 3,388 $ (118) (3.5) %
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 73.4 % 78.5 % (510 bps) (6.5) %
RevPAR (2)
$ 2,941 $ 3,139 $ (198) (6.3) %
RevPOR (3)
$ 3,922 $ 3,942 $ (20) (0.5) %
Rehabilitation and wellness services:
Average revenue per outpatient clinic $ 65 $ 72 $ (7) (9.7) %
Number of visits at outpatient clinics 141 150 (9) (6.0) %
Number of inpatient clinics (end of period) — — — — %
Number of outpatient clinics (end of period) 199 199 — — %
Total clinics 199 199 — — %


	Three Months Ended March 31,						Increase/(Decrease)
	2022(2)			2021(2)			Amount		Percent
REVENUES
Lifestyle services	$	11,670		$	13,288		$	(1,618)	(12.2)	%
Residential	15,393			15,248			145		1.0	%
Residential management fees	8,930			8,580			350		4.1	%
Other operating income	42			6,979			(6,937)		(99.4)	%

OPERATING EXPENSES
Lifestyle services expenses	11,292			11,378			(86)		(0.8)	%
Residential wages and benefits	8,640			10,965			(2,325)		(21.2)	%
Other residential operating expenses	7,088			5,051			2,037		40.3	%

Owned communities:
Number of communities (end of period)	20			20			—		—	%
Number of living units (end of period) (1)	2,100			2,099			1		—	%
Quarter end occupancy at March 31,	72.1		%	69.0		%	310 bps		4.5	%
Average occupancy	71.0		%	68.9		%	210 bps		3.0	%
RevPAR (3)	$	2,443		$	2,421		$	22	0.9	%
RevPOR (4)	$	3,444		$	3,515		$	(71)	(2.0)	%

Managed communities:
Number of communities (end of period)	120			120			—		—	%
Number of living units (end of period) (1)	17,899			17,906			(7)		—	%
Quarter end occupancy at March 31,	74.6		%	73.2		%	140 bps		1.9	%
Average occupancy	74.1		%	72.7		%	140 bps		1.9	%
RevPAR (3)	$	3,027		$	2,946		$	81	2.7	%
RevPOR (4)	$	4,084		$	4,051		$	33	0.8	%

Lifestyle services:
Caseload as a % of census (5)	23.9		%	27.0		%	(310) bps		(11.5)	%
Number of visits at outpatient clinics	137			140			(3)		(2.1)	%
Number of inpatient clinics (end of period)	—			—			—		—	%
Number of outpatient clinics (end of period)	185			185			—		—	%
Total clinics	185			185			—		—	%

n/m - not meaningful

Table of C ontents

(2)The three months ended March 31, 2022 and 2021 include data for 20 owned senior living communities, 120 managed senior living communities and 185 outpatient rehabilitation clinics that we have continuously owned or managed since January 1, 2021. The summary of operations for comparable communities and clinics excludes (i) 1,532 SNF living units that were closed in 27 CCRCs which are in the process of being repositioned and which we will continue to manage for DHC and (ii) ten Ageility inpatient rehabilitation clinics.

(3) 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~~Data for the three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ exclude income received by senior living communities under the Provider Relief Fund of the CARES ~~Act.~~Act and other governmental grants.

(5)

~~Item 2. Management’s Discussion and Analysis~~Caseload as a percentage of ~~Financial Condition and Results~~census represents the number of ~~Operations~~

~~(4)~~ ~~The three months ended September 30, 2021 and 2020 include data for 20 owned~~Ageility customers divided by total census at the senior living communities ~~120 managed senior living communities and 199~~where the Ageility outpatient rehabilitation clinics that we have continuously owned or managed since 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) 1,532 SNF units 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) 27 Ageility inpatient rehabilitation clinics 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 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.located.

The following is a discussion of our operating results for the three months ended ~~September 30, 2021~~March 31, 2022 compared to the three months ended ~~September 30, 2020.~~March 31, 2021.

~~Rehabilitation and wellness services.~~Lifestyle services revenues. The decrease in ~~rehabilitation and wellness~~lifestyle services ~~revenue~~revenues is primarily due to ~~the closure of 27 inpatient clinics as well as disruptions due to employee turnover as a result of the vaccination mandate, with~~ a decrease in inpatient rehabilitation clinic revenues of ~~$4.5~~$3.5 million and outpatient rehabilitation clinic revenues of ~~$1.4~~$1.9 million. The reduction of our inpatient ~~revenue~~rehabilitation clinic revenues is primarily associated with the closure of 27 inpatient rehabilitation clinics in the second quarter of 2021 in accordance with the repositioning of the residential management business. The reduction of our outpatient rehabilitation clinic revenues primarily resulted from a decrease in outpatient visits, the $0.6 million impact of the closure of 17 outpatient rehabilitation clinics in December 2021 in communities that were transitioned to new operators or closed and the net reduction of four outpatient rehabilitation clinics during the three months ended ~~June 30, 2021~~March 31, 2022, as well as the $0.7 million impact of a Medicare fee schedule rate cut in ~~accordance with~~2022; these decreases were partially offset by the ~~Strategic Plan.~~full 2022 first quarter impact of 15 net new outpatient rehabilitation clinics opened during the year ended December 31, 2021. Our fitness services revenue continued to expand during the quarter and partially offset the declines from our inpatient and outpatient rehabilitation clinic closures with an increase in revenue of ~~$0.2~~$0.1 million, ~~from these services. We also realized~~a 20.2% increase over the ~~full quarter impact of 11 net new outpatient rehabilitation clinics opened~~prior year. Fitness services revenue during the ~~six months ended June 30, 2021, as well as opening five net new outpatient rehabilitation clinics during the three months ended September 30, 2021.~~quarter represented 6.2% of total lifestyle services revenue, an increase from 3.7%. The decrease in ~~rehabilitation and wellness~~lifestyle services revenues at our comparable clinics is due to the $0.6 million impact of a Medicare fee schedule rate cut in 2022 as well as a decrease in outpatient visits infor the ~~2021 period.~~three months ended March 31, 2022.

~~Senior living~~Residential revenues. The decrease in ~~senior living~~residential revenues is primarily due to the ~~decline~~termination of a lease for four communities on September 30, 2021. The discontinuation of these four communities resulted in a decrease in revenues of $1.9 million. This decrease was partially offset by an increase in average occupancy from ~~74.7%~~68.3% for the three months ended ~~September 30, 2020~~March 31, 2021 to ~~69.9%~~71.0% 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~~March 31, 2022 at our owned 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~~communities. The increase in ~~a decline in revenue attributable to that community of $0.4 million. The decrease in senior living~~residential revenues at our comparable communities are primarily due to the ~~decline~~increase in average occupancy from ~~75.1%~~68.9% for the three months ended ~~September 30, 2020~~March 31, 2021 to ~~70.4%~~71.0% for the three months ended ~~September 30, 2021 caused~~March 31, 2022, partially offset by ~~the Pandemic.~~an increase of $0.4 million in residential fee discounts and concessions we provided to increase occupancy.

~~Management~~Residential management fees. The decrease in residential 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~~7,400 living units to new operators and the closure of 100 living units subsequent to March 31, 2021, resulting in ~~the three months ended September 30, 2021~~a decrease in residential management fees of $3.9 million, and the closure of approximately 1,500 SNF living units subsequent to March 31, 2021, resulting in ~~the nine months ended September 30, 2021. The ongoing impacts~~a decrease in residential management fees of $1.4 million. These declines in gross revenues as a result of the ~~Pandemic resulted in a decline~~repositioning of the residential management business have been partially offset with the improvement in average occupancy ~~in our managed communities~~ from ~~75.2%~~69.5% for the three months ended ~~September 30, 2020~~March 31, 2021 to ~~72.2%~~74.1% for the three months ended ~~September 30, 2021.~~March 31, 2022. The ~~transitioning of the management of approximately 4,800 living units to new operators resulted~~increase 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 seven senior living communities closed by DHC in 2020 that we previously managed which reduced management fees by $0.6 million from the three months ended September 30, 2020. The decrease inresidential management fees at our comparable senior living communities was primarily due to the ~~decline~~improvement in gross revenues at the senior living communities we manage ~~caused by Pandemic~~ related ~~declines~~to the increase in average occupancy infrom 72.7% for the three months ended March 31, 2021 ~~period, partially offset by~~to 74.1% for the three months ended March 31, 2022, as well as due to an increase in residential 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~~7,400 living units to new operators ~~in the three months ended September 30,~~subsequent to March 31, 2021, and the closure of 100 living units in February 2022 and approximately 1,500 SNF living units ~~in the nine months ended September 30,~~subsequent to March 31, 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 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 recruiting.

Other reimbursed expenses. Other reimbursed expenses represent reimbursements that arise from certain centralized services we provide pursuant to our management agreements with DHC. The decrease in other reimbursed expenses was primarily due to a decrease in the expenses that ~~could be reimbursed due to~~are reimbursable as a result of the ~~transition~~reduced corporate headcount of ~~communities~~approximately 27.0% in connection with the ~~quarter partially offset by reimbursements related to restructuring expenses in the three months ended September 30, 2021~~repositioning of ~~$0.8 million.~~our residential management business.

3726

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

~~Rehabilitation~~Other operating income. Other operating income represents funds received and ~~wellness~~recognized under the Provider Relief Fund of the CARES Act General Fund Distribution and other government grants The decrease in other operating income was due to the decrease in Cares Act funds received during the 2022 period.

Lifestyle services expenses. The decrease in ~~rehabilitation and wellness~~lifestyle services expenses is primarily due to ~~the closure~~$2.7 million of ~~27 inpatient clinics in~~lifestyle services expenses that had been incurred during the three months ended ~~June 30,~~March 31, 2021 with respect to the 27 inpatient rehabilitation clinics that were subsequently closed in the second quarter of 2021 in accordance with the ~~Strategic Plan~~repositioning of our residential management business, as well as ~~employee turnover as a result~~$0.5 million of expenses related to 17 outpatient rehabilitation clinics that were subsequently closed in December 2021 in communities that were transitioned to new operators or closed and the ~~vaccination mandate. This was~~net reduction of four outpatient rehabilitation clinics during the three months ended March 31, 2022. Those decreases were partially offset by ~~the growth of our fitness services, home health visits and other expanded outpatient services. We also realized~~ the full quarter impact of 1115 net new outpatient rehabilitation clinics opened during the ~~six months~~year ended ~~June 30, 2021, as well as opening five net new outpatient rehabilitation clinics during the three months ended September 30,~~December 31, 2021. The decrease in ~~rehabilitation and wellness~~lifestyle services expenses at our comparable ~~communities~~clinics was due to athe decrease in ~~labor costs due to decreased~~ outpatient rehabilitation clinic visits during the three months ended ~~September 30, 2021~~March 31, 2022 when compared to the same quarter in the prior year.

~~Senior living~~Residential wages and benefits. The decrease in ~~senior living~~residential wages and benefits is primarily due to decreased medical insurance and workers compensation costs ~~that are related~~as a result of a reduction in claims received compared to the ~~Pandemic.~~first quarter of 2021, as well as the termination of a lease for four communities on September 30, 2021, which resulted in a decrease in residential wages and benefits of $1.0 million. These decreases were partially offset by an increase in labor costs due to rising wages, temporary staffing needs and market conditions. The decrease in ~~medical insurance and workers compensation costs have been partially offset by increases in contract labor costs. The decrease in senior living~~residential wages and benefits at our comparable communities is primarily due to decreased costs for medical insurance and workers compensation costs, ~~that are related to the Pandemic.~~partially offset by higher labor costs.

Other ~~senior living~~residential operating expenses. Other ~~senior living~~residential operating expenses are comprised of utilities, housekeeping, dietary, repairs and maintenance, insurance and other community-level costs. The ~~decrease~~increase in other ~~senior living~~residential operating expenses is primarily due to increased self-insurance obligations, as well as increased costs related to building maintenance, utilities, disposable food supplies, professional fees and other costs that have been impacted by rising inflation and supply chain issues. This increase was partially offset by the termination of a lease for four communities on September 30, 2021, which resulted in a decrease in ~~self-insurance obligations and decreased costs related to COVID-19 testing supplies, disposable food supplies, infectious disease prevention cleaning, sanitation and labor as a result~~other residential operating expenses of ~~the Pandemic.~~$1.4 million. The ~~decrease~~increase in other ~~senior living~~residential operating expenses at our comparable communities is primarily due to ~~decreased~~increased costs associated with our self-insurance obligations as well as ~~decreases~~increases in costs related to ~~COVID-19 testing supplies,~~building maintenance, utilities, disposable food supplies, ~~infectious disease prevention cleaning, sanitation~~professional fees and ~~labor as a result of Pandemic.~~other costs that have been impacted by rising inflation and supply chain issues.

General and administrative. The ~~increase~~decrease in general and administrative expenses was primarily attributable to lower corporate wages and benefits due to ~~increases~~reduced corporate headcount of approximately 27.0% in ~~marketing expenses and professional fees as we focused on growth of our core business to rebound from~~connection with the ~~Pandemic as well as investments in shared services infrastructure as part~~repositioning of the ~~Evolve phase of our Strategic Plan.~~

~~Restructuring expenses.The increase was primarily~~residential management business and lower fees for services performed by RMR due to ~~severance and retention costs~~a decrease in revenues to which those fees are related ~~to the Strategic Plan.~~to.

Depreciation and amortization. The increase in depreciation and amortization is primarily due to an increase in depreciation as a result of the significant investment of capital in our owned communities, partially offset by the termination of a lease for four communities on September 30, 2021, which resulted in a decrease in depreciation and amortization ~~expense incurred on our equipment finance lease, which was entered into during the fourth quarter~~ of ~~2020.~~$0.2 million.

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

Interest and other expense. Interest and other expense consists primarily of amortization of deferred financing fees and commitment fees related to our ~~credit facility,~~Credit Facility, and interest on our finance leases and ~~our~~ mortgage note for the three months ended March 31, 2021. Interest and other expense consists primarily of interest expense on the Loan, amortization of deferred financing fees on the Loan, and interest on our finance leases and mortgage note for three months ended March 31, 2022. The increase in interest and other expense for the three months ended March 31, 2022 was due to interest related to the Loan.

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

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

~~Loss~~Gain on termination of ~~leases.~~lease. ~~Loss~~Gain on termination of ~~leases~~lease for the three months ended ~~September 30, 2021~~March 31, 2022 represents a ~~$3.3~~$0.3 million ~~loss~~gain on the ~~lease~~partial 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.our headquarters lease.

~~(Provision) benefit~~

Table of C ontents

Provision for income taxes. For the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ we recognized ~~a benefit for income taxes of $0.2 million and~~ a provision for income taxes of ~~$0.5~~$0.1 million and $0.2 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 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~~

~~(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.

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

~~(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~~2022 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 nine months ended September 30, 2021 and 2020, we recognized a provision for income taxes of $0.2 million and $1.0 million, respectively. The provision for income taxes for the nine months ended September 30, 2021 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 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 ~~September 30, 2021,~~March 31, 2022, we had ~~$80.2~~$88.1 million of unrestricted cash and cash equivalents. As of ~~September 30, 2021,~~March 31, 2022, our restricted cash and cash equivalents included ~~$21.5~~$22.9 million of bank term deposits in our captive insurance company. On January 27, 2022, we entered into the $95.0 million Loan, $63.0 million of which was funded upon effectiveness of the Credit Agreement, including approximately $3.2 million in closing costs. For more information about the Loan, see Note 10 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, we had current assets of ~~$185.2~~$211.6 million and ~~$262.3~~$186.8 million, respectively, and current liabilities of ~~$122.4~~$114.9 million and ~~$177.9~~$140.9 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):


		Nine Months Ended September 30,									Three Months Ended March 31,
Net cash provided by (used in)	Net cash provided by (used in)	2021		2020		$ Change		% Change		Net cash provided by (used in)	2022		2021		$ Change		% Change
Operating Activities	Operating Activities	$	1,800	$	62,040	$	(60,240)	(97.1)	%	Operating Activities	$	(33,068)	$	27,022	$	(60,090)	n/m
Investing Activities	Investing Activities	(5,546)		2,270		(7,816)		(344.3)	%	Investing Activities	(5,736)		(1,929)		(3,807)		n/m
Financing Activities	Financing Activities	(911)		(847)		(64)		7.6	%	Financing Activities	60,043		(299)		60,342		n/m
(Decrease) increase in cash and cash equivalents and restricted cash and cash equivalents		(4,657)		63,463		(68,120)		(107.3)	%
Increase in cash and cash equivalents and restricted cash and cash equivalents										Increase in cash and cash equivalents and restricted cash and cash equivalents	21,239		24,794		(3,555)		(14.3)	%
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	92,939		109,597		(16,658)		(15.2)	%
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	$	104,940	$	120,442	$	(15,502)	(12.9)	%	Cash and cash equivalents and restricted cash and cash equivalents at end of period	$	114,178	$	134,391	$	(20,213)	(15.0)	%

Operating Activities

The decrease in cash flows ~~provided by~~used in operating activities for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 compared to the same period in ~~2020~~2021 is primarily due to athe increase in net loss of $13.0 million and decrease in ~~cash flows due to a change in accrued compensation~~accounts payable ($23.4 million) and benefits of $64.6 million, a change in accrued expenses and other current liabilities of $56.5 million and a reduction in the 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 $117.4 million, the change from net income to a net loss for the 2021 period and $6.3 million in 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, accrued payroll and accrued expenses previously recognized while managing those communities.($17.2 million).

Investing Activities

Cash flows used in investing activities for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, increased as compared to the same period in ~~2020~~2021 primarily due to increased investments of property and equipment of ~~$3.2~~$4.3 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.~~infrastructure.

Financing Activities

The ~~decline~~increase in net cash ~~used in~~provided by financing activities for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, compared to the same period in ~~2020~~2021 is primarily due to ~~repayments~~the $60.4 million of ~~finance lease principal in~~proceeds received from the ~~current period partially offset by costs incurred in 2020 related to the issuance~~Loan, net of ~~common stock in the prior year period.~~deferred financing fees.

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

Capital Expenditures

During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we invested ~~$7.1~~$3.2 million primarily in our owned senior living communities and rehabilitation ~~and wellness~~ services ~~clinics.~~clinics as well as shared services infrastructure. During the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, we invested ~~$3.3~~$2.0 million primarily in our 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 our management agreements with DHC.

~~Pandemic~~ Liquidity ~~Impact~~

Our liquidity and capital funding requirements depend on numerous factors, including our operating results, our working capital requirements and capital expenditures to the extent not funded by DHC pursuant to our management agreements with DHC, general economic conditions and the cost of capital. Shortfalls in cash flows from operating results or

Table of C ontents

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,~~Loan, to support our business for at least the next twelve months.

We are closely monitoring the effect of the Pandemic and the current inflationary conditions 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 our management agreements with ~~DHC, and fixed debt obligations, as well as investments in diversifying our service offerings~~DHC. We also have up to ~~diversify our revenue sources.~~$12.0 million of additional proceeds available from the Loan to fund capital improvements. 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 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~~our professional and general liability and 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 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 leased had a fire which has caused extensive damage and the residents of the community to be relocated. We have insurance on this community with a deductible of $1.0 million. Insurance proceeds received for property damages to the previously leased community caused by the fire were subsequently transferred to PEAK.

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

Debt Financings and Covenants

On January 27, 2022, certain of our subsidiaries entered into the Credit Agreement with MidCap. Under the terms of the Credit Agreement, we entered into a $95.0 million Loan, $63.0 million of which was funded upon effectiveness of the Credit Agreement, including approximately $3.2 million in closing costs. The remaining proceeds include $12.0 million for capital improvements at AlerisLife owned communities and an opportunity for another $20.0 million that is available to us upon achieving certain financial targets. Certain of our subsidiaries are borrowers under the Credit Agreement and we and one of our subsidiaries provided a payment guarantee of up to $40.0 million of the obligations under the Credit Agreement as well as non-recourse carve-outs. The guaranty is evidenced by a Guaranty and Security Agreement, or the Guaranty Agreement, made by us and one of our subsidiaries in favor of MidCap. Pursuant to the Guaranty Agreement, our subsidiary granted MidCap a security interest on all of the assets of the subsidiary. The Guaranty Agreement requires us and our subsidiary to comply with various covenants, including restricting our ability to make distributions to shareholders. The Loan is secured by real estate mortgages on 14 senior living communities owned by us, our assets and certain related collateral. The maturity date of the Loan is January 27, 2025. Subject to the payment of an extension fee of 35 basis points and meeting certain other conditions, we may elect to extend the stated maturity date of the Loan for two one-year periods. We ~~have~~are required to pay interest on outstanding amounts at an annual base rate of the Secured Overnight Financing Rate, or SOFR, plus a term SOFR adjustment of 11 basis points (subject to a minimum base rate of 50 basis points) plus 450 basis points. The Credit Agreement requires interest only payments for the first two years and requires mandatory prepayment of the Loan on account of certain events of default. Voluntary prepayments made within 18 months of the effective date of the Loan will be subject to a prepayment fee, equal to the greater of the present value of remaining interest payments or 0.50% of the outstanding balance of the Loan as of the date of prepayment. The Loan may thereafter be voluntarily prepaid without premium or penalty. The Company will be required to pay an exit fee between 1.0% and 1.5%, subject to the conditions set forth in the Credit Agreement, upon any prepayment of the Loan, which would be in addition to any prepayment fees that may be payable. The Loan provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, including a change of control of us, as defined in the Credit Agreement. The default rate of interest is 5.0% per annum in excess of the rate otherwise payable under the Credit Agreement. The Credit Agreement also contains a number of financial and other covenants including covenants that restrict the borrowers' ability to incur indebtedness or to pay or make distributions under certain circumstances and requires us to maintain certain financial ratios. The Credit Agreement also contains certain representations and warranties and reporting obligations. For more information about the Loan, see Note 10 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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The Loan replaced our $65.0 million ~~secured revolving credit facility, or our~~ Credit Facility ~~that is~~which was available for general business ~~purposes. Our Credit Facility matures~~purposes and was scheduled to expire on June 12, 2022 before it was terminated on January 27, 2022. No borrowings were outstanding under the Credit Facility at the time we entered into the Credit Agreement. We ~~are~~were required to pay interest on borrowings under our Credit Facility at aan annual 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 September 30, 2021~~We were ~~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 iswas 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 September 30, 2021, we had six irrevocable standby letters of credit outstanding, totaling $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 $21.5 million of cash equivalents and $5.7 million of debt and equity investments. This letter of credit expires in June 2022 and is automatically extended for one-year terms unless notice of nonrenewal is provided prior to the end of the applicable term. At 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 five irrevocable standby letters of credit outstanding at September 30, 2021, totaling $0.8 million, which are issued under the credit facility, secure certain of our other obligations. The termination of leases on our four leased communities resulted in our outstanding letters of credit being reduced by $0.7 million in October 2021. The remaining letter of credit is scheduled to mature in June 2022 and is required to be renewed annually.

We also have a mortgage note as of ~~September 30, 2021,~~March 31, 2022, 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 ~~September 30, 2021.~~March 31, 2022.

At March 31, 2022, we had one irrevocable standby letter of credit outstanding, totaling $26.9 million. This letter of credit which secures our workers' compensation insurance program, is collateralized by approximately $22.9 million of cash equivalents and $4.3 million of debt and equity investments. This letter of credit expires in June 2022 and is automatically extended for one-year terms unless notice of nonrenewal is provided prior to the end of the applicable term. At March 31, 2022, the cash equivalents collateralizing this letter of credit areclassified as short-term restricted cash and cash equivalents in our 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 consolidated balance sheets.

As of ~~September 30, 2021,~~March 31, 2022, we had ~~no borrowings~~$63.0 million outstanding ~~under~~on our ~~Credit Facility, $0.8 million in letters of credit issued under our Credit Facility, $26.5 million available for borrowing under our Credit Facility,~~Loan, and $6.9 million outstanding on the mortgage note. As of ~~September 30, 2021,~~March 31, 2022, 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, 1213 and 1314 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~~2022 Annual Meeting of Stockholders and our other filings with the SEC. In addition, see the ~~section~~sections captioned "Warning Concerning Forward-Looking Statements, Part I, Item 1, "Business" and Part I, Item 1A, "Risk Factors" in our Annual Report and in Item 4 of this Quarterly 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.

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.

4530

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our Interim 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 Interim 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 ~~September 30, 2021,~~March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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:~~including, but are not limited to the following:

•The duration and severity of the novel coronavirus SARS-CoV-2, or COVID-19, pandemic, or the Pandemic, and its impact on public health and safety, particularly older adults, and on our and Diversified Healthcare Trust's, or DHC's, business, results, operations and liquidity, ~~and the impact of the Pandemic on the senior living industry in general,~~

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

•The execution of our repositioning of the ~~Strategic Plan~~residential management business and our expectations regarding ~~the related~~its timing, costs, savings and benefits,

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

•~~Our expectations regarding demand, impacts of information technology and our competitive advantages in the senior living industry,~~residential management business,

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

•Our ability to operate our senior living communities and deliver lifestyle services 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,~~diversify revenues,

•Our expectation to focus our expansion activities on internal growth from our existing senior living communities ~~and the clinics~~ we operate and other ~~ancillary~~lifestyle 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 Strategic Plan,~~ and residents we serve, and to grow ~~our~~through other sources of revenues, including ~~rehabilitation and wellness~~lifestyle 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~~lifestyle services,

•Our expectations of the types of services ~~seniors~~older adults will demand and our ability to satisfy those demands,

•Our expectation that we will continue to diversify revenue through growth of our lifestyle service offerings, including opening new outpatient rehabilitation clinics and expanding our fitness and other home-based service offerings within and outside our senior living communities;

•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 and unrestricted cash on hand ~~and amounts available under our Credit Facility~~ to support our business,

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

•Our ability to access or raise debt or equity 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 identified in Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10-K 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 for older adult customers within the residential and lifestyle services businesses,

•~~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~~lifestyle 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 the ~~Strategic Plan~~repositioning of our residential management business 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 the repositioning of our ~~strategic growth initiatives,~~residential management business,

•Our ability to deliver ~~senior living~~residential management or ~~rehabilitation and wellness~~lifestyle services profitably and increase the revenues ~~generated by us~~we generate depends upon many factors, including our ability to integrate new senior living communities and rehabilitation 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~~deliver lifestyle services, ~~clinics,~~

•We expect to enter into ~~additional~~ management arrangements with DHC or other owners for additional senior living communities. However, we cannot be sure that we will enter into any additional management arrangements,

•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 lifestyle 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~~the repositioning of ~~the Strategic Plan by the end~~our residential management business, including repositioning 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 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 successfully reposition~~ the 1,532 SNF units that have been closed to other ~~types of units,~~

◦~~We may not be able~~uses that are beneficial to ~~close the ten remaining Ageility inpatient rehabilitation clinics operating in some transitioning communities, or the timing of such closures may be delayed or may change,~~us, our customers and DHC,

•The costs of ~~implementing~~executing the ~~Strategic Plan~~repositioning of our residential management business may be more than we expect,

•We may not realize the benefits we anticipate from the ~~Strategic Plan,~~repositioning of our residential management business,

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

•We cannot be sure that the terms of our new management arrangements with DHC will achieve the anticipated benefit on our operating results,

•Our expectation that our ~~rehabilitation and wellness~~lifestyle 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~~Current inflationary pressures may continue or increase, which may significantly harm our business and results of ~~our Retained Portfolio realized for the quarter ending September 30, 2021 compared to the total DHC managed portfolio for that period~~operations,

•Our strategic arrangements or collaborations with third party service providers may not be ~~achieved in future periods,~~successful and we may not realize the benefits we expect from these arrangements,

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

•Our strategic investments to enhance efficiencies ~~in, and benefits from,~~enhance our ~~purchasing of services~~service offerings or grow our business 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, inflation, 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,

•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,~~us,

•Our efforts to mitigate the continued effects of the Pandemic may not be sufficient,

•We expect that the Pandemic may continue to adversely affect our business, operating results and financial condition, due to ~~continual~~potential deterioration or reduced improvements 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 September 30, 2021, we had $80.2 million of unrestricted cash and cash equivalents. As of September 30, 2021, we had no borrowings under our Credit Facility, letters of credit issued under the Credit Facility in an aggregate amount of $0.8 million and $26.5 million available for borrowing under our Credit Facility. In addition, weWe 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 period, 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 Pandemic has adversely impacted our business and 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 the stated interest rate because of other fees and expenses associated with our Credit Facility,~~

•The amount of available borrowings under our ~~Credit Facility~~Loan is subject to our having qualified collateral, which is primarily based on the value of the assets securing our obligations under our ~~Credit Facility.~~Loan. Accordingly, the available borrowings under ~~our Credit Facility~~the Loan at any time may be less than ~~$65.0~~$95.0 million as it was as of ~~September 30, 2021.~~March 31, 2022. Also, the availability of borrowings under our ~~Credit Facility~~Loan 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~~as well as general 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~~Components of our residential management and ~~rehabilitation and wellness~~lifestyle services 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~~delivery of lifestyle services ~~clinics~~ and, as a result, ~~some of our communities~~we may periodically be prohibited from or limited in admitting new residents or providing services, 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.~~customers.

Currently, unexpected results could occur due to many different circumstances, some of which are beyond our control, such as acts of terrorism, natural disasters, war or other hostilities, global climate change, pandemics, epidemics and other widespread illnesses, including the ~~COVID-19 pandemic,~~Pandemic, changed Medicare or Medicaid rates, new legislation, regulations or rulemaking affecting our business, or changes in capital markets or the economy generally.

50We have based our forward-looking statements on our current expectations about future events that we believe may affect our business, financial condition and results of operations. Because forward-looking statements are inherently subject to risk and uncertainties, some of which cannot be predicted or qualified, our forward-looking statements should not be relied on as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected or implied in our forward-looking statements. The matters discussed in this warning should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Quarterly Report on Form 10-Q.

The information contained elsewhere in this Quarterly Report on Form 10-Q or in our other filings with the Securities and Exchange Commission, or 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.

5135

PART II. Other Information

Item 1. Legal Proceedings

Information on material developments in our legal proceedings is included in Note 1415 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.~~on Form 10-K. 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 may be unable to implement the 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, among other things, we and DHC amended our management arrangements to facilitate the transition of 108 senior living communities that we managed for DHC to new operators, and we intend to (i) reposition 1,532 SNF units that were closed in 27 CCRCs pursuant to the Strategic Plan and that we will continue to manage for DHC, (ii) close the remaining ten Ageility inpatient rehabilitation clinics in certain transitioning communities and (iii) eliminate certain positions in our corporate, regional and divisional teams as well as impacted units and clinics.

~~We may not be able to transition management of the senior living communities to other operators or to reposition SNF units before 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 140, or 35.9% of the positions in our corporate, regional and divisional teams and approximately 1,200, or 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.Item 5. Other Information

The ~~substantial majority~~Board of Directors of the ~~senior living communities~~Company appointed Jeffrey C. Leer as interim President and Chief Executive Officer of the Company effective May 1, 2022.

Mr. Leer, 42, will also continue in his roles as the Company’s Executive Vice President, Chief Financial Officer and Treasurer, which he has held since 2019. Biographical information about Mr. Leer is contained in the Company’s proxy statement for its 2022 annual meeting of stockholders filed with the Securities and Exchange Commission on April 6, 2022.

There are no arrangements or understandings with any other person pursuant to which Mr. Leer was appointed interim President and Chief Executive Officer. He also advised the Company that ~~we operate~~he has no family relationships with any director, executive officer or any person nominated or chosen by the Company to become a director or executive officer of the Company. Additionally, there are ~~owned~~no related party transactions involving Mr. Leer or any member of his immediate family required to be disclosed pursuant to Item 404(a) of Regulation S-K.

Mr. Leer will replace Katherine E. Potter as the Company’s President and Chief Executive Officer. Ms. Potter resigned as our President and Chief Executive Officer, effective April 30, 2022. Ms. Potter will remain with the Company as an employee through December 31, 2022in order to continue to assist in transitioning her duties and responsibilities.

In connection with Ms. Potter’s resignation, the Company entered into a separation agreement with Ms. Potter on May 2, 2022. Under the separation agreement, the Company will pay Ms. Potter $12,000 per month from May 2022 until December 31, 2022 and will pay her a lump sum cash payment in the amount of $483,333 in May 2022. Provided that Ms. Potter signs and does not revoke a release of claims, and subject to the satisfaction of certain other conditions, on December 31, 2022 the Company will make an additional cash payment to Ms. Potter in the amount of $483,333 and will fully accelerate the vesting of any unvested common shares of the Company previously awarded to Ms. Potter as of December 31, 2022, unless that date is accelerated pursuant to the separation agreement. Ms. Potter’s letter agreement also contains other terms and conditions, including confidentiality, non-solicitation and other covenants, and a waiver and release.

The foregoing description of Ms. Potter’s letter agreement is not complete and is qualified in its entirety by ~~DHC~~reference to the full text of such agreement, which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and ~~our business~~ is ~~substantially dependent on our relationship with DHC.~~incorporated by reference herein.

5236

Our business is substantially dependent upon our continued relationship with DHC. Of the 179 senior living communities we operated at September 30, 2021, 159 are owned by DHC. In connection with the Strategic Plan, we and DHC amended our management agreements to facilitate the transition of 108 senior living communities that we managed for DHC to new operators and we closed, and are in the process of, repositioning approximately 1,500 SNF units in 27 CCRCs that we will continue to manage for DHC. The transition of management of 108 senior living communities that we managed for DHC to other operators as well as the closing and repositioning of the 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 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.

DHC may terminate 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 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.

~~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 September 30, 2021:~~

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
September 2021 70 $ 4.38 — $ —
Total 70 $ 4.38 — $ —

~~(1)~~ These common share withholdings and purchases were made to satisfy tax withholding and payment obligations of former employees 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
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

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

10.1

Letter Agreement, dated May 2, 2022, between the Company, The RMR Group LLC and Katherine E. Potter(+) (Filed herewith.)

10-Q

10.1

31.1

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

10-Q

31.1

32.1

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

10-Q

32.1

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).

~~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).~~

5437

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~~ALERISLIFE INC.

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


			/s/ Jeffrey C. Leer
			Jeffrey C. Leer
			Interim President and Chief Executive ~~Vice President,~~Officer and Chief Financial Officer and Treasurer
			(Principal Executive Officer and Principal Financial Officer)
			Dated: ~~November~~May 3, ~~2021~~2022


			/s/ Stephen R. Geiger
			Stephen R. Geiger
			Vice President and Chief Accounting Officer
			(Principal Accounting Officer)
			Dated: ~~November~~May 3, ~~2021~~2022

5538


	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
Balance at January 1, 2021	31,679,207	$	317	$	460,038	$	(251,139)	$	1,316	$	210,532
Comprehensive income (loss):
Net income	—	—		—		3,315		—		3,315
Unrealized loss on debt investments, net of tax	—	—		—		—		(294)		(294)
Total comprehensive income (loss)	—	—		—		3,315		(294)		3,021
Grants under share award plan and share-based compensation	—	—		76		—		—		76
Repurchases and forfeitures under share award plan	(2,778)	—		(1)		—		—		(1)
Balance at March 31, 2021	31,676,429	317		460,113		(247,824)		1,022		213,628
Comprehensive income (loss):
Net loss	—	—		—		(12,302)		—		(12,302)
Unrealized gain on debt investments, net of tax	—	—		—		—		44		44
Realized gain on debt investments reclassified and included in net loss, net of tax	—	—		—		—		(18)		(18)
Total comprehensive income (loss)	—	—		—		(12,302)		26		(12,276)
Grants under share award plan and share-based compensation	87,500	1		637		—		—		638
Repurchases and forfeitures under share award plan	(2,801)	—		(13)		(3)		—		(16)
Balance at June 30, 2021	31,761,128	318		460,737		(260,129)		1,048		201,974
Comprehensive income (loss):
Net loss	—	—		—		(10,201)		—		(10,201)
Unrealized (loss) on debt investments, net of tax	—	—		—		—		(67)		(67)

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


	Three Months Ended September 30, 2021
	Senior Living			Rehabilitation and Wellness Services (3)		Total
Private payer	$	16,032		$	293	$	16,325
Medicare and Medicaid programs	288			10,073		10,361
Other third-party payer programs	—			5,016		5,016
Management fees	11,220		(1) (2)	—		11,220
Reimbursed community-level costs incurred on behalf of managed communities	177,231		(1) (2)	—		177,231
Other reimbursed expenses	5,678		(1) (4)	—		5,678
Total revenues	$	210,449		$	15,382	$	225,831


	Three Months Ended September 30, 2020
	Senior Living			Rehabilitation and Wellness Services		Total
Private payer	$	18,347		$	1,296	$	19,643
Medicare and Medicaid programs	178			10,747		10,925
Other third-party payer programs	—			9,081		9,081
Management fees	15,302		(1)	—		15,302
Reimbursed community-level costs incurred on behalf of managed communities	233,783		(1)	—		233,783
Other reimbursed expenses	6,589		(1)	—		6,589
Total revenues	$	274,199		$	21,124	$	295,323


	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


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


	Three Months Ended September 30,						Increase/(Decrease)
	2021 (4)			2020 (4)			Amount		Percent
REVENUES
Rehabilitation and wellness services	$	13,294		$	14,664		$	(1,370)	(9.3)	%
Senior living	14,829			16,457			(1,628)		(9.9)	%
Management fees	8,510			9,035			(525)		(5.8)	%


OPERATING EXPENSES
Rehabilitation and wellness services expenses	11,907			12,131			(224)		(1.8)	%
Senior living wages and benefits	7,768			9,914			(2,146)		(21.6)	%
Other senior living operating expenses	5,763			5,976			(213)		(3.6)	%

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	70.4		%	75.1		%	(470 bps)		(6.3)	%
RevPAR (2)	$	2,354		$	2,602		$	(248)	(9.5)	%
RevPOR (3)	$	3,270		$	3,388		$	(118)	(3.5)	%

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	73.4		%	78.5		%	(510 bps)		(6.5)	%
RevPAR (2)	$	2,941		$	3,139		$	(198)	(6.3)	%
RevPOR (3)	$	3,922		$	3,942		$	(20)	(0.5)	%

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


	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)	%


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
September 2021	70	$	4.38	—	$	—
Total	70	$	4.38	—	$	—