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Leases and Management Agreements with Five Star

12 Months Ended

Dec. 31, 2019

Leases and Management Agreements With Five Star

Restructuring our Business Arrangements with Five Star

The Transaction Agreement with Five Star. Pursuant to the Transaction Agreement, effective January 1, 2020, or the Conversion Time:


•	our previously existing master leases with Five Star for all of our senior living communities that Five Star leased, as well as our previously existing management agreements and pooling agreements with Five Star for our senior living communities that Five Star managed, were terminated and replaced with the New Management Agreements;


•	Five Star issued to us 10,268,158 of its common shares and an aggregate of approximately 16,118,849 to our shareholders of record as of December 13, 2019; and


•	as consideration for these share issuances, we provided Five Star with $75,000 of additional consideration, by way of our assumption of certain then current and future working capital liabilities of Five Star.

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

Pursuant to the New Management Agreements, Five Star will receive a management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement for its direct costs and expenses related to such communities, as well as an annual incentive fee equal to 15% of the amount by which the annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of all communities on a combined basis exceeds the target EBITDA for all communities on a combined basis for such calendar year, provided that in no event shall the incentive fee be greater than 1.5% of the gross revenues realized at all communities on a combined basis for such calendar year.

The New Management Agreements expire in 2034, subject to Five Star's right to extend for two consecutive five year terms if Five Star achieves certain performance targets for the combined managed communities portfolio, unless earlier terminated or timely notice of nonrenewal is delivered. The New Management Agreements also provide us with the right to terminate the 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 we 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, or

the Guaranty, made by Five Star in favor of our applicable subsidiaries, Five Star has guaranteed the payment and performance of each of its applicable subsidiary's obligations under the applicable New Management Agreements.

In connection with the Transaction Agreement, we entered into a credit agreement with Five Star, pursuant to which we extended to Five Star a $25,000 line of credit. This line of credit matured and was terminated on January 1, 2020, and there were no borrowings outstanding under this line of credit at the time of such termination and Five Star did not make any borrowing under this line of credit at any time.

On April 1, 2019, we concluded that the Restructuring Transaction constituted a reconsideration event requiring us to assess whether we held a controlling financial interest in Five Star. As a result of this assessment, we determined that Five Star was a VIE effective as of the date of the Transaction Agreement. We determined not to consolidate Five Star in our consolidated financial statements, as we do not have the power to direct the activities of Five Star that most significantly impact Five Star's economic performance and therefore are not the primary beneficiary of Five Star. Effective January 1, 2020, we determined that Five Star is not a VIE and we will account for our 33.9% investment in Five Star using the equity method of accounting because we are deemed to exert significant influence, but not control, over Five Star's most significant activities.

Our Senior Living Communities Formerly Leased by Five Star. As of December 31, 2019, we were Five Star's largest landlord and Five Star was our largest tenant. We leased 166, 184 and 185 senior living communities to Five Star as of December 31, 2019, 2018 and 2017, respectively. We leased senior living communities to Five Star pursuant to the following five leases with Five Star, each of which was terminated as of January 1, 2020 pursuant to the Transaction Agreement:


•	Lease No. 1, which was to expire in 2024 and included 73 independent living communities, assisted living communities and SNFs as of December 31, 2019.


•	Lease No. 2, which was to expire in 2026 and included 39 independent living communities, assisted living communities and SNFs as of December 31, 2019.


•	Lease No. 3, which was to expire in 2028 and included 17 independent living communities and assisted living communities as of December 31, 2019.


•	Lease No. 4, which was to expire in 2032 and included 28 independent living communities, assisted living communities and SNFs as of December 31, 2019.


•	Lease No. 5, which was to expire in 2028 and included nine assisted living communities as of December 31, 2019.

As of December 31, 2019, under our previously existing leases with Five Star, Five Star paid us annual rent plus percentage rent equal to 4.0% of the increase in gross revenues at certain of our senior living communities over base year gross revenues as specified in the applicable leases. Pursuant to the Transaction Agreement, commencing February 1, 2019, no percentage rent was payable to us by Five Star. Five Star's obligation to pay percentage rent under Lease No. 5 commenced in 2018. We determined percentage rent due under these leases annually and recognized it when all contingencies were met, which was typically at year end. We recognized total rental income from Five Star of $137,898, $212,622 and $210,539 (including percentage rent of $538, $5,525 and $5,533) for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, 2018 and 2017, our net receivables from Five Star were $1,989, $18,697 and $18,539, respectively, and those amounts are included in due from affiliate in our consolidated balance sheets. No rent or percentage rent is payable to us by Five Star as of December 31, 2019.

As of December 31, 2019, our leases with Five Star were “triple net” leases, which generally required Five Star to pay rent and all property operating expenses, to indemnify us from liability which may arise by reason of our ownership of the properties, to maintain the properties at Five Star's expense, to remove and dispose of hazardous substances on the properties in compliance with applicable law and to maintain insurance on the properties for Five Star's and our benefit.

Under our previously existing leases with Five Star, Five Star could request that we purchase certain improvements to the leased communities and, until we entered into the Transaction Agreement, the annual rent payable to us by Five Star would increase in accordance with a formula specified in the applicable lease in return for such purchases. During the years ended December 31, 2018 and 2017, we purchased $17,956 and $39,800, respectively, of such improvements and Five Star's annual rent payable to us increased by $1,433 and $3,193, respectively, in accordance with the terms of the applicable leases. Pursuant to the Transaction Agreement, the $111,603 of improvements to communities leased to Five Star, including $49,155 of fixed assets and improvements that were purchased pursuant to the Transaction Agreement as discussed above, that we funded during the year ended December 31, 2019 did not result in increased rent payable by Five Star.

As of December 31, 2019, Five Star was our most significant tenant. The following is a summary of the assets leased to and revenues earned from Five Star as a tenant as of and for the years ended December 31, 2019 and 2018 compared to all our other assets and revenues from all sources:



	As of December 31, 2019				As of December 31, 2018
	Gross Book Value of Real Estate Assets⁽¹⁾		% of Total		Gross Book Value of Real Estate Assets⁽¹⁾		% of Total
Five Star ⁽²⁾	$	2,286,951	27.2	%	$	2,253,853	26.7	%
All others ^{(3) (4)}	6,133,672		72.8	%	6,174,791		73.3	%
	$	8,420,623	100.0	%	$	8,428,644	100.0	%

(1)

Represents the gross book value of real estate assets at cost plus certain acquisition costs, before depreciation and purchase price allocations, less impairment write downs, if any. Five Star also manages our managed senior living communities. The gross book value of real estate assets of $1,920,070 as of December 31, 2019 for those managed senior living communities is included in the "All others" category.


(2)	Includes gross book value of real estate assets of $50,951 classified as held for sale in our consolidated balance sheet as of December 31, 2019.


(3)	Includes gross book value of real estate assets of $213,416 and $3,752 classified as held for sale in our consolidated balance sheets as of December 31, 2019 and 2018, respectively.



	Year Ended				Year Ended
	December 31, 2019				December 31, 2018
	Total Revenues⁽¹⁾		% of Total		Total Revenues ⁽¹⁾		% of Total
Five Star	$	137,898	13.3	%	$	212,622	19.0	%
All others	902,257		86.7	%	904,542		81.0	%
	$	1,040,155	100.0	%	$	1,117,164	100.0	%


(1)	Five Star also manages our managed senior living communities. Our revenues of $433,597 and $416,523 for the years ended December 31, 2019 and 2018, respectively, from those communities are included in the “All others” category.

Our Senior Living Communities Managed by Five Star. Five Star managed 78, 76 and 70 senior living communities for our account as of December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, we leased most of our senior living communities that were managed by Five Star to our TRSs, and Five Star managed these communities pursuant to long term management agreements. As described above, pursuant to the Transaction Agreement, effective January 1, 2020, we replaced our long term management and pooling agreements with Five Star with the New Management Agreements, the terms of which are described above. We now lease all of our managed communities to our TRSs.

In December 2019, we acquired a 169 unit Class A active adult rental community located in Plano, Texas for a purchase price of approximately $50.3 million, excluding closing costs. Five Star manages this property for our account. See Note 3 for further information regarding this acquisition.

We incurred management fees of $15,327, $14,426 and $14,080 for the years ended December 31, 2019, 2018 and 2017, respectively, with respect to the communities Five Star managed for us during such years. These amounts are included in property operating expenses or have been capitalized, as appropriate, in our consolidated financial statements.

The following table presents residents fees and services revenue disaggregated by the type of contract and payer:



Revenue from contracts with customers:	Year Ended December 31, 2019
Basic housing and support services	$	353,699
Medicare and Medicaid programs	31,324
Private pay and other third party payer SNF services	48,574
Total residents fees and services	$	433,597

In addition to providing management services to us, Five Star also provides certain other services to residents at some of the senior living communities it manages for us, such as rehabilitation services. At senior living communities Five Star manages for us where Five Star provides rehabilitation services on an outpatient basis, the residents, third party payers or government programs pay Five Star for those rehabilitation services. At senior living communities Five Star manages for us where Five Star provides both inpatient and outpatient rehabilitation services, we generally pay Five Star for those rehabilitation services and charges for these services are included in amounts charged to residents, third party payers or government programs. We incurred fees of $5,920, $6,442 and $7,525 for the years ended December 31, 2019, 2018 and 2017, respectively, with respect to rehabilitation services Five Star provided at senior living communities it manages for us that are payable by us. These amounts are included in property operating expenses in our consolidated statements of comprehensive income (loss).