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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2020  
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-16817
FIVE STAR SENIOR LIVING INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Maryland
04-3516029
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification No.)
400 Centre Street, Newton, Massachusetts 02458
(Address of Principal Executive Offices) (Zip Code) 

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

Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange on Which Registered
Common Stock
 
FVE
 
The Nasdaq Stock Market LLC
 

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

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

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




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

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



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

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





PART I.   Financial Information
Item 1.  Financial Statements
Five Star Senior Living Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share amounts)
(unaudited)
 
 
June 30, 2020
 
December 31, 2019
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
76,114

 
$
31,740

Restricted cash and cash equivalents
 
23,858

 
23,995

Accounts receivable, net of allowance of $3,976 and $4,664, respectively
 
9,387

 
34,190

Due from related person
 
73,466

 
5,533

Debt and equity investments, of which $12,604 and $12,622 are restricted, respectively
 
21,739

 
21,070

Prepaid expenses and other current assets
 
19,118

 
17,286

Assets held for sale
 

 
9,554

Total current assets
 
223,682

 
143,368

 
 
 
 
 
Property and equipment, net
 
162,037

 
167,247

Equity investment of an investee
 
11

 
298

Restricted cash and cash equivalents
 
781

 
1,244

Restricted debt and equity investments
 
6,887

 
7,105

Right of use assets
 
19,459

 
20,855

Other long-term assets
 
4,254

 
5,676

Total assets
 
$
417,111

 
$
345,793

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
15,567

 
$
30,440

Accrued expenses and other current liabilities
 
49,525

 
55,981

Accrued compensation and benefits
 
48,287

 
35,629

Accrued self-insurance obligations
 
27,755

 
23,791

Lease liabilities
 
2,977

 
2,872

Due to related persons
 
592

 
2,247

Mortgage note payable
 
375

 
362

Security deposits and current portion of continuing care contracts
 
409

 
434

Liabilities held for sale
 

 
12,544

Total current liabilities
 
145,487

 
164,300

 
 
 
 
 
Long-term liabilities:
 
 
 
 
Accrued self-insurance obligations
 
33,381

 
33,872

Lease liabilities
 
18,161

 
19,671

Mortgage note payable
 
6,980

 
7,171

Other long-term liabilities
 
8,996

 
798

Total long-term liabilities
 
67,518

 
61,512

 
 
 
 
 
Commitments and contingencies
 

 

 
 
 
 
 
Shareholders’ equity:
 
 
 
 
Common stock, par value $0.01: 75,000,000 shares authorized, 31,574,499 and 5,154,892 shares issued and outstanding, respectively
 
316

 
52

Additional paid-in-capital
 
459,801

 
362,450

Accumulated deficit
 
(257,697
)
 
(245,184
)
Accumulated other comprehensive income
 
1,686

 
2,663

Total shareholders’ equity
 
204,106

 
119,981

Total liabilities and shareholders' equity
 
$
417,111

 
$
345,793

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

1


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



 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
2020
 
2019
REVENUES
 
 
 
 
 
 
 
 
Senior living
 
$
19,590

 
$
263,008

 
$
40,587

 
$
529,171

Management fees
 
15,705

 
4,024

 
32,756

 
8,007

Rehabilitation and wellness services
 
19,268

 
11,488

 
40,652

 
22,260

     Total management and operating revenues
 
54,563

 
278,520

 
113,995

 
559,438

Reimbursed community-level costs incurred on behalf of managed communities
 
224,104

 
77,219

 
456,120

 
151,824

Other reimbursed expenses
 
6,417

 

 
12,414

 

  Total revenues
 
285,084

 
355,739

 
582,529

 
711,262

Other operating income
 
1,499

 

 
1,499

 

Total revenues and other operating income
 
286,583

 
355,739

 
584,028

 
711,262

 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
 
Senior living wages and benefits
 
9,705

 
137,259

 
19,505

 
273,637

Other senior living operating expenses
 
8,331

 
71,301

 
11,573

 
146,967

Rehabilitation and wellness services expenses
 
15,451

 
9,265

 
32,471

 
17,619

Community-level costs incurred on behalf of managed communities
 
224,104

 
77,219

 
456,120

 
151,824

General and administrative
 
23,567

 
20,548

 
46,432

 
47,050

Rent
 
1,378

 
33,262

 
2,555

 
87,804

Depreciation and amortization
 
2,703

 
2,941

 
5,404

 
11,106

Loss on sale of senior living communities
 

 
101

 

 
101

Long-lived asset impairment
 

 
112

 

 
3,260

Total operating expenses
 
285,239

 
352,008

 
574,060

 
739,368

 
 
 
 
 
 
 
 
 
Operating income (loss)
 
1,344

 
3,731

 
9,968

 
(28,106
)
 
 
 
 
 
 
 
 
 
Interest, dividend and other income
 
182

 
415

 
521

 
571

Interest and other expense
 
(409
)
 
(906
)
 
(791
)
 
(1,812
)
Unrealized gain (loss) on equity investments
 
867

 
(38
)
 
(595
)
 
328

Realized gain on sale of debt and equity investments
 
116

 
144

 
95

 
236

Loss on termination of leases
 

 

 
(22,899
)
 

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes and equity in earnings of an investee
 
2,100

 
3,346

 
(13,701
)
 
(28,783
)
Benefit (provision) for income taxes
 
902

 
705

 
(506
)
 
(785
)
Equity in earnings of an investee
 

 
130

 

 
534

Net income (loss)
 
$
3,002

 
$
4,181

 
$
(14,207
)
 
$
(29,034
)
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding—basic
 
31,460

 
5,007

 
31,454

 
5,005

Weighted average shares outstanding—diluted
 
31,582

 
5,142

 
31,454

 
5,005

 
 
 
 
 
 
 
 
 
Net income (loss) per share—basic
 
$
0.10

 
$
0.84

 
$
(0.45
)
 
$
(5.80
)
Net income (loss) per share—diluted
 
$
0.10

 
$
0.81

 
$
(0.45
)
 
$
(5.80
)
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



2


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


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
Net income (loss)
$
3,002

 
$
4,181

 
$
(14,207
)
 
$
(29,034
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on debt investments, net of tax of $0 and $418, and $0 and $1,162, respectively
303

 
(16
)
 
730

 
(221
)
Equity in unrealized gain of an investee, net of tax of $0 and $0, and $0 and $0, respectively

 
71

 

 
136

Realized (gain) loss on debt investments reclassified and included in net income (loss), net of tax of $0 and $0, and $0 and $0, respectively
(3
)
 
(3
)
 
(13
)
 
1

Other comprehensive income (loss)
300

 
52

 
717

 
(84
)
Comprehensive income (loss)
$
3,302

 
$
4,233

 
$
(13,490
)
 
$
(29,118
)

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



3


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



 
Three and Six Months Ended June 30, 2020
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total Shareholders' Equity
Balance at January 1, 2020
5,154,892

 
$
52

 
$
362,450

 
$
(245,184
)
 
$
2,663

 
$
119,981

Comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(17,209
)
 

 
(17,209
)
Unrealized gain on debt investments, net of tax

 

 

 

 
427

 
427

Realized gain on debt investments reclassified and included in net loss, net of tax

 

 

 

 
(10
)
 
(10
)
Total comprehensive (loss) income

 

 

 
(17,209
)
 
417

 
(16,792
)
Cumulative effect adjustment to beginning accumulated deficit and accumulated other comprehensive income in connection with a reclassification of equity investments previously classified as debt investments

 

 

 
1,694

 
(1,694
)
 

Issuance of common shares
26,387,007

 
264

 
97,076

 

 

 
97,340

Grants under share award plan and share-based compensation
4,000

 

 
81

 

 

 
81

Repurchases under share award plan
(3,564
)
 

 
(1
)
 

 

 
(1
)
Balance at March 31, 2020
31,542,335

 
$
316

 
$
459,606

 
$
(260,699
)
 
$
1,386

 
$
200,609

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
3,002

 

 
3,002

Unrealized gain on debt investments, net of tax

 

 

 

 
303

 
303

Realized gain on debt investments reclassified and included in net income, net of tax

 

 

 

 
(3
)
 
(3
)
Total comprehensive income

 

 

 
3,002

 
300

 
3,302

Grants under share award plan and share-based compensation
35,000

 

 
199

 

 

 
199

Repurchases 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




4


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


 
Three and Six Months Ended June 30, 2019
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total Shareholders' Equity
Balance at January 1, 2019
5,085,345

 
$
51

 
$
362,012

 
$
(292,636
)
 
$
1,742

 
$
71,169

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(33,215
)
 

 
(33,215
)
Unrealized loss on debt investments, net of tax

 

 

 

 
(205
)
 
(205
)
Realized loss on debt investments reclassified and included in net loss, net of tax

 

 

 

 
4

 
4

Equity in unrealized gain of an investee, net of tax

 

 

 

 
65

 
65

Total comprehensive loss

 

 

 
(33,215
)
 
(136
)
 
(33,351
)
Cumulative effect adjustment to beginning accumulated deficit in connection with the adoption of ASC Topic 842

 

 

 
67,473

 

 
67,473

Grants under share award plan and share-based compensation

 

 
97

 

 

 
97

Repurchases under share award plan
(1,042
)
 

 

 

 

 

Balance at March 31, 2019
5,084,303

 
$
51

 
$
362,109

 
$
(258,378
)
 
$
1,606

 
$
105,388

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
4,181

 

 
$
4,181

Unrealized loss on debt investments, net of tax

 

 

 

 
(16
)
 
(16
)
Realized gain on debt investments reclassified and included in net income, net of tax

 

 

 

 
(3
)
 
(3
)
Equity in unrealized gain of an investee, net of tax

 

 

 

 
71

 
71

Total comprehensive income

 

 

 
4,181

 
52

 
4,233

Grants under share award plan and share-based compensation
6,250

 

 
123

 

 

 
123

Repurchases under share award plan
(3,964
)
 

 
2

 

 

 
2

Balance at June 30, 2019
5,086,589

 
$
51

 
$
362,234

 
$
(254,197
)
 
$
1,658

 
$
109,746


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

5


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


 
 
Six Months Ended June 30,
 
 
2020
 
2019
CASH FLOW FROM OPERATING ACTIVITIES:
 
 
 
 
Net loss
 
$
(14,207
)
 
$
(29,034
)
Adjustments to reconcile net loss to cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
5,404

 
11,106

Loss on sale of senior living communities
 

 
101

Unrealized loss (gain) on equity securities
 
595

 
(328
)
Realized gain on sale of debt and equity investments
 
(95
)
 
(236
)
Loss on termination of leases
 
22,899

 

Long-lived asset impairment
 

 
3,260

Equity in earnings of an investee
 

 
(534
)
Share-based compensation
 
275

 
222

Provision for losses on accounts receivables
 
1,208

 
2,092

Amortization of non-cash rent adjustments
 

 
(472
)
Other non-cash expense adjustments, net
 
126

 
148

Changes in assets and liabilities:
 
 
 
 

Accounts receivable
 
23,595

 
(953
)
Due from related person
 
(39,920
)
 
17,010

Prepaid expenses and other current assets
 
(8,739
)
 
2,007

Accounts payable
 
(14,873
)
 
(6,506
)
Accrued expenses and other current liabilities
 
41,239

 
682

Accrued compensation and benefits
 
12,658

 
6,389

Due to related persons
 
(1,655
)
 
(524
)
Other current and long-term liabilities
 
11,648

 
994

     Net cash provided by operating activities
 
40,158

 
5,424

 
 
 
 
 
CASH FLOW FROM INVESTING ACTIVITIES:
 
 
 
 
Acquisition of property and equipment
 
(3,121
)
 
(24,427
)
Purchases of debt and equity investments
 
(5,092
)
 
(2,234
)
Proceeds from sale of property and equipment
 
2,725

 
78,920

Distributions in excess of earnings from Affiliates Insurance Company
 
287

 

Proceeds from sale of debt and equity investments
 
4,851

 
4,446

     Net cash (used in) provided by investing activities
 
(350
)
 
56,705

 
 
 
 
 
CASH FLOW FROM FINANCING ACTIVITIES:
 
 
 
 
Repayments of borrowings on revolving credit facility
 

 
(51,484
)
Costs related to issuance of common stock
 
(559
)
 

Repayments of mortgage notes payable
 
(190
)
 
(181
)
Targeted SNF distribution funds received on behalf of others
 
4,715

 

Payment of deferred financing fees
 

 
(1,271
)
     Net cash provided by (used in) financing activities
 
3,966

 
(52,936
)
 
 
 
 
 
Change in cash and cash equivalents and restricted cash and cash equivalents
 
43,774

 
9,193

Restricted cash included in held for sale assets
 

 
(42
)
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period
 
56,979

 
51,258

Cash and cash equivalents and restricted cash and cash equivalents at end of period
 
$
100,753

 
$
60,409

 
 
 
 
 
Reconciliation of cash and cash equivalents and restricted cash and cash equivalents:
 
 
 
 
Cash and cash equivalents
 
$
76,114

 
$
35,500

Current restricted cash and cash equivalents
 
23,858

 
23,880

Other restricted cash and cash equivalents
 
781

 
1,029

Cash and cash equivalents and restricted cash and cash equivalents at end of period
 
$
100,753

 
$
60,409

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
243

 
$
1,565

Income taxes received, net
 
$
(93
)
 
$
(1,491
)
 
 
 
 
 
Non-cash financing activities:
 
 
 
 
Liabilities assumed related to issuance of our common stock
 
$
51,547

 
$

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

6


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


1.  Basis of Presentation and Organization

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

As of June 30, 2020, we managed or operated 265 senior living communities located in 32 states with 30,660 living units, including 254 primarily independent and assisted living communities with 29,396 living units and 11 primarily skilled nursing facilities, or SNFs, with 1,264 living units. As of June 30, 2020, we managed 241 of these senior living communities (28,348 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 265 senior living communities, as of June 30, 2020, included 11,061 independent living apartments, 16,202 assisted living suites and 3,397 SNF units. The foregoing numbers exclude living units categorized as out of service.  

Our rehabilitation and wellness services division, Ageility Physical Therapy Solutions, or Ageility, provides a comprehensive suite of rehabilitation and wellness services at our senior living communities as well as at outpatient clinics located separately from our senior living communities. As of June 30, 2020, we operated 40 inpatient rehabilitation clinics in senior living communities owned by Diversified Healthcare Trust, or DHC, which are managed by us. As of June 30, 2020, we operated 206 outpatient rehabilitation clinics, of which 152 were located at our managed, leased and owned senior living communities and 54 were located within senior living communities not owned or leased by us or DHC. Ageility leases from DHC space at certain of the senior living communities that we manage for DHC.

Restructuring of Business Arrangements with DHC. On April 1, 2019, we entered into a transaction agreement, or the Transaction Agreement, with DHC to 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 better align with the different services we offer older adults. In connection with our reorganization, we changed our reporting structure and the composition of our reporting units. We have reclassified 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.

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

7


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 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.
    
3. Revenue and Other Operating Income

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

8


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

each individual contract within the respective portfolio or our performance obligations within such portfolio. The five-step model defined by ASC Topic 606 requires us to: (i) identify our contracts with customers; (ii) identify our performance obligations under those contracts; (iii) determine the transaction prices of those contracts; (iv) allocate the transaction prices to our performance obligations in those contracts; 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 provided are not material to our condensed consolidated financial statements. Some of our senior living communities require payment of an upfront entrance fee in advance of a resident moving into the community; substantially all of these community fees are non-refundable and are initially recorded as deferred revenue and included in other current liabilities in our condensed consolidated balance sheets. These deferred amounts are then amortized on a straight-line basis into revenue over the term of the resident's agreement. When the resident no longer resides within our community, the remaining deferred non-refundable fees are recognized in revenue. Revenue recorded and deferred in connection with community fees is not material to our condensed consolidated financial statements. Revenue for basic housing and support services and additional requested services is recognized in accordance with ASC Topic 606 and measured based on the consideration specified in the resident agreement and is recorded when the services are provided.

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

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

9


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

communities on a combined basis for such calendar year. The target EBITDA for those communities on a combined basis is increased annually based on the greater of the annual increase of the Consumer Price Index or 2%, plus 6% of any capital investments funded at the managed communities on a combined basis in excess of target amounts. Unless otherwise agreed, the target capital investment increases annually based on the greater of the annual increase of CPI or 2%.

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

Other reimbursed expenses. Other reimbursed expenses include reimbursements that arise from certain centralized services we provide pursuant to our management agreements, a significant portion of which are charged or passed through to and are paid by our customers. We have determined that we control the services provided by third parties for our customers and, therefore, we account for the cost of these services and the related reimbursement revenue on a gross basis. We recognized revenue from other reimbursed expenses of $6,417 for the three months ended June 30, 2020 and $12,414 for the six months ended June 30, 2020. We did not recognize revenue from other reimbursed expenses for the three and six months ended June 30, 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 June 30, 2020
 
Senior Living
 
Rehabilitation and Wellness Services
 
Total
Private payer
$
19,293

 
$
1,214

 
$
20,507

Medicare and Medicaid programs
297

 
9,564

 
9,861

Other third-party payer programs

 
8,490

 
8,490

Management fees
15,705

 

 
15,705

Reimbursed community-level costs incurred on behalf of managed communities
224,104

 

 
224,104

Other reimbursed expenses
6,417

 

 
6,417

  Total revenues
$
265,816

 
$
19,268

 
$
285,084



 
Three Months Ended June 30, 2019
 
Senior Living
 
Rehabilitation and Wellness Services
 
Total
Private payer
$
200,829

 
$
640

 
$
201,469

Medicare and Medicaid programs
54,714

 
6,128

 
60,842

Other third-party payer programs
7,465

 
4,720

 
12,185

Management fees
4,024

 

 
4,024

Reimbursed community-level costs incurred on behalf of managed communities
77,219

 

 
77,219

  Total revenues
$
344,251