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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Maryland04-3516029
(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)
617796‑8387
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title Of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common StockFVEThe Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   No 
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 filerAccelerated filer
Non-accelerated filerSmaller 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes   No 
The aggregate market value of the voting shares of common stock, $.01 par value, or common shares, of the registrant held by non-affiliates was $73.0 million based on the $3.90 closing price per common share on The Nasdaq Stock Market LLC on June 30, 2020. For purposes of this calculation, an aggregate of 203,390 common shares held directly by, or by affiliates of, the directors and officers of the registrant, plus 10,691,658 common shares held by Diversified Healthcare Trust and 1,972,783 common shares held by ABP Acquisition LLC, have been included in the number of common shares held by affiliates.
Number of the registrant’s common shares outstanding as of February 20, 2021: 31,678,649.



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References in this Annual Report on Form 10‑K to the Company, Five Star, we, us or our mean Five Star Senior Living Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context indicates otherwise.

DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K is incorporated by reference to our definitive Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2020.




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Warning Concerning Forward-Looking Statements

This Annual Report on Form 10-K contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever we use words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “will”, “may” and negatives or derivatives of these or similar expressions, we are making forward-looking statements. These forward-looking statements are based upon our present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Forward-looking statements in this Annual Report on Form 10-K relate to various aspects of our business, including:

The duration, severity and geographic reach of the novel coronavirus SARS-CoV-2, or COVID-19, pandemic, or the Pandemic, and its impact on our and Diversified Healthcare Trust's, or DHC's, business, results, operations and liquidity, and the impact of the Pandemic on the senior living industry in general,

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

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

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

Our ability to operate our senior living communities profitably,

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

Our expectation to focus our expansion activities on internal growth from our existing senior living communities and clinics we operate and other ancillary services 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 and health and wellness centers,

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

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

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

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

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

Our ability to access or raise debt or equity capital.
    
Our actual results may differ materially from those contained in or implied by our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. A summary of the risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, cash flows, liquidity and prospects identified in Part I, Item IA. "Risk Factors" in this Annual Report on Form 10-K include, but are not limited to:

The impact of conditions in the economy and the capital markets on us and our residents, clients and other customers,
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Competition within the senior living and other health and wellness related services businesses,

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

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

Increases in tort and insurance liability costs,

Our operating and debt leverage,

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

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

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

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

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

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

For example:

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

We may not successfully execute our strategic growth initiatives,

Our ability to operate senior living communities or rehabilitation and wellness services clinics profitably and increase the revenues generated by us depends upon many factors, including our ability to integrate new communities 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 into additional management arrangements with DHC for additional senior living communities that DHC owns or may acquire in the future. However, we cannot be sure that we will enter any additional management arrangements with DHC,

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

Our investments in our workforce and continued focus on reducing team member turnover by enhancing our competitiveness in the marketplace with respect to cash compensation and other benefits, as well as our innovative
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efforts to attract talent, 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 customers or their family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics generally could affect the revenues and profitability of our business,

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

The various federal and state government agencies that pay us for the services we provide to some of our customers are still experiencing budgetary constraints and may lower the Medicare, Medicaid and other rates they pay us. On December 2, 2020, CMS issued a final rule that, among other things, reduces Medicare payments that will reduce revenues related to outpatient therapy on or after January 1, 2021 by 9.5%. On December 27, 2020, the reduction was cut to 3.5% as a result of the Consolidated Appropriations Act.

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

We believe that our insurance costs may continue to rise as a result of claims or litigation associated with the Pandemic, coupled with general market conditions prior to the Pandemic,

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

At December 31, 2020, we had $84.4 million of unrestricted cash and cash equivalents. As of December 31, 2020, we had no borrowings under our secured revolving credit facility, or our credit facility, letters of credit issued under the credit facility in an aggregate amount of $2.4 million and $42.1 million available for borrowing under our credit facility. In addition, we believe that we have adequate financial resources to fund our business for at least the next 12 months. However, we have incurred in prior periods and may continue to incur in future periods operating losses and we have a large accumulated deficit. Moreover, certain aspects of our operations and future growth opportunities that we may pursue in our business may require significant amounts of working cash and require us to make significant capital expenditures. Further, the impact of the 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 available borrowings under our credit facility at any time may be less than $65.0 million. Also, the available borrowings under our credit facility is subject to our satisfying certain financial covenants and other conditions that we may be unable to satisfy.

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

Our actions and approach to managing our insurance costs, including our operating an offshore captive insurance company and self-insuring with respect to certain liability matters, may not be successful and could result in our incurring significant costs and liabilities that we will be responsible for funding,
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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 or exit, may not occur, may be delayed or the terms of such transactions or arrangements may change,

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

We may not be able to sell senior living communities that we own, and DHC may not be able to sell senior living communities we manage, that we or DHC may seek to sell, on acceptable terms, or we may incur losses in connection with any such sales,

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

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

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

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

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

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

Except as required by law, we do not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.
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FIVE STAR SENIOR LIVING INC.
2020 ANNUAL REPORT ON FORM 10‑K
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This Annual Report on Form 10-K includes our trademarks, such as “Five Star Senior Living”, “Bridge to Rediscovery”, Lifestyle360 and “Ageility Physical Therapy Solutions," which are our property and are protected under applicable intellectual property laws. Solely for convenience, these trademarks referred to in this Annual Report on Form 10-K 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.



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PART I
Item 1. Business
The Company
We operate 252 senior living communities, including one active adult community, located in 31 states and provide services to approximately 21,000 residents. We also operate 244 rehabilitation and wellness services clinics located in 28 states and provide services to approximately 16,500 clients. We conduct our operations in two reportable segments: (i) senior living and (ii) rehabilitation and wellness services.

With our mission, “To honor and enrich the journey of life, one experience at a time,” our leadership team is committed to prioritizing the needs of our residents, clients and team members. We employ approximately 19,500 team members experienced in supporting older adults and we are focused on establishing ourselves as a premier provider of services to older adults.

As of December 31, 2020, our senior living segment was comprised of older adults residing in (i) 243 primarily independent and assisted living communities and (ii) 9 skilled nursing facilities, or SNFs. Our independent and assisted living communities, which includes our Bridge to Rediscovery memory care units, consist of 28,316 living units. These units include 37 continuing care retirement communities, or CCRCs, with 8,574 living units. Our 9 SNFs consist of 955 living units. As of December 31, 2020, we managed 228 senior living communities (26,969 living units), including one active adult community (167 living units), owned and operated 20 senior living communities (2,098 living units), and leased and operated 4 senior living communities (204 living units).

With the goal of offering a comprehensive suite of services, we 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 through Ageility Physical Therapy Solutions, or Ageility, a division of our rehabilitation and wellness services segment. As of December 31, 2020, we operated 37 inpatient clinics providing rehabilitation and wellness services in 32 of our CCRCs and 5 of our SNFs. As of December 31, 2020, we operated 207 outpatient clinics, of which 149 were clinics within our senior living communities and 58 were clinics within senior living communities operated by other providers. We provided Ageility services to approximately 16,500 clients in 2020. As of December 31, 2020, we have continued to expand our Ageility service line by starting to introduce innovative fitness and personal training offerings to complement outpatient therapy in 185 senior living and active adult communities.

According to "The Longevity Economy Outlook", from AARP and The Economist, as of December 31, 2019, the over-50 age population in the United States was comprised of 117.4 million people, or 35% of the population. The fastest growing age population in the United States is the over 85, and the second fastest is the over 100. We believe our business has the platform and service offerings to position us to support a higher quality of life for these adults as they age.

We are focused on (i) creating experiences for older adults that meet and often exceed their expectations and (ii) offering residences and services that meet the needs and demands of older adults. To that end, we collaborate and actively engage with innovative organizations. We also sponsor and pilot programs to continually evolve our service capabilities to meet the needs of our residents, clients and team members and we adapt our offerings to meet the evolving consumer demands of a growing population of older adults. In 2020, we served approximately 24,000 older adults on a daily basis by providing a variety of living experiences and services including altered services offered to adhere to rigorous infectious disease protocols as a result of the Pandemic in addition to rehabilitation and wellness services through Ageility. For residents in our assisted living and SNF communities, we offer assistance with their daily living activities, including bathing and dressing, eating, toileting and mobility assistance. In certain senior living communities, we also provide licensed skilled nursing services. In addition, we offer additional services including, but not limited to, on-site entertainment, cultural and educational activities, social opportunities and camaraderie, virtual communication, wellness programs and activities to support a healthy lifestyle, personal grooming services, telehealth visits and home health and dining services. Our focus on offering a broad array of services helps promote a greater sense of community and enable older adults to age-in-place independently. In addition, through our rehabilitation and wellness services clinics, we offer a wide range of therapeutic services, including physical, speech and occupational therapy within many of our senior living communities as well as at outpatient clinics.


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Restructuring Transactions 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, or the Restructuring Transactions, pursuant to which, effective as of January 1, 2020, or the Conversion Time:

our five then existing master leases with DHC for 166 of DHC's senior living communities (18,636 living units) that we then leased, as well as our then existing management and pooling agreements with DHC for 78 senior living communities (10,337 living units), were terminated and replaced, or the Conversion, with new management agreements for all of these senior living communities and 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 $75.0 million of additional consideration by assuming certain of our working capital liabilities and through cash payments (with DHC's provision of such consideration to us, collectively with the Conversion and the Share Issuances, being included in the definition of Restructuring Transactions in this Annual Report on Form 10-K).

For more information regarding the Restructuring Transactions, see "Properties" included in Part I, Item 2, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, Item 7, of this Annual Report on Form 10-K and Notes 1 and 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Our History

We are a corporation formed under the laws of the State of Maryland in 2001. Effective March 3, 2017, we changed our name from Five Star Quality Care, Inc. to Five Star Senior Living Inc. We have grown primarily by leasing or managing senior living communities owned by DHC. We also offer rehabilitation and wellness services both at our senior living communities as well as in senior living communities of other senior living companies. Our principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is (617) 796-8387.

Our Communities and Our Services

Our present business plan contemplates the operation of owned, leased and managed primarily independent and assisted senior living communities as well as CCRC's. Our senior living communities can be classified into different primary service categories; while some provide a single service, a majority provide multiple service levels in a single building or in a campus setting.

Independent Living Communities. Independent living communities provide residents with high levels of privacy in various types of apartments and require residents to be relatively independent. An independent living apartment usually bundles several non-healthcare services as part of a regular monthly charge. For example, the base charge may include one or two meals per day in a central dining room, weekly housekeeping service or access to a variety of activities. Additional non-healthcare services are generally available from staff employees on a fee for service basis. Independent living communities can provide both assisted living and skilled nursing services in separate parts of the community or campus. As of December 31, 2020, our operations included 10,982 independent living units in 95 senior living communities. Included in this total is an active adult community, which we classify as an independent living community, that has 167 living units.

Assisted Living Communities. Assisted living communities are typically comprised of one-bedroom units, which include private bathrooms and efficiency kitchens. Services bundled within one charge usually include three meals per day in a central dining room, daily housekeeping, laundry, medical reminders and 24-hour availability of assistance with the activities of daily living such as bathing, dressing and eating. Professional nursing and healthcare services are usually available at the community, as requested, or at regularly scheduled times. In addition, residents have access to a variety of entertainment and wellness activities. We also provide Alzheimer’s or memory care services at certain of our assisted living communities through our award-winning Bridge to Rediscovery program. As of December 31, 2020, our operations included 15,332 assisted living suites in 219 senior living communities, of which 3,220 in 111 senior living communities are dedicated to memory care services.

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Skilled Nursing Facilities. SNFs generally provide extensive nursing and healthcare services that are similar to services available in hospitals, without the high costs associated with operating theaters, emergency rooms or intensive care units. A typical purpose-built SNF includes one or two beds per room with a separate bathroom in each room and shared dining facilities. SNFs are staffed by licensed nursing professionals 24 hours per day. As of December 31, 2020, our operations included 2,957 SNF units in 45 senior living communities.

In addition to our senior living communities, we provide a comprehensive suite of rehabilitation and wellness services at our senior living communities, as well as outpatient clinics located separately from our senior living communities through our rehabilitation and wellness services segment.

Rehabilitation and Wellness Services. Through Ageility, we offer rehabilitation and wellness services, primarily in a clinical setting. Staffed with licensed therapists or other trained personnel, our clinics provide rehabilitation services, including physical therapy, speech therapy and occupational therapy. In addition, we offer other rehabilitation and wellness services with a hospitality approach, including strength training, orthopedic rehabilitation, fall prevention, cognitive or memory enhancement, aquatic therapy, continence management programs, pain management programs, neurological rehabilitation, post-surgical or post-hospitalization services and general personal fitness and wellness programs. As of December 31, 2020, our operations included 37 inpatient clinics and 207 outpatient clinics providing rehabilitation and wellness services.

Current Industry Trends

While construction of new senior living communities has slowed during 2020, the industry has experienced several years of significant construction of new communities and other buildings to service older adults. We believe this has resulted in an oversupply and put downward pressures on occupancy and the rates that operators can charge for their services to their residents. In addition, pressures on governmental budgets have resulted in reductions or limitations on government funding growth for senior living and healthcare services, despite the increasing regulatory requirements imposed on the industry. These revenue pressures have been buffeted by increased costs for labor, insurance and regulatory compliance. At the same time, older adults are delaying the age at which they move to senior living communities, or forgoing such a move entirely.

In the last ten years, the industry evolved to serve the growing number of older adults, and we expect the demand for senior living services to increase in future years. We have searched for innovative ways to overcome the industry's challenges, including workforce shortages and low employee retention, occupancy pressures, challenges related to new technology and higher service level expectations.

The Pandemic has added to these challenges, altering the public perception of senior living negatively while increasing regulatory focus on the industry. The vulnerability of the demographic we serve has caused the health care aspect of the senior living industry to be pushed to the forefront, rather than its growing focus on hospitality and lifestyle. Our roots in clinical excellence have served us well through this time, and allowed us to focus on the safety and well-being of our residents, continuously maintain compliance with changing regulations and support our front-line team members. We remain confident that the pent-up demand in the marketplace will serve those operators who have been able to maintain operational stability and focus on the customer through this challenging time and are able to evolve to meet the needs of the post-pandemic customer who will have higher expectations around safety measures, technological offerings, clinical capabilities and transparent communication.

Even before the Pandemic, demographic trends regarding aging adults had captured the attention of a number of entrepreneurs, start-ups and other companies in the technology arena, resulting in a steady stream of innovations entering the senior living space. Many of these innovations enable older adults to age in their own existing homes longer. Technology is causing the industry to look at new ways of delivering care to older adults. Regardless of the influx of technology solutions that change how senior living companies deliver adult care, we believe that the senior living industry remains a person-to-person, relationship-centered business. Technology can augment, but we believe, will never replace the human touch, friendship and compassion of individuals of all ages who feel called to care for and honor the generations who came before them. We are committed to continue thoughtful and impactful investment in technology to enhance the resident experience.

To address workforce and retention challenges, senior living companies like us have looked to data-driven recruitment processes that use benchmarking and analytics to find quality candidates who stay in their roles longer. Personnel retention plans also include increasing wages, especially in geographic areas where competition for healthcare and senior living professionals is intense. Other inventive efforts to attract talent to the senior living industry include connecting to the future workforce through school partnerships and recruitment presentations.

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To address occupancy challenges, we are investing in business intelligence, website enhancements, targeted content, search engine optimization strategy and targeted marketing campaigns tailored to each micro-market, to attract families and individuals searching for the services they need for their aging loved ones or themselves. In addition, we are focused on higher quality prospect engagement, beginning with high touch digital interactions and supported by extensive sales training that focuses on research-based sales tactics to more effectively “close” the prospects generated by our digital marketing efforts.

Recent trends suggest older adults are focused on evaluating senior living communities that offer service platforms that enable individuals to live a more independent lifestyle. With a broader scope of senior living communities operating in the United States, combined with technology enablement, consumers have more options in choosing where to live as they age. This wider range of options for consumers is causing further pressure on the industry to implement innovative methods and services that provide for an exceptional customer experience and our continued focus on customer needs and ongoing investment in marketing intelligence is a direct result of our commitment to that experience.

Competition

The active adult and senior living services markets continue to be highly competitive despite the challenges experienced in the industry this year due to the Pandemic. We compete with numerous local, regional and national senior living community operators. Increasingly, we are also competing with other companies that provide senior living services, such as home healthcare companies and other real estate based service providers. Some of our competitors are larger and have greater financial resources than we do and some of our competitors are not-for-profit entities that have endowment income and may not face the same financial pressures that we do. In recent years, a significant number of new senior living communities have been developed, and we expect this increased development activity to continue in the future as new operators attempt to seize market share in a highly fragmented market. This activity has increased competitive pressures on us, particularly in the geographic markets where we have high senior living community concentrations. While smaller senior living operators may have struggled to deal with the impact of the Pandemic and higher operating costs, other competitors may have lower operating expenses or other cost advantages compared to us. Therefore, they may be able to provide services at a lower price than we can offer to our residents and clients.
We continue to address competition (i) by focusing on operations to ensure an exceptional resident experience, high customer satisfaction and team member retention through, among other things, training and development, (ii) by differentiating ourselves with the innovative programs and services we offer, (iii) with enhanced marketing efforts and (iv) by evaluating the current position of our senior living communities relative to their competition. In addition, we may enter into additional arrangements with DHC for us to operate new or additional senior living communities, including active adult communities that DHC owns, and our relationships with DHC and RMR LLC may provide us with competitive advantages; however, DHC is not obligated to provide us with opportunities to operate additional properties it owns. We cannot be sure that we will be able to compete successfully or operate profitably. For more information on the competitive pressures we face and associated risks, see “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
Our Growth Strategy
We are one of the largest senior living management companies in the United States, based on unit count. We have been in operation for over 19 years, currently servicing approximately 21,000 older adults in our senior living communities as well as approximately 16,500 clients in our Ageility clinics. As our prospective customers' demographics and psychographics change, we are focused on establishing ourselves as a premier provider of services to older adults and their caregivers.

We seek to improve revenues from our existing senior living operations by focusing on providing an exceptional resident experience and seeking residents who pay for our services with private resources. We also seek to improve profitability through continued strategic capital investments at our senior living communities and investments in the development of our staff, as well as by working with service providers to increase the desirability and competitiveness of our senior living communities. In addition to routine renovations and upgrades at our existing senior living communities, since January 1, 2019, we have invested $8.3 million in capital improvements in our currently owned and leased senior living communities.

We also seek to grow our business by entering into additional long-term management agreements for senior living communities and active adult communities where residents’ private resources account for all or a large majority of revenues. Since January 1, 2019, we began managing an additional senior living community and an active adult community for the account of DHC. For more information about our management and prior leasing arrangements with DHC, see "Restructuring Transactions with DHC" above and “Properties — Our DHC Leases and Management Agreements with DHC” included in Part I, Item 2 of this Annual Report on Form 10-K and Note 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
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Through our ancillary services, including our rehabilitation and wellness services segment, we provide diversified offerings to older adults both within our senior living communities and outside of them, including skilled rehabilitation services for short-term inpatient stays, such as after joint replacement surgery, home healthcare in certain of our independent living and assisted living communities, outpatient rehabilitation focused on older adults, and concierge services in certain communities. The therapy services we offer include physical, occupational, speech and other specialized therapy services. The home health services we provide include nursing, physical, occupational, speech and other specialized therapy services, home health aide services, and social services, as needed. In addition, we offer personalized concierge services to accommodate our residentsspecific lifestyle and needs in certain communities. Concierge services include personal shopping, companion services, enhanced transportation, bedtime assistance, and personalized dining and nutrition planning, delivery and consultation. By providing residents with a range of service options as their needs change, we provide greater continuity of care, which we believe may encourage our customers to reside with us for an extended period.

Since January 1, 2019, we have opened 78 net new rehabilitation and wellness services outpatient clinics. We also continued to expand our rehabilitation and wellness services to senior living communities outside of our current senior living operations. In addition, we continue to seek ways to grow our other ancillary services that complement our existing senior living operations to residents of the senior living communities we operate as well as older adults living outside of our communities.

We also continue to develop public awareness of the Five Star Senior Living brand through various marketing initiatives that we believe differentiate us from other senior living operators. For example, we offer “Lifestyle360”, a wellness program focused on five dimensions of wellness (social, intellectual, spiritual, emotional and physical). We believe that programs like “Lifestyle360” will enhance the appeal of our senior living communities among current and prospective residents and their families and provide us with an opportunity to improve our operating performance.

Our expansion efforts are currently focused on internal growth through effective management of our existing portfolio, by increasing occupancy, as well as by increasing revenues from our ancillary services, such as outpatient therapy services, health and wellness, fitness and concierge services, to residents of the senior living communities we operate as well as older adults living outside of our communities. We may also agree to operate additional senior living communities and active adult communities for the account of DHC or other third parties pursuant to management arrangements and, from time to time, we may acquire and operate additional senior living communities.

Recent Developments

Portfolio Optimization Through Dispositions. We continually monitor our portfolio of senior living communities that we own or lease. We seek to dispose of, or change our method of operating, certain of our senior living communities if and when we determine it is in our best interest to do so and we are able to reach an agreement regarding the sale or change of our method of operating of such communities with our pre-existing contracting parties, including DHC. In April 2019, DHC announced a plan to sell certain properties to reduce its leverage, with a focus on the sale of certain senior living communities. Since January 1, 2019, we have participated in the sale or closure of 34 senior living communities that DHC owned and we operated or managed.

Portfolio Optimization Through Expansion Activities. We currently expect that our expansion activities will be focused on internal growth from our senior living communities plus ancillary services, and entering into additional long-term management agreements for senior living communities.

Since January 1, 2019, we began managing a senior living community and active adult community for the account of DHC, pursuant to a management agreement and/or our then existing pooling agreements. We began managing the senior living community, which is located in Oregon (318 living units), in April 2019, and the active adult community, located in Texas (167 living units), in December 2019.

Effective January 1, 2020, our then existing management and pooling agreements with DHC for these communities were terminated and replaced with New Management Agreements in connection with the Restructuring Transactions.

Expansion of Rehabilitation and Wellness Services. We currently expect to continue to grow our ancillary service offerings, including rehabilitation and wellness services, by opening new clinics and expanding our fitness and other home-based service offerings. Since January 1, 2019, we have opened 78 net new rehabilitation and wellness services outpatient clinics, 17 of which were opened in 2020.

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For more information about our former leases and our management arrangements with DHC, see “Properties—Our Leases and Management Agreements with DHC” in Part I, Item 2 and Note 10 to our Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K.

Financing Sources

Our principal sources of funds to meet operating and capital expenses and debt service obligations are cash flows from operating activities, unrestricted cash balances of $84.4 million and borrowings under our $65.0 million secured revolving credit facility, which is available for general business purposes. Our credit facility matures in June 2021, and, subject to our payment of an extension fee and meeting other conditions, we have the option to extend the stated maturity date of our credit facility for a one-year period. 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 the agreement governing our credit facility, or our credit agreement, plus 150 basis points per annum on borrowings under our credit facility. As of December 31, 2020, the annual interest rate options were 2.64% 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. No principal repayment is due until maturity.

On January 1, 2020, as part of the Restructuring Transactions, we issued 10,268,158 of our common shares to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019. As consideration for the Share Issuances, DHC provided to us $75.0 million of additional consideration by assuming $51.5 million of our working capital liabilities and through cash payments. We received cash of $23.5 million from DHC during the year ended December 31, 2020 as consideration for the Share Issuances.

For more information about our credit facility, see Note 9 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

In the future, we may also assume mortgage debt on properties we may acquire, or place mortgages on properties we own or seek to obtain other additional sources of financing, including term debt or issuing equity or debt securities. We currently have mortgage debt that we assumed in connection with a previous acquisition of one of our properties.

Operating Structure

We have four operating divisions. Three of these divisions are headed by an executive vice president at our corporate office and are responsible for senior living communities located in specified geographic regions. These three divisions constitute one of our reporting segments as of January 1, 2020. Each region’s management is responsible for independent living, assisted living and skilled nursing units within its specified region. With extensive experience in the senior living industry, a divisional vice president manages one of our divisions from one of our regional offices. Our regional offices are responsible for the senior living communities we operate within a designated geographic region and are led by regional directors of operations that have extensive experience in the senior living industry. Each of our regional offices is typically supported by a clinical or wellness director, a regional accounts manager, a human resources specialist, a food services specialist and a sales and marketing specialist. Regional office staff members are responsible for all senior living community operations within their designated geographic region, including:

resident services;

localized targeted sales and marketing;

hiring of community personnel;

compliance with applicable legal and regulatory requirements; and

supporting our development and acquisition plans within their region.

Our fourth division is responsible for rehabilitation and wellness services and is headed by a senior vice president at our corporate office who has extensive experience in rehabilitation and wellness services and is supported by a network of divisional and regional directors of rehabilitation and wellness services that are assigned to specified geographic regions. This division constitutes our other reporting segment as of January 1, 2020.

Our corporate headquarters staff is responsible for corporate-level systems, policies and procedures, such as:

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company-wide policies and procedures;

human resources and team member engagement;

marketing and communications;

resident experience;

information technology services;

licensing and certification maintenance;

legal services and regulatory compliance;

centralized purchasing and cash disbursements;

financial planning and analysis;

budgeting and supervision of maintenance and capital expenditures;

implementation of our growth strategy; and

accounting, auditing and finance functions, including operations, budgeting, certain accounts receivable and collections functions, accounts payable, payroll, tax and financial reporting.

As described elsewhere in this Annual Report on Form 10‑K, we have a business management agreement with RMR LLC, pursuant to which RMR LLC provides to us certain business management services, including services related to compliance with various laws and rules applicable to our status as a publicly-traded company, including our internal audit function, capital markets and financing activities and investor relations.

Human Capital Resources

We are a service organization and our employees, which we call team members, are the foundation of our success and, in many ways, our most important asset. We are led by an experienced management team with a proven ability to manage and grow a resilient business. We focus significant attention on attracting and retaining talented and skilled team members to manage and support our operations. Our management team routinely reviews team member turnover rates at various levels of the organization.

We aim to attract team members who are uniquely suited to be successful in our business and will uphold our values. Our management teams and all of our team members are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of our team members must adhere to a code of conduct that sets standards for appropriate behavior and includes required annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination.

Employees and Equal Opportunity. As a service provider to a diverse group of residents and clients, much of our success is rooted in our team members’ diversity and our commitment to inclusion. We value diversity at all levels and continue to focus on extending our diversity and inclusion initiatives across our entire workforce, from working with managers to develop strategies for building diverse teams to promoting leaders from different backgrounds. We are an equal opportunity employer, with all qualified applicants receiving consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity or expression, national origin, disability or protected veteran status. Throughout our organization, including our Board, we are committed to racial equality and fostering diversity and inclusion culture. We have made diversity and inclusion an important part of our hiring process and continue to evolve programs that focus on retention and development. As of December 31, 2020, approximately 77% and 42% of our approximately 19,500 team members were female and non-white, respectively. We are committed to hiring, developing and supporting a diverse and inclusive workplace. As of February 20, 2021, we had approximately 19,000 team members, including approximately 12,000 full time and 7,000 part-time. Approximately 89% of our team members work in our senior living communities, 9% in our rehabilitation and wellness services clinics, and 2% in our corporate office. The average tenure of a team member is approximately 2.1 years.

Board Diversity. As of December 31, 2020, our Board composition was 43% female.

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Team Member Safety. During the year ended December 31, 2020, in response to the Pandemic, we implemented safety protocols and new procedures to protect our team members, our subcontractors and our residents and clients as well as visitors. These protocols include complying with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention, or CDC, and other public health authorities. In addition, we modified the way we conduct many aspects of our business to reduce the number of in-person interactions. For example, we significantly expanded the use of virtual interactions in all aspects of our business, and ensured our team members and subcontractors had adequate personal protective equipment, or PPE, available. During this time, many of our administrative and operational functions have required modification as well, including some of our workforce working remotely. In addition, since the summer of 2020, we have been testing our community and clinic based team members at regular intervals to curb the spread of COVID-19 and, in December 2020 we started making COVID-19 vaccinations available to our team members in our communities and clinics as well as residents. For a detailed discussion of the impact of the Pandemic on our human capital resources, see “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Annual Report on Form 10-K. The Pandemic has had, and may continue to have, a materially adverse effect on our business, operations, financial results and liquidity and its duration is unknown.

Team Member Compensation. We ensure team members receive competitive salaries and we offer a broad range of company-paid benefits, which we believe are competitive with others in our industry.

Team Member Engagement, Education and Training. Our team member engagement initiatives align with our goal of being an employer of choice with a thriving workforce that encourages career enrichment and positions us for growth. Our recruiting programs, on-boarding and retention programs and our development and ongoing training programs currently include the following:

Team Member Engagement: Management reviews team member engagement and satisfaction surveys to monitor employee morale and receive feedback on a variety of issues.

Rewards: We reward team members for innovation and productivity. We have several recognition programs for team members at various levels of the organization.

Tuition Reimbursement Program: We offer tuition assistance for work-related education from accredited colleges and universities in order to deepen team members’ skill sets and support personal enrichment.

We also prioritize ongoing education and training for all team members across our organization as follows:

Training and Development: We offer a robust learning management platform to provide training and development opportunities to all team members. In 2020, team members took an average of approximately 17 hours of training assignments per year. In addition, new hires are assigned 16 hours of general orientation training.

Industry Associations & Credentials: In order to further their professional development, many of our team members seek out credentials or hold professional licenses and association memberships. Examples of credentials, professional licenses and association memberships include: Medical License, Licensed Practical Nurse, Registered Nurse, Certified Medical Assistants, Certified Physical and Occupational Therapists, Speech-Language Pathologist, Certified Fitness Trainers, Cardiopulmonary resuscitation certifications (CPR), First Aid Certification, Law License and Certified Public Accountant accreditations.

Communities and Clinics staffing: Our team members predominately work collaboratively in our communities and clinics that have different staffing requirements further described below:

Independent and Assisted Living Community Staffing. Each of our independent and assisted living communities has an executive director that is responsible for the day-to-day operations of the applicable community, including quality of care, resident services, sales and marketing, financial performance and staff supervision, as applicable. The executive director is supported by department managers who oversee the care and service of our residents, a wellness director who is responsible for coordinating the services necessary to meet the care needs of our residents and a sales director who is responsible for sales and promoting our services and brand. These communities also typically have a dining services coordinator, an activities coordinator and a property maintenance coordinator.

Skilled Nursing Facility Staffing. Each of our SNFs is managed by a state-licensed administrator who is supported by other professional personnel, including a director of nursing, an activities director, a marketing director, a social services
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director, a business office manager and physical, occupational and speech therapists. Our directors of nursing are state-licensed nurses who supervise our registered nurses, licensed practical nurses and nursing assistants. Staff size and composition vary among our SNFs depending on the size and occupancy of, and the type of care provided at, the applicable SNF. Our SNFs also contract with physicians to serve as Medical Directors who provide certain administrative, clinical and oversight services. These communities also typically have a dining services coordinator and a property maintenance coordinator.

Rehabilitation and Wellness Services Staffing. Each Ageility outpatient clinic is located within an independent living, assisted living or memory care neighborhood within a senior living community. Ageility outpatient clinics are located in select Five Star senior living communities as well as in senior living communities owned, operated or leased by other senior living companies. Each outpatient clinic has a licensed therapist functioning as a rehabilitation director or therapist assistant operating as a team leader who is responsible for operations of a clinic, including quality of care, clinical services, sales and marketing, financial performance and staff supervision. Each outpatient clinic has services available from licensed therapists or certified therapist assistants in the disciplines of physical therapy, occupational therapy and speech pathology. Therapy services are provided under a physician’s order with verified insurance coverage in place prior to beginning services.

Ageility inpatient clinics provide rehabilitation services to Five Star SNF’s under the direction of a licensed therapist acting as a rehabilitation director who is responsible for the therapy operations of the SNF. Licensed therapists or certified therapist assistants in the disciplines of physical therapy, occupational therapy and speech pathology provide therapy as ordered by a physician for residents admitted to a SNF for short-term rehabilitation as well as for those residents requiring rehabilitation services and residing under a long-term care arrangement.

Government Regulation and Reimbursement

The senior living and healthcare industries are subject to extensive, frequently changing federal, state and local laws and regulations. These laws and regulations vary by jurisdiction but may address, among other things, licensure, personnel training, staffing ratios, types and quality of medical care, physical facility requirements, government healthcare program participation, fraud and abuse, payments for patient services and patient records. In addition, the spread of COVID-19, which was declared a pandemic by the World Health Organization, or WHO, on March 11, 2020, brought increased government regulation, as well as compliance burdens, in 2020.

We are subject to, and our operations must comply with, these laws and regulations. From time to time, our senior living communities receive notices from federal, state and local agencies regarding non-compliance with such requirements. Upon receipt of these notices, we review them for accuracy and, based on our review, we either take corrective action or contest the allegation of noncompliance. When corrective action is required, we work with the relevant agency to address and remediate any violations. Challenging and appealing any notices or allegations of noncompliance require the expenditure of significant legal fees and management attention. Any adverse determination concerning any of our licenses or eligibility for Medicare or Medicaid reimbursement, any penalties, repayments or sanctions, and the increasing costs of required compliance with applicable laws may adversely affect our ability to meet our financial obligations and negatively affect our financial condition and results of operations. Also, adverse findings with regard to any one of our senior living communities may have an adverse impact on our licensing and ability to operate and attract residents to other senior living communities.
    
The healthcare industry depends significantly upon federal and state programs for revenues and, as a result, is affected by the budgetary policies of both the federal and state governments. Reimbursements under the Medicare and Medicaid programs for skilled nursing, physical therapy and rehabilitation and wellness services provided operating revenues at our outpatient clinics and some of our senior living communities (principally our SNFs). Out of our total senior living and rehabilitation and wellness services revenues, we derived approximately 26.4% and 21.3% from Medicare and Medicaid programs for the years ended December 31, 2020 and 2019, respectively. Specific to our senior living revenues, we derived approximately 1.8% and 19.7% from Medicare and Medicaid programs for the years ended December 31, 2020 and 2019, respectively. Specific to our rehabilitation and wellness services revenues, we derived approximately 49.4% and 55.9%, from Medicare and Medicaid programs for the years ended December 31, 2020 and 2019, respectively. Out of the total revenues earned at senior living communities we manage on behalf of DHC, they derived approximately 14.4% and 6.8% from Medicare and Medicaid programs for the years ended December 31, 2020 and 2019, respectively.

In addition to existing government regulation, we are aware of numerous healthcare regulatory initiatives and fair housing laws on the federal, state and local levels, which may affect our business operations if implemented.

COVID Pandemic. On March 13, 2020, the Pandemic was declared a National Emergency by the President of the United States effective as of March 1, 2020, and it has significantly disrupted, and likely will continue to significantly disrupt,
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the United States economy, our business and the senior living industry as a whole. Federal and state governments have taken a number of actions in response. For example:

On March 13, 2020, the Centers for Medicare & Medicaid Services, or CMS, issued a memorandum that required nursing homes to follow the CDC guidelines to, among other things, limit access to nursing homes by visitors and non-essential personnel, increase the availability of certain supplies and cancel all communal activities. 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. 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 is using appropriate PPE 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.

In 2020, the Secretary of the U.S. Department of Health and Human Services, or HHS, and CMS issued several waivers applicable to long-term care facilities, including SNFs, retroactive to March 1, 2020, and in effect through the end of the National Emergency. Under the waivers, for example: (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 Pandemic; (2) SNF coverage is renewed for certain Medicare beneficiaries with recently exhausted SNF benefits; (3) certain requirements related to the submission of staffing data, preadmission screenings, in-person resident groups, certain nurse aide training, and long term care facility transfer and discharge protocols is waived; (4) certain physical environment requirements are waived to allow non-SNF buildings to be temporarily certified and non-resident rooms to be used for patients; (5) the requirement for physicians and non-physician practitioners to perform in-person visits for residents is waived to allow telehealth visits, as appropriate; and (6) hospitals are permitted to establish SNF beds, allowing patients that would otherwise be transferred to a post-acute care facility to remain in hospitals.

On May 8, 2020, CMS published an interim final rule that set forth new COVID-19 reporting requirements for SNFs, among other requirements. SNFs are required to electronically submit weekly reports to the CDC, which must include data on a number of measures, including suspected or confirmed COVID-19 infections among residents and staff, total deaths and COVID-19 deaths among residents and staff, ventilator capacity and supplies, resident beds and census, access to COVID-19 testing and staffing shortages. SNFs are also required to promptly notify residents, family members and representatives of confirmed or suspected COVID-19 cases in the facility. Facilities may face enforcement action, including civil monetary penalties, for failure to comply with these new reporting requirements.

On May 18, 2020, CMS issued recommendations to state and local officials for the reopening of SNFs, relying on a number of factors, including whether COVID-19 cases are increasing or declining in the geographic area and at SNFs, the adequacy of staffing, supplies and access to COVID-19 testing, as well as local hospital capacity. These guidelines are not binding for states, and some states may be more aggressive in permitting the reopening of SNFs, while others may take a more conservative approach. CMS continued to issue guidance on facilitating outdoor and indoor visitation in June 2020 and September 2020.

In May 2020, the HHS Office of Inspector General, or OIG, announced its updated work plan featuring several SNF-focused items, including, for example, reviews of on-site surveys during the Pandemic and audits of nursing home infection prevention and control programs, and OIG announced a COVID-19 Response Strategic Plan focused on potential fraud, waste and abuse that may arise out of COVID-19 response and recovery programs. OIG has further updated its work plan to include, among other items, a review of compliance with facility-initiated discharge requirements and audits of nursing home reporting of COVID-19 information and Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, Provider Relief Fund payments.

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

On August 25, 2020, CMS published an interim final rule that set forth new COVID-19 testing requirements for long-term care facility residents and staff. CMS offered guidance on testing residents and staff in cases where a symptomatic individual is identified, where there is an outbreak and where community COVID-19 activity
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dictates routine testing, as well as guidance on documentation to demonstrate compliance with testing requirements. The interim rule also enhanced CMS’s ability to enforce previously issued long-term care facility COVID-19 reporting requirements by imposing civil monetary penalties for failure to report required data to the CDC.

On October 28, 2020, CMS published an interim final rule that, among other items, clarified its interpretation that the CARES Act provided Medicare Part B coverage and the payment for COVID-19 vaccine and administration.

In response to a rising number of complaints and lawsuits against senior living communities, certain state Attorneys General have continued efforts to increase scrutiny of long-term care facilities. While these investigations and initiatives have been related to the Pandemic, they have focused on a broad range of alleged misconduct that extends beyond facility responses to the Pandemic, including both civil and criminal theories of liability related to patient abuse and neglect, consumer fraud and false advertising and Medicaid fraud.

In addition, the CARES Act was signed into law on March 27, 2020. The CARES Act, among other things, provides billions of dollars of relief to certain individuals and businesses suffering from the Pandemic, including as follows:

It temporarily suspended the 2% Medicare sequestration payment reductions from May 1, 2020 through December 31, 2020. This suspension was extended to March 31, 2021 as part of the Consolidated Appropriations Act, 2021, which was signed into law on December 27, 2020.

It established a Provider Relief Fund for allocation by HHS. On April 10, 2020, HHS began to distribute these funds, or the General Distribution, to healthcare providers who received Medicare fee-for-service reimbursement in 2018 and 2019. On May 22, 2020, HHS announced that Provider Relief Funds would be available to SNFs with six or more certified beds that have been impacted by the Pandemic, or the Targeted SNF Distribution. On June 9, 2020, HHS announced Phase 2 General Distributions, including the Medicaid and Children's Health Insurance Program, or the Medicaid and CHIP Targeted Distribution. On September 3, 2020, HHS announced details of a $2 billion incentive-payment distribution to nursing homes, of which approximately $333 million was distributed in the first round and $523 million in the second round. On October 1, 2020, HHS announced Phase 3 General Distributions, intended to balance payments of 2% of annual revenue from patient care for all applicants plus a possible add-on payment to account for revenue losses and expenses attributable to COVID-19.

It established an option for companies to elect to defer payment of the employer portion of social security payroll taxes incurred from March 27, 2020 to December 31, 2020. The first half of the deferred payments will become due on December 31, 2021, with the remainder due December 31, 2022.

In addition, the Consolidated Appropriations Act, 2021 was signed into law on December 27, 2020. Among other things, this Act further supplemented the Provider Relief Fund with an additional $3 billion. Information on future allocations of the Provider Relief Fund are not yet known, though the statute requires that no less than 85% of unobligated balances of the fund and funds recovered from providers after the enactment date be allocated based on financial losses and changes in operating expenses occurring in the third or fourth quarter of calendar year 2020.

We elected to defer payment of the employer portion of social security payroll taxes incurred from March 27, 2020 to December 31, 2020 as provided for under the CARES Act. In addition, we have received funds as part of certain relief programs provided under the CARES Act. The terms and conditions of the Provider Relief Fund require that the funds are utilized to compensate for lost revenues that are attributable to the Pandemic and for eligible costs to prevent, prepare for and respond to the Pandemic that are not covered by other sources. In addition, Provider Relief Fund recipients are subject to other terms and conditions, including certain reporting requirements. Any funds not used in accordance with the terms and conditions must be returned to HHS. Receipt of additional government funds and other benefits from the CARES Act is subject to, in certain circumstances, a detailed application and approval process and it is too soon to accurately predict whether we will meet any eligibility requirements.

We received $1.7 million in Phase 1 General Distribution funds for rehabilitation and wellness services clinics and home health operations that participate in Medicare for the year ended December 31, 2020. We recognized $1.7 million as other operating income for Phase 1 General Distribution funds for which we have met the required terms and conditions for the year ended December 31, 2020. We received $1.6 million in Phase 2 General Distribution funds primarily for our senior living communities for the year ended December 31, 2020. We recognized $1.6 million as other operating income for Phase 2 General Distribution funds for which we have met the required terms and conditions for the year ended December 31, 2020. In addition, we recognized $0.1 million as other operating income from funding we received from various state programs for which we
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believe we have met the required terms and conditions, and also recognized $0.1 million as other operating income for the fair market value of rapid point-of-care diagnostic testing devices and COVID-19 test kits that we received and used for testing from the federal government.

For more information about COVID-19 relief funds, see Note 17 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

In addition to federal measures, many states have taken actions to waive or modify healthcare laws or regulations and Medicaid reimbursement rules. Both state and federal waivers and other temporary actions in response to the Pandemic are expected to last throughout the National Emergency, the duration of which is currently unknown. Additional measures may be taken prior to and after the conclusion of the National Emergency to alleviate the economic impact of the Pandemic. Governmental responses to COVID-19 are rapidly evolving, and it is not yet known what the duration or impact of such responses will be.

On December 11 and December 18, 2020, the U.S. Food and Drug Administration, or FDA, issued the emergency use authorizations, or the EUAs, to Pfizer Inc. / BioNTech SE and Moderna, Inc., respectively, for vaccines for the prevention of COVID-19. The CDC’s Advisory Committee on Immunization Practices has placed long-term care facility residents and healthcare personnel in “Phase 1a,” the highest priority group to receive COVID-19 vaccines, which included residents and team members at our SNFs, memory care units and assisted living communities. States have subsequently prioritized all categories of older adults, which include our independent living facilities. In order to protect the health and safety of our residents, team members and clients, we scheduled multiple vaccination clinics as soon as possible after the EUAs for our SNF, memory care and assisted living residents and team members at no cost to those individuals. As of February 20, 2021, 87.2% of our residents and 42.5% of our team members at our senior living communities had received their initial dose of a COVID-19 vaccine, and 52.7% of our residents and 26.9% of our team members had received their second dose of a COVID-19 vaccine. As of February 20, 2021, 249 senior living communities have held a vaccination clinic for the initial dose of a COVID-19 vaccine, and 183 senior living communities have also held a vaccination clinic for the second dose of a COVID-19 vaccine. Despite these efforts and the issuances of these EUAs, and potentially others for additional vaccines in the future, it is expected that throughout the first quarter of 2021 substantially all residents and team members in our senior living communities will have been offered the opportunity to be vaccinated. In addition, we may be subject to claims by residents and team members related to vaccine administration by us or the care provided by us following administration of the vaccine. However, such liability is currently limited by the Public Readiness and Emergency Preparedness Act, which provides immunity protections under federal and state law for individuals and entities, or Covered Persons, against claims of loss relating to certain COVID-19 countermeasures, or Covered Countermeasures, although such protections are currently subject to challenges in certain courts. We and our team members who administer Covered Countermeasures such as the COVID-19 vaccine are classified as Covered Persons immune to claims arising from COVID-19 vaccine administration with the exception of death or serious physical injury caused by willful misconduct.

Independent Living Communities - Regulation and Reimbursement. Government benefits are not generally available for services at independent living communities, and residents in those communities use private resources to pay for their living units and the services they receive. The rates in these communities are determined by local market conditions and operating costs. However, a number of federal Supplemental Security Income program benefits pay housing costs for elderly or disabled recipients to live in these types of residential communities. The Social Security Act requires states to certify that they will establish and enforce standards for any category of group living arrangement in which a significant number of Supplemental Security Income recipients reside or are likely to reside. Categories of living arrangements that may be subject to these state standards include independent living communities and assisted living communities. Because independent living communities usually offer common dining facilities, they are required to obtain licenses applicable to food service establishments in many jurisdictions in addition to complying with land use and life safety requirements. In addition, in some states, state or county health departments, social service agencies and/or offices on aging have jurisdiction over group residential communities for older adults and license independent living communities. To the extent that independent living communities include units to which assisted living or nursing services are provided, these units are subject to applicable state licensing regulations. If the communities receive Medicaid or Medicare funds, they are subject to certification standards and requirements that they must meet, or the Conditions of Participation. In some states, insurance or consumer protection agencies regulate independent living communities in which residents pay entrance fees or prepay for services.

Assisted Living Communities - Regulation and Reimbursement. A majority of states provide or are approved to provide Medicaid payments for personal care and medical services to some residents in licensed assisted living communities under waivers granted by or under Medicaid state plans approved by CMS. State Medicaid programs control costs for assisted living and other home and community-based services by various means. Because rates paid to assisted living community operators are generally lower than rates paid to SNF operators, some states use Medicaid funding of assisted living as a means
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of lowering the cost of services for residents who may not need the higher level of services provided in SNFs. States that administer Medicaid programs for services in assisted living communities are responsible for monitoring the services at, and physical conditions of, the participating communities.

As a result of a large number of states using Medicaid funds to purchase services at assisted living communities and the growth of assisted living in recent years, states have adopted licensing standards applicable to assisted living communities. According to the National Center for Assisted Living and the HHS Office of the Assistant Secretary for Planning and Evaluation, all states regulate assisted living and residential care communities, although states do not use a uniform approach. Most state licensing standards apply to assisted living communities regardless of whether they accept Medicaid funding. Also, according to the National Conference of State Legislatures, a few states require certificates of need, or CONs, from state health planning authorities before new assisted living communities may be developed. Based on our analysis of recent economic and regulatory trends, we believe that assisted living communities that become dependent upon Medicaid or other government payments for a majority of their revenues may decline in value because Medicaid and other public rates may fail to keep up with increasing costs. We also believe that assisted living communities located in states that adopt CON requirements or other limitations on the development of new assisted living communities may increase in value because those limitations may help ensure higher nongovernment rates and reduced competition.

HHS, the Senate Special Committee on Aging and the Government Accountability Office, or the GAO, have studied and reported on the development of assisted living and its role in the continuum of long-term care and as an alternative to SNFs. In addition, CMS has oversight of state quality assurance programs for assisted living communities and provides guidance and technical assistance to states to improve their ability to monitor and improve the quality of services paid for through Medicaid waiver programs.

CMS is encouraging state Medicaid programs to expand their use of home and community-based services as alternatives to institutional services, pursuant to provisions of the Deficit Reduction Act of 2005, or the DRA, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the ACA, and other authorities, through the use of several programs. One such program, the Community First Choice Option, or the CFC Option, grants states that choose to participate in the program a 6% increase in federal matching payments for related medical assistance expenditures. According to CMS, as of January 2019, eight states had approved CFC Option programs. We are unable to predict the effect of the implementation of the CFC Option and other similar programs, but their impact may be adverse and material to our operations and our future financial results of operations.

Skilled Nursing Facilities - Medicare Reimbursement. Currently, we only manage SNFs and we are not the licensed operators of such SNFs. As of December 31, 2020, we managed nine SNFs. A majority of all SNF revenues in the United States comes from publicly funded programs. According to CMS, Medicaid is the largest source of public funding for SNFs, followed by Medicare. For example, nationally in 2019 approximately 29% of SNF and continuing care retirement community revenues came from Medicaid and approximately 22% from Medicare.

SNFs are highly regulated businesses. The federal and state governments regularly monitor the quality of care provided at SNFs. State health departments conduct surveys of resident care and inspect the physical condition of SNF properties. These periodic inspections and occasional changes in life safety and physical plant requirements sometimes require SNF operators to make significant capital improvements. These mandated capital improvements have usually resulted in Medicare and Medicaid rate adjustments, albeit on the basis of amortization of expenditures over the expected useful lives of the improvements.

Under the Medicare SNF prospective payment system, or SNF PPS, capital costs are part of the prospective rate and are not community-specific. The SNF PPS and other recent legislative and regulatory actions with respect to state Medicaid rates limit the reimbursement levels for some SNF services. At the same time, federal and state enforcement agencies have increased oversight of SNFs, making licensing and certification of these communities more rigorous.

Under the SNF PPS, SNFs receive a fixed payment for each day of care provided to residents who are Medicare beneficiaries. Medicare SNF PPS payments cover substantially all services provided to Medicare residents in SNFs, including ancillary services such as rehabilitation services. The SNF PPS historically required SNFs to assign each resident to a care group depending on that resident’s medical characteristics and service needs. These care groups were known as Resource Utilization Groups, or RUGs, and CMS establishes a per diem payment rate for each RUG.

On October 1, 2019, CMS replaced the RUG model, with a revised case-mix methodology called the Patient-Driven Payment Model, or PDPM. The PDPM focuses on clinically relevant factors, rather than volume-based payment. Therapy
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reimbursement under the PDPM is linked to patient diagnoses with higher reimbursements being provided to higher-acuity patients. As a result, initial patient assessments, including obtaining full clinical documentation from hospitals and accurately applying the International Classification of Diseases, or ICD-10, diagnosis codes to reflect a patient’s full clinical status, have become increasingly important factors in reimbursement. CMS estimates that paperwork simplification related to patient assessments will reduce reporting burdens for SNFs by approximately $2.0 billion over ten years.
    
On July 31, 2020, CMS issued the latest SNF prospective payment system final rule for federal fiscal year 2020, which CMS estimates will increase Medicare payments to SNFs by approximately $750 million for federal fiscal year 2021, or 2.2%, compared to federal fiscal year 2020. It is unclear whether these adjustments in Medicare rates will compensate for the increased costs we may incur for services to our residents whose services are paid for by Medicare. The final rule also made changes to certain clinical diagnosis codes included in patient case-mix groups that determine the rate paid under the PDPM, formalized deadlines related to quarterly quality reporting under Medicare’s SNF Value-Based Payment Program, and established performance periods and performance standards for upcoming program years.
The Budget Control Act of 2011 and the Bipartisan Budget Act of 2013 allow for automatic reductions in federal spending by means of a process called sequestration, which reduces Medicare payment rates by 2.0% through 2023. In subsequent years, Congress approved additional extensions of Medicare sequestration, through 2029. Medicaid is exempt from the automatic reductions, as are certain Medicare benefits. The automatic 2.0% payment cuts took effect in April 2013. Any future reductions in Medicare payment rates could be adverse and material to our operations and financial results. 

We are unable to predict the impact on us of these or other recent legislative or regulatory actions or proposed actions with respect to Medicare rates received by our facilities.
 
Skilled Nursing Facilities - Medicaid Reimbursement. Although Medicaid is exempt from the sequestration process described above, some of the states in which we operate either have not raised Medicaid rates by amounts sufficient to offset increasing costs or have frozen or reduced, or are expected to freeze or reduce, Medicaid rates. Some states are expanding their use of managed care, partly to control Medicaid program costs. According to a report by the CMS Office of the Actuary in February 2018, Medicaid enrollment is estimated to have increased 11.9% in 2014, 4.9% in 2015, 3.0% in 2016, and 2.0% in 2017, due primarily to the expansion in Medicaid eligibility under the ACA, which began in 2014. According to a Kaiser Family Foundation report published in October 2020, in 2018 and 2019, Medicaid enrollment declined 2.1% and 1.7%, respectively, and was relatively flat in 2020, increasing 0.04%. As reported, enrollment is projected to increase significantly to 8.2% in 2021, which increase in growth we believe is due to the economic downturn associated with the Pandemic and temporary maintenance of eligibility requirements that incentivize states to allow more residents to remain enrolled in Medicaid.

In January 2018, CMS issued a letter to State Medicaid Directors announcing that CMS would support state efforts to test incentives that make participation in work or other community engagement a requirement for continued Medicaid eligibility for non-elderly, non-pregnant adults. States would be required to have exemptions for individuals who are classified as “disabled” for Medicaid eligibility purposes, as well as those with acute medical conditions or medical frailty that would prevent them from complying with the work requirement. As of December 2020, work requirements in Arkansas, Kentucky, Michigan and New Hampshire had been set aside by courts. Arizona, Georgia, Indiana, Nebraska, Ohio, South Carolina, Utah and Wisconsin have received CMS approval but have not yet implemented or have suspended implementation of work requirements. In addition, Alabama, Idaho, Mississippi, Montana, Oklahoma, South Dakota and Tennessee have submitted requests to modify their respective state Medicaid plans to include work requirements. The implementation of work requirements, if it were to occur, may reduce the availability of Medicaid coverage within our patient population. Additionally, the Biden administration has indicated that it will seek to reverse the January 2018 guidance and prohibit states from implementing work requirements. In February 2021, CMS, in response to guidance from the Biden administration, began notifying states that it is determining whether to withdraw the approvals that permitted states to implement work requirements.
We expect state budgetary pressures to result in continued challenging state fiscal conditions, particularly in those states that are not participating in Medicaid expansion. As a result, some state budget deficits may increase, and certain states may continue to reduce Medicaid payments to healthcare providers like us as part of an effort to balance their budgets. These state level cuts have the potential to negatively impact our revenue from Medicaid sources.

We are unable to predict the impact on us of these or other recent legislative and regulatory actions or proposed actions with respect to state Medicaid rates, the federal payments to states for Medicaid programs, Medicaid program design and Medicaid eligibility standards.

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Skilled Nursing Facilities - Quality Improvement, Pay-for-Performance and Value-Based Purchasing Initiatives. In addition to the reimbursement and rate changes discussed above, payments to SNFs will be increasingly determined by the quality of care provided. The federal government has enhanced its focus on developing and imposing quality-related regulations, standards and programs to improve the quality of care provided at SNFs and to better align payment to quality outcomes. As mandated by the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, the Protecting Access to Medicare Act of 2014, or PAMA, and the Improving Medicare Post-Acute Care Transformation Act of 2014, or the IMPACT Act, CMS established the SNF Value-Based Purchasing Program and the SNF Quality Reporting Program to achieve these goals.

The IMPACT Act established the SNF Quality Reporting Program under which SNFs are required to report certain quality measures and resource use measures in a standardized and interoperable format and to report certain patient assessment data in such a format. SNFs that fail to comply with the reporting requirements by the established times are subject to a 2% reduction in their Medicare payment rates for that fiscal year. SNF Quality Reporting Program data is publicly available on CMS’ Nursing Home Compare website.

PAMA established the SNF Value-Based Purchasing Program, under which HHS will assess SNFs based on hospital readmissions and make these assessments available to the public. CMS has adopted an all-condition, risk-adjusted potentially preventable hospital readmission rate measure for SNFs. Beginning in federal fiscal year 2019, Medicare payment rates are partially based on SNFs’ performance scores on this measure. The 2020 federal fiscal year update adopted two new quality measures to assess whether certain health information is provided by the SNF at the time of transfer or discharge. The update also adopted several standardized patient assessment data elements. To fund the program, CMS reduces Medicare payments to all SNFs by 2% through a withhold mechanism and then redistributes between 50% to 70% of the withheld payments as incentive payments to those SNFs with the highest rankings on this measure. CMS estimates that the federal fiscal year 2021 changes to the SNF Value-Based Purchasing program will decrease payments to SNFs by an aggregate of approximately $200 million, compared to federal fiscal year 2020.
    
As these quality improvement initiatives increase in size and scope, the federal government will likely monitor the impact of these programs more closely. We are unable to predict the impact of these quality improvement initiatives on our Medicare reimbursement rates or the cost of our SNFs’ operations.

Other legislative proposals introduced in Congress, proposed by federal or state agencies or under consideration by some state governments include the option of block grants for states rather than federal matching money for certain state Medicaid services, laws authorizing or directing Medicare to negotiate rate reductions for prescription drugs, additional Medicare and Medicaid enforcement procedures and federal and state cost-containment measures, such as freezing Medicare or Medicaid SNF payment rates at their current levels and reducing or eliminating annual Medicare or Medicaid inflation allowances or gradually reducing rates for SNFs. We cannot estimate the type or magnitude of the potential Medicare and Medicaid policy changes, rate reductions or other changes and the impact on us of the possible failure of these programs to increase rates to match our increasing expenses, but they may be material to and adversely affect our future results of operations.

Skilled Nursing Facilities – Conditions of Participation. CMS maintains and enforces Conditions of Participation that healthcare organizations must meet in order to participate in the Medicare and Medicaid programs. These standards are designed to improve the quality of care and protect the health and safety of beneficiaries. Through the Conditions of Participation, CMS is able to require certain quality standards protocols, including most recently, requiring SNFs to implement a quality assurance and performance improvement program.

In November 2016, CMS instituted a comprehensive update to the Conditions of Participation for long-term care facilities that participate in Medicare and Medicaid, such as our SNFs, which included a broad range of new requirements, some of which stem from statutory modifications under the ACA and the IMPACT Act.

In July 2019, CMS announced two rules - one final and one proposed - to further update requirements that long-term care facilities that participate in Medicare and Medicaid must meet. Specifically, the final rule repeals the prohibition on the use of pre-dispute, binding arbitration agreements by long-term care facilities. The final rule also imposes certain safeguards intended to increase the transparency of arbitration agreements used by long-term care facilities, as well as the related arbitration process, including mandating that a facility not require any resident or his or her representative to sign an arbitration agreement as a condition of admission to the facility. Under the proposed rule, CMS proposes to further reform the requirements for long-term care facilities by eliminating or reducing certain requirements deemed unnecessary, obsolete, or excessively burdensome. Notably, CMS put forward proposals to modify certain requirements related to grievance policies, infection control staffing, and compliance program requirements, among other changes. As of February 20, 2021, this proposed
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rule has not been finalized. We cannot estimate the type or magnitude of the potential Medicare and Medicaid policy changes, but they may be material to and adversely affect our future results of operations.

Skilled Nursing Facilities - Survey and Enforcement. The OIG has issued several reports concerning quality of care and billing practices in SNFs, and the GAO has issued several reports recommending that CMS and states strengthen their compliance and enforcement practices, including federal oversight of state actions and to ensure that SNFs provide adequate care and states act more consistently. Moreover, the OIG has publicly stated that it will review compliance with various aspects of the SNF PPS, including the documentation requirement in support of claims paid by Medicare, and assess the incidence of serious quality of care issues, such as abuse and neglect. In recent years, the OIG and the GAO have also repeatedly called for increased oversight and payment system reform for SNFs.

In addition to scrutiny from the GAO and the OIG, the Senate Special Committee on Aging and other congressional committees have also held hearings on related SNF issues. As a result, CMS has undertaken several initiatives to increase the effectiveness of Medicare and Medicaid SNF survey and enforcement activities. CMS has been taking steps to identify and focus enforcement efforts on SNFs and chains of SNF operators with findings of substandard care or repeat violations of Medicare and Medicaid standards. CMS has also increased its oversight of state survey agencies and has improved the process by which data is captured from these surveys. As an added measure of improving patient care, the ACA provides for the funding of a state background check system for job applicants to long-term care providers who will have direct access to patients. CMS has begun the administration of this program, and, as of October 2020, had awarded funding to approximately half of the states.

In addition, CMS adopted regulations expanding federal and state authority to impose civil monetary penalties in instances of noncompliance. When CMS or state agencies identify deficiencies under state licensing and Medicare and Medicaid standards, they may impose sanctions and remedies such as denials of payment for new Medicare and Medicaid admissions, civil monetary penalties, state oversight, temporary management or receivership and loss of Medicare and Medicaid participation or licensure on SNF operators. Our senior living communities may incur sanctions and penalties from time to time. If we are unable to cure deficiencies that have been identified or that are identified in the future, or if appeals of proposed sanctions or penalties are not successful, decertification or additional sanctions or penalties may be imposed. These consequences may adversely affect our ability to meet our financial obligations and negatively affect our financial condition and results of operations.

Therapy Services – Provider Reimbursement. Our rehabilitation and wellness segment, including Ageility, provides various therapy services, including physical therapy, occupational therapy and speech therapy. The outpatient therapy revenue received by our providers is tied to the Medicare Physician Fee Schedule, or MPFS, which has historically been subject to limitations on the amount of therapy services that can be provided, as well as limitations on annual cost growth. For example, in 2006, Medicare payments for outpatient therapies became subject to payment limits. The DRA created an exception process under which beneficiaries could request an exception from the cap and be granted the amount of services deemed medically necessary by Medicare, while the Bipartisan Budget Act of 2018 permanently repealed the caps, effective January 1, 2018.

CMS has implemented a Merit-Based Incentive Payment System, or MIPS, and Advanced Alternative Payment Models, or APMs, which together CMS calls the Quality Payment Program. These reforms were mandated under MACRA and replace the Sustainable Growth Rate, or SGR, methodology for calculating updates to the MPFS. Starting in 2019, providers may be subject to either MIPS payment adjustments or APM incentive payments. MIPS consolidates the various CMS incentive and quality programs into a single reporting mechanism. Providers will receive either incentive payments or reimbursement cuts based on their compliance with MIPS requirements and their performance against a mean and median threshold of all MIPS eligible providers. CMS expanded the definition of MIPS-eligible clinicians to include physical and occupational therapists. APMs are innovative models approved by CMS for paying healthcare providers for services provided to Medicare beneficiaries that draw on existing programs, such as the bundled payment and shared savings models.

In addition, under MACRA, there have been and will be MPFS conversion factor updates. The Bipartisan Budget Act of 2018 reduced the conversion factor for 2019 from 0.5% to 0.25%. For 2020 through 2025, the conversion factor will be further reduced to 0.0%.

In November 2019, CMS published a final rule that updates the MPFS for the calendar year 2020 and changed other Medicare Part B policies. In particular, the rule continued to implement a statutory requirement that claim modifiers be used to identify certain therapy services that are furnished in whole or in part by physical therapy assistants, or PTAs, and occupational therapy assistants, or OTAs, beginning January 1, 2020. CMS has adopted a standard that, when more than 10% of the service is furnished by a PTA or OTA, then the service is considered to be furnished “in whole or in part” by a PTA or OTA. CMS proposes to base the 10% calculation on the therapeutic minutes of time spent by the therapist versus a PTA or OTA. Beginning
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January 1, 2022, claims that contain a therapy assistant modifier will be paid at 85% of the otherwise applicable payment amount.

In December 2020, CMS published a final rule that updates the MPFS for the calendar year 2021. Amongst other changes, the rule adds certain services to the Medicare Telehealth Services list, either permanently or for the duration of the National Emergency, and reduces the frequency limitations for nursing facility care services delivered through telehealth. The final rule also includes increases to certain visit codes, including evaluation and management services. However, in order to maintain mandatory budget neutrality, these increases are offset by a decrease in the PFS conversion factor. The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020 further revised the PFS conversion factor to have a less substantial decrease, with such revision expected to result in a 3% decrease in reimbursement for therapy services.

Our Medicare Part B outpatient therapy provider revenue rates are tied to the MPFS and may be affected by these modifications; however, we are unable to predict the impact of these modifications on the Medicare rates received by our providers.
Furthermore, physical therapy, occupational therapy and speech, hearing and language disorder services are optional benefits under Medicaid and thus states may choose whether or not to provide coverage of such benefits. We expect states will continue to experience budgetary pressures, and certain states may choose these services to be cut to reduce Medicaid spending; however, we are unable to predict whether such cuts will occur and the impact of such cuts on us.

Certificates of Need. As a mechanism to prevent overbuilding and subsequent healthcare price inflation, many states limit the number of SNFs by requiring developers to obtain certificates of need, or CONs, before new facilities may be built or additional beds may be added to existing facilities. As noted above, a few states also limit the number of assisted living facilities by requiring CONs. In addition, some states (such as California and Texas) that have eliminated CON laws have retained other means of limiting new development, including moratoria, licensing laws or limitations upon participation in the state Medicaid program. These government requirements limit expansion, which we believe may make existing SNFs more valuable by limiting competition.

Healthcare Reform. The ACA has resulted in changes to insurance, payment systems and healthcare delivery systems. The ACA was intended to expand access to health insurance coverage, including the expansion of access to Medicaid coverage, and reduce the growth of healthcare expenditures while simultaneously maintaining or improving the quality of healthcare. The ACA also encouraged the development and testing of bundled payment for services models, the development of Medicare value-based purchasing plans as well as several initiatives to encourage states to develop and expand home and community-based services under Medicaid. Some of the provisions of the ACA took effect immediately, whereas others took effect or will take effect at later dates. Recently, the ACA has been subject to significant reform, repeal and revision efforts by the executive and legislative branches of the federal government and subject to changes resulting from lawsuits filed with the judicial branch of the federal government. It is unclear what the result of any of these legislative, executive and regulatory reform efforts may be or the effect they may have on us, if any. For example:

In 2018, the ACA was also subject to lawsuits that sought to invalidate some or all of its provisions. In February 2018, a lawsuit brought in federal district court in Texas by 18 attorneys general and two governors argued that, following the legislative repeal of the ACA mandate’s tax penalties by the Tax Cuts and Jobs Act of 2017 (which set the penalty to $0), the entire ACA should be enjoined as invalid. On December 14, 2018, the district court found that the ACA, following the mandate repeal, was unconstitutional. Following the ruling, additional state attorneys general intervened as defendants in the case and on December 30, 2018, the court granted the intervenor defendants’ request for a stay pending appeal.

In January 2019, the Department of Justice, or the DOJ, and the intervenor defendants appealed the district court’s 2018 decision to the Fifth Circuit Court of Appeals. On December 18, 2019, a three-judge panel of the Fifth Circuit Court of Appeals held in a 2-1 opinion that the ACA’s individual mandate was unconstitutional, but, rather than determining whether the remainder of the ACA is valid, the Fifth Circuit Court of Appeals remanded the case for additional analysis on severability. In March 2020, the Supreme Court agreed to review the case and oral arguments were held on November 10, 2020.

The effect of the transition from the Trump administration to the Biden administration in January 2021 on the ACA is unknown at this time. If the ACA is repealed, replaced or modified, additional regulatory risks may arise and our future financial results could be adversely and materially affected. We are unable to predict the impact of these or other recent legislative and regulatory actions or proposed actions with respect to state Medicaid rates and federal Medicare rates and federal payments to states for Medicaid programs discussed above on us. The changes implemented or to be implemented as a result of
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such actions could result in the failure of Medicare, Medicaid or private payment reimbursement rates to cover increasing costs, in a reduction in payments or other circumstances.

Regulatory Reform. In the fall of 2020, the Trump administration, including HHS, updated its “Unified Agenda of Regulatory and Deregulatory Actions,” which lists the scope and anticipated timing of pending and future regulations. In releasing the agenda, the Administration highlighted its “ongoing progress toward the goals of more effective and less burdensome regulation." It is unclear how these regulatory reform efforts will impact our operations or whether the Biden administration will continue these efforts. Some of the regulatory updates described above may in the future, be repealed, replaced or modified as a result of these regulatory reform efforts, if such efforts continue. For instance, in the latest update, HHS notes CMS's efforts to assist healthcare providers and suppliers in responding to the National Emergency through its issuance of regulatory waivers and other flexibilities. CMS has identified some of these waivers as opportunities to eliminate the burden permanently.

We are unable to predict the impact on us of these or other regulatory reform efforts. While these efforts could ultimately decrease the regulatory burden for our operations in the long-term, they may increase regulatory uncertainty in the near term.

Enforcement. Federal and state efforts to target false claims, fraud and abuse and violations of anti‑kickback, physician referral (including the Ethics in Patient Referrals Act of 1989), privacy and consumer protection laws by providers under Medicare, Medicaid and other public and private programs have increased in recent years, as have civil monetary penalties, treble damages, repayment requirements and criminal sanctions for noncompliance. The FCA, as amended and expanded by the Fraud Enforcement and Recovery Act of 2009, and the ACA, provides significant civil monetary penalties and treble damages for false claims and authorizes individuals to bring claims on behalf of the federal government for false claims and earn a percentage of the government's recovery should the government intervene. These incentives have led to a steady increase in whistleblower actions. The federal Civil Monetary Penalties Law authorizes the Secretary of HHS to impose substantial civil penalties, treble damages and program exclusions administratively for false claims or violations of the federal Anti-Kickback Statute. In addition, the ACA increased penalties under federal sentencing guidelines by between 20% and 50% for healthcare fraud offenses involving more than $1.0 million. State Attorneys General typically enforce consumer protection laws relating to senior living services, clinics and other healthcare facilities.

Government authorities are devoting increasing attention and resources to the prevention, detection and prosecution of healthcare fraud and abuse. The OIG has guidelines for SNFs intended to assist them in developing voluntary compliance programs to prevent fraud and abuse. CMS contractors are also expanding the retroactive audits of Medicare claims submitted by SNFs and other providers, and recouping alleged overpayments for services determined by auditors not to have been medically necessary or not to meet Medicare coverage criteria as billed. State Medicaid programs and other third-party payers are conducting similar medical necessity and compliance audits.

In addition, federal agencies have announced intentions to enhance enforcement efforts to improve the quality and safety of care in nursing homes, which will impact our operations and increase our operating costs. For example, in accordance with the previously announced attention by CMS regarding the overuse of antipsychotics in nursing homes, CMS stated its intention to use civil monetary penalties and denial of Medicare reimbursement to penalize nursing homes that fail to adopt strategies to lower medically-unnecessary use of antipsychotic medications. Further, the DOJ announced a National Nursing Home Initiative to pursue civil and criminal penalties against “nursing homes that provide grossly substandard care to their residents.” The DOJ stated that it would consider a number of factors in identifying problematic nursing homes, including:
(1) consistent failure to provide adequate nursing staff; (2) failure to adhere to basic protocols for hygiene and infection control; (3) failure to provide sufficient food to residents; (4) withholding of pain medication; and (5) use of physical or chemical restraints to restrain or sedate residents.

The ACA facilitates the DOJ’s ability to investigate allegations of wrongdoing or fraud at SNFs, in part because of increased cooperation and data sharing among CMS, the OIG, the DOJ and the states. On October 20, 2020, the DOJ issued its Annual Report to Congress on its Work to Combat Elder Fraud and Abuse, highlighting among its nursing home cases a $15.0 million settlement and Corporate Integrity Agreement resolving False Claims Act allegations regarding medically unnecessary rehabilitation services. The significant nature of the settlement indicates that the federal government is increasingly focused on the appropriateness of billing practices of, and medical necessity of services provided at, SNFs. The DOJ has also established 10 regional intergovernmental Elder Justice Task Forces across the country to identify and take enforcement action against SNFs that provide substandard care to residents. In September 2019, the DOJ announced that it intends to identify criminal charges, such as wire fraud or healthcare fraud, that can be brought alongside civil actions against SNFs and employees accused of abusing or defrauding elderly patients.

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In addition, the ACA requires all states to terminate the Medicaid participation of any provider that has been terminated under Medicare or any other state Medicaid plan. Moreover, state Medicaid fraud control agencies may investigate and prosecute assisted living communities and SNFs, clinics and other healthcare facilities under fraud and patient abuse and neglect laws. We expect that increased enforcement and monitoring by government agencies will cause us to expend considerable amounts on regulatory compliance and likely reduce the profits available from providing healthcare services.

Current state laws and regulations allow enforcement officials to make determinations as to whether the care provided at our senior living communities exceeds the level of care for which a particular community is licensed, which could result in the closure of the community and the immediate discharge and transfer of residents. Citations or revocation of a license or certification at one community could impact our ability to obtain new licenses or certifications or to maintain or renew existing licenses and certifications at other communities, and trigger defaults under our management agreements with DHC, our leases and our credit agreement or adversely affect our ability to operate or obtain financing in the future. In addition, an adverse finding by state officials could serve as the basis for lawsuits by private plaintiffs and lead to investigations under federal and state laws, which could result in civil and/or criminal penalties against the community as well as a related entity.

Other Matters. We must comply with laws designed to protect the confidentiality and security of individually identifiable information. Under the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, we must comply with rules adopted by HHS governing the privacy, security, use and disclosure of individually identifiable information, including financial information and protected health information, or PHI, and also with security rules for electronic PHI. There may be both civil monetary penalties and criminal sanctions for non-compliance with these laws. Under the HITECH Act, penalties for violation of certain provisions may be as high as $50,000 per violation for a maximum civil penalty of $1.5 million per calendar year. In January 2013, HHS released the HIPAA Omnibus Rule, or the Omnibus Rule, which modified various requirements, including the standard for providing breach notices, which previously required an analysis of the harm of any disclosure, to a more objective analysis relating to whether any PHI was actually acquired or viewed as a result of the breach. On December 10, 2020, HHS issued a proposed rule that would modify certain standards, definitions, and patient rights under the HIPAA Privacy Rule to address barriers to coordinated care and case management. The effect of this proposed rule, if finalized, upon our operations is unknown at this time. In addition to HIPAA, many states have enacted their own security and privacy laws relating to individually identifiable information, including financial information and health information. For example, the California Consumer Privacy Act became effective in 2020, and we expect additional federal and state legislative and regulatory efforts to regulate consumer privacy in the future. In some states, these laws are more burdensome than HIPAA. In instances in which the state provisions are more stringent than or differ from HIPAA, our communities must comply with both the applicable federal and state standards. If we fail to comply with applicable federal or state standards, we could be subject to civil sanctions and criminal penalties, which could materially and adversely affect our business, financial condition and results of operations. HIPAA enforcement efforts have increased considerably over the past few years, with HHS, through its Office for Civil Rights, entering into several multi-million dollar HIPAA settlements in 2020 alone. Finally, the Office for Civil Rights and other regulatory bodies have become increasingly focused on cybersecurity risks, including the emerging threat of ransomware and similar cyber-attacks. The increasing sophistication of cybersecurity threats presents challenges to the entire healthcare industry.

We must also comply with the Americans with Disabilities Act, or the ADA, and similar state and local laws to the extent that such communities are “public accommodations” as defined in those laws. The obligation to comply with the ADA and other similar laws is an ongoing obligation, and we continue to assess our communities and make appropriate modifications. 

Insurance

Litigation against senior living and healthcare companies continues to increase, and liability insurance costs continue to increase as a result. In addition, our employee benefit costs, including health insurance and workers’ compensation insurance, generally continue to increase and increased during the year ended December 31, 2020 due to the Pandemic and we expect that these increased costs due to the Pandemic may continue in the future. To partially offset these insurance cost increases, among other things, we have:

a fully self-insured program for all health-related claims of covered team members;

increased the deductible or retention amounts for which we are liable under our liability insurance;

operated an offshore captive insurance company which participates in our workers’ compensation, professional and general liability and certain of our automobile liability insurance programs, which may allow us to reduce our
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net insurance costs by retaining the earnings on our reserves, provided our claims experience does not exceed that projected by various statutory and actuarial formulas;

increased the amounts that some of our team members are required to pay for health insurance coverage and co-payments for health services and pharmaceutical prescriptions and decreasing the amount of certain healthcare benefits as well as adding a high deductible health insurance plan as an option for our team members;

utilized insurance and other professional advisors to help us establish programs to reduce our workers’ compensation and professional and general liabilities, including programs to prevent liability claims and to reduce workplace injuries; and

utilized insurance and other professional advisors to help us establish appropriate reserves for our retained liabilities and captive insurance programs.

We partially self-insure up to certain limits for workers’ compensation, professional and general liability, automobile and property coverage. Claims that exceed these limits are insured up to contractual limits, over which we are self-insured. Our current insurance arrangements are generally renewable annually. We cannot be sure that our insurance charges and self-insurance reserve requirements will not increase, and we cannot predict the amount of any such increase, or to what extent, if at all, we may be able to offset any such increase through higher deductibles, retention amounts, self-insurance or other means in the future. 

For more information on our self-insurance see Note 2 and 15 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Environmental and Climate Change Matters
    
Ownership of real estate is subject to risks associated with environmental hazards. Under various laws, owners as well as tenants and operators of real estate may be required to investigate and clean up or remove hazardous substances present at or migrating from properties they own, lease or operate and may be held liable for property damage or personal injuries that result from hazardous substances. These laws also expose us to the possibility that we may become liable to government agencies or third parties for costs and damages we incur in connection with hazardous substances. In addition, these laws also impose various requirements regarding the operation and maintenance of properties, and recordkeeping and reporting requirements relating to environmental matters that may require us to incur costs to comply.

Under our previously existing leases with DHC, we agreed to indemnify DHC for any environmental liabilities it may
incur related to the senior living communities subject to those leases and the properties on which they are located. We reviewed environmental surveys of certain of our owned and previously leased, but now managed, properties prior to their purchase or the commencement of our leasing of those senior living communities. Based upon environmental surveys, we obtained and reviewed for certain of our senior living communities, as well as the results of operations at our senior living communities; we do not believe that there are environmental conditions at any of the senior living communities we currently operate that have had or will have a material adverse effect on us. However, we cannot be sure that environmental conditions are not present at our owned or previously leased properties, that DHC will fund potential costs we incur in the future related to any such conditions if they relate to a senior living community we manage for DHC, or that such potential costs will not have a material adverse effect on our business or financial condition or results of operations.

When major weather or climate-related events, such as hurricanes, floods and wildfires, occur near our senior living communities, we may relocate the residents at our senior living communities to alternative locations for their safety and close or limit the operations of the impacted senior living community until the event has ended and the senior living community is then ready for operation. We may incur significant costs and losses as a result of these activities, both in terms of operating, preparing and repairing our senior living communities in anticipation of, during and after severe weather or climate-related event, and suffer potential lost business due to the interruption in operating our senior living communities. Our insurance may not adequately compensate us for these costs and losses.

Concerns about climate change have resulted in various treaties, laws and regulations that are intended to limit carbon emissions and address other environmental concerns. These and other laws may cause energy or other costs at our senior living communities to increase. In the long-term, we believe any such increased costs will be passed through and paid by our residents and other customers in the form of higher charges for our services. However, in the short-term, these increased costs, if material in amount, could materially and adversely affect our financial condition and results of operations. For more information regarding climate change and other environmental matters and their possible adverse impact on us, see “Risk Factors—Risks
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Related to Our Business—Our operations are subject to environmental risks and liabilities,” “Risk Factors—Risks Related to Our Business—Our operations are subject to risks from adverse weather and climate events” and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Impact of Climate Change".
    
We are aware of the impact of our communities on the environment. When we renovate our senior living communities, we generally use energy-efficient products, including lighting, windows and heating ventilation and air conditioning equipment.

Internet Website

Our internet website address is www.fivestarseniorliving.com. Copies of our governance guidelines, our code of business conduct and ethics, or our Code of Conduct, and the charters of our audit, quality of care, compensation and nominating and governance committees are posted on our website and also may be obtained free of charge by writing to our Secretary, Five Star Senior Living Inc., Two Newton Place, 255 Washington Street, Newton, Massachusetts 02458-1634. We also have a policy outlining procedures for handling concerns or complaints about accounting, internal accounting controls or auditing matters and a governance hotline accessible on our website that shareholders can use to report concerns or complaints about accounting, internal accounting controls or auditing matters or violations or possible violations of our Code of Conduct. We make available, free of charge, through the "Investor Relations" section of our website, our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to, the SEC. Any material we file with or furnish to the SEC is also maintained on the SEC website, www.sec.gov. Security-holders may send communications to our Board or individual Directors by writing to the party for whom the communication is intended at c/o Secretary, Five Star Senior Living Inc., Two Newton Place, 255 Washington Street, Newton, Massachusetts 02458 or by email at secretary@5ssl.com. Our website address is included several times in this Annual Report on Form 10-K as a textual reference only and the information on or accessible through our website is not incorporated by reference into this Annual Report on Form 10-K or other documents we file with, or furnish to, the SEC. We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Those disclosures will be included on our website in the “Investor Relations” section. Accordingly, investors should monitor such portions of our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.

Item 1A. Risk Factors

Risks Related to Our Business

The Pandemic has had, and may continue to have, a materially adverse effect on our business, operations, financial results and liquidity and its duration is unknown.

The Pandemic has had a negative impact on the global economy, including certain industries in the U.S. economy that are primarily focused on personal services.

These conditions have had, and will likely continue to have, a material and adverse impact on our business, results of operations and liquidity. Occupancy at our senior living communities has continually declined during the Pandemic and we expect these declines may continue for a sustained period of time, which we expect would have a significant adverse impact on our financial results. Although the rates we charge residents has not changed significantly to date as a result of the Pandemic, that could change if the Pandemic continues or economic conditions worsen. We earn management fees based on a percentage of revenues generated at the senior living communities that we manage; therefore, declines in occupancy, restrictions on admitting new residents and the closure or curtailment of operations of senior living communities we manage, without sufficient offsets from increased rates or other revenues, and vice versa, have and likely will continue to reduce the management fees we earn. In addition, the Pandemic may further adversely impact our business if shortages in the materials we need to operate our senior living communities or staffing shortages result. Additionally, the Pandemic could continue to significantly increase certain operating costs for our senior living communities, including labor costs due to agency usage or overtime pay and our costs to obtain PPE, to incorporate enhanced infection control measures and to implement quarantines for residents. Also, we believe that our insurance costs may continue to rise as a result of claims or litigation associated with the Pandemic. In addition, as a result of the Pandemic, Ageility has been forced to close certain outpatient clinics temporarily and we significantly reduced the number of new clinics we planned to open during 2020. As a result, revenues from our Ageility business have been, and may continue to be, negatively impacted.

Although immunization against COVID-19 is in process, it is expected to continue through the first quarter of 2021, and with considerable effort and expense, for all of the residents and team members in our senior living communities to be vaccinated and even longer for the vaccines to be produced, distributed and administered to a sufficient number of people to
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enable the cessation of the Pandemic. In addition, we may be subject to claims by residents and team members related to vaccine administration by us or the care provided by us following administration of the vaccine and we cannot be sure we will be protected from liability as a result of being a "Covered Person" under the Public Readiness and Emergency Preparedness Act.

We cannot predict the extent and duration of the Pandemic or its economic impact, but we expect the adverse consequences will be substantial. Further, the extent and strength of any economic recovery after the Pandemic abates is uncertain and subject to various factors and conditions. Our business, operations and financial position may continue to be negatively impacted after the Pandemic abates and may remain at depressed levels compared to prior to the outbreak of the Pandemic for an extended period.

The high levels of infected COVID-19 patients and deaths at senior living communities and resulting negative publicity may have a long-term significant detrimental impact on the senior living industry.

COVID-19 has been particularly harmful to seniors and persons with pre-existing health conditions. If the senior living industry continues to experience high levels of COVID-19 infections among residents and related deaths, and news accounts emphasize these experiences, seniors may delay or forgo moving into senior living communities or using other services provided by senior living operators. As a result, our senior living communities’ business and our results of operations may experience a long-term significant detrimental impact.

We may fail to operate profitably and grow our revenues.

Most of the senior living communities we manage are owned by DHC and we operate those senior living communities pursuant to the New Management Agreements that became effective following the Restructuring Transactions. Pursuant to these New Management Agreements, DHC funds the operations and capital needs of those senior living communities, which alleviates us of those funding commitments. In return, we earn base management fees and construction supervision fees based on a fixed percentage of revenues and construction costs for construction projects we manage at those senior living communities. As a result, our ability to grow our revenues from managing those senior living communities will be limited to the applicable fee percentages related to the growth of revenues or applicable construction costs from those senior living communities, subject to any incentive fees we may earn. In addition, some of our costs are fixed or cannot be, or may be delayed in being, proportionally adjusted in response to any decline in fees and other revenues we may experience. As a result, a small percentage decline in our revenues or increase in our expenses could have a material adverse impact on our operating results.

In addition to managing senior living communities for DHC, we own senior living communities outright and lease senior living communities from another owner of senior living communities, as well as providing other services, such as rehabilitation, wellness and home health services. We may grow these businesses or engage in new or additional businesses in the future. If we do not profitably operate our businesses, the losses we may incur from these businesses, together with corporate and general and administrative expenses we may incur, may exceed the fees we earn from managing senior living communities for DHC and we may incur operating losses as a result.

Termination of assisted living resident agreements and resident attrition could adversely affect our revenues and earnings.

Unlike typical apartment leases that typically have a one-year term, state regulations governing assisted living communities typically require that senior living community residents have the right to terminate their assisted living resident agreements for any reason on reasonable (30 to 60 days’) notice. Should a large number of our residents elect to terminate their resident agreements at or around the same time, our revenues and earnings could be materially and adversely affected. In addition, the advanced ages of our senior living residents may result in high resident turnover rates.

Current and future trends in healthcare and the needs and preferences of older adults could have a material adverse effect on our business, financial condition and results of operations.

The healthcare industry is dynamic. The needs and preferences of older adults have generally changed over the past several years, including preferences for older adults to reside in their homes permanently or to delay moving to senior living communities until they require greater care. Further, rehabilitation services and other services are increasingly available and being provided to older adults on an outpatient basis or in older adults’ personal residences, which may cause older adults to delay moving to senior living communities. Such delays may result in decreases in our occupancy rates and increases in our resident turnover rates. Moreover, older adults who do eventually move to senior living communities may have greater care needs and acuity, which may increase our cost of doing business, expose us to additional liability or result in lost business and shorter stays at our senior living communities. These trends may negatively impact our occupancy rates, revenues, cash flows and results of operations.
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Additionally, if we fail to identify and successfully act upon future changes and trends in healthcare and the needs and preferences of older adults, our business, financial condition, results of operations and prospects will be adversely impacted.

Circumstances that adversely affect the ability of older adults or their families to pay for our services could cause our revenues and results of operations to decline.

Because government benefits, such as Medicare and Medicaid, are not generally available for services at independent and assisted living communities, our residents paid from their private resources approximately 86.3% of the total resident fees in connection with the senior living communities we operated during the year ended December 31, 2020, and we expect to continue to rely on our residents’ ability to pay for our services from their private resources. Economic downturns, lower levels of consumer confidence, stock market volatility and/or changes in demographics could adversely affect the ability of older adults to afford our resident fees. Our prospective residents frequently use the proceeds from their home sales to pay our entrance and resident fees. Downturns or stagnation in the U.S. housing market could adversely affect the ability, or perceived ability of older adults to afford these fees. Also, recent high unemployment as a result of the Pandemic may reduce the ability of family members to assist their older relatives in paying these fees. If we are unable to retain and/or attract older adults with sufficient income, assets or other resources required to pay the fees associated with independent and assisted living services and other service offerings, our revenues and results of operations could decline.

We face significant competition.

We compete with numerous other senior living community operators, as well as companies that provide senior living services, such as home healthcare companies and other real estate based service providers. Some of our competitors are larger and have greater financial resources than us and some are not for profit entities that have endowment income and may not face the same financial pressures that we do. We cannot be sure that we will be able to attract a sufficient number of residents to our senior living communities at rates that will generate acceptable returns or that we will be able to attract team members and keep wages and other employee benefits, insurance costs and other operating expenses at levels that will allow us to compete successfully and operate profitably.

In recent years, a significant number of new senior living communities have been developed. Although there are indications that the rate of newly started developments has recently declined and further slowed due to the Pandemic, new inventory is expected to still hit the market in the near term due to the increased development of senior living communities in the past several years, and this increased supply of senior living communities has increased and will continue to increase competitive pressures on us, particularly in certain geographic markets where we operate senior living communities, and we expect these competitive challenges to continue for the foreseeable future. These competitive challenges may prevent us from maintaining or improving occupancy and rates at our senior living communities, which may adversely affect their profitability and, therefore, negatively impact our revenues, cash flows and results from operations.

Changes in the reimbursement rates, methods, or timing of payment from government programs, including Medicare and Medicaid, or other reductions in reimbursement for senior living and healthcare services could adversely impact our revenues.

Our revenues rely in part on reimbursement from government programs and third party payers for the senior living and rehabilitation services we provide. The healthcare industry in the United States is subject to continuous reform efforts and pressures to reduce costs. Some of our operations, especially the SNFs we manage on behalf of DHC and our Ageility business, receive significant revenues from Medicare and Medicaid. The rates and amounts of payments under these programs are subject to periodic adjustment and there have been numerous recent legislative and regulatory actions or proposed actions with respect to Medicare and Medicaid payments, insurance and healthcare delivery. Additionally, we receive significant payments from third party payers for certain of our rehabilitation and wellness services, including approximately 50.6% and 44.1% of our total revenues for the years ended December 31, 2020 and 2019, respectively. These private third party payers continue their efforts to control healthcare costs and decrease payments for our services through direct contracts with healthcare providers, increased utilization review practices and greater enrollment in managed care programs and preferred provider organizations. Any reduction in the payments we receive from Medicare, Medicaid and third party payers could result in the failure of those reimbursements to cover our costs of providing required services to our residents and clients and could have a material adverse effect on our business, financial condition and results of operations.

Increases in our labor costs and staffing turnover may have a material adverse effect on us.

The success of our senior living communities depends on our ability to attract and retain team members for the day-to-day operations of those communities. We continue to face upward pressure on wages and benefits due to high competition for qualified personnel in our industry, low unemployment prior to the onset of the Pandemic and recent proposed and enacted legislation to increase the minimum wage in certain jurisdictions. The market for regional and executive directors at our
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communities, and qualified nurses, therapists and other healthcare professionals is highly competitive, and periodic or geographic area shortages of such healthcare professionals, as well as the added pressure of the Pandemic, may require us to increase the wages and benefits we offer to our team members in order to attract and retain them or to utilize temporary personnel at an increased cost. In addition, employee benefit costs, including health insurance and workers’ compensation insurance costs, have materially increased in recent years.

Our labor costs have increased because of the Pandemic, including because of increased staffing needs and team member exposure to COVID-19. Staffing turnover at our senior living communities is common and has increased as a result of the Pandemic, the current competitive labor market conditions and the competitive environment in the senior living industry. We have had to rely on more expensive agency help or pay overtime to adequately staff our communities and clinics. Labor unions also attempt to organize our team members from time to time; if our team members were to unionize, it could result in business interruptions, work stoppages, the degradation of service levels due to work rules, or increased operating expenses that may adversely affect our results of operations.

Additionally, our operations are subject to various employment related laws and regulations, which govern matters such as minimum wages, the Family and Medical Leave Act, overtime pay, compensable time, recordkeeping and other working conditions, and a variety of similar laws that govern these and other employment related matters. We are currently subject to employment related claims in connection with our operations. These claims, lawsuits and proceedings are in various stages of adjudication or investigation and involve a wide variety of claims and potential outcomes. Because labor represents a significant portion of our operating expenses, compliance with these evolving laws and regulations could substantially increase our cost of doing business, while failure to do so could subject us to significant back pay awards, fines and lawsuits and could have a material adverse effect on our business, financial condition and results of operations.

Any significant failure by us to control labor costs or to pass any increases on to residents through rate increases could have a material adverse effect on our business, financial condition and results of operations. Further, increased costs charged to our residents may reduce our occupancy and growth.

Our business is subject to extensive regulation, which requires us to incur significant costs and may result in losses.

Licensing and Medicare and Medicaid laws require operators of senior living communities and rehabilitation and wellness clinics to comply with extensive standards governing operations and physical environments. Federal and state laws also prohibit fraud and abuse by senior living healthcare providers and rehabilitation and wellness clinic operators, including civil and criminal laws that prohibit false claims and regulate patient referrals in Medicare, Medicaid and other payer programs. In recent years, federal and state governments have devoted increased resources to monitoring the quality of care at senior living communities and to anti‑fraud investigations in healthcare generally. CMS contractors, state Medicaid programs and other third-party payers continue to conduct medical necessity and compliance audits. When federal or state agencies identify violations of anti‑fraud, false claims, anti‑kickback and physician referral laws, they may impose or seek civil or criminal penalties, treble damages and other government sanctions, and may revoke a community’s license or make conditional or exclude the community from Medicare or Medicaid participation. The ACA amended the federal Anti‑Kickback Statute and the FCA, making it easier for government agencies and private plaintiffs to prevail in lawsuits brought against healthcare providers and for severe fines and penalties to be imposed. In addition, when these agencies determine that there has been quality of care deficiencies or improper billing, they may impose or seek various remedies or sanctions, including denial of new admissions, exclusion from Medicare or Medicaid program participation, monetary penalties, restitution of overpayments, government oversight, temporary management, loss of licensure and criminal penalties.

Current state laws and regulations allow enforcement officials to make determinations as to whether the care provided at our senior living communities exceeds the level of care for which a particular community is licensed, which could result in holds on accepting new residents, or the closure of the facility and the immediate discharge and transfer of residents. Citations or revocation of a license or certification at one community could impact our ability to obtain new licenses or certifications or to maintain or renew existing licenses and certifications at other communities, and trigger defaults under our management agreements with DHC, our leases with PEAK and our credit agreement, adversely affect our ability to operate our senior living communities or our Ageility clinics or obtain financing in the future.

Our senior living communities incur sanctions and penalties from time to time. As a result of the healthcare industry’s extensive regulatory system and increasing enforcement initiatives, we have experienced increased costs for monitoring quality of care compliance, billing procedures and compliance with referral laws and other laws that apply to us, and we expect these costs may continue to increase.




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Provisions of the ACA could reduce our income and increase our costs.

The ACA regulates insurance, payment and healthcare delivery systems that have affected, and will continue to affect our revenues and costs. The ACA provides for multiple reductions to the annual market updates for inflation that may result in reductions in SNF Medicare payment rates. The ACA includes other provisions that may affect us, such as enforcement reforms and Medicare and Medicaid program integrity control initiatives, new compliance, ethics and public disclosure requirements, initiatives to encourage the development of home and community based long-term care services rather than institutional services under Medicaid, value based purchasing plans and a Medicare post-acute care pilot program to develop and evaluate making a bundled payment for services, including physician and SNF services, provided during an episode of care. We are unable to predict the impact on us of the insurance, payment, and healthcare delivery systems provisions contained in and to be developed pursuant to the ACA. In addition, maintaining compliance with the ACA requires us to expend management time and financial resources.

Our business requires us to make significant capital expenditures to maintain and improve our senior living communities and to retain our competitive position in the senior living industry.

Our senior living communities sometimes require significant expenditures to address required ongoing maintenance or to make them more attractive to residents. Various government authorities mandate certain physical characteristics of senior living communities; changes in these regulations may require us to make significant expenditures. In addition, we are often required to make significant capital expenditures when we acquire or newly lease senior living communities. Our available financial resources may be insufficient to fund these expenditures. We incur capital costs for senior living communities we own or lease and for our other businesses and corporate level activities. Further, increases in capital costs at our managed senior living communities may negatively impact the financial metrics at our senior living communities and our potential to earn incentive fees for these senior living communities or even give DHC a right to terminate the applicable management agreements. DHC’s failure to make certain capital expenditures may result in our senior living communities being less competitive and in our earning less management fees.

The nature of our business exposes us to litigation and regulatory and government proceedings.

We have been, are currently, and expect in the future to be, involved in claims, lawsuits and regulatory and government audits, investigations and proceedings arising in the ordinary course of our business, some of which may involve material amounts. The defense and resolution of such claims, lawsuits and other proceedings may require us to incur significant expenses.

In several well publicized instances, private litigation by residents of senior living communities for alleged abuses has resulted in large damage awards against other senior living companies. As a result, the cost of our liability insurance continues to increase. Medical liability insurance reforms have not generally been adopted, and we expect our insurance costs may continue to increase.

Litigation may subject us to adverse rulings and judgments that may materially impact our business, operating results and liquidity. In addition, defending litigation distracts the attention of our management and may be expensive. For more information regarding certain of the settled employee litigation matters, our legal contingencies and past legal and compliance matters, see Note 12 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

If we do not achieve and maintain a high quality of care, payments through pay-for-performance and value-based purchasing programs may be reduced, and the overall attractiveness of our senior living communities to potential residents could decrease as more quality data becomes publicly available.

CMS is moving toward pay-for-performance programs, such as value-based payment, as an alternative to fee-for-service reimbursement. In October 2016, CMS issued a final rule to implement the Quality Payment Program. Beginning in 2019, providers were subject to either MIPS payment adjustments or APM incentive payments. Under PAMA, since October 2018, Medicare payment rates are now partially based on SNFs’ performance scores on a hospital readmission measure as part of CMS’s new SNF Value-Based Purchasing Program. Under the IMPACT Act, SNFs are required to report certain quality measures, resource use measures and certain patient assessment data in a standardized and interoperable format. SNFs that fail to comply with the reporting requirements are subject to a 2% reduction in their Medicare payment rates. Since October 2018, HHS has made SNF-reported data publicly available on its Nursing Home Compare website. We cannot predict the impact of these quality-driven payment reforms, but they may be material to and adversely affect our future results of operations. In addition, we cannot predict the impact of more quality data becoming publicly available, but if we do not achieve and maintain a high quality of care, the overall attractiveness of our communities to potential residents could decrease.

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We may fail to comply with the terms of our credit agreement.

Our credit agreement includes various conditions, covenants and events of default. We may not be able to satisfy all of these conditions or may default on some of these covenants for various reasons, including for reasons beyond our control. For example, our credit agreement requires us to comply with certain financial and other covenants. Our ability to comply with such covenants will depend upon our ability to operate our business profitably. If the recent trends in occupancy, rates and employment and other costs and expenses continue or increase, we may incur operating losses. Complying with these covenants may limit our ability to take actions that may be beneficial to us and our security holders.

If we default under our credit agreement, our lenders may demand immediate payment. Any default under our credit agreement that results in acceleration of our obligations to repay outstanding indebtedness would likely have serious adverse consequences to us, including the possible foreclosure of the real estate mortgages on 11 senior living communities owned by us, and would likely cause the value of our securities to decline.

In the future, we may obtain additional debt financing, and the covenants and conditions that apply to any such additional debt may be more restrictive than the covenants and conditions that are contained in our credit agreement.

Changes in market interest rates may adversely affect us.

Interest rates are at relatively low levels on a historical basis, and the U.S. Federal Reserve System has indicated that it does not expect to raise interest rates in response to the Pandemic and current market conditions until at least the end of 2023. There can be no assurance, however, that the U.S. Federal Reserve System will not raise rates prior to that time. Any increases in market interest rates may materially and negatively affect us in several ways, including:

increases in interest rates could adversely impact the housing market and reduce demand for our services and occupancy at our senior living communities, which could reduce the likelihood that we will earn incentive fees at our managed senior living communities if the EBITDA we realize at our managed senior living communities declines as a result;

amounts outstanding under our credit facility require interest to be paid at variable interest rates. When interest rates increase, our interest costs will increase, which could adversely affect our cash flows, our ability to pay principal and interest on our debt, our cost of refinancing our debt when it becomes due and our ability to fund our operations and working capital; and

an increase in interest rates could negatively impact the market value of our owned senior living communities and limit our ability to sell any owned senior living communities. Increased interest rates would increase our costs for, and may limit our ability to obtain, mortgage financing.

Conversely, low market interest rates, particularly if they remain over a sustained period, may increase our use of debt capital to fund property acquisitions, lower capitalization rates for property purchases and increase competition for property purchases, which may reduce opportunities for us to operate additional communities.

Our growth strategy may not succeed.

We intend to continue to grow our business by entering into additional long-term management arrangements for senior living communities and growing the ancillary services we provide in which residents’ private resources account for all or a large majority of revenues. Our business plans include seeking to take advantage of expected long-term increases in demand for senior living communities and health and wellness services. Our growth strategy is subject to risks, including, but not limited to, the following:

we may not be an attractive business partner given our operating history and the liquidity challenges we have experienced;

we may be unable to identify and acquire or newly manage or lease additional senior living communities and rehabilitation and wellness services clinics on acceptable terms;

we may be unable to access the capital required to manage additional senior living communities and operate rehabilitation and wellness services clinics or grow ancillary services;

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we may not achieve the operating results we expect from senior living communities we operate or any rehabilitation and wellness or other services we may provide;

it may take a period of time to stabilize the operations of senior living communities after we acquire, or commence managing or leasing, them;

integrating the operations of newly managed senior living communities and rehabilitation and wellness services clinics we commence operating, or other rehabilitation and wellness services we may provide, may disrupt our existing operations, or may cost more than anticipated;

we may fail to realize any expected operating or cost efficiencies from any future additional senior living communities or rehabilitation and wellness services clinics we operate;

we may commence operating senior living communities that are subject to unknown liabilities and without any recourse, or with limited recourse, such as liability for the cleanup of undisclosed environmental contamination or for claims by residents, vendors or other persons related to actions taken by former owners or operators of the communities;

any failure to comply with licensing requirements at our senior living communities, rehabilitation and wellness services clinics or elsewhere may prevent our obtaining or renewing licenses needed to conduct and grow our businesses; and

senior living communities and rehabilitation and wellness services clinics that we commence operating, and any new or expanded rehabilitation and wellness services we may seek to provide might require significant management attention that would otherwise be devoted to our other business activities.

For these reasons, among others, our growth strategy may not succeed or may cause us to experience losses.

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

Of the 252 senior living communities we operate, 228 are owned by DHC, and we manage all of those senior living communities pursuant to the New Management Agreements.

DHC may terminate the New Management Agreements in certain circumstances, including if the EBITDA we generate at our managed senior living communities does not exceed target levels or for our uncured material breach. Our business is substantially dependent upon our continued relationship with DHC. The loss of the New Management Agreements with DHC, or a material change to their terms less favorable to us, could have a material adverse effect on our business, financial condition or results of operations.

We rely on information technology and systems in our operations, and any material failure, inadequacy, interruption or security failure of that technology or those systems could materially and adversely affect us.

We rely on information technology and systems, including the Internet and cloud-based infrastructures, commercially available software and our internally developed applications, to process, transmit, store and safeguard information and to manage or support a variety of our business processes, including managing our building systems, financial transactions and maintenance of records, which may include personally identifiable information or protected health information of team members and residents. If we or our third party vendors experience material security or other failures, inadequacies or interruptions, we could incur material costs and losses and our operations could be disrupted. We take various actions, and incur significant costs, to maintain and protect the operation and security of our information technology and systems, including the data maintained in those systems. However, these measures may not prevent the systems’ improper functioning or a compromise in security.

Security breaches, computer viruses, attacks by hackers, and online fraud schemes can create significant system disruptions, shutdowns, fraudulent transfer of assets or unauthorized disclosure of confidential information. The cybersecurity risks to us and our third-party vendors are heightened by, among other things, the evolving nature of the threats faced, advances in computer capabilities, new discoveries in the field of cryptography and new and increasingly sophisticated methods used to perpetrate illegal or fraudulent activities against us, including cyberattacks, email or wire fraud and other attacks exploiting security vulnerabilities in our or third parties' information technology networks and systems or operations. Any failure by us or
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our third party vendors to maintain the security, proper function and availability of information technology and systems could result in financial losses, interrupt our operations, damage our reputation, cause us to be in default of material contracts and subject us to liability claims or regulatory penalties, any of which could materially and adversely affect our business and the value of our securities.

We may fail to comply with laws governing the privacy and security of personal information, including relating to health.

We are required to comply with federal and state laws governing the privacy, security, use and disclosure of personally identifiable information and protected health information, including HIPAA and the HITECH Act, as updated by the Omnibus Rule. If we fail to comply with applicable federal or state standards, we could be subject to civil sanctions and criminal penalties, which could materially and adversely affect our business, financial condition and results of operations.

Insurance may not adequately cover our losses, and the cost of obtaining such insurance may continue to increase.

We purchase certain third party insurance coverage for our business and properties, including for casualty, liability, malpractice, fire, extended coverage and rental or business interruption loss insurance. Pursuant to our management agreements with DHC, we are obligated to maintain certain insurance coverage for our DHC managed senior living communities. Recently, the costs of insurance have increased significantly, and these increased costs have had an adverse effect on us and the operating results for our senior living communities. Although DHC funds the insurance premiums for our DHC managed senior living communities, the increased costs of insurance may negatively impact the financial results at those managed senior living communities or give rise to a DHC right of termination of the applicable management agreements if the EBITDA at those managed senior living communities does not meet certain targets. In addition, we are responsible for paying for insurance for other properties that we operate, including senior living communities that we own or lease, and increased insurance costs will adversely impact us as a result. Losses of a catastrophic nature, such as those caused by hurricanes, flooding, volcanic eruptions and earthquakes, or losses from terrorism, may be covered by insurance policies with limitations such as large deductibles or co-payments that we or the owner may not be able to pay. Insurance proceeds may not be adequate to restore an affected property to its condition prior to loss or to compensate us for our losses, including lost revenues or other costs. Certain losses, such as losses we may incur as a result of known or unknown environmental conditions, are not covered by our insurance. Market conditions or our loss history may limit the scope of insurance or coverage available to us on economic terms. If an uninsured loss or a loss in excess of insured limits occurs, we may have to incur uninsured costs to mitigate such losses or lose all or a portion of the capital invested in a property, as well as the anticipated future revenue from the property.

We may incur significant costs from our self-insurance arrangements.

We self-insure up to certain limits for workers’ compensation, professional and general liability and automobile coverage. Claims in excess of these limits are insured up to contractual limits, over which we are self-insured. We fully self-insure all health-related claims for our covered employees. We may incur significant costs for claims and related matters under our self-insurance arrangements. We cannot be sure that our insurance charges and self-insurance reserve requirements will not increase, and we cannot predict the amount of any such increase, or to what extent, if at all, we may be able to offset any such increase through higher retention amounts, self-insurance or other means in the future. Although we determine our employee health insurance, workers’ compensation and professional and general liability self-insurance reserves with guidance from third party professionals, our reserves may nonetheless be inadequate. Determining reserves for the casualty, liability, workers’ compensation and healthcare losses and costs that we have incurred as of the end of a reporting period involves significant judgments based upon our experience and our expectations of future events, including projected settlements for pending claims, known incidents that we expect may result in claims, estimates of incurred but not yet reported claims, expected changes in premiums for insurance provided by insurers whose policies provide for retroactive adjustments, estimated litigation costs and other factors. Since these reserves are based on estimates, the actual expenses we incur may differ from the amount reserved and could result in our recognizing a significant amount of expenses in excess of our reserves. Our costs under our self-insurance arrangements may materially and adversely affect our business, results of operations and liquidity.

We are subject to limitations on our ability to use our net operating loss and tax credit carryforwards.
    
Our ability to deduct pre-2020 net operating loss carryforwards and tax credit carryforwards are subject to a significant annual limitation on account of the ownership changes resulting from the Restructuring Transactions, as described in Note 6 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. Losses and credits that arise after January 1, 2020, the effective date of the Restructuring Transactions, which currently are expected to be utilized to offset future taxable income, will not be subject to the limitations resulting from the Restructuring Transactions, but future changes in ownership may result in limitations on usage or elimination of those future losses and credits. Our bylaws contain provisions to facilitate the preservation of the tax treatment of our net operating losses and tax credit carryforwards, including provisions generally prohibiting a person or group from becoming a “5-percent shareholder” (as defined in the applicable Treasury regulations) without the consent of our Board. However, we cannot be sure that these restrictions will be effective or
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that our Board will not determine to waive such restrictions in the future. Moreover, net operating losses and other carryforwards are subject to other limitations under the United States Internal Revenue Code of 1986, as amended, or the IRC, including provisions generally restricting carryforwards of net operating losses arising in taxable years beginning after 2017 from offsetting more than 80% of the current year’s taxable income, which could affect our ability to utilize all of our existing net operating loss and tax credit carryforwards in a given year.

Our operations are subject to environmental risks and liabilities.

We are required to comply with various environmental laws governing the use, management and disposal of, and human exposure to, hazardous and toxic substances. If we fail to comply with such laws, or if the properties we own, operate or use for disposal are contaminated by such substances, we may be subject to penalties or other corrective action requirements and liabilities, including the costs to investigate or remediate such contamination. These laws also expose us to claims by third parties for costs and damages they may incur in connection with hazardous substances related to our activities and properties. If we experience these environmental liabilities and costs, they could have a material impact on our operating results and financial condition.

Our operations are subject to risks from adverse weather and climate events.

Severe weather may have an adverse effect on senior living communities we operate. Flooding caused by rising sea levels and severe weather events, including hurricanes, tornadoes and widespread fires have had and may have in the future an adverse effect on senior living communities we operate and result in significant losses to us and interruption of our business. When major weather or climate-related events occur near our senior living communities, we may relocate the residents of those senior living communities to alternative locations for their safety and close or limit the operations of the impacted senior living communities until the event has ended and the community is ready for operation. We may incur significant costs and losses as a result of these activities, both in terms of operating, preparing and repairing our senior living communities in anticipation of, during, and after a severe weather or climate-related event and in terms of potential lost business due to the interruption in operating our senior living communities. Our insurance may not adequately compensate us for these costs and losses.

Further, concerns about climate change have resulted in various treaties, laws and regulations that are intended to limit carbon emissions and address other environmental concerns. These and other laws may cause energy or other costs at our senior living communities to increase. In the long-term, we believe any such increased operating costs will be passed through and paid by our residents and other customers in the form of higher charges for our services. However, in the short-term, these increased costs, if material in amount, could adversely affect our financial condition and results of operations and cause the value of our securities to decline.

The geographic concentration of our senior living communities exposes us to changes in market conditions in those areas.

We have a high concentration of senior living communities in certain geographic areas, including in Florida, North Carolina, South Carolina, Georgia, Texas and Indiana. As a result of this concentration, the conditions of local economies and real estate markets, changes in governmental rules and regulations, acts of nature and other factors that may result in a decrease in demand for our services in these states could have an adverse effect on our revenues, results of operations and cash flow. In addition, we are particularly susceptible to revenue loss, cost increases or damage caused by severe weather conditions or natural disasters such as hurricanes, wildfires, earthquakes or tornadoes in those areas.

Widespread illnesses due to a severe cold or flu season or a pandemic (like COVID-19) could adversely affect the occupancy of our senior living communities.

Our revenues are dependent on occupancy at our senior living communities. If a severe cold or flu season, an epidemic or any other widespread illnesses, like COVID-19, were to occur in locations where our senior living communities are located, our revenues from those communities would likely be significantly adversely impacted. During such occasions, we may experience a decline in occupancy due to residents leaving our communities and, we may be required, or we may otherwise determine that it would be prudent, to quarantine some or all of the senior living community and not permit new residents during that time. Further, depending on the severity of the occurrence, we may be required to incur costs to identify, contain and remedy the impacts of those occurrences at those senior living communities. As a result, these occurrences could significantly adversely affect our results of operations.


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The benefits we have realized and may continue to realize from participating in relief programs provided under the CARES Act may not be sufficient to enable us to withstand the current economic conditions and any extended economic downturn or recession which may result from the Pandemic.

We have received funds under the CARES Act, and have benefited from other relief measures pursuant to the CARES Act and other government stimulus, including the deferral of employer payroll taxes. Receipt of additional government funds and other benefits from the CARES Act is subject to, in certain circumstances, a detailed application and approval process and it is unclear whether we will meet any eligibility requirements, receive any funds and the extent to which these funds may offset our Pandemic-related cash flow disruptions. Additionally, retaining these funds subjects us to various terms and conditions. While we have taken steps to ensure compliance with these terms and conditions, any violation may trigger repayment of some or all of the funds received. Further, funds we have received or may receive, either directly through participation in government programs, or indirectly through increased revenues attributable to a possible economic recovery generated in whole or in part by the CARES Act, may not be sufficient to mitigate the impact of the Pandemic.

Risks Arising From Certain of Our Relationships

Our agreements and relationships with DHC, one of our Managing Directors, RMR LLC and others related to them may create conflicts of interest or the perception of such conflicts of interest.

We have significant commercial and other relationships with DHC, the Chair of our Board who is also one of our Managing Directors, Adam D. Portnoy, RMR LLC and others related to them, including:

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

DHC owned 33.7% of our outstanding common shares as of December 31, 2020;

RMR LLC provides management services to us and DHC and we pay RMR LLC fees for those services based on a percentage of revenues, as defined under our business management agreement with RMR LLC. In the event of a conflict between us and DHC or us and RMR LLC, any of its affiliates or any public entity RMR LLC or its subsidiaries provide management services to, RMR LLC may not act on our behalf;

Adam D. Portnoy, is also the chair of the board of trustees and a managing trustee of DHC, is a managing director, an officer and employee and, as the sole trustee of ABP Trust, the controlling shareholder of RMR Inc., and is an officer of, and through ABP Trust owns equity interests in, RMR LLC. RMR Inc. is the managing member of RMR LLC;

Adam D. Portnoy beneficially owned, in aggregate, approximately 6.2% of our outstanding common shares and 1.1% of DHC's outstanding common shares, in each case as of December 31, 2020;

our President and Chief Executive Officer, Katherine E. Potter, and our Executive Vice President, Chief Financial Officer and Treasurer, Jeffrey C. Leer, are also officers and employees of RMR LLC;

our other Managing Director and Secretary, Jennifer B. Clark, is a managing trustee and secretary of DHC and a managing director and officer of RMR Inc. and an officer and employee of RMR LLC;

our agreements with DHC and RMR LLC limit (subject to certain exceptions) ownership of more than 9.8% of our voting shares, restrict our ability to take any action that could jeopardize the tax status of DHC as a real estate investment trust and limit our ability to acquire real estate of types which are owned by DHC or other businesses managed by RMR LLC; and

we lease our corporate headquarters building from a subsidiary of ABP Trust, the controlling shareholder of RMR Inc.

These multiple responsibilities, relationships and cross ownerships could create competition for the time and efforts of RMR LLC, our Managing Directors and other RMR LLC personnel, including our executive officers, and give rise to conflicts of interest, or the perception of such conflicts of interest with respect to matters involving us, RMR Inc., RMR LLC, our Managing Directors, the other companies to which RMR LLC or its subsidiaries provide management services and their related parties. Conflicts of interest or the perception of conflicts of interest could have a material adverse impact on our reputation,
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business and the market price of our common shares and other securities and we may be subject to increased risk of litigation as a result.

As a result of these relationships, the New Management Agreements, business management agreement with RMR LLC and other transactions with DHC, our Managing Director, RMR LLC and others related to them were not negotiated on an arm’s-length basis between unrelated third parties, and therefore, while certain of these agreements were negotiated with the use of a special committee and approved by our disinterested directors after receipt of a fairness opinion, the terms thereof may be different from those negotiated on an arm’s-length basis between unrelated third parties. In the past, in particular, following periods of volatility in the overall market or declines in the market price of a company’s securities, shareholder litigation, dissident shareholder director nominations and dissident shareholder proposals have often been instituted against companies alleging conflicts of interest, in business dealings with affiliated and related persons and entities. These activities, if instituted against us, and the existence of conflicts of interest or the perception of conflicts of interest could result in substantial costs and diversion of our management’s attention and could have a material adverse impact on our reputation, business and the market price of our common shares.

DHC owns 33.7% of our outstanding common shares. As a result, investors in our securities may have less influence over our business than shareholders of other publicly traded companies and trading in our shares may be difficult.

As of the date of this Annual Report on Form 10-K, DHC owns 33.7% of our outstanding common shares.

For so long as DHC retains a significant ownership stake in us, it will have a significant influence in the election of the members of our Board, including our Independent Directors, and the outcome of shareholder actions. As a result, DHC may have the ability to significantly impact all matters affecting us, including:

the composition of our Board;

determinations with respect to mergers and other business combinations; and

the number of common shares available for issuance under our equity compensation plan.

In addition, the significant ownership of our common shares by DHC and Adam D. Portnoy and the entities controlled by him may discourage transactions involving a change of control of us, including transactions in which our shareholders might otherwise receive a premium for their common shares over the then current market price.

DHC's large shareholding also reduces the number of our common shares that might otherwise be available to trade publicly, which could adversely affect the liquidity and market price of our common shares.

Risks Related to Ownership of Our Securities

Ownership limitations and certain provisions in our charter, bylaws and certain material agreements, as well as certain provisions of Maryland law, may deter, delay or prevent a change in our control or unsolicited acquisition proposals.

Our charter and bylaws contain separate provisions that prohibit any shareholder from owning more than 9.8% and 5% of the number or value of any class or series of our outstanding shares of stock, respectively. Our charter's 9.8% ownership limitation is consistent with our contractual obligation with DHC not to take actions that may conflict with DHC’s status as a real estate investment trust under the IRC. The 5% ownership limitation in our bylaws is intended to help us preserve the tax treatment of any net operating losses and other tax benefits we may have from time to time. We also believe these provisions promote good orderly governance. These provisions inhibit acquisitions of a significant stake in us and may deter, delay or prevent a change in control of us or unsolicited acquisition proposals that a shareholder may consider favorable.

Other provisions contained in our charter and bylaws or under Maryland law may also inhibit acquisitions of a significant stake in us and deter, delay or prevent a change in control of us or unsolicited acquisition proposals that a shareholder may consider favorable, including, for example, provisions relating to:

the division of our Directors into three classes, with the term of one class expiring each year;

shareholder voting rights and standards for the election of Directors and other provisions which require larger majorities for approval of actions which are not approved by our Board than for actions which are approved by our Board;

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the authority of our Board, and not our shareholders, to adopt, amend or repeal our bylaws and to fill vacancies on our Board;

required qualifications for an individual to serve as a Director and a requirement that certain of our Directors be “Independent Directors” and other Directors be “Managing Directors”, as defined in our bylaws;

limitations on the ability of our shareholders to propose nominees for election as Directors and propose other business to be considered at a meeting of shareholders;

certain procedural and informational requirements applicable to shareholders requesting that a special meeting be called;

limitations on the ability of our shareholders to remove our Directors;

the authority of our Board to create and issue new classes or series of shares (including shares with voting rights and other rights and privileges that may deter a change in control) and issue additional common shares;

restrictions on business combinations between us and an interested shareholder that have not first been approved by our Board (including a majority of Directors not related to the interested shareholder); and

the authority of our Board, without shareholder approval, to implement certain takeover defenses.

As changes occur in the marketplace for corporate governance policies, the above provisions may change or be removed, or new provisions may be added.

Our management agreements with DHC provide that our rights under those agreements may be cancelled by DHC upon the acquisition by any person or group of more than 9.8% of our voting shares, and upon other change in control events, as defined in those documents, including the adoption of any proposal (other than a precatory proposal) or the election to our Board of any individual if such proposal or individual was not approved, nominated or appointed, as the case may be, by vote of a majority of our Directors in office immediately prior to the making of such proposal or the nomination or appointment of such individual. In addition, a change in control event of us, including upon the acquisition by any person or group of more than 35% of our voting shares, is a default under our credit agreement, unless approved by our lenders.

Our rights and the rights of our shareholders to take action against our Directors and officers are limited.

Our charter limits the liability of our Directors and officers to us and our shareholders for monetary damages to the maximum extent permitted under Maryland law. Under current Maryland law, our Directors and officers will not have any liability to us and our shareholders for money damages other than liability resulting from:

actual receipt of an improper benefit or profit in money, property or services; or

active and deliberate dishonesty by such Director or officer that was established by a final judgment as being material to the cause of action adjudicated.

Our charter and contractual obligations authorize and may require us to indemnify, to the maximum extent permitted by Maryland law, any present or former Director or officer for actions taken by them in those and other capacities. In addition, we may be obligated to pay or reimburse the expenses incurred by our present and former Directors and officers without requiring a preliminary determination of their ultimate entitlement to indemnification. As a result, we and our shareholders may have more limited rights against our present and former Directors and officers than might otherwise exist absent the provisions in our charter and contracts or that might exist with other companies, which could limit our shareholders recourse in the event of actions not in their best interest.

Shareholder litigation against us or our Directors, officers, manager, other agents or employees may be referred to mandatory arbitration proceedings, which follow different procedures than in-court litigation and may be more restrictive to shareholders asserting claims than in-court litigation.

Our shareholders agree, by virtue of becoming shareholders, that they are bound by our governing documents, including the arbitration provisions of our bylaws, as they may be amended from time to time. Our bylaws provide that certain actions by one or more of our shareholders against us or any of our Directors, officers, manager, other agents or employees, other than disputes, or any portion thereof, regarding the meaning, interpretation or validity of any provision of our charter or
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bylaws, will be referred to mandatory, binding and final arbitration proceedings if we, or any other party to such dispute, including any of our Directors, officers, manager, other agents or employees, unilaterally so demands. As a result, we and our shareholders would not be able to pursue litigation in state or federal court against us or our Directors, officers, manager, other agents or employees, including, for example, claims alleging violations of federal securities laws or breach of fiduciary duties or similar director or officer duties under Maryland law, if we or any of our Directors, officers, manager, other parties or employees, against whom the claim is made unilaterally demands the matter be resolved by arbitration. Instead, our shareholders would be required to pursue such claims through binding and final arbitration.
Our bylaws provide that such arbitration proceedings would be conducted in accordance with the procedures of the Commercial Arbitration Rules of the American Arbitration Association, as modified by our bylaws. These procedures may provide materially more limited rights to our shareholders than litigation in a federal or state court. For example, arbitration in accordance with these procedures does not include the opportunity for a jury trial, document discovery is limited, arbitration hearings generally are not open to the public, there are no witness depositions in advance of arbitration hearings and arbitrators may have different qualifications or experiences than judges. In addition, although our bylaws’ arbitration provisions contemplate that arbitration may be brought in a representative capacity or on behalf of a class of our shareholders, the rules governing such representation or class arbitration may be different from, and less favorable to, shareholders than the rules governing representative or class action litigation in courts. Our bylaws also generally provide that each party to such an arbitration is required to bear their own costs in the arbitration, including attorneys’ fees, and that the arbitrators may not render an award that includes shifting of such costs or, in a derivative or class proceeding, award any portion of our award to any shareholder or such shareholder’s attorneys. The arbitration provisions of our bylaws may discourage our shareholders from bringing, and attorneys from agreeing to represent our shareholders wishing to bring, litigation against us or our Directors, officers, manager, other agents or employees. Our agreements with RMR LLC and DHC have similar arbitration provisions to those in our bylaws.

We believe that the arbitration provisions in our bylaws are enforceable under both state and federal law, including with respect to federal securities laws claims. We are a Maryland corporation and Maryland courts have upheld the enforceability of arbitration bylaws. In addition, the U.S. Supreme Court has repeatedly upheld agreements to arbitrate other federal statutory claims, including those that implicate important federal policies. However, some academics, legal practitioners and others are of the view that charter or bylaw provisions mandating arbitration are not enforceable with respect to federal securities laws claims. It is possible that the arbitration provisions of our bylaws may ultimately be determined to be unenforceable.

By agreeing to the arbitration provisions of our bylaws, shareholders will not be deemed to have waived compliance by us with federal securities laws and the rules and regulations thereunder.

Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to obtain a judicial forum they deem favorable for disputes with us or our Directors, officers, manager, agents or employees.

Our bylaws provide that, unless the dispute has been referred to binding arbitration, the Circuit Court for Baltimore City, Maryland will be the sole and exclusive forum for: (1) any derivative action or proceeding brought on our behalf; (2) any action asserting a claim for breach of a fiduciary duty owed by any Director, officer, manager, agent or employee of ours to us or our shareholders; (3) any action asserting a claim against us or any Director, officer, manager, agent or employee of ours arising pursuant to Maryland law, our charter or bylaws brought by or on behalf of a shareholder, either on his, her or its own behalf, on our behalf or on behalf of any series or class of shares of stock of ours or by shareholders against us or any Director, officer, agent, or employee of ours, or our manager, including any disputes, claims or controversies relating to the meaning, interpretation, effect, validity, performance or enforcement of the charter or bylaws; or (4) any action asserting a claim against us or any Director, officer, agent, employee, or manager of ours that is governed by the internal affairs doctrine. Our bylaws also provide that the Circuit Court for Baltimore City, Maryland will be the sole and exclusive forum for any dispute, or portion thereof, regarding the meaning, interpretation or validity of any provision of our charter or bylaws. The exclusive forum provision of our bylaws does not apply to any action for which the Circuit Court for Baltimore City, Maryland does not have jurisdiction or to a dispute that has been referred to binding arbitration in accordance with our bylaws. The exclusive forum provision of our bylaws does not establish exclusive jurisdiction in the Circuit Court for Baltimore City, Maryland for claims that arise under the Securities Act of 1933, as amended, the Exchange Act or other federal securities laws if there is exclusive or concurrent jurisdiction in the federal courts. Any person or entity purchasing or otherwise acquiring or holding any interest in our common shares shall be deemed to have notice of and to have consented to these provisions of our bylaws, as they may be amended from time to time. The arbitration and exclusive forum provisions of our bylaws may limit a shareholder’s ability to bring a claim in a judicial forum that the shareholder believes is favorable for disputes with us or our Directors, officers, agents, employees, or our manager, which may discourage lawsuits against us and our Directors, officers, agents, employees or our manager.
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We do not intend to pay cash dividends on our common shares in the foreseeable future.

We have never declared or paid any cash dividends on our common shares, and we currently do not anticipate paying any cash dividends in the foreseeable future.

Item 1B. Unresolved Staff Comments
None.

Item 2. Properties
Our Senior Living Communities
As of December 31, 2020, we owned, leased or managed 252 senior living communities as follows (dollars in thousands):

No. of
Communities
Type of UnitsAverage
Occupancy
Spot Occupancy(4)
Revenues (5)(6)
Percent of
Revenues
from Private
Resources
Operation Type
Indep.
 Living (2)(3)
Assisted
 Living (2)
Memory Care (1)(2)
Skilled
 Nursing (2)
Total
Units
Owned20 564 1,264 270 — 2,098 76.7%70.2%$67,637 98.9%
Leased— 177 27 — 204 74.0%64.2%9,378 93.1%
Managed (7)
228 10,418 10,671 2,923 2,957 26,969 77.2%70.8%1,204,811 85.6%
Total252 10,982 12,112 3,220 2,957 29,271 77.2%70.7%$1,281,826 86.3%
_______________________________________
(1)    Memory Care units are shown above separately; however, they typically are part of an assisted living community or CCRC and not a stand alone building or community.
(2)    Includes 37 CCRCs that we manage on behalf of DHC, which includes independent living units (4,309 units), assisted living units (1,868 units), SNF units (2,055 units) and in certain instances memory care units (342 units).
(3)    Included in the managed units are 53 independent living units that are located in SNF's.
(4)    As of December 31, 2020.
(5)    Data excludes $82.0 million of revenue from Ageility rehabilitation and wellness services clinics as well as $21.8 million of income received under the Provider Relief Fund of the CARES Act, related to our independent and assisted living communities and rehabilitation and wellness services clinics.
(6)    Represents the revenues of the senior living communities we own and lease as well as those we manage for the account of DHC. Managed senior living communities' revenues does not represent our revenues and is included to provide supplemental information regarding the operating results and financial condition of the communities from which we earn management fees.
(7)    Includes one active adult community with 167 independent living units.

As of December 31, 2020, we operated, owned, leased and managed 252 senior living communities located in 31 states. We owned 20 communities, leased four communities from Healthpeak Properties, Inc., or PEAK, and managed 228 communities on behalf of DHC.

Rehabilitation and Wellness Services Clinics

As of December 31, 2020, we operated 244 rehabilitation and wellness services clinics as follows (dollars in thousands):

Type of Clinic
No. of
Clinics (1)
No. of
States
Average Square Footage of Clinics (2)
Revenues (3)
Percentage of Revenues from Medicare and Medicaid (3)
Inpatient3716n/a$25,724 16.1%
Outpatient2072848754,969 66.2%
Total24428487$80,693 50.2%
_______________________________________
(1)    As of December 31, 2020, inpatient clinics provide rehabilitation and wellness services in 32 of our CCRCs and in 5 of our SNFs. As of December 31, 2020, 149 of our outpatient clinics were clinics within our senior living communities and 58 were clinics within senior living communities operated by other providers.
(2)    Inpatient clinics operate under a service agreement with the senior living community and do not have dedicated clinic space.
(3)    Data excludes $1.3 million of revenue from home healthcare services as well as income received under the Provider Relief Fund of the CARES Act, related to our rehabilitation and wellness services clinics.
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We lease space from DHC at certain of the senior living communities that we manage for DHC to operate our outpatient Ageility clinics. The leased clinics from DHC and those located within other senior living companies are typically leased for an initial period of one year and automatically renew for successive one year periods. The leases are generally terminable with 30 to 90 days' notice. The average rehabilitation and wellness services clinic is approximately 500 square feet. As of December 31, 2020, Ageility leased approximately 100,000 square feet in 28 states.

Geographic Breakdown of Our Senior Living Communities and Rehabilitation and Wellness Services Clinics

The following table sets forth certain information about our owned, leased and managed senior living communities, as well as our inpatient and outpatient Ageility clinics, by state as of December 31, 2020 (dollars in thousands):

Senior Living CommunitiesAgeility Clinics
State
Total Living Units (1)
Average
Occupancy
(1)
OwnedLeasedManaged
Total (1)
InpatientOutpatientTotal
Revenues (1)(2)(3)(4)
1. Alabama695 80.5%— 10 $25,014 
2. Arizona1,146 78.2%— — 391253,055 
3. Arkansas187 75.3%— — 6,505 
4. California908 81.9%— — 11255,097 
5. Colorado1,005 68.8%— — 51666,028 
6. Delaware988 68.0%— — 36955,761 
7. Florida4,620 85.0%— 19 20 72734202,053 
8. Georgia1,629 72.7%— — 22 22 1222358,068 
9. Illinois1,025 80.9%— — 11 11 16738,259 
10. Indiana1,672 75.7%— 11 16 26860,132 
11. Kansas557 83.2%— — 23528,071 
12. Kentucky934 82.6%— — 13443,517 
13. Maryland1,281 71.7%— — 11 11 9971,605 
14. Massachusetts123 87.2%— — 119,159 
15. Minnesota188 53.9%— — 116,567 
16. Missouri434 85.2%— 3313,685 
17. Nebraska69 73.0%— — 8,333 
18. Nevada287 91.9%— — 2214,468 
19. New Jersey930 71.6%— 17846,651 
20. New Mexico204 77.1%— — 11211,129 
21. New York310 80.3%— — 1118,476 
22. North Carolina1,905 78.1%— 16 21 272793,769 
23. Ohio282 77.7%— — 11216,292 
24. Oregon318 65.1%— — 118,431 
25. Pennsylvania808 64.3%— 7732,111 
26. South Carolina1,500 68.8%16 21 2111362,344 
27. Tennessee1,015 81.9%— 13 14 8838,684 
28. Texas2,262 77.6%— — 13 13 52126103,846 
29. Virginia1,049 81.8%— — 11 11 121243,147 
30. Washington— —%— — — — 771,376 
31. Wisconsin751 74.9%— 13456,042 
32. Wyoming189 69.0%— — 14,101 
Totals29,271 77.2%20 228 252 37 207 244$1,361,776 
_______________________________________
(1)    Includes owned, leased and managed senior living communities.
(2)    Data does not include revenue earned in the state of Mississippi of $2,056 and in the state of Iowa of $26, as the Mississippi and Iowa senior living communities were disposed of.
(3)    Represents financial data of rehabilitation and wellness services clinics we operate and senior living communities we own, lease, and manage for the account of DHC. Managed senior living communities' data does not represent our financial results and is included to provide supplemental information regarding the operating results and financial condition of the senior living communities from which we earn management fees.
(4)    Data excludes $21.8 million of income received under the Provider Relief Fund of the CARES Act and other governmental grants, related to our independent and assisted living communities and rehabilitation and wellness services clinics.
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Our Leases and Management Agreements with DHC
    
As of December 31, 2019, we had five master leases with DHC, and managed senior living communities for the account of DHC pursuant to long-term management and pooling agreements. Effective January 1, 2020, we and DHC completed the Restructuring Transactions pursuant to which our five then existing master leases with DHC for all the senior living communities that we leased from DHC, as well as our then existing management and pooling agreements with DHC for the senior living communities that we managed for DHC, were terminated and replaced with the New Management Agreements.

Pursuant to the New Management Agreements, we receive a management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement for our direct costs and expenses related to such communities. We also receive 3% of construction costs for construction projects we manage at the senior living communities we manage. Commencing with the 2021 calendar year, we may receive an annual incentive fee equal to 15% of the amount by which the annual EBITDA of all senior living communities on a combined basis exceeds the target EBITDA for all senior living 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 senior living communities on a combined basis for such calendar year. The target EBITDA for those communities on a combined basis is increased annually based on the greater of the annual increase of the Consumer Price Index, or CPI, or 2%, plus 6% of any capital investments funded at the managed communities on a combined basis in excess of the target capital investment. Unless otherwise agreed, the target capital investment increases annually based on the greater of the annual increase of CPI or 2%.

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 senior living 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 any 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.

For more information regarding our historical leases and management arrangements with DHC, see Note 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. For more information regarding our relationship with DHC, see Note 14 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Corporate Headquarters

Our corporate headquarters is located in Newton, Massachusetts, where we lease approximately 41,000 square feet of administrative office space from a subsidiary of ABP Trust. On February 24, 2021, we entered into an amendment to the lease which extends the lease through December 31, 2031, see Note 18 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. In addition, a copy of the Second Amendment to the Lease is included in Part IV, Item 15 of this Annual Report on Form 10-K. For more information regarding our relationship with ABP Trust, see Note 14 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Item 3. Legal Proceedings

For information regarding our legal proceedings, see Note 12 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Item 4. Mine Safety Disclosures
Not applicable.

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PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Our common shares are traded on Nasdaq (symbol: FVE).
As of February 20, 2021, there were approximately 930 shareholders of record of our common shares.
Issuer purchases of equity securities. The following table provides information about our purchases of our equity securities during the quarter ended December 31, 2020:

Calendar Month
Number of Shares Purchased (1)
Average Price
Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
December 20206,542 $8.15 — $— 
Total6,542 $8.15 — $— 
_______________________________________
(1)    These common share withholdings and purchases were made to satisfy tax withholding and payment obligations of current and former employees and officers of us and of RMR LLC in connection with the vesting of awards of our common shares. We withheld and purchased these shares at their fair market value based upon the trading price of our common shares at the close of trading on Nasdaq on the purchase date.

Item 6. Selected Financial Data
Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes to the financial statements in Part IV, Item 15 of this Annual Report on Form 10-K.

General Industry Trends

We believe that, in the United States, the primary market for senior living services is focused towards individuals age 80 and older. As a result of medical advances, adults are living longer and expanding their options as to where they choose to reside as they age. Due to these demographic trends, in the last ten years the senior living industry evolved to serve the growing number of older adults and we expect the demand for senior living services to increase in future years. We have searched for innovative ways to overcome the industry's challenges, including workforce shortages and low employee retention, occupancy pressures, challenges related to new technology and higher service level expectations. More recently, the senior living industry has been materially adversely impacted by the Pandemic and resulting economic recession.

COVID-19 Pandemic

The Pandemic has significantly disrupted and likely will continue to significantly disrupt the United States economy, our business and the senior living industry as a whole. The WHO declared COVID-19 a pandemic in March of 2020. From March 2020 through February 20, 2021, there have been approximately 28.7 million reported cases of COVID-19 in the United States and 510,000 related deaths, which have disproportionately impacted older adults like our customers. In response to the Pandemic, most states and municipalities closed non-essential businesses and implemented restrictions on others to prevent the spread of COVID-19 in March and April of 2020. Although states and municipalities have partially reopened their economies and eased certain restrictions in recent months and economic data has indicated that the United States economy has improved since the lowest periods experienced in March and April 2020, the United States gross domestic product remains below pre-Pandemic levels. Recently, following the holiday season, the reopening of economies and the easing of restrictions, the United States has experienced peak numbers of COVID-19 infections and deaths. In some cases, certain states have again required the closure of certain business activities and imposed certain other restrictions.

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Vaccinations. On December 11 and December 18, 2020, the FDA issued EUAs to Pfizer Inc. / BioNTech SE and Moderna, Inc., respectively, for vaccines for the prevention of COVID-19. The CDC's Advisory Committee on Immunization Practices placed long-term care facility residents and healthcare personnel in "Phase 1a," the highest priority group to receive COVID-19 vaccines, which included residents and team members at our SNFs, memory care units and assisted living communities. States have subsequently prioritized all categories of older adults, which include our independent living facilities. In order to protect the health and safety of our residents, team members and clients, we scheduled multiple vaccination clinics as soon as possible after the EUAs for our SNF, memory care and assisted living residents and team members at no cost to those individuals. As of February 20, 2021, 87.2% of our residents and 42.5% of our team members at our senior living communities had received their initial dose of a COVID-19 vaccine, and 52.7% of our residents and 26.9% of our team members had received their second dose of a COVID-19 vaccine. As of February 20, 2021, 249 senior living communities have held a vaccination clinic for the initial dose of a COVID-19 vaccine, and 183 senior living communities have also held a vaccination clinic for the second dose of a COVID-19 vaccine. We expect that widespread vaccination for COVID-19 amongst our residents and team members will decrease the incidence of COVID-19 in our senior living communities, eventually end restrictions on the admission of more new residents in our senior living communities and decrease our costs for PPE and COVID-19 testing.

Protective Measures for Residents and Team Members. Our residents and clients are part of a population that has been disproportionately affected by the Pandemic. Older adults also tend to have more chronic medical conditions than the general population. Those with pre-existing medical conditions are at a higher risk of serious illness or death, or both, if they contract COVID-19. In addition, our team members who work in our communities may be at a higher risk of contracting or spreading COVID-19 due to the nature of their work environment when caring for our residents and clients. Our highest priority is maintaining the health and well-being of our residents, clients and team members. As a result, we continue to monitor, evaluate and adjust our plans to address the impact to our business. We have, among other steps:

facilitated multiple COVID-19 vaccination clinics for residents and team members at our senior living communities and Ageility clinics, and encouraged our residents and team members at our senior living communities and Ageility clinics to receive a COVID-19 vaccination as soon as it became available at their community;

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

reopened our rehabilitation and wellness services clinics for in-person services when it was determined safe to do so and in accordance with federal, state and local regulations and guidelines;

reopened our corporate office, when it was safe to do so, at a reduced capacity in accordance with federal, state and local regulations and guidelines;

enhanced infectious disease prevention and control policies, procedures and protocols at all properties;

created a cross-functional team to implement proactive protection for residents in our senior living communities and clients in our rehabilitation and wellness services clinics as well as team members;

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

worked with vendors to provide adequate supplies and PPE to our senior living communities and rehabilitation and wellness services clinics;

identified residents needs for higher level of care and worked with them and their family members to ensure their safety during the Pandemic; and

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

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

provided meals to team members to limit their outside exposure during shifts;
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provided COVID-19 emergency leave to team members, including paid leave to team members if they were exposed to, or tested positive for, COVID-19 and offered flexible work schedules;

as of February 20, 2021, conducted over 290,000 resident and team member tests, and also performed health screenings for visitors to our senior living communities;

recognized and rewarded team members with bonuses in addition to our total rewards package;

provided corporate team members with appropriate information technology, including laptop computers, smart phones, computer applications, information technology security applications and technical support, to work remotely during mandatory work-from-home orders directed by local and state governments;

promoted access to mental health services and other benefits to support residents' and team members' mental and physical well-being as well as complementary counseling and support services for residents;

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

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

expanded effective communication channels to residents, their families and team members;

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

focused on learning and development opportunities for team members.

We have also been impacted by mandatory work from home orders directed by local and state governments in the jurisdictions in which we operate. However, essential work exemptions permit certain of our team members to work on site to meet the needs of our residents and clients at our senior living communities and rehabilitation and wellness services clinics. Effective as of July 13, 2020, our corporate office was re-opened in compliance with state and local guidelines and restrictions and most corporate team members returned to the corporate office at a reduced capacity. We continue to monitor regulations and guidance from federal, state and local governments and agencies and will adapt and update our policies and procedures to continue to prioritize the health and safety of our residents, clients and team members. Our team members at our corporate office have been able to support the needs of the business while working remotely or in the corporate office. At our corporate office, we continue to provide enhanced cleaning protocols and abide by social distancing guidelines to reduce the possibility of our team members gathering in groups and in close proximity to each other, for the purpose of mitigating the potential for the spread of COVID-19 infections. Included among these protocols and measures are focusing on sanitizing high touch points in common areas and restrooms, shutting down certain building amenities, limiting staff interactions and reducing non-essential building services.

Occupancy. As a result of the Pandemic, we experienced declines in occupancy at our owned and leased senior living communities from 82.9% for the year ended December 31, 2019 to 76.4% for the year ended December 31, 2020. Consistent with occupancy declines experienced within our owned and leased portfolio, the senior living communities we manage on behalf of DHC also experienced occupancy declines from 85.0% for the year ended December 31, 2019 to 77.2% for the year ended December 31, 2020. Additionally, in accordance with certain federal, state and local regulatory requirements, in conjunction with our own policies and procedures, we ceased or limited admissions to and tours of certain of our senior living communities as a precautionary measure and only have reopened communities to resident admissions and in-person tours when it was determined safe to do so. During the three months ended December 31, 2020, the number of new residents moving into our senior living communities was slightly higher compared to the three months ended September 30, 2020, reducing the rate of decline in occupancy rates compared to the preceding quarter. At December 31, 2020, 89% of our senior living communities were accepting new residents in at least one service line of business (independent living, assisted living, skilled nursing or memory care). Following the EUA, our residents and team members began receiving COVID-19 vaccines in December of 2020. As of February 20, 2021, 87.2% of our residents and 42.5% of our team members at our senior living communities had received their initial dose of a COVID-19 vaccine, and 52.7% of our residents and 26.9% of our team members had received their second dose of a COVID-19 vaccine. As of February 20, 2021, 249 senior living communities have held a vaccination
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clinic for the initial dose of a COVID-19 vaccine, and 183 senior living communities have also held a vaccination clinic for the second dose of a COVID-19 vaccine. We expect that widespread vaccination for COVID-19 among our residents and team members will decrease the incidence of COVID-19 in our senior living communities and eventually ease restrictions at our senior living communities, which impact new admissions and resident programming. Despite the continued distribution of the COVID-19 vaccine, as a result of the ongoing effects of the Pandemic, we expect continued occupancy declines in the near term, due to current residents leaving our senior living communities, restrictions on new residents moving into and/or touring our senior living communities and the possibility that older adults will forego or delay moving into senior living communities because of perceived safety issues associated with the Pandemic. Our revenues are largely dependent on occupancy at our senior living communities and any decline in occupancy adversely impacts our revenues, unless we are able to offset those lost revenues with increased rates we charge our residents and clients or other sources of increased revenues.
    
Expenses. We have also incurred and will continue to incur significant costs to address the Pandemic, which principally include costs associated with PPE, testing supplies, professional services costs, agreements with laboratories to provide COVID-19 testing to our residents and team members that were not otherwise covered by government payer or third-party insurance sources and disposable food supplies as well as increased sanitation and janitorial supplies and increased labor costs. We have, for example, entered into temporary staffing agreements with staffing agencies in order to supply additional workers in the event that our team members contract COVID-19. Our labor costs have also increased as a result of rising health insurance costs caused by the Pandemic. Although COVID-19 vaccinations have been made available to residents and team members at our senior living communities, and we expect that widespread vaccination at our senior living communities will decrease the incidence of COVID-19, we expect the increased costs associated with the Pandemic to continue throughout the first half of 2021 and for the reasonably foreseeable future thereafter. We incur these costs for our owned and leased senior living communities, rehabilitation and wellness services clinics and corporate and regional operations. Although DHC is responsible for these costs at the senior living communities we manage for DHC, increases in these costs would reduce EBITDA realized at these communities and, hence, negatively impact our ability to earn, and the amount of, any incentive fees, as well as possibly impact other aspects of our management arrangements. The Pandemic has also disrupted the global supply chain, including many of our medical and technological suppliers, due to factory closures and reduced manufacturing output. We believe that our current supplies and supplies we currently have on order should be sufficient to support our needs for the reasonably foreseeable future. We have undertaken efforts to mitigate potential future impacts on the supply chain by increasing our stock of critical materials to meet our expected increased needs for the reasonably foreseeable future and by identifying and engaging alternative suppliers. We continue to be alert to the potential for disruptions that could arise from the Pandemic and remain in close contact with our suppliers.

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

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

Senior Living Development. For the past few years prior to the Pandemic, increased access to capital and continued low-interest rates appear to have encouraged increased senior living development, particularly in areas where existing senior living communities have historically experienced high occupancy. This has resulted in a significant increase in new senior living community inventory entering the market in recent years, increasing competitive pressures on us, particularly in certain of our geographic markets. Although new development had been slowing prior to the onset of the Pandemic, and the impact of the Pandemic and the economic slowdown may further impact new development, we expect that new inventory will hit the market in the near term due to the increased development of senior living communities in the past several years, and that increase will continue to have a competitive effect on our business for at least the next few years, and that the related challenges may be intensified as a result of the Pandemic and the associated economic downturn.

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Labor Market. Prior to the onset of the Pandemic, low unemployment, the competitive labor market and, in certain jurisdictions, increased minimum wages, caused employment costs to increase, including for salaries, wages and benefits, such as health care benefit coverage, for our team members, which increased our operating expenses and negatively impacted our financial results. The U.S. labor market may return to such levels as the impact of the Pandemic subsides. As noted above, in connection with the Pandemic, we incurred increased labor costs as a result of increased overtime pay for team members, increased costs associated with team member engagement and retention programs, such as meals for certain of our team members and bonuses to team members at our senior living communities and rehabilitation and wellness clinics, and increased health insurance and workers' compensation costs. We also increased staffing needs, for which we have entered into temporary staffing agreements with staffing agencies to accommodate staffing shortages due to quarantine protocols of our current staff that may have contracted or been potentially exposed to COVID-19, and we experienced increased costs associated with PPE and testing requirements due to the Pandemic.

2020 Operations

We primarily earn revenue by providing housing and services to residents of our senior living communities that we own or lease, in addition to managing senior living communities for the account of DHC, and by providing our residents, clients 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. Effective January 1, 2020, due to the Transaction Agreement, 166 of our formerly leased senior living communities from DHC were converted to managed communities. This resulted in a significant decrease in senior living revenues and corresponding expenses, an increase in management fees and an increase in costs incurred for managed communities and the reimbursement of those costs in our financial statements. We bill all private pay residents in advance for the housing and services to be provided in the following month.

Our expenses primarily were:

senior living wages and benefits, including wages and wage-related expenses, such as health insurance, workers’ compensation insurance and other benefits for our team members working at our owned and leased senior living communities;

other senior living operating expenses, including utilities, housekeeping, dietary, maintenance, insurance and community-level administrative costs at our owned and leased senior living communities;

rehabilitation and wellness services expenses, including wages and wage-related expenses, such as health insurance and other benefits for our team members working at our rehabilitation and wellness services clinics, as well as other operating expenses such as insurance, supplies and other administrative costs;

costs incurred on behalf of managed senior living communities, including wages and benefits for staff and other operating expenses related to the senior living communities that we manage for the account of DHC, which are reimbursed to us by DHC, including from revenues we receive from the applicable managed communities, pursuant to our New Management Agreements with DHC. For more information about our management arrangements with DHC, see “Properties—Our Leases and Management Agreements with DHC” in Part I, Item 2 of this Annual Report on Form 10-K and Note 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K;

general and administrative expenses, principally comprised of wages and wage-related expenses for headquarters and regional staff as well as investments in technology used in supporting our senior living community operations and ancillary business lines and professional service fees and other administrative costs;

rent expense attributable to the 4 senior living communities we leased from PEAK. Effective January 1, 2020, all of our then existing leases with DHC were terminated and we entered into the New Management Agreements. For more information about our management arrangements with DHC, see “Properties—Our Leases and Management Agreements with DHC” in Part I, Item 2 of this Annual Report on Form 10-K and Note 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K;

depreciation and amortization expense as we incur depreciation expense on buildings and furniture and equipment that we own and amortization expense on our finance lease right-of-use assets; and

interest and other expense, primarily including interest on outstanding debt and amortization of deferred financing costs.
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Expansion Activities

In April 2019, we began managing for the account of DHC a senior living community DHC owns located in Oregon with 318 living units.

In December 2019, we began managing for the account of DHC an active adult community DHC owns located in Texas with 167 units.    

During 2020 and 2019, we opened 23 and 65 new rehabilitation and wellness services outpatient clinics, respectively.

We currently expect that our expansion activities will be focused on entering into additional long-term management agreements for senior living communities and growing the ancillary services that we provide, including through our Ageility clinics, rather than from the acquisition or leasing of additional senior living communities, although we may from time to time acquire or lease additional senior living communities.
     
Investment Activities
    
Historically, when we made capital improvements to the senior living communities that we leased from DHC, we generally would sell such improvements to DHC and our annual rent payments would increase pursuant to the terms of our then existing leases with DHC. On April 1, 2019, DHC purchased from us approximately $50.0 million of unencumbered Qualifying PP&E (as defined in the Transaction Agreement) related to DHC’s senior living communities leased and operated by us, which was subsequently reduced to $49.2 million due to the exclusion of certain fixed assets in accordance with the Transaction Agreement. In addition, subsequent to entering into and in accordance with the Transaction Agreement, DHC pre-funded estimated capital expenditures for the DHC senior living communities that we operated on a monthly basis during the remainder of 2019. In the following month, adjustments were made based on the actual amounts incurred in the prior month. As of December 31, 2019, $1.8 million due to DHC related to this prefunding was included in due to related persons on our consolidated balance sheets. On January 1, 2020, in accordance with the Transaction Agreement, we sold to DHC $2.7 million of the remaining qualified capital improvements at the senior living communities we previously leased from DHC at net book value. DHC funds capital improvements at the senior living communities we manage for the account of DHC pursuant to the New Management Agreements.

During 2020 and 2019, we received gross proceeds of $10.4 million and $5.2 million, respectively, in connection with the sale of equity and debt investments through our offshore captive insurance company, and recorded net realized gains of $0.4 million and $0.2 million, respectively.

During 2020 and 2019, we purchased certain debt and equity investments through our offshore captive insurance company for $5.8 million and $3.0 million, respectively.

Restructuring Transactions with DHC

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

our five then existing master leases with DHC as well as our then existing management and pooling agreements with DHC were terminated and replaced with 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.

For more information regarding the Transaction Agreement, our leases and management agreements and other transactions with DHC, see Notes 1, 10 and 14 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.



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Credit Facilities

We have a $65.0 million secured revolving credit facility with a syndicate of lenders that is available for us to use for general business purposes, of which $42.1 million is available for borrowing as of December 31, 2020.

For more information regarding our credit facility and our irrevocable standby letters of credit, see Note 9 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Disposition Activities

In 2019, we and DHC sold to third parties 18 SNFs located in California, Kansas, Iowa and Nebraska that DHC owned and leased to us for an aggregate sales price of approximately $29.5 million, excluding closing costs. As a result of these sales, the annual minimum rent payable to DHC by us under our then existing master leases with DHC was reduced in accordance with the Transaction Agreement.

In 2020, DHC sold nine senior living communities that we previously managed located in California, Mississippi, Nebraska and Wisconsin. Upon completion of these sales, our management agreements with DHC for these communities were terminated. In addition, DHC in November 2020 closed seven senior living communities and one building in one senior living community that we previously managed. While these closed communities are no longer being used as senior living communities, we continue to manage their back-office operations and monitor the empty facilities. For the year ended December 31, 2020, we recognized $2.7 million of management fees related to the sold and closed communities.

During 2020 and 2019, we permanently closed six and four rehabilitation and wellness services outpatient clinics, respectively, primarily as a result of being located in senior living communities that were operated in communities we managed on behalf of DHC that were sold or closed.

Results of Operations

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

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

Key Statistical Data For the Years Ended December 31, 2020 and 2019.

The following tables present a summary of our operations for the years ended December 31, 2020 and 2019 (dollars in thousands, except RevPAR):
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 Year Ended December 31,Increase/(Decrease)
20202019AmountPercent
REVENUES
Senior living$77,015 $1,036,498 $(959,483)(92.6)%
Management fees62,880 16,169 46,711 288.9 %
Rehabilitation and wellness services82,032 48,685 33,347 68.5 %
Total management and operating revenues221,927 1,101,352 (879,425)(79.8)%
Reimbursed community-level costs incurred on behalf of managed communities916,167 313,792 602,375 192.0 %
Other reimbursed expenses25,648 — 25,648 n/m
Total revenues1,163,742 1,415,144 (251,402)(17.8)%
Other operating income3,435 — 3,435 n/m
OPERATING EXPENSES
Senior living wages and benefits41,819 538,931 (497,112)(92.2)%
Other senior living operating expenses25,470 292,644 (267,174)(91.3)%
Rehabilitation and wellness services expenses64,496 39,903 24,593 61.6 %
Community-level costs incurred on behalf of managed communities916,167 313,792 602,375 192.0 %
General and administrative87,168 87,884 (716)(0.8)%
Rent5,118 141,486 (136,368)(96.4)%
Depreciation and amortization10,997 16,640 (5,643)(33.9)%
Loss on sale of senior living communities— 856 (856)(100.0)%
Long-lived asset impairment— 3,282 (3,282)(100.0)%
Total operating expenses1,151,235 1,435,418 (284,183)(19.8)%
Operating income (loss)15,942 (20,274)36,216 (178.6)%
Interest, dividend and other income757 1,364 (607)(44.5)%
Interest and other expense(1,631)(2,615)984 (37.6)%
Unrealized gain on equity investments480 782 (302)(38.6)%
Realized gain on sale of debt and equity investments425 229 196 85.6 %
Loss on termination of leases(22,899)— (22,899)n/m
Loss before income taxes and equity in earnings of an investee(6,926)(20,514)13,588 (66.2)%
Provision for income taxes(663)(56)(607)1083.9 %
Equity in earnings of an investee— 575 (575)(100.0)%
Net loss$(7,589)$(19,995)$12,406 (62.0)%
Owned and leased communities:
Number of communities (end of period)24 190 (166)(87.4)%
Number of living units (end of period) (1)
2,302 20,948 (18,646)(89.0)%
Spot occupancy at December 31,69.7 %82.7 %(13.0)%n/m
Average occupancy76.4 %82.9 %(6.5)%n/m
RevPAR (2)
$2,751 $3,975 $(1,224)(30.8)%
Managed communities:
Number of communities (end of period)228 78 150 192.3 %
Number of living units (end of period) (1)
26,969 10,337 16,632 160.9 %
Spot occupancy at December 31,70.8 %83.5 %(12.7)%n/m
Average occupancy77.2 %85.0 %(7.8)%n/m
RevPAR (2)
$3,546 $3,602 $(56)(1.6)%
Rehabilitation and wellness services:
Number of inpatient clinics (end of period)37 41 (4)(9.8)%
Number of outpatient clinics (end of period)207 190 17 8.9 %
Total clinics244 231 13 5.6 %
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_______________________________________
n/m - not meaningful
(1)    Includes only living units categorized as in service. As a result, the number of living units may change from period to period for reasons other than the acquisition or disposition of senior living communities.
(2)    RevPAR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of available units for the period, divided by the number of months in the period. Amounts for the year ended December 31, 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act and other governmental grants.

Comparable Communities and Clinics

Comparable communities (senior living communities and rehabilitation and wellness services clinics that we have continuously owned, continuously leased or continuously managed since January 1, 2019) results, for the year ended December 31, 2020, compared to the year ended December 31, 2019, are listed below. The number of comparable communities represent a minority of the senior living communities we operated since January 1, 2019 as a result of the changes to our business arrangements with DHC pursuant to the Restructuring Transaction for senior living communities that we manage on behalf of DHC (dollars in thousands, except RevPAR):

 Year Ended December 31,Increase/(Decrease)
20202019AmountPercent
REVENUES
Senior living$76,293 $82,154 $(5,861)(7.1)%
Management fees19,536 15,091 4,445 29.5 %
Rehabilitation and wellness services60,048 41,064 18,984 46.2 %
Reimbursed community-level costs incurred on behalf of managed communities279,162 284,179 (5,017)(1.8)%
Other operating income3,047 — 3,047 n/m
OPERATING EXPENSES
Senior living wages and benefits42,546 38,980 3,566 9.1 %
Other senior living operating expenses19,597 15,166 4,431 29.2 %
Rehabilitation and wellness services expenses48,295 33,152 15,143 45.7 %
Community-level costs incurred on behalf of managed communities279,162 284,179 (5,017)(1.8)%
Rent4,119 3,815 304 8.0 %
Owned and leased communities:
Number of communities (end of period)24 24 — — %
Number of living units (end of period) (1)
2,302 2,312 (10)(0.4)%
Average occupancy76.4 %81.4 %(5.0)%n/m
RevPAR (2)
$2,751 $2,961 $(210)(7.1)%
Managed communities:
Number of communities (end of period)