---

---

---

---

---

---

---

---

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

As of March 31, 2020, we managed or operated 268 senior living communities located in 32 states with 31,272 living units, including 257 primarily independent and assisted living communities with 30,008 living units and 11 primarily skilled nursing facilities, or SNFs, with 1,264 living units. As of March 31, 2020, we managed 244 of these senior living communities (28,960 living units), we owned and operated 20 of these senior living communities (2,108 living units) and we leased and operated four of these senior living communities (204 living units). Our 268 senior living communities, as of March 31, 2020, included 11,362 independent living apartments, 16,459 assisted living suites and 3,451 SNF units. The foregoing numbers exclude living units categorized as out of service.  

Our rehabilitation and wellness services division provides a comprehensive suite of services; for example, our Ageility Physical Therapy Solutions division, or Ageility, provides our residents and others with rehabilitation and wellness services at our senior living communities as well as at outpatient clinics located separately from our senior living communities. As of March 31, 2020, we operated 41 inpatient rehabilitation clinics in senior living communities of Diversified Healthcare Trust, or DHC, that are managed by us. As of March 31, 2020, we operated 203 outpatient rehabilitation clinics, of which 152 were located at our managed, leased and owned senior living communities and 51 were located within senior living communities not owned or leased by us or DHC.

Restructuring of Business Arrangements with DHC. On April 1, 2019, we entered into a transaction agreement, or the Transaction Agreement, with DHC to restructure our business arrangements with DHC, pursuant to which, effective as of January 1, 2020, or the Conversion Time:

•	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 of these senior living communities, together with a related omnibus agreement, or collectively, the New Management Agreements;

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

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

As of January 1, 2020, we reorganized our business to focus on the different services we offer older adults. In connection with our reorganization, we changed our reporting structure and the composition of our reporting units. As a result, we have reclassified certain prior year amounts to conform to the current year’s presentation. See Note 4 for more information regarding our segment reporting.

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

---

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

Recently Adopted Accounting Pronouncements. On January 1, 2020, we adopted ASU No. 2018-13, Fair Value Measurement (Topic 820) issued by the Financial Accounting Standards Board, or FASB, which modifies certain disclosure requirements in Topic 820, such as the removal of the need to disclose the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, and several changes related to Level 3 fair value measurements. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements.

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

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

Recently Issued Accounting Pronouncements Not Yet Adopted. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires a financial asset or a group of financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This ASU eliminates the probable initial recognition threshold and instead requires reflection of an entity’s current estimate of all expected credit losses. In addition, this ASU amends the current available for sale security other-than-temporary impairment model for debt securities. The length of time that the fair value of an available for sale debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists and credit losses will now be limited to the difference between a security’s amortized cost basis and its fair value. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which amends the transition and effective date for nonpublic entities and smaller reporting companies and clarifies that receivables arising from operating leases are not in the scope of this ASU. Entities will apply the provisions of the ASU as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This ASU is effective for smaller reporting companies for reporting periods beginning after December 15, 2022. We are assessing the potential impact that the adoption of this ASU (and the related clarifying guidance issued by the FASB) will have on our 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 LIBOR and other interbank offered rates to the alternative reference rates. For a contract that meets the criteria, this ASU generally allows an entity to account for and present modifications as an event that does not require remeasurement at the modification date or reassessment of a previous accounting determination. This ASU was effective upon issuance and can be applied through December 31, 2022. We are assessing the potential impact that this ASU will have on our consolidated financial statements.

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

---

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

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

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

Rehabilitation and wellness services revenues at our Ageility clinics consist of charges for clinically-based rehabilitation services, including physical therapy, speech therapy and occupational therapy, as well as other service-based programs and therapies. Revenue for these services is recognized in accordance with ASC Topic 606 and is recorded when the services are provided.

    

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

Commencing with the 2021 calendar year, we may also earn incentive fees from DHC under the management agreements, which are payable in cash and are contingent performance based fees recognized only when earned at the end of each respective measurement period. Incentive management fees are excluded from the transaction price until it becomes probable that there will not be a significant reversal of cumulative revenue recognized. The incentive fee is equal to 15% of the amount by which the annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of all the managed communities on a combined basis exceeds target EBITDA for those communities on a combined basis for such calendar year,

---

provided that in no event shall the incentive fee be greater than 1.5% of the gross revenues realized at all the managed communities on a combined basis for such calendar year.

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

Other reimbursed expenses. Other reimbursed expenses include reimbursements that arise from certain centralized services we provide pursuant to our management agreements, a significant portion of which are charged or passed through to and are paid by our customers. We have determined that we control the services provided by third parties for our customers and therefore, we account for the cost of these services and the related reimbursement revenue on a gross basis. We recognized other reimbursed expenses reflecting corresponding amounts in revenue and expense of $5,997 for the three months ended March 31, 2020. We did not recognize other reimbursed expenses for the three months ended March 31, 2019.

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

	Three Months Ended March 31, 2020
	Senior Living				Rehabilitation and Wellness Services				Total
Private payer	$	20,501			$	804			$	21,305
Medicare and Medicaid programs	716				9,570				10,286
Other third-party payer programs	121				10,669				10,790
Management fees	17,051				—				17,051
Reimbursed community-level costs incurred on behalf of managed communities	232,016				—				232,016
Other reimbursed expenses	5,997				—				5,997
Total revenues	$	276,402			$	21,043			$	297,445

	Three Months Ended March 31, 2019
	Senior Living				Rehabilitation and Wellness Services				Total
Private payer	$	198,875			$	526			$	199,401
Medicare and Medicaid programs	59,586				5,443				65,029
Other third-party payer programs	8,068				4,437				12,505
Management fees	3,983				—				3,983
Reimbursed community-level costs incurred on behalf of managed communities	74,605				—				74,605
Total revenues	$	345,117			$	10,406			$	355,523

Segment Information. Operating segments are components of an enterprise that engages in business activities and for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-

---

making group, in determining the allocation of resources and in assessing performance. Our chief operating decision maker is our President and Chief Executive Officer.

Effective as of January 1, 2020, we reorganized our business to focus on the different services we offer. As a result of the reorganization, our chief operating decision maker changed the manner in which our performance is assessed and, therefore, we changed our reporting structure and the composition of our operating segments. As a result, we have reclassified certain prior year amounts to conform to the current year's presentation.

Subsequent to the reorganization, we operate in two reportable segments: senior living and rehabilitation and wellness services. In the senior living reportable segment, we manage for the account of others and operate for our own account, respectively, independent living communities, assisted living communities and SNFs that are subject to centralized oversight. In the rehabilitation and wellness services segment, we provide therapy and home health services, including physical, occupational, speech and other specialized therapy services, in the inpatient setting and in outpatient clinics, through our Ageility division. Corporate and other amounts excluded from our reportable segments' performance are separately stated below and include amounts related to functional areas such as finance, information technology, legal, human resources and our captive insurance company subsidiary, which participates in our workers' compensation, professional and general liability and certain automobile insurance programs. All of our operations and assets are located in the United States, except for the operations of our captive insurance company subsidiary, which is organized in the Cayman Islands.

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

	Three Months Ended March 31, 2020
	Senior  Living				Rehabilitation and Wellness Services				Corporate and Other				Total
Total revenues	$	276,402			$	21,043			$	—			$	297,445
Operating income (loss)	20,328				3,881				(15,585		)		8,624
Income (loss) before income taxes and equity in earnings of an investee	4,735				2,828				(23,364		)		(15,801		)
Net income (loss)	4,735				2,828				(24,772		)		(17,209		)

	Three Months Ended March 31, 2019
	Senior Living				Rehabilitation and Wellness Services				Corporate and Other				Total
Total revenues	$	345,117			$	10,406			$	—			$	355,523
Operating (loss) income	(7,658		)		2,228				(26,407		)		(31,837		)
(Loss) income before income taxes and equity in earnings of an investee	(26,821		)		1,190				(6,498		)		(32,129		)
Net (loss) income	(28,311		)		1,190				(6,094		)		(33,215		)

---

Property and equipment, net consist of the following:

		March 31, 2020				December 31, 2019
Land		$	12,155			$	12,155
Buildings and improvements		202,417				201,447
Furniture, fixtures and equipment		57,932				59,174
Property and equipment, at cost		272,504				272,776
Less: accumulated depreciation		(108,230		)		(105,529		)
Property and equipment, net		$	164,274			$	167,247

 

We recorded depreciation expense relating to our property and equipment of $2,701 and $8,165 for the three months ended March 31, 2020 and 2019, respectively.

 

We review the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. If there is an indication that the carrying value of an asset or group of assets is not recoverable, we estimate the recoverability of these assets by comparing projected undiscounted cash flows associated with these assets to their respective historical carrying values. If we conclude that an impairment exists, we determine the amount of impairment loss by comparing the historical carrying value of the asset or group of assets to their estimated fair value. We determine estimated fair value based on input from market participants, our experience selling similar assets, market conditions and internally developed cash flow models that our assets or asset groups are expected to generate, and we consider these estimates to be a Level 3 fair value measurement. As a result of our long-lived assets impairment review, we recorded $3,148 of impairment charges to certain of our long-lived assets for the three months ended March 31, 2019. The fair value of the impaired assets was $4,520 as of March 31, 2019. No impairment charges were recorded for the three months ended March 31, 2020.

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

The following tables detail the changes in accumulated other comprehensive income, net of tax, for the three months ended March 31, 2020 and 2019:

		Three Months Ended March 31, 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		—				427				427
Realized loss on debt investments reclassified and included in net loss, net of tax		—				(10		)		(10		)
Balance at March 31, 2020		$	(175	)		$	1,561			$	1,386

 

---

		Three Months Ended March 31, 2019
		Equity Investment of an Investee				Investments				Accumulated Other Comprehensive Income
Balance at January 1, 2019		$	(266	)		$	2,008			$	1,742
Unrealized loss on debt investments, net of tax		—				(205		)		(205		)
Equity in unrealized gain of an investee, net of tax		65				—				65
Realized gain on debt investments reclassified and included in net loss, net of tax		—				4				4
Balance at March 31, 2019		$	(201	)		$	1,807			$	1,606

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

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

We recognized a provision for income taxes of $1,408 and $1,490 for the three months ended March 31, 2020 and 2019, respectively. The provision for income taxes for the three months ended March 31, 2020 is related to federal income taxes, partially offset by a federal alternative minimum tax, or AMT, credit refund benefit and a federal benefit related to lease termination expense, plus state income taxes, including a state valuation allowance. The provision for income taxes for the three months ended March 31, 2019, is due to state income taxes, partially offset by the intraperiod tax allocation benefit related to unrealized gains on available for sale securities.

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.

We calculated basic earnings per common share, or EPS, using the weighted average number of shares of our common shares outstanding during the periods. When applicable, diluted EPS reflects the more dilutive earnings per common share amount calculated using the two class method or the treasury stock method. For the three months ended March 31, 2020 and 2019, 123,660 and 108,210 unvested common shares, respectively, were not included in the calculation of diluted EPS because to do so would have been antidilutive.

Our assets recorded at fair value have been categorized based on a fair value hierarchy in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures. We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels.

 

Level 1 - Inputs are based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

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

---

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

Recurring Fair Value Measures

The tables below present certain of our assets measured at fair value at March 31, 2020 and December 31, 2019, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset.

		As of March 31, 2020
						Quoted Prices in Active Markets for Identical  Assets				Significant  Other Observable  Inputs				Significant Unobservable  Inputs
Description		Total				(Level 1)				(Level 2)				(Level 3)
Cash equivalents(1)		$	25,847			$	25,847			$	—			$	—
Investments:
Equity investments(2)
High yield fund(3)		2,608				—				2,608				—
International bond fund(4)		2,742				—				2,742				—
Financial services industry		1,022				1,022				—				—
Healthcare		399				399				—				—
Technology		203				203				—				—
Other(5)		3,904				3,904				—				—
Total equity investments		10,878				5,528				5,350				—
Debt investments(6)
Industrial bonds		1,164				—				1,164				—
Technology bonds		1,952				—				1,952				—
Government bonds		10,063				10,063				—				—
Energy bonds		619				—				619				—
Financial bonds		1,540				—				1,540				—
Other		1,025				—				1,025				—
Total debt investments		16,363				10,063				6,300				—
Total investments		27,241				15,591				11,650				—
Total		$	53,088			$	41,438			$	11,650			$	—

---

 

		As of December 31, 2019
						Quoted Prices in Active Markets for Identical Assets				Significant  Other Observable Inputs				Significant  Unobservable Inputs
Description		Total				(Level 1)				(Level 2)				(Level 3)
Cash equivalents(1)		$	27,456			$	27,456			$	—			$	—
Investments:
Equity investments(2)
Financial services industry		1,233				1,233				—				—
Healthcare		395				395				—				—
Technology		281				281				—				—
Other		4,500				4,500				—				—
Total equity investments		6,409				6,409				—				—
Debt investments(6)
High yield fund(3)		2,977				—				2,977				—
International bond fund(4)		2,680				—				2,680				—
Industrial bonds		1,180				—				1,180				—
Technology bonds		2,189				—				2,189				—
Government bonds		9,537				9,537				—				—
Energy bonds		625				—				625				—
Financial bonds(5)		1,853				—				1,853				—
Other		725				—				725				—
Total debt investments		21,766				9,537				12,229				—
Total investments		28,175				15,946				12,229				—
Total		$	55,631			$	43,402			$	12,229			$	—

(1)

Cash equivalents consist of short-term, highly liquid investments and money market funds held primarily for obligations arising from our self-insurance programs. Cash equivalents are reported in our condensed consolidated balance sheets as cash and cash equivalents and current and long term restricted cash and cash equivalents. Cash equivalents include $23,300 and $23,014 of balances that are restricted at March 31, 2020 and December 31, 2019, respectively.

(2)	The fair value of our equity investments is readily determinable. During the three months ended March 31, 2020 and 2019, we received gross proceeds of $45 and $1,115, respectively, in connection with the sales of equity investments and recorded gross realized gains totaling $0 and $136, respectively, and gross realized losses totaling $30 and $40, respectively.

 

(3)

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

(4)

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

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

(6)

As of March 31, 2020, our debt investments, which are classified as available for sale, had a fair value of $16,363 with an amortized cost of $15,536; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $834, net of unrealized losses of $7. As of December 31, 2019, our debt investments had a fair value of $21,766 with an amortized cost of $19,662; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $2,114, net of unrealized losses of $10. Debt investments include $12,318 and $12,477 of balances that are restricted as of March 31, 2020 and December 31, 2019, respectively. At March 31, 2020, eight of the investments we held, with a fair value of $1,059, had been in a loss position for less than 12 months and we did not hold any debt investments with a fair value in a loss position for greater than 12 months. We do not believe these investments are impaired primarily because they have not been in a loss position for an extended period of time, the financial conditions of the issuers of these investments remain strong with solid fundamentals as of March 31, 2020, we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery, and other factors that support our conclusion

---

that the loss is temporary. During the three months ended March 31, 2020 and 2019, we received gross proceeds of $1,409 and $1,528, respectively, in connection with the sales of debt investments and recorded gross realized gains totaling $10 and $2, respectively, and gross realized losses totaling $0 and $6, respectively. We record gains and losses on the sales of these investments using the specific identification method.

The amortized cost basis and fair value of debt securities at March 31, 2020, by contractual maturity, are shown below.

		Amortized Cost				Fair Value
Due in one year or less		$	1,503			$	1,512
Due after one year through five years		8,702				9,034
Due after five years through ten years		5,331				5,817
Total		$	15,536			$	16,363

Our financial assets (which include cash equivalents and investments) have been valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing third-party pricing services or other market observable data. During the three months ended March 31, 2020, we did not change the type of inputs used to determine the fair value of any of our assets and liabilities that we measure at fair value. 

 

The carrying value of accounts receivable and accounts payable approximates fair value as of March 31, 2020 and December 31, 2019. The carrying value and fair value of our mortgage notes payable were $7,445 and $9,412, respectively, as of March 31, 2020 and $7,533 and $8,861, respectively, as of December 31, 2019, and are categorized in Level 3 of the fair value hierarchy in their entirety. We estimate the fair values of our mortgage notes payable by using discounted cash flow analyses and currently prevailing market terms as of the measurement date.

Non-Recurring Fair Value Measures

 

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

In June 2019, we entered into a second amended and restated credit agreement with Citibank, N.A., as administrative agent and lender, and a syndicate of other lenders pursuant to which we obtained a $65,000 secured revolving credit facility scheduled to mature on June 12, 2021. At our option, we may extend the maturity date for a one year period, which is subject to payment of an extension fee and meeting other conditions.

We paid fees of $1,271 in 2019 in connection with the closing of our credit facility, which these fees were deferred and are being amortized over the initial term of our credit facility. Our credit facility is available for general business purposes, including acquisitions, and provides for the issuance of letters of credit. We are required to pay interest at a rate of LIBOR plus a premium of 250 basis points per annum, or at a base rate, as defined in our credit agreement, plus 150 basis points per annum, on borrowings under our credit facility; the effective annual interest rates, as of March 31, 2020, were 3.49% 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 borrowings under our credit facility. We did not borrow any funds under our credit facility during the three months ended March 31, 2020. The weighted average annual interest rate for borrowings under our prior credit facility was 5.00% for the three months ended March 31, 2019. As of March 31, 2020, we had no borrowings outstanding under our credit facility. As of March 31, 2020, we had letters of credit issued in an aggregate amount of $3,238 and $54,450 available for borrowings under our credit facility. We incurred aggregate interest expense and other associated costs related to our credit facilities of $254 and $772 for the three months ended March 31, 2020 and 2019, respectively.

Our credit facility is secured by real estate mortgages on 11 senior living communities with a combined 1,245 living units owned by certain of our subsidiaries that guarantee our obligations under our credit facility. Our credit facility is also secured by these subsidiaries’ 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 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 control of us, as defined in our credit agreement. Our credit agreement contains financial and other covenants, including those that restrict our ability to pay dividends or make other distributions to our shareholders in certain circumstances.

At March 31, 2020, we had seven irrevocable standby letters of credit outstanding, totaling $28,626. One of these letters of credit in the amount of $25,388, which secures our workers' compensation insurance program, is currently collateralized by approximately $21,707 of cash equivalents and $6,586 of debt and equity investments. This letter of credit currently expires in June 2020 and is automatically extended for one year terms unless notice of nonrenewal is provided by the issuing bank prior to the end of the applicable term. As of May 4, 2020, we have not received a notice of nonrenewal. We expect that our workers' compensation insurance program will require an increase in the amount of this letter of credit in June 2020. At March 31, 2020, the cash equivalents collateralizing this letter of credit, including accumulated interest, were classified as short-term restricted cash and cash equivalents in our condensed consolidated balance sheets, and the debt and equity investments collateralizing this letter of credit are classified as short-term investments in our condensed consolidated balance sheets. The remaining six irrevocable standby letters of credit outstanding at March 31, 2020, totaling $3,238, secure certain of our other obligations. As of March 31, 2020, these letters of credit are scheduled to mature between June 2020 and October 2020 and are required to be renewed annually. As of March 31, 2020, our obligations under these six letters of credit, totaling $3,238, remain issued and outstanding under our credit facility.

At March 31, 2020, one of our senior living communities was encumbered by a mortgage that secured a note. This mortgage note contains standard mortgage covenants. We recorded a discount in connection with the assumption of this mortgage note as part of our acquisition of the community secured by this mortgage in order to record this mortgage note at its estimated fair value. We amortize this discount as an increase in interest expense until the maturity of this mortgage note. This mortgage note requires payments of principal and interest monthly until maturity. The following table is a summary of this mortgage note as of March 31, 2020:

Balance as of March 31, 2020						Contractual Stated Interest Rate				Effective Interest Rate				Maturity Date		Monthly Payment						Lender Type
$	7,691				(1)	6.20		%		6.70		%		September 2032		$	72					Federal Home Loan Mortgage Corporation

(1)	Contractual principal payment excluding unamortized discount and debt issuance costs of $246.

We incurred interest expense, net of discount amortization, of $128 and $134 with respect to the mortgage note for the three months ended March 31, 2020 and 2019, respectively. Our mortgage note requires monthly payments into escrows for taxes, insurance and property replacement funds; certain withdrawals from escrows require Federal Home Loan Mortgage Corporation approval.

As of March 31, 2020, we believe we were in compliance with all applicable covenants under our credit facility and mortgage note.

See Note 11 for information regarding the $25,000 credit facility we obtained from DHC on April 1, 2019. The DHC credit facility matured and was terminated on January 1, 2020, in connection with the completion of the Restructuring Transactions. There were no borrowings outstanding under the DHC credit facility at the time of such termination and we did not borrow any funds under the DHC credit facility during its term.

    

As of December 31, 2019, we leased 166 senior living communities from DHC pursuant to five master leases and we managed for DHC's account 78 senior living communities pursuant to management agreements. Effective as of January 1, 2020, we restructured our business arrangements with DHC as further described below, and after giving effect to the Restructuring Transactions, we manage 244 senior living communities for the account of DHC pursuant to the New Management Agreements.

Restructuring our Business Arrangements with DHC. Pursuant to the Transaction Agreement as of the Conversion Time:

---

•	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 the New Management Agreements;

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

•

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

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

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

Pursuant to the Transaction Agreement, we agreed to expand our Board of Directors within six months of January 1, 2020, to add an Independent Director (as defined in our Bylaws) reasonably satisfactory to DHC. As a result, on February 26, 2020, our Board of Directors elected Michael E. Wagner, M.D. as an Independent Director.

Pursuant to the New Management Agreements, we will 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, as well as, commencing with the 2021 calendar year, an annual incentive fee equal to 15% of the amount by which the annual EBITDA, of all communities on a combined basis exceeds the target EBITDA for all communities on a combined basis for such calendar year, provided that in no event shall the incentive fee be greater than 1.5% of the gross revenues realized at all communities on a combined basis for such calendar year.

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

We recognized transaction costs of $1,095 related to the Transaction Agreement for the three months ended March 31, 2020.

In connection with the Transaction Agreement, we entered into the DHC credit facility pursuant to which DHC extended to us a $25,000 line of credit. The DHC credit facility matured and was terminated on January 1, 2020, in connection with the completion of the Restructuring Transactions. There were no borrowings outstanding under the DHC credit facility at the time of such termination and we did not make any borrowings under the DHC credit facility during its term.

---

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

Our total rent expense under all of our leases with DHC was $53,782 for the three months ended March 31, 2019, which amount included estimated percentage rent of $1,549 for the three months ended March 31, 2019. Pursuant to the Transaction Agreement, our rent payable to DHC was reduced by a total of $13,840 in aggregate for February and March 2019 and we did not pay such amount to DHC. However, as the Transaction Agreement was not entered into until April 1, 2019, our rent expense for the three months ended March 31, 2019, was not adjusted for the rent reduction for February and March 2019. Instead, the rent reduction for February and March 2019 was determined to be a lease inducement, for which a liability for the $13,840 was recorded as a reduction of the right of use asset on our condensed consolidated balance sheets as of March 31, 2019, and was amortized as a reduction of rent expense over the remaining terms of our master leases.

As of December 31, 2019, we had no outstanding rent obligation to DHC.

Our previously existing leases with DHC were “triple net” leases, which generally required us to pay rent and all property operating expenses, to obtain, maintain and comply with all applicable permits and licenses necessary to operate the leased communities, to indemnify DHC from liability which may arise by reason of its ownership of the communities, to maintain the communities at our expense, to remove and dispose of hazardous substances on the communities in compliance with applicable laws and to maintain insurance on the communities for DHC’s and our benefit.

Prior to the Transaction Agreement, under our previously existing leases with DHC, we could request that DHC purchase certain improvements to the leased communities in return for increases in annual rent in accordance with a formula specified in the applicable lease. Pursuant to the Transaction Agreement, the $22,578 of capital improvements to the leased communities that we sold to DHC during the three months ended March 31, 2019, did not result in increased rent.

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

Senior Living Communities Managed for the Account of DHC and its Related Entities. As of March 31, 2020 and 2019, we managed 244 and 76 senior living communities, respectively, for the account of DHC. We earned management fees of $16,462 and $3,718 from the senior living communities we managed for the account of DHC for the three months ended March 31, 2020 and 2019, respectively. In addition, we earned fees for our management of capital expenditure projects at the communities we managed for the account of DHC of $462 and $195 for the three months ended March 31, 2020 and 2019, respectively. These amounts are included in management fee revenue in our condensed consolidated statements of operations. In connection with the completion of the Restructuring Transactions, effective as of January 1, 2020, we and DHC terminated the long-term management and pooling agreements and replaced them with the New Management Agreements, the terms of which are discussed above.

We also provide certain other services to residents at some of the senior living communities we manage for the account of DHC, such as rehabilitation services. At senior living communities we manage for the account of DHC where we provide rehabilitation services on an outpatient basis, the residents, third party payers or government programs pay us for those rehabilitation services. At senior living communities we manage for the account of DHC where we provide inpatient rehabilitation 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 $8,057 and $1,675 for the three months ended March 31, 2020 and 2019, respectively, for rehabilitation services we provided at senior living communities we manage for the account of DHC and that are payable by DHC. These amounts are included in rehabilitation and wellness services in our condensed consolidated statements of operations. Consistent with our historical accounting for these services at our managed communities, the revenues earned at these inpatient clinics that were previously located at senior living communities that we leased from DHC but as of the Conversion Time, we now manage, no longer constitute intercompany revenues and thus will

---

not be eliminated in consolidation and will be recognized and reported as rehabilitation and wellness services revenues in our condensed consolidated statements of operations.

We earned management fees of $127 and $70 for the three months ended March 31, 2020 and 2019, respectively, for management services at a part of a senior living community DHC subleases to an affiliate, which amounts are included in management fee revenue in our condensed consolidated statements of operations.

The RMR Group LLC, or RMR LLC, provides us certain services pursuant to a business management agreement. Pursuant to our business management agreement with RMR LLC, we incurred aggregate fees and certain cost reimbursements payable to RMR LLC of $2,351 and $2,364 for the three months ended March 31, 2020 and 2019, respectively, which amounts include reimbursements for our share of RMR LLC’s costs for providing our internal audit function. These amounts are included in general and administrative expenses in our condensed consolidated statements of operations.

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

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

DHC. DHC is currently our largest shareholder, owning, as of March 31, 2020, 10,691,658 of our common shares, or 33.9% of our outstanding common shares. We manage for the account of DHC a substantial majority of the senior living communities we operate. RMR LLC provides management services to both us and DHC and Adam Portnoy is chair of the board of trustees and a managing trustee of DHC. Jennifer Clark is a managing trustee and the secretary of DHC. Effective as of January 1, 2020, we completed the Restructuring Transactions, pursuant to which we restructured our existing business arrangements with DHC. See Note 11 for more information regarding our relationships, agreements and transactions with DHC and certain parties related to it and us.

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

ABP Trust. ABP Trust and its subsidiaries, owned 1,972,783 of our common shares, representing 6.3% of our outstanding common shares as of March 31, 2020.

We lease our headquarters from a subsidiary of ABP Trust. Our rent expense for our headquarters, including utilities and real estate taxes that we pay as additional rent, was $435 and $520 for the three months ended March 31, 2020 and 2019, respectively. The adoption of ASC Topic 842 resulted in the recognition of a lease liability and right of use asset, which amount was $1,215 and $2,119 as of March 31, 2020 and 2019, respectively, with respect to our headquarters lease, using an incremental borrowing rate of 4.4%. 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.

---

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

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

At both March 31, 2020 and December 31, 2019, our investment in AIC had a carrying value of $298. These amounts are presented as equity investment of an investee in our condensed consolidated balance sheets. We did not recognize any income related to our investment in AIC for the three months ended March 31, 2020, and recognized income of $404 for the three months ended March 31, 2019, which amounts are presented as equity in earnings of an investee in our condensed consolidated statements of operations. Our other comprehensive income for the three months ended March 31, 2019, includes our proportionate part of unrealized gains (losses) on securities that are owned by AIC related to our investment in AIC.

Retirement and Separation Arrangements. In connection with his retirement, we entered into a retirement agreement with our former officer, Bruce J. Mackey Jr. Additionally, we entered into a separation agreement with our former Senior Vice President, Senior Living Operations, R. Scott Herzig. Pursuant to these agreements, we made cash payments of $600 and $510 to Mr. Mackey and Mr. Herzig, respectively, in January 2019. In addition, we made release and transition payments to Mr. Mackey, in cash, totaling $110 and $132 for the three months ended March 31, 2020 and 2019, respectively. The full severance costs for Messrs. Mackey and Herzig were recorded during the fourth quarter of 2018 as they met the criteria in FASB ASC Topic 420, Exit or Disposal Cost Obligations, or ASC Topic 420.

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

As of May 5, 2020, we settled all outstanding amounts due from DHC associated with the Share Issuances. See Notes 1 and 11 for more information regarding the Share Issuances.

---

•	restricted access to our senior living communities to only essential visitors and team members;

•	closed 11 of our Ageility clinics for in-person services;

•	limited sales and marketing activities;

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

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

•	worked with vendors to ensure adequate supplies and personal protective equipment are available to our communities.

---

•	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 the New Management Agreements;

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

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

---

•

On March 13, 2020, CMS issued a memorandum that requires nursing homes to follow The Centers for Disease Control and Prevention, or CDC, guidelines to, among other things, limit access to nursing homes by visitors and non-essential personnel, increase the availability of certain supplies, such as hand sanitizer and personal protective equipment, and cancel all communal activities and communal dining. On March 23, 2020, CMS issued guidance that temporarily amended the state survey inspection process for nursing homes to target and assess compliance with CDC-recommended infection control measures. The new state survey process prioritizes complaint inspections, targeted infection control inspections and self-assessments of nursing homes, and suspends standard and revisit inspections of nursing homes. On April 2, 2020, CMS issued further guidance instructing nursing homes to immediately implement symptom screening for all staff, residents and visitors, and ensure staff are using appropriate personal protective equipment when interacting with residents. The guidance also suggests that nursing homes use separate staffing teams for residents who have tested positive for COVID-19 and those who have tested negative for COVID-19.

•

The Secretary of the U.S. Department of Health and Human Services has waived certain Medicare requirements applicable to long-term care facilities, including SNFs. Under the March 13, 2020 waiver: (1) the requirement that covered SNF care be preceded by an inpatient hospital stay of at least three days’ duration is waived for those Medicare beneficiaries who need to be transferred as a result of the COVID-19 pandemic; (2) SNF coverage is renewed for certain Medicare beneficiaries who have recently exhausted SNF benefits; and (3) the deadlines for performance of clinical assessment of SNF residents and submission of such clinical assessment data are waived. The Secretary also subsequently waived certain requirements related to the submission of staffing data, pre-admission screenings, in-person resident groups, certain nurse aide training, and long-term care facility transfer and discharge protocols. Further, given the need for surge capacity overall and the need to isolate residents who have been or may be affected by the COVID-19 pandemic, the Secretary waived certain physical environment requirements to allow for non-SNF buildings to be temporarily certified and for non-resident rooms to be used for patient care. Finally, CMS waived the requirement for physicians and non-physician practitioners to perform in-person visits for residents and to allow visits to be conducted, as appropriate, via telehealth options. These waivers are retroactive to March 1, 2020, and are in effect through the end of the National Emergency.

•	The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020. In addition to broad-based public and private financial relief, the CARES Act included a number of measures intended to assist the healthcare industry, including changes to the Medicare accelerated and advance payment program, which is a

---

---

---

---

---

---

---

---

---

---

•	The continued impact of the COVID-19 pandemic on our and DHC's business, results, operations and liquidity, and the impact of the COVID-19 pandemic on the senior living industry in general,

•	Our ability to operate our senior living communities profitably,

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

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

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

•	Whether the aging U.S. population and increasing life spans of older adults will increase the demand for senior living communities, health and wellness service clinics and other healthcare related properties and services,

•	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 expectations regarding any increases to the amounts of our letters of credit,

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

•	Other matters.

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

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

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

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

•	Increases in tort and insurance liability costs,

•	Our operating 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

---

•	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,

•	Continued efforts by third-party payers to reduce costs, and

•	Acts of terrorism, outbreaks or continuations of public health crises, including COVID-19, or other manmade or natural disasters beyond our control.

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

•	We may not successfully execute our strategic growth initiatives,

•

Our ability to operate senior living communities profitably and increase the revenues generated by us depends upon many factors, including our ability to integrate new communities 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,

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

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

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

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

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

•

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

•	Residents who pay for our services with their private resources may become unable to afford our services, resulting in decreased occupancy and decreased revenues at our senior living communities,

•	The various federal and state government agencies that pay us for the services we provide to some of our residents are still experiencing budgetary constraints and may lower the Medicare, Medicaid and other rates they pay us,

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

---

•

At March 31, 2020, we had $36.6 million of unrestricted cash and cash equivalents. As of March 31, 2020, we had no borrowings under our $65.0 million credit facility, letters of credit issued in an aggregate amount of $3.2 million and $54.5 million available for borrowing under our credit facility. In addition, we believe that we have adequate financial resources to fund our business for at least the next 12 months. However, we have incurred and may continue to incur operating losses and have a large accumulated deficit. Moreover, certain aspects of our operations and future growth we may pursue in our business may require significant amounts of working cash and require us to make significant capital expenditures. Further, the impact of the COVID-19 pandemic and resulting economic conditions has adversely impacted us and will likely continue to do so. As a result, we may not have sufficient cash liquidity,

•	Actual costs under our credit facility will be higher than LIBOR plus a premium because of other fees and expenses associated with our credit facility,

•

The amount of available borrowings under our credit facility is subject to our having qualified collateral, which is primarily based on the value of the assets securing our obligations under our credit facility. Accordingly, the availability of borrowings under our credit facility at any time may be less than $65.0 million. Also, the availability of borrowings under our credit facility is subject to our satisfying certain financial covenants and other conditions that we may be unable to satisfy,

•	We intend to conduct our business in a manner that will afford us reasonable access to capital for investment and financing activities. However, we may not be able to successfully carry out this intention. Further, market disruptions, such as may be caused and continued by the COVID-10 pandemic and the current economic conditions, may significantly limit our availability to capital.

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

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

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

•	We may not be able to sell communities that we may seek to sell on terms acceptable to us or otherwise,

•	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,

•

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

•	We expect that the COVID-19 pandemic will continue to adversely affect our business, operating results and financial condition, including by decreasing the occupancy of our senior living communities, causing staffing and supply shortages and increasing the costs of operating our senior living facilities.

---

---

•	the current low market price of our common stock may continue for an indefinite period and could decline further, and if it does, we may fail to satisfy Nasdaq listing requirements to maintain the listing of our shares on Nasdaq;

---

•	our inability to comply with certain financial covenants, or to pay interest and principal when due, under any outstanding debt we may have that could result in our defaulting under our credit agreement and the possible loss of our revolving credit facility;

•	our inability to access debt and equity capital on attractive terms, or at all;

•	increased risk of default or bankruptcy;

•	increased risk of our inability to weather an extended cessation of normal economic activity and thereby impairing our ability to continue functioning as a going concern;

•	our inability to operate our businesses if the health of our management personnel and other employees is affected, particularly if a significant number of individuals are impacted; and

•	reduced economic demand resulting from mass employee layoffs or furloughs in response to governmental action taken to slow the spread of COVID-19, which could impact our continued viability.

---

(1)

These common share withholdings and purchases were made to satisfy tax withholding and payment obligations of current and former employees and officers of us and of RMR LLC in connection with the vesting of awards of our common shares. We withheld and purchased these shares at their fair market value based upon the trading price of our common shares at the close of trading on Nasdaq on the purchase date.

---

---