Related Person Transactions

We have relationships and historical and continuing transactions with Five Star, RMR LLC and others related to them, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also our Trustees or officers. For further information about these and other such relationships and certain other related person transactions, please refer to our Annual Report.

Five Star: Five Star was our 100% owned subsidiary until we distributed its common shares to our shareholders in 2001. We are currently Five Star’s largest stockholder. As of September 30, 2016, we owned 4,235,000 of Five Star’s common shares, or approximately 8.6% of Five Star’s outstanding common shares. Five Star is our largest tenant and a manager of certain of our senior living communities.

Our investment in Five Star common shares, which is included in other assets in our condensed consolidated balance sheets, is recorded at fair value, with the related unrealized gain (loss) included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets. We recognize the increase or decrease in the fair value of our Five Star common shares each reporting period as unrealized gain or loss on investment in available for sale securities which is a component of other comprehensive income (loss) in our condensed consolidated statements of comprehensive income. For further information, see Notes 4 and 7.

On June 29, 2016, we entered into a transaction agreement, or the Transaction Agreement, and related agreements, or, collectively, the Transaction Documents, with Five Star. Pursuant to the Transaction Documents, among other things, on June 29, 2016, we and Five Star completed a sale and leaseback transaction with respect to certain senior living communities owned by Five Star and amended the pooling arrangements related to Five Star’s management of certain senior living communities we own. Significant terms of the Transaction Documents are summarized below.


•	Pursuant to the Transaction Agreement, we purchased seven senior living communities from Five Star for an aggregate purchase price of $112,350, and we and Five Star simultaneously entered into a new long term lease agreement, or the New Lease, whereby we have leased those seven senior living communities to Five Star.

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Pursuant to the New Lease, Five Star is required to pay initial annual rent of $8,426, plus, beginning in 2018, percentage rent equal to 4% of the amount by which gross revenues, as defined in the New Lease, of each community exceeds gross revenues of such community in 2017. The initial term of the New Lease expires on December 31, 2028 and Five Star has options to extend the term of the New Lease for two consecutive 15-year terms. Pursuant to the New Lease, Five Star may request that we purchase certain improvements to the communities in return for rent increases in accordance with the formula specified in the New Lease; however, we are not obligated to purchase such improvements and Five Star is not required to sell them to us. Pursuant to the Transaction Agreement, we have the right, in connection with a financing or other capital raising transaction, to reassign one or more of the communities covered by the New Lease to another existing or new long term lease agreement between us and Five Star. Other terms of the New Lease are substantially similar to those of our other four preexisting long term leases with Five Star, such terms being described in our Annual Report, which descriptions are incorporated herein by reference.

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Pursuant to the Transaction Agreement, our three then existing pooling agreements with Five Star that combined for certain purposes certain of our management agreements with Five Star for senior living communities that include assisted living units, or AL Management Agreements, were terminated and we entered into 10 new pooling agreements with Five Star, or the New Pooling Agreements. Nine of the New Pooling Agreements combine six AL Management Agreements and one of the New Pooling Agreements currently combines five AL Management Agreements. Each New Pooling Agreement combines various calculations of revenues and expenses from the operations of the applicable communities covered by each New Pooling Agreement.

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Pursuant to the New Pooling Agreements, the AL Management Agreements covered by each New Pooling Agreement generally provide Five Star with a management fee equal to either 3% or 5% of the gross revenues realized at such communities plus reimbursement for its direct costs and expenses related to such communities, as well as an annual incentive fee equal to either 35% or 20% of the annual net operating income of such communities remaining after we realize an annual minimum return equal to either 8% or 7% of our invested capital, or, in the case of nine communities, a specified amount plus 7% of our invested capital since December 31, 2015. The calculations of Five Star’s fees and of our annual minimum return related to any AL Management Agreement that became effective before May 2015 and had been pooled under one of the previously existing pooling agreements are generally the same as they were under the previously existing pooling agreements. However, with respect to certain communities, our annual minimum return was reduced to 7%, and also, with respect to the nine communities referenced above, our annual minimum return was reset as of 2016 to specified amounts. With regard to AL Management Agreements that became effective from and after May 2015, the management fee was changed to 5%, rather than the prior 3%, of the gross revenues realized at the applicable community, and the incentive fee was changed to 20%, rather than the prior 35%, of the annual net operating income of the applicable community remaining, in all cases after we realize our requisite annual minimum return. Pursuant to the New Pooling Agreements, we will pay Five Star a fee for its management of capital expenditure projects equal to 3% of amounts funded by us.

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The terms of the AL Management Agreements covered by the New Pooling Agreements expire between 2030 and 2039 and are subject to automatic renewals, unless earlier terminated or timely notices of nonrenewal are delivered. The right that we and Five Star each had under the AL Management Agreements that became effective from and after May 1, 2015 to terminate each such AL Management Agreement as of December 31, 2016 was eliminated pursuant to the applicable New Pooling Agreement. Five Star has a limited right under the AL Management Agreements to require underperforming communities to be sold, and we have the right to terminate all the AL Management Agreements subject to a New Pooling Agreement if we do not receive our annual minimum return under such New Pooling Agreement in each of three consecutive years, commencing with calendar year 2016, subject to certain Five Star cure rights.

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The New Pooling Agreements collectively combine all AL Management Agreements except for the management agreement related to one assisted living community located in New York and the management agreement related to one assisted living community located in California, and, other than as described below, the terms of those management agreements were not amended as part of the transactions implemented by the Transaction Documents. The terms of our existing pooling agreement with Five Star that combines our management agreements with Five Star for senior living communities that include only independent living units, and the terms of those management agreements, also were not amended as part of the transactions implemented by the Transaction Documents.


•	Pursuant to the Transaction Agreement, we and Five Star amended the management agreement for one California community so that the calculation of our annual minimum return under that agreement is fixed at $3,610 plus 7% of any amount funded by us for capital expenditures at this community since December 31, 2015.

Because of the continuing relationships between us and Five Star, the terms of the Transaction Documents were negotiated and approved by special committees of our Board of Trustees and Five Star’s board of directors composed solely of our Independent Trustees and Five Star’s independent directors who are not also Trustees or directors of the other party, which committees were represented by separate counsel.

In September 2016, we acquired for $130 an additional living unit at a senior living community located in Florida that we lease to Five Star. This living unit was added to the applicable lease and Five Star’s annual rent payable to us increased by $10 in accordance with the terms of that lease.

In September 2016, we and Five Star sold a vacant SNF located in Wisconsin that we leased to Five Star for $248, and as a result of this sale, Five Star’s annual rent payable to us decreased by $25 in accordance with the terms of the applicable lease.

As of September 30, 2016 and 2015, we leased 183 and 178 senior living communities to Five Star, respectively. We recognized total rental income from Five Star of $50,417 and $47,828 for the three months ended September 30, 2016 and 2015, respectively, and $146,758 and $143,271 for the nine months ended September 30, 2016 and 2015, respectively. These amounts exclude estimated percentage rent payments we received from Five Star of $1,367 and $1,371 for the three months ended September 30, 2016 and 2015, respectively, and $4,228 and $4,194 for the nine months ended September 30, 2016 and 2015, respectively. We determine actual percentage rent due under our Five Star leases annually and recognize any resulting amount as rental income at year end when all contingencies are met. As of September 30, 2016 and December 31, 2015, we had rents receivable from Five Star of $16,831 and $17,466, respectively. Those amounts are included in other assets in our condensed consolidated balance sheets.

Pursuant to the terms of our leases with Five Star, we funded $3,470 and $7,523 for the three months ended September 30, 2016 and 2015, respectively, and $15,306 and $16,425 for the nine months ended September 30, 2016 and 2015, respectively, of improvements to communities leased to Five Star. As a result, the annual rent payable to us by Five Star increased by approximately $279 and $604 for the three months ended September 30, 2016 and 2015, respectively, and $1,228 and $1,322, for the nine months ended September 30, 2016 and 2015, respectively.

Also in September 2016, we agreed to acquire two senior living communities with a combined 126 living units located in Illinois for approximately $18,600, excluding closing costs. If these acquisitions are completed, we expect to lease these communities to Five Star under one of our existing master leases with Five Star. These acquisitions are subject to various conditions; accordingly, we cannot be sure that we will complete these acquisitions and that we will lease them to Five Star, that the acquisitions and lease arrangements will not be delayed or that the terms will not change.

During the nine months ended September 30, 2016, Five Star began managing for our account three senior living communities we own with an aggregate 288 living units. We acquired one of those communities in May 2016 for a purchase price of approximately $8,400, excluding closing costs, and each of the other two communities had previously been leased to an unrelated third party that defaulted on its lease. The terms under which Five Star is managing these senior living communities are described above.

As of September 30, 2016 and 2015, Five Star managed 63 and 60 senior living communities for our account, respectively. We incurred management fees payable to Five Star of $3,070 and $2,717 for the three months ended September 30, 2016 and 2015, respectively, and $8,689 and $7,939 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income. In addition, we incurred fees for Five Star's management of capital expenditure projects at our Five Star managed communities of $266 for the three and nine months ended September 30, 2016. These amounts have been capitalized in our condensed consolidated financial statements.

In October 2016, we entered into an agreement to sell a former memory care building at an assisted living community in Florida that Five Star has historically managed for our account for $2,100. If this sale is completed, we expect that our management agreement with Five Star for this community will be terminated. This sale is subject to various conditions; accordingly, we cannot be sure that we will complete the sale or that the management agreement will be terminated, that the sale and termination will not be delayed or that the terms will not change.

In October 2016, Five Star agreed to manage four senior living communities we own located in Georgia with approximately 350 living units. Five Star will manage these senior living communities pursuant to management agreements that will be added to an existing or new pooling agreement with terms consistent with the AL Management Agreements that became effective from and after May 2015 as described above. Five Star's assumption of the management of these communities is subject to conditions and we cannot be sure that those conditions will be satisfied.

D&R Yonkers LLC: In order to accommodate certain requirements of New York licensing laws, one of our TRSs subleases a part of a senior living community we own that is managed by Five Star to D&R Yonkers LLC. D&R Yonkers LLC is owned by our President and Chief Operating Officer and Five Star’s chief financial officer and treasurer. Our transactions and balances with D&R Yonkers LLC are eliminated upon consolidation for accounting purposes and are not separately stated and do not appear in our condensed consolidated financial statements.

RMR LLC: Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $9,609 and $8,682 for the three months ended September 30, 2016 and 2015, respectively, and $27,199 and $26,644 for the nine months ended September 30, 2016 and 2015, respectively. The net business management fees we recognized for the 2016 and 2015 periods are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.

In accordance with the terms of our business management agreement, we issued 68,983 of our common shares to RMR LLC for the period from January 1, 2015 through May 31, 2015 as payment for a part of the business management fee we recognized for that period. Beginning June 1, 2015, all management fees under our business management agreement are paid in cash.

Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $2,961 and $2,533 for the three months ended September 30, 2016 and 2015, respectively, and $8,193 and $7,554 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf. Our property level operating expenses are generally incorporated into rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC. We reimbursed RMR LLC $2,482 and $1,954 for property management related expenses for the three months ended September 30, 2016 and 2015, respectively, and $6,781 and $5,189 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income.

We have historically awarded share grants to certain RMR LLC employees under our equity compensation plans. In September 2016 and 2015, we awarded annual share grants of 79,650 and 84,000 of our common shares, respectively, to our officers and to other employees of RMR LLC. In September 2016, we purchased 17,667 of our common shares, at the closing price of our common shares on the Nasdaq on the date of purchase, from certain employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. In addition, under our business management agreement we reimburse RMR LLC for our allocable costs for internal audit services. The amounts recognized as expense for share grants to RMR LLC employees and internal audit costs were $901 and $302 for the three months ended September 30, 2016 and 2015, respectively, and $2,075 and $1,337 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.

We lease office space to RMR LLC in certain of our properties for its property management offices. Pursuant to our lease agreements with RMR LLC, we recognized rental income from RMR LLC for leased office space of $82 and $198 for the three and nine months ended September 30, 2016, respectively, and $51 and $153 for the three and nine months ended September 30, 2015, respectively.

RMR Inc.: In connection with our June 2015 acquisition of shares of class A common stock of RMR Inc., we recorded a liability for the amount by which the estimated fair value of these shares exceeded the price we paid for these shares. This liability is included in accounts payable and other liabilities in our condensed consolidated balance sheets. A part of this liability is being amortized on a straight line basis through December 31, 2035 as an allocated reduction to our business management and property management fee expense. We amortized $943 and $959 of this liability for the three months ended September 30, 2016 and 2015, respectively, and $2,829 and $1,202 of this liability for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in the net business management and property management fee amounts for such periods. As of September 30, 2016, the remaining unamortized amount of this liability was $72,876.

As of September 30, 2016, we owned 2,637,408 shares of class A common stock of RMR Inc. We receive dividends on our RMR Inc. class A common shares as declared and paid by RMR Inc. to all holders of its class A common shares. We received a dividend of $789 on our RMR Inc. class A common shares during the three months ended June 30, 2016, which was for the period from December 14, 2015 through March 31, 2016. We received a dividend of $659 on our RMR Inc. class A common shares during the three months ended September 30, 2016, which was for the period from April 1, 2016 through June 30, 2016. On October 11, 2016, RMR Inc. declared a regular quarterly dividend of $0.25 per class A common share payable to shareholders of record on October 21, 2016. RMR Inc. has stated that it expects to pay this dividend on or about November17, 2016.

Our investment in RMR Inc. class A common shares is included in other assets in our condensed consolidated balance sheets and is recorded at fair value, with the related unrealized gain (loss) included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets. We recognize the increase or decrease in the fair value of our RMR Inc. class A common shares each reporting period as unrealized gain or loss on investment in available for sale securities which is a component of other comprehensive income (loss) in our condensed consolidated statements of comprehensive income. For further information, see Notes 4 and 7.

ABP Trust: ABP Trust is the indirect controlling shareholder of RMR LLC and is owned by our Managing Trustees, Barry M. Portnoy and Adam D. Portnoy. On October 2, 2016, in connection with the proposed commencement of a partial tender offer by a subsidiary of ABP Trust, or the Purchaser, of up to 10,000,000 shares of common stock of Five Star at a price of $3.00 per share, or the Offer, we entered into a Consent Agreement with the Purchaser, ABP Trust, Adam D. Portnoy and Barry M. Portnoy, or the Requesting Parties. Pursuant to the Consent Agreement, we consented to Five Star’s granting of certain exceptions to the ownership restrictions set forth in its charter to the Requesting Parties, and waived any default under our leases, management and other agreements with Five Star arising or resulting from the Offer. The Consent Agreement provides certain conditions to the effectiveness of our consent and waiver, including that the Requesting Parties enter into a Consent, Standstill, Registration Rights and Lock-Up Agreement with Five Star in a form satisfactory to us, and that all conditions to the effectiveness of that agreement be satisfied. The Requesting Parties entered into that agreement on October 2, 2016. On October 6, 2016, the Purchaser commenced the Offer, and on October 27, 2016, the Purchaser amended the Offer to increase the number of shares of common stock of Five Star that it is offering to purchase from 10,000,000 to 18,000,000. Because of the continuing relationships among us and ABP Trust and its affiliates, the terms of the Consent Agreement were negotiated and approved by a special committee of our Board of Trustees composed solely of our Independent Trustees and which special committee was represented by separate counsel, and also were approved by our Independent Trustees and our Board of Trustees (with Barry M. Portnoy and Adam D. Portnoy abstaining), voting separately. For additional information related to the Consent Agreement, please refer to our Current Report on Form 8-K dated October 2, 2016.

AIC: We and six other companies to which RMR LLC provides management services each own Affiliates Insurance Company, or AIC, in equal amounts. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC. We paid aggregate annual premiums, including taxes and fees, of approximately $3,607 in connection with this insurance program for the policy year ending June 30, 2017, which amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program.

As of September 30, 2016 and December 31, 2015, our investment in AIC had a carrying value of $7,110 and $6,827, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. We recognized income (loss) of $13 and $(24) related to our investment in AIC for the three months ended September 30, 2016 and 2015, respectively, and $107 and $70 for the nine months ended September 30, 2016 and 2015, respectively. Our other comprehensive income includes our proportionate part of unrealized gains (losses) on securities which are owned by AIC of $80 and $(72) for the three months ended September 30, 2016 and 2015, respectively, and $175 and $(91) for the nine months ended September 30, 2016 and 2015, respectively.

Directors’ and Officers’ Liability Insurance: We, RMR Inc., RMR LLC and certain companies to which RMR LLC provides management services participate in a combined directors’ and officers’ liability insurance policy. In September 2016, we participated in a one year extension of this combined directors’ and officers’ insurance policy through September 2018. Our premium for this policy extension was approximately $142.