Company Quick10K Filing
Quick10K
Five Star Senior Living
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.59 51 $30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
10-Q 2012-12-31 Quarter: 2012-12-31
8-K 2019-06-11 Enter Agreement, Off-BS Arrangement, Shareholder Vote, Other Events, Exhibits
8-K 2019-05-08 Earnings, Exhibits
8-K 2019-04-01 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-03-11 Enter Agreement, Exhibits
8-K 2018-12-27 Officers, Exhibits
8-K 2018-12-18 Enter Agreement, Exhibits
8-K 2018-12-11 Officers
8-K 2018-12-11 Officers, Exhibits
8-K 2018-11-15 Other Events
8-K 2018-11-14 Earnings, Exhibits
8-K 2018-10-22
8-K 2018-08-09 Earnings, Exhibits
8-K 2018-06-29 Exhibits
8-K 2018-05-17 Officers, Shareholder Vote, Other Events, Exhibits
8-K 2018-02-25 Other Events, Exhibits
8-K 2018-01-19 M&A, Exhibits
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UGI UGI 9,410
SQM Chemical & Mining Co of Chile 9,100
SFBS Servisfirst Bancshares 1,820
CTMX Cytomx Therapeutics 455
IMH Impac Mortgage Holdings 72
CCCL China Ceramics 7
JCTG Jiucaitong Group 0
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FVE 2019-03-31
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Note 1. Basis of Presentation and Organization
Note 2. Summary of Significant Accounting Policies
Note 3. Property and Equipment
Note 4. Accumulated Other Comprehensive Income
Note 5. Income Taxes
Note 6. Earnings per Share
Note 7. Fair Values of Assets and Liabilities
Note 8. Indebtedness
Note 9. Leases with Snh and Hcp and Management Agreements with Snh
Note 10. Business Management Agreement with Rmr Llc
Note 11. Related Person Transactions
Note 12. Legal Proceedings and Claims
Note 13. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 5. Other Information
Item 6. Exhibits
EX-10.5 a3312019-exhibit105.htm
EX-31.1 a3312019-exhibit311.htm
EX-31.2 a3312019-exhibit312.htm
EX-32.1 a3312019-exhibit321.htm

Five Star Senior Living Earnings 2019-03-31

FVE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a3312019-10qxdocument.htm 10-Q Document


 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
FORM 10-Q
ý  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2019  
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-16817
FIVE STAR SENIOR LIVING INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Maryland
04-3516029
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification No.)
400 Centre Street, Newton, Massachusetts 02458
(Address of Principal Executive Offices) (Zip Code) 

(Registrant’s Telephone Number, Including Area Code): 617-796-8387

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  ý 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  ý No  ¨

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

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








Securities registered pursuant to Section 12(b) of the Act:

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

Number of registrant’s shares of common stock, $.01 par value, outstanding as of May 3, 2019:  50,843,032.  
 
 
 
 
 




FIVE STAR SENIOR LIVING INC.
FORM 10-Q
MARCH 31, 2019
INDEX
 
Page
 
 
 
 
 
 
 
 
 
References in this Quarterly Report on Form 10-Q to the Company, Five Star, we, us or our include Five Star Senior Living Inc. and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.





PART I.   Financial Information
Item 1.  Condensed Consolidated Financial Statements

FIVE STAR SENIOR LIVING INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
 
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
49,699

 
$
29,512

Accounts receivable, net of allowance of $3,748 and $3,422 at March 31, 2019 and December 31, 2018, respectively
 
39,744

 
37,758

Due from related persons
 
9,800

 
7,855

Investments, of which $10,717 and $11,285 are restricted at March 31, 2019 and December 31, 2018, respectively
 
19,850

 
20,179

Restricted cash
 
19,464

 
19,720

Prepaid expenses and other current assets
 
22,571

 
23,029

Assets held for sale
 
526

 

Total current assets
 
161,654

 
138,053

 
 
 
 
 
Property and equipment, net
 
223,195

 
243,873

Equity investment of an investee
 
9,102

 
8,633

Restricted cash
 
930

 
923

Restricted investments
 
8,227

 
8,073

Right of use assets
 
1,455,568

 

Other long term assets
 
5,375

 
6,069

Total assets
 
$
1,864,051

 
$
405,624

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Revolving credit facility
 
$
51,484

 
$
51,484

Accounts payable and accrued expenses
 
82,067

 
69,667

Current portion of lease liabilities
 
149,381

 

Accrued compensation and benefits
 
43,204

 
35,421

Due to related persons
 
36,466

 
18,883

Mortgage notes payable
 
344

 
339

Accrued real estate taxes
 
10,730

 
12,959

Security deposits and current portion of continuing care contracts
 
3,093

 
3,468

Other current liabilities
 
29,850

 
37,472

Total current liabilities
 
406,619

 
229,693

 
 
 
 
 
Long term liabilities:
 
 
 
 
Mortgage notes payable
 
7,445

 
7,533

Long term portion of lease liabilities
 
1,307,868

 

Accrued self insurance obligations
 
34,898

 
33,030

Deferred gain on sale and leaseback transaction
 

 
59,478

Other long term liabilities
 
1,833

 
4,721

Total long term liabilities
 
1,352,044

 
104,762

 
 
 
 
 
Commitments and contingencies
 

 

 
 
 
 
 
Shareholders’ equity:
 
 
 
 
Common stock, par value $.01: 75,000,000 shares authorized, 50,843,032 and 50,853,452 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
 
508

 
508

Additional paid in capital
 
361,652

 
361,555

Accumulated deficit
 
(258,378
)
 
(292,636
)
Accumulated other comprehensive income
 
1,606

 
1,742

Total shareholders’ equity
 
105,388

 
71,169

 
 
$
1,864,051

 
$
405,624

See accompanying notes.

1


FIVE STAR SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)


 
 
Three Months Ended March 31,
 
 
2019
 
2018
Revenues:
 
 
 
 
Senior living revenue
 
$
276,935

 
$
274,525

Management fee revenue
 
3,983

 
3,622

Reimbursed costs incurred on behalf of managed communities
 
74,605

 
67,370

Total revenues
 
355,523

 
345,517

 
 
 
 
 
Operating expenses:
 
 
 
 
Senior living wages and benefits
 
143,630

 
136,169

Other senior living operating expenses
 
76,768

 
73,777

Costs incurred on behalf of managed communities
 
74,605

 
67,370

Rent expense
 
54,542

 
52,245

General and administrative expenses
 
26,502

 
19,963

Depreciation and amortization expense
 
8,165

 
8,860

Gain on sale of senior living communities
 

 
(5,684
)
Long lived asset impairment
 
3,148

 

Total operating expenses
 
387,360

 
352,700

 
 
 
 
 
Operating loss
 
(31,837
)
 
(7,183
)
 
 
 
 
 
Interest, dividend and other income
 
156

 
167

Interest and other expense
 
(906
)
 
(703
)
Unrealized gain (loss) on equity investments
 
366

 
(50
)
Realized gain on sale of debt and equity investments, net of tax
 
92

 
32

 
 
 
 
 
Loss before income taxes and equity in earnings of an investee
 
(32,129
)
 
(7,737
)
Provision for income taxes
 
(1,490
)
 
(256
)
Equity in earnings of an investee, net of tax
 
404

 
44

Net loss
 
$
(33,215
)
 
$
(7,949
)
 
 
 
 
 
Weighted average shares outstanding—basic and diluted
 
50,040

 
49,594

 
 
 
 
 
Net loss per share—basic and diluted
 
$
(0.66
)
 
$
(0.16
)
 
See accompanying notes.


2


FIVE STAR SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)


 
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
Net loss
$
(33,215
)
 
$
(7,949
)
Other comprehensive income:
 
 
 
Unrealized loss on investments, net of tax
(205
)
 
(397
)
Equity in unrealized gain (loss) of an investee, net of tax
65

 
(93
)
Realized loss (gain) on investments reclassified and included in net loss, net of tax
4

 
(3
)
Other comprehensive loss
(136
)
 
(493
)
Comprehensive loss
$
(33,351
)
 
$
(8,442
)
See accompanying notes.


3


FIVE STAR SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)


 
Three Months Ended March 31, 2019
 
Number of
Shares
 
Common
Stock
 
Additional
Paid in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Balance at January 1, 2019
50,853,452

 
$
508

 
$
361,555

 
$
(292,636
)
 
$
1,742

 
$
71,169

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(33,215
)
 

 
(33,215
)
Unrealized loss on investments in available for sale securities, net of tax

 

 

 

 
(205
)
 
(205
)
Realized loss on investments in available for sale securities reclassified and included in net loss, net of tax

 

 

 

 
4

 
4

Equity in unrealized gain of an investee, net of tax

 

 

 

 
65

 
65

Total comprehensive loss

 

 

 
(33,215
)
 
(136
)
 
(33,351
)
Cumulative effect adjustment to beginning retained earnings in connection with the adoption of FASB ASU No. 2016-02

 

 

 
67,473

 

 
67,473

Grants under share award plan and share based compensation

 

 
97

 

 

 
97

Repurchases and forfeitures under share award plan
(10,420
)
 

 

 

 

 

Balance at March 31, 2019
50,843,032

 
$
508

 
$
361,652

 
$
(258,378
)
 
$
1,606

 
$
105,388

 
Three Months Ended March 31, 2018
 
Number of
Shares
 
Common
Stock
 
Additional
Paid in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Balance at January 1, 2018
50,524,424

 
$
505

 
$
360,942

 
$
(220,489
)
 
$
4,036

 
$
144,994

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Cumulative effect of reclassification of unrealized gain on equity investments in connection with the adoption of FASB ASU No. 2016-01
 
 
 
 
 
 
1,107

 
(1,107
)
 

Net loss

 

 

 
(7,949
)
 

 
(7,949
)
Unrealized gain on investments in available for sale securities, net of tax

 

 

 

 
(397
)
 
(397
)
Realized gain on investments in available for sale securities reclassified and included in net loss, net of tax

 

 

 

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

 

 

 

 
(93
)
 
(93
)
Total comprehensive loss

 

 

 
(6,842
)
 
(1,600
)
 
(8,442
)
Grants under share award plan and share based compensation
12,500

 

 
211

 

 

 
211

Balance at March 31, 2018
50,536,924

 
$
505

 
$
361,153

 
$
(227,331
)
 
$
2,436

 
$
136,763


See accompanying notes.

4


FIVE STAR SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


 
 
Three Months Ended March 31,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(33,215
)
 
$
(7,949
)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization expense
 
8,165

 
8,860

Gain on sale of senior living communities
 

 
(5,684
)
Unrealized (gain) loss on equity securities
 
(366
)
 
50

Realized gain on sale of debt and equity investments
 
(92
)
 
(32
)
Loss on disposal of property and equipment
 
76

 

Long lived asset impairment
 
3,148

 

Equity in earnings of an investee, net of tax
 
(404
)
 
(44
)
Stock based compensation
 
97

 
211

Provision for losses on receivables
 
1,045

 
1,761

Amortization of deferred gain on sale and leaseback transaction
 

 
(1,653
)
Other noncash expense (income) adjustments, net
 
125

 
246

Changes in assets and liabilities:
 
 
 
 

Accounts receivable
 
(3,031
)
 
(1,222
)
Prepaid expenses and other assets
 
1,062

 
1,123

Accounts payable and accrued expenses
 
9,732

 
(4,971
)
Accrued compensation and benefits
 
7,783

 
3,126

Due from (to) related persons, net
 
15,702

 
(4,511
)
Other current and long term liabilities
 
(1,492
)
 
(1,513
)
Cash provided by (used in) operating activities
 
8,335

 
(12,202
)
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Acquisition of property and equipment
 
(12,056
)
 
(9,639
)
Purchases of investments
 
(1,471
)
 
(300
)
Proceeds from sale of property and equipment
 
22,578

 

Proceeds from sale of communities
 

 
25,141

Proceeds from sale of investments
 
2,643

 
1,425

Cash provided by investing activities
 
11,694

 
16,627

 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Repayments of mortgage notes payable
 
(91
)
 
(189
)
Cash used in financing activities
 
(91
)
 
(189
)
 
 
 
 
 
Change in cash and cash equivalents and restricted cash
 
19,938

 
4,236

Cash and cash equivalents and restricted cash at beginning of period
 
50,155

 
48,478

Cash and cash equivalents and restricted cash at end of period
 
$
70,093

 
$
52,714

 
 
 
 
 
Reconciliation of cash and cash equivalents and restricted cash:
 
 
 
 
Cash and cash equivalents
 
$
49,699

 
$
31,186

Restricted cash
 
20,394

 
21,528

Cash and cash equivalents and restricted cash at end of period
 
$
70,093

 
$
52,714

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Cash paid for interest
 
$
780

 
$
563

Cash paid for income taxes, net
 
$
120

 
$
348

 
 
 
 
 
Non-cash activities:
 
 
 
 
Initial recognition of right of use assets
 
$
1,478,958

 
$

Initial recognition of lease liabilities
 
$
1,478,958

 
$

Real estate sale
 
$

 
$
16,776

Mortgage notes assumed by purchaser in real estate sale
 
$

 
$
16,776

See accompanying notes.

5


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)



Note 1.  Basis of Presentation and Organization

General

The accompanying condensed consolidated financial statements of Five Star Senior Living Inc. and its subsidiaries, or we, us or our, are unaudited.  Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted.  We believe the disclosures made are adequate to make the information presented not misleading.  However, the accompanying financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2018, or our Annual Report.  In the opinion of our management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.  All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated.  Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Certain reclassifications have been made to the prior years’ condensed consolidated financial statements to conform to the current year’s presentation.

We operate senior living communities, including independent living communities, assisted living communities and skilled nursing facilities, or SNFs. As of March 31, 2019, we operated 284 senior living communities located in 32 states with 31,956 living units, including 255 primarily independent and assisted living communities with 29,450 living units and 29 SNFs with 2,506 living units. As of March 31, 2019, we owned and operated 20 of these senior living communities (2,108 living units), we leased and operated 188 of these senior living communities (20,082 living units) and we managed 76 of these senior living communities (9,766 living units). Our 284 senior living communities, as of March 31, 2019, included 10,893 independent living apartments, 16,393 assisted living suites and 4,670 SNF units. The foregoing numbers exclude living units categorized as out of service.  

Going Concern

The accompanying condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which accordingly assumes, among other things, the realization of assets and the satisfaction of liabilities in the ordinary course of business. We face increased competition across the senior living industry, including in specific markets in which we operate senior living communities. Medical advances and healthcare services also allow some potential residents to defer the time when they require the special services available at our communities. In addition, low unemployment in the United States combined with a competitive labor market within our industry are increasing our employment costs. These challenges are currently negatively impacting our revenues, expenses, cash flows and results from operations, and we expect these challenges to continue at least through the first quarter of 2020. At March 31, 2019, we had an accumulated deficit of $258,378 and we had incurred operating losses in each of the last three years. In addition, our credit facility is scheduled to expire on June 28, 2019, and we currently have $51,484 of borrowings outstanding under that facility. These conditions raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We currently operate 261 senior living communities under lease and management arrangements with Senior Housing Properties Trust, or, together with its subsidiaries, SNH, or approximately 91.9% of the total communities we operate. In order to address the operating and liquidity challenges we face, on April 1, 2019, we entered into a transaction agreement with SNH, or the Transaction Agreement, pursuant to which we and SNH agreed to modify our existing business arrangements, subject to certain conditions and the receipt of various approvals. For more information regarding the Transaction Agreement and related agreements and the transactions contemplated thereby, see Note 13 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. We are also currently evaluating options to refinance our existing credit facility with unrelated lenders, which is scheduled to expire on June 28, 2019. We cannot be sure that we will obtain any renewed or restructured credit facility, and our ability to do so will likely depend on the lenders’ belief that our prospects, operating leverage and expected future operating results, including the potential impact of the agreed upon modifications of our existing business arrangements with SNH, will permit us to continue as a going concern and to fund our operations, capital investments and debt service and other obligations.

The Transaction Agreement and any renewed or restructured credit facility, if completed and obtained, may not result in our realizing improved operating results or liquidity and may not be sufficient to enable us to continue as a going concern.


6


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


Segment Information

As of March 31, 2019, we have two operating segments: senior living communities and rehabilitation and wellness. In the senior living community segment, we operate for our own account or manage for the account of others independent living communities, assisted living communities and SNFs that are subject to centralized oversight and provide housing and services to elderly residents. In the rehabilitation and wellness operating segment we provide therapy services, including physical, occupational, speech and other specialized therapy services, in the inpatient setting and in outpatient clinics. We have determined that our two operating segments meet the aggregation criteria as prescribed under Financial Accounting Standards Board, or FASB, Accounting Standards Codification™, or ASC, Topic 280, Segment Reporting, and we have therefore determined that our business is comprised of one reportable segment, senior living. 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.

Note 2. Summary of Significant Accounting Policies

Leases

On January 1, 2019, we adopted FASB ASC Topic 842, Leases, or ASC Topic 842, utilizing the modified retrospective transition method with no adjustments to comparative periods presented. Additionally, we elected the practical expedients within FASB Accounting Standards Update, or ASU, No. 2016-02, Leases (Topic 842), or ASU No. 2016-02, that allow an entity to not reassess as of January 1, 2019 its prior conclusions on whether an existing contract contains a lease, lease classification for existing leases, and whether costs incurred for existing leases qualify as initial direct costs.

In accordance with ASC Topic 842, at inception of a contract, we, as lessee, evaluate and determine whether such contract is or contains a lease based on whether such contract conveys the right to control the use of the identified asset. We apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. We have elected to apply the portfolio approach where possible in assessing our leases and performed an assessment of all our leases. In addition, we have elected the practical expedient, by class of underlying asset, not to separate non-lease components from the associated lease component if certain conditions are met. As lessee, we lease senior living communities and our headquarters, and enter into contracts for the use and maintenance of various pieces of equipment that contain a lease. We have determined that none of these leases have met any of the criteria to be classified as a finance lease and, therefore, we have accounted for all of these leases as operating leases.

We have determined that our leases for the use and maintenance of equipment are short term leases. In accordance with ASC Topic 842, we have made an accounting policy election for our leases which are determined to be short term leases, whereby we recognize the lease payments on a straight line basis over the lease term and variable lease payments in the period in which the obligations for those payments are incurred. Expense related to these leases is recognized in the statement of operations in other senior living operating expenses and is not material to our condensed consolidated financial statements.

We have determined that our leases for senior living communities and our headquarters are long term leases. In accordance with ASC Topic 842, a lessee is required to record a right of use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Accordingly, we have recorded a right of use asset and lease liability for all of our leased communities and our headquarters. We determined that the discount rate implicit in the leases was not readily available, and therefore, in accordance with ASC Topic 842, we determined our incremental borrowing rate, or IBR, to calculate the right of use assets and lease liabilities. For purposes of determining the lease term, we concluded that it is not reasonably certain that our lease extensions will be exercised and, therefore, we included payments required to be made under the committed lease term in calculating the right of use assets and lease liabilities. Expense related to these leases is recognized in the statement of operations in rent expense, except for the expense related to our headquarters, which is recorded in general and administrative expenses. We recognize variable lease payments primarily relating to percentage rent paid under our leases with SNH, and operating costs such as insurance and real estate taxes, in the statement of operations in the period in which the obligations for those payments are incurred.

We have not capitalized any initial direct costs related to our leases as these costs are not material to our condensed consolidated financial statements.


7


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


ASC Topic 842 provides lessors with a practical expedient, by class of underlying asset, not to separate non-lease components from the associated lease component if certain conditions are met. In addition, ASC Topic 842 clarifies which ASC Topic (Topic 842 or FASB ASC Topic 606, Revenue from Contracts with Customers, or ASC Topic 606) applies for the combined component. Specifically, if the non-lease components associated with the lease component are the predominant component of the combined components, the lessor should account for the combined component in accordance with FASB ASC Topic 606. Otherwise, the lessor should account for the combined component as an operating lease in accordance with ASC Topic 842. We have elected this practical expedient and recognized revenue under our resident agreements at our independent living and assisted living communities based upon the predominant component rather than allocating the consideration and separately accounting for it under ASC Topic 842 and ASC Topic 606. We have concluded that the non-lease components of the agreements with respect to our independent and assisted living communities are the predominant component of the leases and, therefore, we recognize revenue for these agreements under ASC Topic 606.

Revenue Recognition

We recognize revenue from contracts with customers in accordance with ASC Topic 606 using the practical expedient in paragraph 606-10-10-4 that allows for the use of a portfolio approach, because we have determined that the effect of applying the guidance to our portfolios of contracts within the scope of ASC Topic 606 on our consolidated financial statements would not differ materially from applying the guidance to each individual contract within the respective portfolio or our performance obligations within that portfolio. The five step model defined by ASC Topic 606 requires us to: (1) identify our contracts with customers; (2) identify our performance obligations under those contracts; (3) determine the transaction prices of those contracts; (4) allocate the transaction prices to our performance obligations in those contracts; and (5) recognize revenue when each performance obligation under those contracts is satisfied. Revenue is recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services.

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

Senior Living Revenue. Resident fees at our independent living and assisted living communities consist of regular monthly charges for basic housing and support services and fees for additional requested services, such as assisted living services, personalized health services and ancillary services. Fees are specified in our agreements with residents, which are generally short term (30 days to one year), with regular monthly charges billed in advance. Funds received from residents in advance of services being provided are not material to our consolidated financial statements. Some of our senior living communities require payment of an entrance fee in advance of a resident moving into the community; substantially all of these community fees are non-refundable and are initially recorded as deferred revenue and included in other current liabilities in our consolidated balance sheets. These deferred amounts then are amortized on a straight line basis into revenue over the term of the resident agreement. Revenue recorded and deferred in connection with community fees is not material to our consolidated financial statements. Revenue for basic housing and support services and additional requested services is recognized in accordance with ASC Topic 606 and measured based on the consideration specified in the resident agreement and is recorded when the services are provided.

In our SNFs and certain of our independent and assisted living communities where we provide SNF services, we are paid fixed daily rates from governmental and contracted third party payers, and we charge a predetermined fixed daily rate for private pay residents. These fixed daily rates and certain other fees are billed monthly in arrears. Although there are complex regulatory compliance rules governing fixed daily rates, we have no episodic payments or capitation arrangements. We currently use the “most likely amount” technique to estimate revenue in accordance with ASC Topic 606, although rates are generally known and considered fixed prior to services being performed, whether included in the resident agreement or contracted with governmental or third party payers. Rate adjustments from Medicare or Medicaid are recorded when known (without regard to when the assessment is paid or withheld), and subsequent adjustments to these amounts are recorded in revenues when known. Billings under certain of these programs are subject to audit and possible retroactive adjustment, and related revenue is recorded at the

8


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


amount we ultimately expect to receive, which is inclusive of the estimated retroactive adjustments or refunds, if any, under reimbursement programs. Retroactive adjustments are recorded on an estimated basis in the period the related services are rendered and adjusted in future periods or as final settlements are determined. Revenue is recognized when performance obligations are satisfied by transferring control of the service provided to the resident, which is generally when services are provided over the duration of care. We derived approximately 23.6% and 23.7% of our senior living revenues for the three months ended March 31, 2019 and 2018, respectively, from payments under Medicare and Medicaid programs.

Management Fee Revenue and Reimbursed Costs Incurred on Behalf of Managed Communities. We manage senior living communities for the account of SNH pursuant to long term management agreements which provide for periodic management fee payments to us and reimbursement for our direct costs and expenses related to such communities. Management fees are determined by an agreed upon percentage of gross revenues (as defined) and recognized in accordance with ASC Topic 606 in the same period that we provide the management services to SNH, generally monthly. FASB ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. Where we are the primary obligor and therefore control the transfer of the goods and services with respect to any such operating expenses incurred in connection with the management of these communities, we recognize revenue when the goods have been delivered or the service has been rendered and we are due to be reimbursed from SNH. Such revenue is included in reimbursed costs incurred on behalf of managed communities in our consolidated statements of operations. The related costs are included in costs incurred on behalf of managed communities in our consolidated statements of operations. Amounts due from SNH related to management fees and reimbursed costs incurred on behalf of managed communities are included in due from related persons in our consolidated balance sheets.

The following table presents revenue disaggregated by type of contract and payer:

 
Three Months Ended
March 31, 2019
 
Three Months Ended March 31, 2018
Revenue from contracts with customers:
 
 
 
Basic housing and support services (1)
$
162,776

 
$
162,106

Medicare and Medicaid programs (1)
65,320

 
64,966

Additional requested services, and private pay and other third party payer SNF services (1)
48,839

 
47,453

Management fee revenue
3,983

 
3,622

Reimbursed costs incurred on behalf of managed communities
74,605

 
67,370

Total revenues
$
355,523

 
$
345,517


(1)
Included in senior living revenue in our consolidated statements of operations.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). This ASU also changes the accounting for sale and leaseback transactions, such as our sale and leaseback transaction with SNH in June 2016, and any associated deferred gain. In accordance with ASC Topic 842, if a previous sale and leaseback transaction was accounted for as a sale and operating leaseback in accordance with FASB ASC Topic 840, Leases, or ASC Topic 840, any deferred gain or loss not resulting from off-market terms shall be recognized as a cumulative-effect adjustment to equity. This ASU is effective for reporting periods beginning after December 15, 2018. In July 2018, the FASB issued ASU No. 2018-11, Leases: Targeted Improvements, or ASU No. 2018-11, which works to improve on certain aspects of ASU No. 2016-02 identified by stakeholders as problematic or difficult to implement, including the adoption method. ASU No. 2018-11 provides for a transition method option, allowing entities to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption, rather than restating comparative periods being presented. ASU No. 2018-11 also provides lessors with a practical expedient, by class of underlying asset, not to separate non-lease components from the associated lease component if certain conditions are met. We adopted these ASUs as required effective January 1, 2019 utilizing the modified retrospective transition method with no adjustments to comparative periods presented in accordance with ASU No. 2018-11.

The adoption of ASC Topic 842 resulted in the recognition of lease liabilities and right of use assets of approximately $1.5 billion as of January 1, 2019. Such amount of right of use assets was recognized based upon the amount of the recognized lease

9


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


liabilities, adjusted for accrued lease payments, which are not material to our condensed consolidated financial statements as of January 1, 2019. We have also concluded that any previously unrecognized right of use assets needed to be reviewed for impairment effective January 1, 2019, which could have resulted in a reduction to the initially recognized right of use assets with a cumulative effect adjustment to beginning retained earnings as of January 1, 2019. We have completed the process of evaluating the initial right of use assets for impairment and have determined there were no indicators of impairment. While the adoption of these ASUs does not affect the rent we pay, the rent expense amounts presented in our condensed consolidated statements of operations and comprehensive loss increased by approximately $1,700 for the three months ended March 31, 2019 as a result of adopting these ASUs primarily due to changes in how we accounted for the deferred gain on our sale and leaseback transaction described above effective with the adoption of these ASUs. On January 1, 2019, we recorded through retained earnings our total deferred gain of $67,473 on our consolidated balance sheets as of December 31, 2018, $55 of which was in accounts payable and accrued expenses, $6,723 of which was in other current liabilities, $1,217 of which was in other long term liabilities and the remaining $59,478 was separately stated on our consolidated balance sheets.

For the year ended December 31, 2018, a substantial portion of our senior living revenue at our independent living and assisted living communities related to housing services and was subject to ASC Topic 840, and revenue for additional requested services was recognized in accordance with ASC Topic 606. Upon adoption of Topic 842, we elected the lessor practical expedient within ASU No. 2018-11 and recognized revenue under our resident agreements at our independent living and assisted living communities based upon the predominant component, either the lease or non-lease component, of the contracts rather than allocating the consideration and separately accounting for it under ASC Topic 842 and ASC Topic 606. We have concluded that the non-lease components of the agreements with respect to our independent and assisted living communities are the predominant component of the lease and, therefore, we recognize revenue for these agreements under ASC Topic 606. After the adoption of ASC Topic 842, the timing and pattern of revenue recognition are substantially the same as those prior to the adoption.

See also the discussion above under “Leases” and Note 9 for more information regarding the impact of these ASUs on our consolidated financial statements.

On January 1, 2019, we adopted FASB ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), which shortens the amortization period for certain callable debt securities held at a premium. Specifically, this ASU requires the premium to be amortized to the earliest call date. This ASU does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The adoption of this ASU did not have a material impact on our consolidated financial statements.

On January 1, 2019, we adopted FASB ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220), which permits an entity to reclassify the tax effects that remain recorded within other comprehensive income to retained earnings as a result of tax reform legislation that became effective in December 2017. The adoption of this ASU did not have a material impact on our consolidated financial statements.

On January 1, 2019, we adopted FASB ASU No. 2018-07, Compensation—Stock Compensation (Topic 718), which expands the scope of Topic 718 to include share based payment transactions for acquiring goods and services from non-employees. The adoption of this ASU did not have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires a financial asset or a group of financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This ASU eliminates the probable initial recognition threshold and instead requires reflection of an entity’s current estimate of all expected credit losses. In addition, this ASU amends the current available for sale security other-than-temporary impairment model for debt securities. The length of time that the fair value of an available for sale debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists and credit losses will now be limited to the difference between a security’s amortized cost basis and its fair value. This ASU is effective for reporting periods beginning after December 15, 2019. We are assessing the potential impact that the adoption of this ASU will have on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies certain disclosure requirements in Topic 820, such as the removal of the need to disclose the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, and several changes related to Level 3 fair value measurements. This ASU is effective

10


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


for reporting periods beginning after December 15, 2019. We are assessing the potential impact that the adoption of this ASU will have on our consolidated financial statements.

In August 2018, the FASB also issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal Use Software (Subtopic 350-40), which aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. This ASU is effective for reporting periods beginning after December 15, 2019. We are assessing the potential impact that the adoption of this ASU will have on our consolidated financial statements.

Note 3. Property and Equipment

Property and equipment consists of the following:
 
 
March 31, 2019
 
December 31, 2018
Land
 
$
16,383

 
$
16,383

Buildings and improvements
 
205,818

 
208,375

Furniture, fixtures and equipment
 
223,951

 
239,240

Property and equipment, at cost
 
446,152

 
463,998

Accumulated depreciation
 
(222,957
)
 
(220,125
)
Property and equipment, net
 
$
223,195

 
$
243,873

 
We recorded depreciation expense relating to our property and equipment of $8,165 and $8,840 for the three months ended March 31, 2019 and 2018, respectively.
 
We review the carrying value of long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an indication that the carrying value of an asset is not recoverable, we determine the amount of impairment loss, if any, by comparing the historical carrying value of the asset to its estimated fair value. We determine estimated fair value based on input from market participants, our experience selling similar assets, market conditions and internally developed cash flow models that our assets or asset groups are expected to generate, and we consider these estimates to be a Level 3 fair value measurement. As a result of our long lived assets impairment review, we recorded $3,148 of impairment charges to certain of our long lived assets for the three months ended March 31, 2019.

As of March 31, 2019 and December 31, 2018, we had $526 and $0, respectively, of net property and equipment classified as held for sale and presented separately in our consolidated balance sheets. See Note 9 for more information regarding our communities classified as held for sale.
 
As of March 31, 2019, we had $2,478 of assets related to our leased senior living communities included in our property and equipment that we expect to request SNH to purchase from us; however, SNH is not obligated to purchase such amounts. See Note 9 for more information regarding our leases and other arrangements with SNH.

On April 1, 2019, pursuant to the Transaction Agreement, SNH purchased from us approximately $50,000 of unencumbered fixed assets and improvements related to SNH’s senior living communities leased to and operated by us. See Note 13 for more information regarding the Transaction Agreement and the transactions contemplated thereby.

Note 4. Accumulated Other Comprehensive Income

The following table details the changes in accumulated other comprehensive income, net of tax, for the three months ended March 31, 2019:

11


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


 
 
Equity
Investment of an
Investee
 
Investments
 
Accumulated
Other
Comprehensive
Income
Balance at January 1, 2019
 
$
(266
)
 
$
2,008

 
$
1,742

Unrealized loss on investments, net of tax
 

 
(205
)
 
(205
)
Equity in unrealized gain of an investee, net of tax
 
65

 

 
65

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

 
4

 
4

Balance at March 31, 2019
 
$
(201
)
 
$
1,807

 
$
1,606

 
Accumulated other comprehensive income represents the unrealized gains and losses of our debt investments, net of tax, and our share of other comprehensive income of Affiliates Insurance Company, or AIC. See Note 11 for more information regarding our arrangements with AIC.

Note 5.  Income Taxes

We recognized a provision for income taxes of $1,490 and $256 for the three months ended March 31, 2019 and 2018, respectively. The provision for income taxes for the three months ended March 31, 2019 is due to state income taxes partially offset by the intraperiod tax allocation benefit related to unrealized gains on available for sale securities, and the provision for income taxes for the three months ended March 31, 2018 is due to state income taxes.

We previously determined it was more likely than not that a majority of our net deferred tax assets would not be realized and concluded that a valuation allowance was required, which eliminated the majority of our net deferred tax assets recorded in our condensed consolidated balance sheets. In the future, if we believe that we will more likely than not realize the benefit of these deferred tax assets, we will adjust our valuation allowance and recognize an income tax benefit, which may affect our results of operations.

If our common shares are issued to SNH and SNH’s shareholders as contemplated by the Transaction Agreement, and further described in Note 13, our net operating loss and tax credit carryforwards, which currently are expected to be utilized to offset future taxable income, may be subject to limitations on usage or elimination.

Note 6.  Earnings Per Share

We calculated basic earnings per common share, or EPS, for the three months ended March 31, 2019 and 2018 using the weighted average number of shares of our common shares, outstanding during the periods.  When applicable, diluted EPS reflects the more dilutive earnings per common share amount calculated using the two class method or the treasury stock method. The three months ended March 31, 2019 and 2018 had 1,082,100 and 1,265,770, respectively of potentially dilutive restricted unvested common shares that were not included in the calculation of diluted EPS because to do so would have been antidilutive. 

Note 7.  Fair Values of Assets and Liabilities

Our assets recorded at fair value have been categorized based on a fair value hierarchy in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures. We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels.
 
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
 
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in inactive markets.
 
Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.


12


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


Recurring Fair Value Measures

The tables below present the assets measured at fair value at March 31, 2019 and December 31, 2018 categorized by the level of inputs used in the valuation of each asset.
 
 
As of March 31, 2019
 
 
 
 
Quoted Prices in
Active Markets
for Identical
 Assets
 
Significant 
Other
Observable
 Inputs
 
Significant
Unobservable 
Inputs
Description
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash equivalents(1)
 
$
23,611

 
$
23,611

 
$

 
$

Investments:
 
 
 
 
 
 
 
 
Equity investments(2)
 
 
 
 
 
 
 
 
Financial services industry
 
1,763

 
1,763

 

 

REIT industry
 
83

 
83

 

 

Other
 
3,884

 
3,884

 

 

Total equity investments
 
5,730

 
5,730

 

 

Debt investments:(3)
 
 
 
 
 
 
 
 
International bond fund(4)
 
2,588

 

 
2,588

 

High yield fund(5)
 
2,855

 

 
2,855

 

Industrial bonds
 
1,411

 

 
1,411

 

Technology bonds
 
2,131

 

 
2,131

 

Government bonds
 
9,826

 
9,826

 

 

Energy bonds
 
612

 

 
612

 

Financial bonds
 
1,927

 

 
1,927

 

Other
 
997

 

 
997

 

Total debt investments
 
22,347

 
9,826

 
12,521

 

Total investments
 
28,077

 
15,556

 
12,521

 

Total
 
$
51,688

 
$
39,167

 
$
12,521

 
$

 

13


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


 
 
As of December 31, 2018
 
 
 
 
Quoted Prices in
Active Markets
for Identical
Assets
 
Significant 
Other
Observable
Inputs
 
Significant
 Unobservable
Inputs
Description
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash equivalents(1)
 
$
23,390

 
$
23,390

 
$

 
$

Investments:
 
 
 
 
 
 
 
 
Equity investments(2)
 
 
 
 
 
 
 
 
Financial services industry
 
1,686

 
1,686

 

 

REIT industry
 
105

 
105

 

 

Other
 
3,675

 
3,675

 

 

Total equity investments
 
5,466

 
5,466

 

 

Debt investments(3)
 
 
 
 
 
 
 
 
International bond fund(4)
 
2,537

 

 
2,537

 

High yield fund(5)
 
2,669

 

 
2,669

 

Industrial bonds
 
1,692

 

 
1,692

 

Technology bonds
 
2,375

 

 
2,375

 

Government bonds
 
9,791

 
9,791

 

 

Energy bonds
 
595

 

 
595

 

Financial bonds
 
1,858

 

 
1,858

 

Other
 
1,268

 

 
1,268

 

Total debt investments
 
22,785

 
9,791

 
12,994

 

Total investments
 
28,251

 
15,257

 
12,994

 

Total
 
$
51,641

 
$
38,647

 
$
12,994

 
$

 
 
(1)
Cash equivalents consist of short term, highly liquid investments and money market funds held principally for obligations arising from our self insurance programs. Cash equivalents are reported in our condensed consolidated balance sheets as cash and cash equivalents and current and long term restricted cash.  Cash equivalents include $19,470 and $19,529 of balances that are restricted at March 31, 2019 and December 31, 2018, respectively.
(2)
The fair value of our equity investments is readily determinable. During the three months ended March 31, 2019 and 2018, we received gross proceeds of $1,115 and $220, respectively, in connection with the sales of equity investments and recorded gross realized gains totaling $136 and $34, respectively, and gross realized losses totaling $40 and $5, respectively.
 
(3)
As of March 31, 2019, our debt investments, which are classified as available for sale, had a fair value of $22,347 with an amortized cost of $20,826; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $1,602, net of unrealized losses of $81. As of December 31, 2018, our debt investments had a fair value of $22,785 with an amortized cost of $21,806; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $1,276, net of unrealized losses of $296. Debt investments include $13,186 and $13,943 of balances that are restricted as of March 31, 2019 and December 31, 2018, respectively. At March 31, 2019, two of the securities we hold, with a fair value of $305, have been in a loss position for less than 12 months and 37 of the investments we hold, with a fair value of $9,996, have been in a loss position for greater than 12 months. We do not believe these investments are impaired primarily because they have not been in a loss position for an extended period of time, the financial conditions of the issuers of these investments remain strong with solid fundamentals, or we intend to hold these investments until recovery, and other factors that support our conclusion that the loss is temporary. During the three months ended March 31, 2019 and 2018, we received gross proceeds of $1,528 and $1,205, respectively, in connection with the sales of debt investments and recorded gross realized gains totaling $2 and $6, respectively, and gross realized losses totaling $6 and $3, respectively. We record gains and losses on the sales of these investments using the specific identification method.

(4)
The investment strategy of this fund is to invest principally in fixed income securities issued by non-U.S. issuers. The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of U.S. dollar investment grade fixed income securities. There are no unfunded commitments and the investment can be redeemed weekly.
 
(5)
The investment strategy of this fund is to invest principally in fixed income securities. The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of primarily fixed income securities issued by companies with below investment grade ratings. There are no unfunded commitments and the investment can be redeemed weekly.
 
During the three months ended March 31, 2019, we did not change the type of inputs used to determine the fair value of any of our assets and liabilities that we measure at fair value.  Accordingly, there were no transfers of assets or liabilities between levels of the fair value hierarchy during the three months ended March 31, 2019.

14


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


 
The carrying value of accounts receivable and accounts payable approximates fair value as of March 31, 2019 and December 31, 2018.  The carrying value and fair value of our mortgage notes payable were $7,789 and $9,118, respectively, as of March 31, 2019 and $7,872 and $8,986, respectively, as of December 31, 2018, and are categorized in Level 3 of the fair value hierarchy in their entirety.  We estimate the fair values of our mortgage notes payable by using discounted cash flow analyses and currently prevailing market terms as of the measurement date.

Non-Recurring Fair Value Measures
 
We review the carrying value of our long lived assets, including our right of use assets, property and equipment and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. See Note 3 for more information regarding fair value measurements related to impairments of our long lived assets we recorded.
 
Note 8.  Indebtedness

We have a revolving secured credit facility, or our credit facility, with unrelated lenders. The aggregate amount of commitments available under our credit facility is $54,000 and the stated maturity date of our credit facility is June 28, 2019. The agreement governing our credit facility, or our credit agreement, requires us to pay interest at a rate based on, at our option, LIBOR or a base rate, plus a premium, or 4.99% and 7.00%, respectively, per annum as of March 31, 2019, on outstanding borrowings under our credit facility. We are also required to pay a quarterly commitment fee of 0.35% per annum on the unused part of the available borrowings under our credit facility. The weighted average annual interest rate for borrowings under our credit facility was 5.00% for the three months ended March 31, 2019. As of March 31, 2019, we had outstanding borrowings of $51,484, letters of credit issued in an aggregate amount of $2,516 and no availability for further borrowing under our credit facility. We incurred aggregate interest expense and other associated costs related to our credit facilities of $772 and $266 for the three months ended March 31, 2019 and 2018, respectively.

Our credit facility is secured by real estate mortgages on 10 senior living communities with a combined 1,219 living units owned by certain of our subsidiaries that guarantee our obligations under our credit facility. Our credit facility is also secured by these subsidiaries’ accounts receivable and related collateral. The amount of available borrowings under our credit facility is subject to our having qualified collateral, which is primarily based on the value of the communities securing our obligations under our credit facility. Our credit facility provides for acceleration of payment of all amounts outstanding under our credit facility upon the occurrence and continuation of certain events of default, including a change of control of us, as defined. Our credit agreement contains financial and other covenants, including those that restrict our ability to pay dividends or make other distributions to our stockholders in certain circumstances.

We are currently evaluating options to refinance our existing credit facility, which is scheduled to expire on June 28, 2019. We cannot be sure that we will obtain any renewed or restructured credit facility, and our ability to do so will likely depend on the lenders’ belief that our prospects, operating leverage and expected future operating results, including the potential impact of the agreed upon modifications of our existing business arrangements with SNH, as further described in Note 13, will permit us to continue as a going concern and to fund our operations, capital investments and debt service and other obligations.
 
At March 31, 2019, we had seven irrevocable standby letters of credit outstanding, totaling $25,216. In June 2018, we increased, from $17,800 to $22,700, one of these letters of credit which secures our workers' compensation insurance program, and this letter of credit is currently collateralized by approximately $17,983 of cash equivalents and $5,758 of debt and equity investments. This letter of credit currently expires in June 2019 and is automatically extended for one year terms unless notice of nonrenewal is provided by the issuing bank prior to the end of the applicable term. We expect that our workers' compensation insurance program will require an increase in the value of this letter of credit in June 2019. At March 31, 2019, the cash equivalents collateralizing this letter of credit, including accumulated interest, were classified as short term restricted cash in our condensed consolidated balance sheets, and the debt and equity investments collateralizing this letter of credit are classified as short term investments in our condensed consolidated balance sheets. The remaining six irrevocable standby letters of credit outstanding at March 31, 2019, totaling $2,516, secure certain of our other obligations. These letters of credit were scheduled to mature between June 2019 and October 2019 and are required to be renewed annually. As of March 31, 2019, our obligations under these six letters of credit, totaling $2,516, were issued and outstanding under our credit facility and there was no availability for further borrowing under our credit facility.


15


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


At March 31, 2019, one of our senior living communities was encumbered by a mortgage. This mortgage contains standard mortgage covenants. We recorded a mortgage discount in connection with the assumption of this mortgage note as part of our acquisition of the community secured by this mortgage note in order to record this mortgage at its estimated fair value. We amortize this mortgage discount as an increase in interest expense until the maturity of this mortgage. This mortgage note requires payments of principal and interest monthly until maturity. The following table is a summary of this mortgage note as of March 31, 2019:
Balance as of
 
Contractual Stated
 
Effective
 
 
 
Monthly
 
 
March 31, 2019
 
Interest Rate
 
Interest Rate
 
Maturity Date
 
Payment
 
Lender Type
 
 
 
 
 
 
 
 
 
 
 
$
8,060
 
(1) 
6.20
%
 
6.70
%
 
September 2032
 
$
72
 
 
Federal Home Loan Mortgage Corporation

(1)
Contractual principal payment excluding unamortized discount and debt issuance costs of $271.

We incurred mortgage interest expense, net of discount amortization, of $134 and $437 for the three months ended March 31, 2019 and 2018, respectively. Our mortgage debt requires monthly payments into escrows for taxes, insurance and property replacement funds; certain withdrawals from escrows require Federal Home Loan Mortgage Corporation approval.
In February 2018, in connection with the sale of one of our senior living communities to SNH, SNH assumed a Federal National Mortgage Association mortgage note that had a principal balance of $16,776 and required interest at the contracted rate of 6.64% per annum. In connection with SNH's assumption of this debt, we recorded a gain of $543, which amount is included in gain on sale of senior living communities in our condensed consolidated statements of operations.

As of March 31, 2019, we believe we were in compliance with all applicable covenants under our credit facility and mortgage debts.

See Note 13 for information regarding the $25,000 credit facility we obtained from SNH on April 1, 2019.
 
Note 9. Leases with SNH and HCP and Management Agreements with SNH
    
Senior Living Communities Leased from SNH. We are SNH’s largest tenant and SNH is our largest landlord. As of March 31, 2019 and 2018, we leased 184 and 185 senior living communities from SNH, respectively. We lease senior living communities from SNH pursuant to five master leases with SNH. Under our master leases with SNH, we pay SNH annual rent plus percentage rent equal to 4.0% of the increase in gross revenues at the applicable senior living communities over base year gross revenues as specified in the applicable lease. Our obligation to pay percentage rent under Lease No. 5 commenced in 2018. Different base years apply to those communities that pay percentage rent. The base year is usually the first full calendar year after each community is initially leased.

Our total annual rent payable to SNH as of March 31, 2019 and 2018 was $209,565 and $206,908, respectively, excluding percentage rent. Our total rent expense under all of our leases with SNH, which for the three months ended March 31, 2018 was net of lease inducement amortization and the amortization of the deferred gain associated with the sale and leaseback transaction with SNH in June 2016, as described below, was $53,782 and $51,522 for the three months ended March 31, 2019 and 2018, respectively, which amounts included estimated percentage rent of $1,549 and $1,391 for the three months ended March 31, 2019 and 2018, respectively. Pursuant to the Transaction Agreement, our rent payable to SNH was reduced by a total of $14,379 in aggregate for February and March 2019 and we did not pay such amount to SNH. However, as the Transaction Agreement was not entered into until April 1, 2019, our rent expense for the three months ended March 31, 2019 was not adjusted for the rent reduction for February and March 2019.

On March 11, 2019, we entered into a letter agreement with SNH, pursuant to which, with respect to our master leases with SNH, SNH agreed to defer, until March 31, 2019, payment of the aggregate minimum rent due and payable by us to SNH under the master leases for February 2019. As of March 31, 2019 and December 31, 2018, we had outstanding rent due and payable to SNH of $36,379 and $18,781, respectively, which amounts are included in due to related persons in our condensed consolidated balance sheets. The rent due and payable as of March 31, 2019 included rent due and payable for February 2019 that was deferred and payable for March 2019. The rent due and payable as of March 31, 2019 includes $14,379 that we are not required to pay as a result of the modification of our leases with SNH pursuant to the Transaction Agreement, which was effective April 1, 2019.

16


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)



Our leases with SNH are “triple net” leases, which generally require us to pay rent and all property operating expenses, to obtain, maintain and comply with all applicable permits and licenses necessary to operate the leased communities, to indemnify SNH from liability which may arise by reason of its ownership of the communities, to maintain the communities at our expense, to remove and dispose of hazardous substances on the communities in compliance with applicable law and to maintain insurance on the communities for SNH’s and our benefit. SNH’s consent is generally required for any direct or indirect assignment or sublease of any of the communities. Also, in the event of any assignment or subletting, we remain liable under the terms of the applicable lease. In the event of any damage, or immaterial condemnation, of a leased community, we are generally required to rebuild with insurance or condemnation proceeds or, if such proceeds are insufficient, other amounts made available by SNH, if any, but if other amounts are made available by SNH, our rent will be increased accordingly. In the event of any material or total condemnation of a leased community, the lease will terminate with respect to that leased community, in which event SNH will be entitled to the condemnation proceeds and our rent will be reduced accordingly. In the event of any material or total destruction of a leased community, we may terminate the lease with respect to that leased community, in which event we are required to pay to SNH any shortfall in the amount of proceeds SNH receives from insurance compared to the replacement cost of that leased community and our rent will be reduced accordingly. We may not enter any management agreement affecting any leased community without the prior written consent of SNH. Our leases may be subordinated to any mortgages on communities leased from SNH. As of March 31, 2019, none of our leases were subordinated to any mortgage notes.

Under our leases with SNH, we are required to operate continuously and maintain, at our expense, the leased communities in good order and repair, including structural and non-structural components. We may request that SNH purchase certain improvements to the leased communities in return for increases in annual rent in accordance with a formula specified in the applicable lease; however, SNH is not obligated to purchase such improvements and we are not obligated to sell them to SNH. Pursuant to the terms of our leases with SNH, for the three months ended March 31, 2019 and 2018, we sold to SNH $22,578 and $0, respectively, of improvements to communities leased from SNH. Pursuant to the Transaction Agreement, our monthly minimum rent, which is set at $11,000 for the period February 1, 2019 through December 31, 2019, subject to extension, will not increase as a result of capital improvements that SNH purchases from us during that period. The sales of capital improvements that we made to SNH for the three months ended March 31, 2019 occurred after February 1, 2019. At the end of each lease term, we are required to surrender the leased communities in substantially the same condition as that existed on the commencement date of the lease, subject to any permitted alterations and ordinary wear and tear. As of March 31, 2019, our property and equipment included $2,478 for similar improvements to communities leased from SNH that we expect to request SNH to purchase from us.

Events of default under each lease generally include failure to pay rent or any money due under the lease when it is due, failure to maintain the insurance required under such lease, failure to comply with certain ownership, change in control and Board election restrictions, the occurrence of certain events with respect to our insolvency or dissolution, and our being declared ineligible to receive reimbursement under Medicare or Medicaid programs among other licensing requirements. Upon the occurrence of any event of default, remedies under each lease provide that, among other things, SNH may, accelerate the rent, terminate the lease in whole or in part, enter the community and take possession of any and all our personal property and retain or sell the same at a public or private sale, make any payment or perform any act required to be performed by us under the lease, rent the community and recover from us any deficiency between the amount of rent which would have been due under the lease and the rent received from the re‑letting. Many of our debt and lease documents contain cross default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors).

In accordance with FASB ASC Topic 840, Leases, the sale and leaseback transaction we completed in June 2016 with SNH qualified for sale-leaseback accounting and we classified the related lease as an operating lease. Accordingly, the gain generated from the sale of $82,644 was deferred and was being amortized as a reduction of rent expense over the initial term of the related lease. In accordance with our adoption of Topic 842 effective January 1, 2019, we recorded through retained earnings our total deferred gain as of that date.

In April 2019, we and SNH entered into an agreement to sell to a third party two SNFs located in Wisconsin that SNH owns and leases to us for an aggregate sales price of approximately $11,000, excluding closing costs. These sales are subject to conditions; as a result, these sales may not occur, they may be delayed or their terms may change.


17


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


In May 2019, we and SNH sold to a third party three SNFs located in California that SNH owned and leased to us for an aggregate sales price of approximately $21,500, excluding closing costs. In accordance with FASB ASC Topic 360, Property, Plant and Equipment, or ASC Topic 360, these SNFs we and SNH had agreed to sell and have since sold, met the conditions to be classified as held for sale as of March 31, 2019. These communities, while leased by us, generated income from operations before income taxes of $290 and $140 for the three months ended March 31, 2019 and 2018, respectively.

In June 2018, we and SNH sold one SNF to a third party, which had been previously leased to us, located in California with 97 living units for a sales price of approximately $6,500, excluding closing costs. This community, while leased by us, generated a loss from operations before income taxes of $0 and $21 for the three months ended March 31, 2019 and 2018, respectively. Pursuant to the terms of our lease with SNH, as a result of this sale, our annual rent payable to SNH decreased by 10.0% of the net proceeds that SNH received from this sale, in accordance with the terms of the applicable lease. We did not receive any proceeds from this sale.

Also in June 2018, SNH acquired an additional living unit at a senior living community we lease from SNH located in Florida which was added to the lease for that senior living community, and, as a result of this acquisition, our annual rent payable to SNH increased by $14 in accordance with the terms of such lease.

Senior Living Communities Leased from HCP. As of March 31, 2019, we leased four senior living communities under one lease with HCP, Inc., or HCP. This lease is also a “triple net” lease which requires that we pay all costs incurred in the operation of the communities, including the cost of insurance and real estate taxes, maintaining the communities, and indemnifying the landlord for any liability which may arise from the operations during the lease term. Our lease with HCP contains a minimum annual escalator of 2.0%, but not greater than 4.0%, depending on increases in certain cost of living indexes and expires on April 30, 2028 and includes one 10 year renewal option. Rent expense is recognized for actual rent paid plus or minus a straight line adjustment for the minimum lease escalators, which amount is not material to our condensed consolidated financial statements. The right of use asset balance has been decreased for the amount of accrued lease payments, which amounts are not material to our consolidated financial statements.

The following table is a summary of our leases with SNH and with HCP as of March 31, 2019:
 
 
 
 
 
Future Minimum Rents for the Twelve Months Ending March 31,
 
 
 
 
 
Number of Properties
Current Expiration Date
Remaining Renewal Options
Annual Minimum Rent as of March 31, 2019
2020
2021
2022
2023
2024
Thereafter
Total
IBR
Lease Liability (1)
1. Lease No. 1 for SNFs and independent and assisted living communities
82

December 31, 2024
Two 15-year renewal options.
$
59,654

$
59,654

$
59,654

$
59,654

$
59,654

$
59,654

$
44,741

$
343,011

4.53
%
$
301,522

2. Lease No. 2 for SNFs and independent and assisted living communities
47

June 30, 2026
Two 10-year renewal options.
67,725

67,725

67,725

67,725

67,725

67,725

152,382

491,007

4.64
%
416,275

3. Lease No. 3 for independent and assisted living communities
17

December 31, 2028
Two 15-year renewal options.
36,340

36,340

36,340

36,340

36,340

36,340

172,614

354,314

4.6
%
285,084

4. Lease No. 4 for SNFs and independent and assisted living communities
29

April 30, 2032
Two 15-year renewal options.
35,944

35,944

35,944

35,944

35,944

35,944

290,548

470,268

4.64
%
352,119

5. Lease No. 5 for independent and assisted living communities
9

December 31, 2028
Two 15-year renewal options.
9,902

9,902

9,902

9,902

9,902

9,902

47,034

96,544

4.6
%
77,680

6. One HCP lease
4

April 30, 2028
One 10-year renewal option.
2,760

2,811

2,867

2,924

2,983

3,043

13,066

27,694

4.6
%
22,450

Totals
188

 
 
$
212,325

$
212,376

$
212,432

$
212,489

$
212,548

$
212,608

$
720,385

$
1,782,838

 
$
1,455,130


(1)    Total lease liability does not include the lease liability related to our headquarters of $2,119.

Senior Living Communities Managed for the Account of SNH and its Related Entities. As of March 31, 2019 and 2018, we managed 76 and 72 senior living communities, respectively, for the account of SNH. We earned base management fees of $3,718 and $3,423 from the senior living communities we managed for the account of SNH for the three months ended March 31, 2019 and 2018, respectively. In addition, we earned fees for our management of capital expenditure projects at the communities we managed for the account of SNH of $195 and $128 for the three months ended March 31, 2019 and 2018, respectively. These amounts are included in management fee revenue in our condensed consolidated statements of operations. As further described in Note 13, pursuant to the Transaction Agreement, we and SNH have agreed to replace our long term

18


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


management and pooling agreements with new management agreements, subject to certain conditions and the receipt of various approvals.

In the first quarter of 2018, we sold two senior living communities pursuant to a transaction agreement we entered with SNH in November 2017 for an aggregate sales price of $41,917. These two senior living communities had an aggregate carrying value of $19,425, net of mortgage debt and premiums of $17,356, of which the principal amount of $16,776 was assumed by SNH. These transactions are accounted for in accordance with ASU No. 2014-09, in particular ASC Topic 610 and related ASUs, effective with the adoption of these new ASUs on January 1, 2018. Under these new ASUs, the income recognition for real estate sales is largely based on the transfer of control rather than continuing involvement in the ownership of the real estate. We recorded a gain of $5,684 for the three months ended March 31, 2018 as a result of the sale of these two senior living communities, which gain is included in loss (gain) on sale of senior living communities in our condensed consolidated statements of operations.

In June 2018, we sold the remaining two senior living communities described above for an aggregate sales price of $23,300. These two senior living communities had an aggregate carrying value of $5,163, net of mortgage debt and premiums of $17,226, of which the principal amount of $16,588 was assumed by SNH. These transactions are accounted for in accordance with ASU No. 2014-09, in particular ASC Topic 610 and related ASUs, effective with our adoption of these new ASUs on January 1, 2018. We recorded a gain of $1,549 for the three months ended June 30, 2018 as a result of the sale of these two senior living communities, which gain is included in loss (gain) on sale of senior living communities in our condensed consolidated statements of operations.

We also provide certain other services to residents at some of the senior living communities we manage for the account of SNH, such as rehabilitation services. At senior living communities we manage for the account of SNH where we provide rehabilitation services on an outpatient basis, the residents, third party payers or government programs pay us for those rehabilitation services. At senior living communities we manage for the account of SNH where we provide both inpatient and outpatient rehabilitation services, SNH generally pays us for these services and charges for such services are included in amounts charged to residents, third party payers or government programs. We earned revenues of $1,675 and $1,699 for the three months ended March 31, 2019 and 2018, respectively, for rehabilitation services we provided at senior living communities we manage for the account of SNH and that are payable by SNH. These amounts are included in senior living revenue in our condensed consolidated statements of operations.

In order to accommodate certain requirements of New York healthcare licensing laws, a part of the senior living community SNH owns, and we manage, located in Yonkers, New York is subleased by a subsidiary of SNH to D&R Yonkers LLC. As of March 31, 2019, D&R Yonkers LLC was owned by our Executive Vice President, Chief Financial Officer and Treasurer and by SNH’s former president and chief operating officer. We count the part of this senior living community that we manage for D&R Yonkers LLC and the part of this senior living community that we manage for the account of SNH as one senior living community. We earned management fees of $70 and $71 for the three months ended March 31, 2019 and 2018, respectively, under this management arrangement with D&R Yonkers LLC, which amounts are included in management fee revenue in our condensed consolidated statements of operations.

Note 10. Business Management Agreement with RMR LLC

The RMR Group LLC, or RMR LLC, provides us certain services that we require to operate our business and which relate to various aspects of our business. RMR LLC provides these services pursuant to a business management agreement. Pursuant to our business management agreement with RMR LLC, we incurred aggregate fees payable to RMR LLC of $2,293 and $2,257 for the three months ended March 31, 2019 and 2018, respectively. In addition, we incurred internal audit costs of $71 and $69 for the three months ended March 31, 2019 and 2018, respectively, that we reimbursed RMR LLC pursuant to our business management agreement. These amounts are included in general and administrative expenses in our condensed consolidated statements of operations. For further information about our relationship with RMR LLC, see our Annual Report.

Note 11. Related Person Transactions

We have relationships and historical and continuing transactions with SNH, RMR LLC, ABP Trust, AIC and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and which have trustees, directors and officers who are also our Directors or officers.


19


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


SNH. SNH is currently one of our largest stockholders, owning, as of March 31, 2019, 4,235,000 of our common shares, or approximately 8.3% of our outstanding common shares. We lease from, and manage for the account of, SNH a majority of the senior living communities we operate. RMR LLC provides management services to both us and SNH and Adam D. Portnoy, one of our Managing Directors, also serves as a managing trustee of SNH. SNH’s executive officers are officers of RMR LLC. Our President and Chief Executive Officer and Executive Vice President, Chief Financial Officer and Treasurer are officers and employees of RMR LLC. On April 1, 2019, we entered into the Transaction Agreement with SNH, pursuant to which we agreed to modify our existing business arrangements with SNH, subject to certain conditions and the receipt of various approvals. See Notes 1, 9 and 13 for more information regarding our relationships, agreements and transactions with SNH and certain parties related to it and us.

RMR LLC. We have an agreement with RMR LLC to provide management services to us. See Note 10 for more information regarding our management agreement with RMR LLC.

ABP Trust. ABP Acquisition LLC, a subsidiary of ABP Trust is our largest stockholder, owning, as of March 31, 2019, 17,999,999 of our common shares, or approximately 35.4% of our outstanding common shares. Adam Portnoy, one of our Managing Directors, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of The RMR Group Inc., or RMR Inc.; RMR Inc. is the managing member of RMR LLC.

We lease our headquarters from another subsidiary of ABP Trust. Our rent expense for our headquarters, including utilities and real estate taxes that we pay as additional rent, was $520 and $464 for the three months ended March 31, 2019 and 2018, respectively. The adoption of Topic 842 resulted in the recognition of a lease liability and right of use asset, which amount was $2,119 as of March 31, 2019, with respect to our headquarters lease, using an IBR of 4.4%. The right of use asset balance has been decreased for the amount of accrued lease payments, which amounts are not material to our condensed consolidated financial statements.

AIC. We, ABP Trust, SNH and four other companies to which RMR LLC provides management services currently own AIC, an Indiana insurance company, in equal amounts. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC.

As of March 31, 2019 and December 31, 2018, our investment in AIC had a carrying value of $9,102 and $8,633, respectively. These amounts are presented as equity investment of an investee in our condensed consolidated balance sheets. We recognized income related to our investment in AIC, which amounts are presented as equity in earnings of an investee in our condensed consolidated statements of operations. Our other comprehensive income includes our proportionate part of unrealized gains (losses) on securities that are owned by AIC related to our investment in AIC.
Other. Pursuant to a separation agreement with Bruce J. Mackey Jr., our former President and Chief Executive Officer, we made a cash payment to him in the amount of $600 in January 2019. Additionally, we made the first of four, equal quarterly release payments of $138 to Mr. Mackey, in cash, in March 2019 and made monthly transition payments to him, in cash, totaling $30 for the three months ended March 31, 2019. RMR LLC paid 20% and we paid 80% of the release and transition payments to Mr. Mackey pursuant to his separation agreement. Mr. Mackey will continue to receive quarterly release payments and monthly transition payments until December 31, 2019, and we will pay 80% and RMR LLC will pay 20% of those payment amounts.
Pursuant to a separation agreement with R. Scott Herzig, our former Senior Vice President of Senior Living Operations, we made a cash payment to him in the amount of $510 on January 11, 2019.
For further information about these and other such relationships and certain other related person transactions, see our Annual Report.

Note 12.  Legal Proceedings and Claims

We have been, are currently, and expect in the future to be involved in claims, lawsuits, and regulatory and other government audits, investigations and proceedings arising in the ordinary course of our business, some of which may involve material amounts. Also, the defense and resolution of these claims, lawsuits, and regulatory and other government audits, investigations and proceedings may require us to incur significant expense. We account for claims and litigation losses in accordance with FASB ASC Topic 450, Contingencies. Under FASB ASC Topic 450, loss contingency provisions are recorded for probable and

20


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


estimable losses at our best estimate of a loss or, when a best estimate cannot be made, at our estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment and are refined as additional information becomes known. Accordingly, we are often initially unable to develop a best estimate of loss and therefore the estimated minimum loss amount, which could be zero, is recorded; then, as information becomes known, the minimum loss amount is updated, as appropriate. A minimum or best estimate amount may be increased or decreased when events result in a changed expectation.

As previously disclosed, in July 2017, as a result of our compliance program to review records related to our Medicare billing practices, we became aware of certain potential inadequate documentation and other issues at one of our leased SNFs. This compliance review was not initiated in response to any specific complaint or allegation, but was a review of the type that we periodically undertake to test our compliance with applicable Medicare billing rules. As a result of these discoveries, we made a voluntary disclosure of deficiencies to the U.S. Department of Health and Human Services Office of the Inspector General, or the OIG, pursuant to the OIG's Provider Self-Disclosure Protocol. We submitted supplemental disclosures related to this matter to the OIG in December 2017 and March 2018. At December 31, 2017, we accrued an estimated revenue reserve of $888 for historical Medicare payments we received and expect to repay as a result of these deficiencies, which amount we reduced to $759 in March 2018. The entire $759 reserve remained accrued and unpaid at March 31, 2019. In addition, at December 31, 2017, we recorded an aggregate $658 expense for additional costs we incurred as a result of this matter, including estimated OIG imposed penalties, which amount we reduced to $594 in March 2018, and thereafter recorded an additional expense of $55, $20 and $13 for further costs related to this matter for the three months ended March 31, 2018, June 30, 2018 and September 30, 2018, respectively. Our total costs incurred related to this matter at March 31, 2019, excluding revenue reserves, was $682, $559 of which remained accrued and unpaid at March 31, 2019.

Note 13.  Subsequent Events
In April 2019, we began managing for SNH’s account a senior living community that SNH owns located in Oregon with 318 living units, pursuant to a management agreement with SNH on terms substantially similar to those of existing management agreements between us and SNH.

The April 2019 Transaction Agreement with SNH. In April 2019, we entered into the Transaction Agreement. Among other things, the Transaction Agreement provides that, subject to approval by our stockholders of the Share Issuances (as defined below) and receipt of other required approvals, effective January 1, 2020 (or January 1, 2021 if extended under the Transaction Agreement), or the Conversion Time:

our five existing master leases with SNH for all of SNH's senior living communities that are leased by us, as well as our existing management agreements and pooling agreements with SNH for SNH's senior living communities that are operated by us, will be terminated and replaced, or the Conversion, with new management agreements for all of these senior living communities, or collectively, the New Management Agreements;

we will issue to SNH such number of our common shares as is necessary to cause SNH to own, when considered together with SNH's then owned common shares, approximately 34% of our then outstanding common shares, and SNH will declare a pro rata distribution to holders of its common shares of beneficial interest of the right to receive, and we will issue on a pro rata basis to such holders, a number of common shares which equals approximately 51% of our then outstanding common shares, or, together, the Share Issuances; the noted percentage ownership amounts are post-issuance, giving effect to the Share Issuances; and

as consideration for the Share Issuances, SNH will provide to us $75,000 of additional consideration, or, collectively with the Conversion and the Share Issuances, the Restructuring Transactions.

In accordance with ASC Topic 360, the senior living communities under the five existing master leases with SNH that will terminate, as described above, will meet the conditions to be classified as held for sale in reporting periods subsequent to our entry into the Transaction Agreement; however, as of March 31, 2019, we have not classified these senior living communities as held for sale.

Also pursuant to the Transaction Agreement: (1) commencing February 1, 2019 through December 31, 2019, the aggregate amount of monthly minimum rent payable to SNH by us under our master leases with SNH is $11,000, subject to adjustment and extension, and no additional rent is payable to SNH by us from such date to the Conversion Time; and (2) on April 1, 2019, SNH purchased from us approximately $50,000 of unencumbered Qualifying PP&E (as defined in the Transaction Agreement)

21


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


related to SNH's senior living communities leased and operated by us, which amount is subject to adjustment but will not exceed $60,000.
The Restructuring Transactions are subject to conditions, including, among others: (1) approval of the Share Issuances by at least a majority of the votes cast, in person or by proxy, by the holders of our outstanding common shares at any meeting of our stockholders held for that purpose, or the Stockholder Approval; (2) the receipt of all Required Licenses (as defined in the Transaction Agreement) and any other third party consent or approval required for the consummation of the Restructuring Transactions; (3) the effectiveness of the registration statement on Form S-1 to be filed by us with the Securities and Exchange Commission, or SEC, to register our common shares to be issued pursuant to the Share Issuances; and (4) approval by The Nasdaq Stock Market LLC, or Nasdaq, of the listing of our common shares to be issued pursuant to the Share Issuances, subject to official notice of issuance.
If any required approval (other than the Stockholder Approval) is not obtained by December 31, 2019, and the failure to obtain such approval is not the result of a breach or default by us under the Transaction Agreement, we and SNH have agreed to work in good faith to determine an alternative to allow the Restructuring Transactions to occur on January 1, 2020; provided SNH is not required to agree to any alternative that would adversely affect SNH's qualification for taxation as a REIT under the Internal Revenue Code of 1986, as amended. If we and SNH do not agree to any such alternative, and, as of January 1, 2020, the failure to obtain a required approval is the only remaining condition under the Transaction Agreement, the Conversion Time will be automatically extended to January 1, 2021.
If the Stockholder Approval is not obtained by December 31, 2019, and SNH does not elect to extend the Transaction Agreement, the Transaction Agreement will terminate, our existing master leases and management agreements and pooling agreements with SNH will remain in effect, and the amount of monthly minimum rent payable to SNH by us under our existing master leases with SNH will return to the rate provided for therein and additional rent again will be payable to SNH by us in accordance therewith. If the Stockholder Approval is obtained by December 31, 2019, our existing master leases with SNH will remain at $11,000 per month, subject to adjustment, regardless of whether the Transaction Agreement is extended and/or is terminated.
We have agreed to, within six months following the Conversion Time, expand our Board of Directors to add an Independent Director (as defined in our Bylaws) reasonably satisfactory to SNH. In addition, SNH and ABP Trust, on behalf of ABP Acquisition LLC, a wholly owned subsidiary of ABP Trust and our largest stockholder, have each agreed to vote all our common shares that SNH and ABP Trust beneficially own in favor of approval of the Share Issuances at any meeting of our stockholders held for that purpose, in the case of ABP Trust, pursuant to a voting agreement we entered into with ABP Trust on April 1, 2019, or the Voting Agreement.
Pursuant to the New Management Agreements, we will receive a management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement for our direct costs and expenses related to such communities, as well as 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 provide for 15 year terms, subject to our right to extend for two consecutive five year terms if we achieve certain performance targets for the combined managed communities portfolio. The New Management Agreements also provide SNH 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 SNH 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.
In connection with the Transaction Agreement, we entered into a credit agreement with SNH pursuant to which SNH extended to us a $25,000 line of credit, or the SNH credit facility. The SNH credit facility matures on January 1, 2020, or January 1, 2021 if the Conversion Time is extended pursuant to the Transaction Agreement. The SNH credit facility provides for interest to be paid on borrowed amounts at a rate of 6% per year and is secured by real estate mortgages on six senior living communities owned by certain of our subsidiaries that guarantee our obligations under the SNH credit facility, and certain personal property owned by those and certain other of our subsidiaries. The SNH credit facility provides for acceleration of payment of all

22


FIVE STAR SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
(unaudited)


amounts outstanding under the SNH credit facility upon the occurrence and continuation of certain events of default, including a default by us under the Transaction Agreement and certain other agreements. The agreement governing the SNH credit facility contains covenants, including those that restrict our ability to incur debt or to pay dividends or make other distributions to our stockholders in certain circumstances.

In accordance with ASC Topic 855, Subsequent Events, and ASC Topic 842, the impact of the modification of our leases with SNH pursuant to the Transaction Agreement is not included in our condensed consolidated statement of operations or balance sheet as of and for the three months ended March 31, 2019, because the agreement was not effective until April 1, 2019. We incurred transaction costs of $7,675 related to the Transaction Agreement for the three months ended March 31, 2019.

23



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report.

GENERAL INDUSTRY TRENDS

We believe that the primary market for senior living services is individuals age 80 and older, and, according to U.S. Census data, that group is projected to be among the fastest growing age cohort in the United States over the next 20 years. Also, as a result of medical advances, seniors are living longer. Due to these demographic trends, we expect the demand for senior living services to increase in future years.
    
Despite this trend, future economic downturns, softness in the U.S. housing market, higher levels of unemployment among our residents' and potential residents' family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics could adversely affect the ability of seniors to afford our resident charges. Prospective residents who plan to use the proceeds from the sale of their homes to cover the cost of senior living services seem to be especially affected by cyclical factors affecting the housing market. In recent years, economic indicators reflect an improving housing market; however, it is unclear how sustainable the improvements will be and whether any such improvements will result in any increased demand for our services. Although many of the services that we provide to residents are needs driven, some prospective residents may be deferring decisions to relocate to senior living communities in light of economic circumstances, among other reasons.

For the past few years, low capital costs appear to have encouraged increased senior living development, particularly in areas where existing senior living communities have historically experienced high occupancies. This has resulted in a significant number of new senior living communities being developed in recent years, although there are indications that the rate of newly started development has recently declined. The development activity has increased competitive pressures on us, particularly in certain of our geographic markets, and we expect these challenges to continue for at least the next few years. As recently developed senior living communities begin operations, we expect to have continuing challenges to maintain or increase occupancies and charges at our senior living communities. These challenges are currently negatively impacting our revenues, cash flows and results from operations and we expect these challenges to continue at least through the first quarter of 2020.

Another factor which appears to be negatively affecting us and our industry is that the same medical advances and healthcare services that are extending lives and periods of occupancy at senior living communities are also allowing some potential residents to defer the time when they require the special services available at our communities or forgo moving to senior living communities altogether. We do not currently believe that the increased stays that may result from medical advances and healthcare services will be completely offset by deferred entry, but we think this factor may be contributing to occupancy declines at this time.

In addition, low unemployment in the United States combined with a competitive labor market and, in certain jurisdictions, legislation and regulations that increase minimum wages, are increasing our employment costs, including salaries, wages and benefits, such as health care benefit coverage, for our employees, which will increase our operating expenses and may negatively impact our financial results.

The senior living and healthcare industries are subject to extensive and 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, the definition of "fraud and abuse", payment rates for resident services and confidentiality of patient records. We incur significant costs to comply with these laws and regulations and these laws and regulations may result in our having to repay payments we received for services we provided and to pay penalties, fines and interest, which amounts can be significant. See Note 12 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. For further information regarding government regulations and reimbursements, including possible changes and related legislative and other reform efforts, see "—Our Revenues" in Part I, Item 2 of this Quarterly Report on Form 10-Q.


24


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



2019 TRANSACTION AGREEMENT WITH SNH
On April 1, 2019, we entered into the Transaction Agreement pursuant to which we and SNH agreed to modify our existing business arrangements. Pursuant to the Transaction Agreement, effective January 1, 2020 (or January 1, 2021 if extended under the Transaction Agreement), our existing leases, management agreements and pooling agreements with SNH will be terminated and replaced with new management agreements, we will issue our common shares to SNH and SNH’s shareholders, which, after giving effect to those issuances, will result in SNH owning approximately 34% and SNH’s shareholders owning approximately 51% of our then outstanding common shares, and at that time, SNH will pay us $75 million as consideration for such share issuances. Also pursuant to the Transaction Agreement, in addition to other transactions: (1) commencing February 1, 2019 through December 31, 2019, the aggregate amount of monthly minimum rent payable to SNH by us under our master leases is $11.0 million, subject to adjustment and extension, and no additional rent is payable to SNH by us from such date to the Conversion Time; (2) on April 1, 2019 SNH purchased from us approximately $50.0 million of unencumbered fixed assets and improvements related to SNH's senior living communities leased and operated by us, subject to adjustment; and (3) on April 1, 2019 we entered into the SNH credit facility, subject to a one year extension. These transactions are subject to conditions, including among others, the receipt of approval by our stockholders of the Share Issuances and certain regulatory approvals, as further described in Note 13 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We cannot be sure that any or all such conditions will be satisfied or that these transactions will be completed.
GOING CONCERN

We face increased competition across the senior living industry, including in specific markets in which we operate senior living communities. Medical advances and healthcare services also allow some potential residents to defer the time when they require the special services available at our communities. In addition, low unemployment in the United States combined with a competitive labor market within our industry are increasing our employment costs. These challenges have been negatively impacting our revenues, expenses, cash flows and results from operations, and we expect these challenges to continue at least through the first quarter of 2020. At March 31, 2019, we had an accumulated deficit of $258.4 million and we had incurred operating losses in each of the last three years. In addition, our credit facility is scheduled to expire on June 28, 2019, and we currently have $51.5 million of borrowings outstanding under that facility. These conditions raise substantial doubt about our ability to continue as a going concern. In addition, in its audit opinion on our consolidated financial statements as of, and for the year ending, December 31, 2018, our independent auditors, RSM US LLP, included a going concern qualification. Further, due to our operating and liquidity challenges, we face not being able to fund our operating and capital expenses or debt service obligations. In addition, due to these challenges we may need to reduce our capital and operating expenses, which may harm our competitive position, require us to make larger expenditures in the future for deferred maintenance and other costs and harm our business.

In order to address the operating and liquidity challenges we face, we entered into the Transaction Agreement and related
agreements as further described in Note 13 to our condensed consolidated financial statements included in Part I, Item 1 of
this Quarterly Report on Form 10-Q. We are also currently evaluating options to refinance our existing credit facility with unrelated lenders, which is scheduled to expire on June 28, 2019. We cannot be sure that we will obtain any renewed or restructured credit facility, and our ability to do so will likely depend on the lenders’ belief that our prospects, operating leverage and expected future operating results, including the potential impact of the agreed upon modifications of our existing business arrangements with SNH, will permit us to continue as a going concern and to fund our operations, capital investments and debt service and other obligations.

The Transaction Agreement and any renewed or restructured credit facility, if completed and obtained, may not result in our realizing improved operating results or liquidity and may not be sufficient to enable us to continue as a going concern.

RESULTS OF OPERATIONS

As of March 31, 2019, we have two operating segments: senior living communities and rehabilitation and wellness. In the senior living community segment, we operate for our own account or manage for the account of others independent living communities, assisted living communities and SNFs that are subject to centralized oversight and provide housing and services to elderly residents. In the rehabilitation and wellness operating segment we provide therapy services, including physical, occupational, speech and other specialized therapy services, in the inpatient setting and in outpatient clinics. We have determined that our two operating segments meet the aggregation criteria as prescribed under FASB ASC Topic 280, Segment Reporting, and we have therefore determined that our business is comprised of one reportable segment, senior living. All of our operations and assets are located in the United States, except for the operations of our Cayman Islands organized captive

25


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



insurance company subsidiary, which participates in our workers’ compensation, professional and general liability and certain automobile insurance programs.

In November 2017, we entered a transaction agreement with SNH pursuant to which we agreed to sell six senior living communities to SNH for $104.4 million, including SNH’s assumption of approximately $33.5 million of mortgage debt principal secured by certain of these senior living communities, excluding closing costs. In December 2017, January 2018, February 2018 and June 2018, we sold to, and began managing for the account of, SNH these senior living communities and concurrently with those sales, we and SNH entered management agreements for each of these senior living communities and two new pooling arrangements with SNH. For more information regarding our leases and management agreements and other transactions with SNH, see Note 9 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Key Statistical Data For the Three Months Ended March 31, 2019 and 2018:
The following tables present a summary of our operations for the three months ended March 31, 2019 and 2018:
 
 
Three Months Ended March 31,
 
(dollars in thousands, except average monthly rate)
 
2019
 
2018
 
Change
 
%/bps
Change
 
Senior living revenue
 
$
276,935

 
$
274,525

 
$
2,410

 
0.9
 %
 
Management fee revenue
 
3,983

 
3,622

 
361

 
10.0
 %
 
Reimbursed costs incurred on behalf of managed communities
 
74,605

 
67,370

 
7,235

 
10.7
 %
 
Total revenues
 
355,523

 
345,517

 
10,006

 
2.9
 %
 
Senior living wages and benefits
 
(143,630
)
 
(136,169
)
 
7,461

 
5.5
 %
 
Other senior living operating expenses
 
(76,768
)
 
(73,777
)
 
2,991

 
4.1
 %
 
Costs incurred on behalf of managed communities
 
(74,605
)
 
(67,370
)
 
7,235

 
10.7
 %
 
Rent expense
 
(54,542
)
 
(52,245
)
 
2,297

 
4.4
 %
 
General and administrative expenses
 
(26,502
)
 
(19,963
)
 
6,539

 
32.8
 %
 
Depreciation and amortization expense
 
(8,165
)
 
(8,860
)
 
(695
)
 
(7.8
)%
 
Gain on sale of senior living communities
 

 
5,684

 
(5,684
)
 
(100.0
)%
 
Long lived asset impairment
 
(3,148
)
 

 
3,148

 
100.0
 %
 
Interest, dividend and other income
 
156

 
167

 
(11
)
 
(6.6
)%
 
Interest and other expense
 
(906
)
 
(703
)
 
203

 
28.9
 %
 
Unrealized gain (loss) on equity investments
 
366

 
(50
)
 
(416
)
 
100.0
 %
 
Realized gain on sale of debt and equity investment, net of tax
 
92

 
32

 
60

 
187.5
 %
 
Provision for income taxes
 
(1,490
)
 
(256
)
 
(1,234
)
 
482.0
 %
 
Equity in earnings of an investee, net of tax
 
404

 
44

 
360

 
818.2
 %
 
Net loss
 
$
(33,215
)
 
$
(7,949
)
 
$
(25,266
)
 
(317.9
)%
 
Total number of communities (end of period):
 
 
 
 
 
 
 
 
 
Owned and leased communities
 
208

 
211

 
(3
)
 
(1.4
)%
 
Managed communities
 
76

 
72

 
4

 
5.6
 %
 
Number of total communities
 
284

 
283

 
1

 
0.4
 %
 
Total number of living units (end of period):
 
 
 
 
 
 
 
 
 
Owned and leased living units (1)
 
22,190

 
22,529

 
(339
)
 
(1.5
)%
 
Managed living units (1)
 
9,766

 
9,258

 
508

 
5.5
 %
 
Number of total living units (1)
 
31,956

 
31,787

 
169

 
0.5
 %
 
 
 
 
 
 
 
 
 
 
 
Owned and leased communities:
 
 
 
 
 
 
 
 
 
Occupancy % (1)(2)
 
82.9
%
 
81.7
%
 
n/a 

 
120

bps
Average monthly rate (2)(3)
 
$
4,818

 
$
4,796

 
$
22

 
0.5
 %
 
Percent of senior living revenue from Medicaid
 
12.6
%
 
12.1
%
 
n/a 

 
50

bps
Percent of senior living revenue from Medicare
 
11.0
%
 
11.6
%
 
n/a 

 
(60
)
bps
Percent of senior living revenue from private and other sources
 
76.4
%
 
76.3
%
 
n/a 

 
10

bps
 
 
(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) Occupancy and average monthly rate for the three months ended March 31, 2018 include data for the senior living communities that were sold to SNH during such period as owned until the time of sale and as managed from the time of sale through the end of such period.
(3) Average monthly rate is calculated by taking the average daily rate, which is defined as total operating revenues for senior living services divided by occupied units during the period, and multiplying it by 30 days.

26


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



Comparable communities (senior living communities that we have operated continuously since January 1, 2018):
 
 
Three Months Ended March 31,
 
(dollars in thousands, except average monthly rate)
 
2019
 
2018
 
Change
 
%/bps
Change
 
Senior living revenue
 
$
275,329

 
$
270,894

 
$
4,435

 
1.6
 %
 
Management fee revenue
 
3,467

 
3,410

 
57

 
1.7
 %
 
Senior living wages and benefits
 
142,540

 
134,316

 
(8,224
)
 
6.1
 %
 
Other senior living operating expenses
 
76,595

 
73,153

 
(3,442
)
 
4.7
 %
 
Total number of communities (end of period):
 
 
 
 
 
 
 
 
 
Owned and leased communities
 
208

 
208

 

 
 %
 
Managed communities
 
70

 
70

 

 
 %
 
Number of total communities
 
278

 
278

 

 
 %
 
Total number of living units (end of period):
 
 
 
 
 
 
 
 
 
Owned and leased living units (1)
 
22,190

 
22,281

 
(91
)
 
(0.4
)%
 
Managed living units (1)
 
9,059

 
9,043

 
16

 
0.2
 %
 
Number of total living units (1)
 
31,249

 
31,324

 
(75
)
 
(0.2
)%
 
 
 
 
 
 
 
 
 
 
 
Owned and leased communities (1):
 
 
 
 
 
 
 
 
 
Occupancy % (1)
 
82.9
%
 
81.6
%
 
n/a 

 
130

bps
Average monthly rate (2)
 
$
4,818

 
$
4,799

 
$
19

 
0.4
 %
 
Percent of senior living revenue from Medicaid
 
12.7
%
 
11.8
%
 
n/a 

 
90

bps
Percent of senior living revenue from Medicare
 
10.6
%
 
11.5
%
 
n/a 

 
(90
)
bps
Percent of senior living revenue from private and other sources
 
76.7
%
 
76.7
%
 
n/a 

 

bps
 
 

(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) Average monthly rate is calculated by taking the average daily rate, which is defined as total operating revenues for senior living services divided by occupied units during the period, and multiplying it by 30 days.
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
The following is a discussion of our operating results for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

Senior living revenue. Senior living revenue for the three months ended March 31, 2019 increased approximately 0.9% compared to the same period in 2018 primarily due to an increase in occupancy and average monthly rates from residents who pay privately for services, as well as an increase in revenues from ancillary services, such as rehabilitation and wellness services, partially offset by the sale of four senior living communities to SNH, which we are currently managing for SNH's account, and the sale of one SNF to a third party during the first half of 2018. The 1.6% increase in senior living revenue at the communities that we have operated continuously since January 1, 2018 was primarily due to an increase in occupancy and average monthly rates to residents who pay privately for services.
 
Management fee revenue. Management fee revenue increased by 10.0% for the three months ended March 31, 2019 compared to the same period in 2018 primarily due to an increase in the number of managed communities to 76 from 72 for the same period in 2018.

Reimbursed costs incurred on behalf of managed communities. Reimbursed costs incurred on behalf of managed communities increased by 10.7% for the three months ended March 31, 2019 compared to the same period in 2018 primarily due to an increase in the number of managed communities to 76 from 72 for the same period in 2018.

Senior living wages and benefits. Senior living wages and benefits increased by 5.5% for the three months ended March 31, 2019 compared to the same period in 2018 primarily due to annual wage increases, partially offset by a decrease in employee health insurance expenses and the sale of four senior living communities to SNH, which we are currently managing for SNH's account, and the sale of one SNF to a third party during the first half of 2018. The 6.1% increase in senior living wages and benefits at the communities that we have operated continuously since January 1, 2018 was primarily due to annual wage increases, partially offset by a decrease in employee health insurance expenses.
 
Other senior living operating expenses. Other senior living operating expenses, which include utilities, housekeeping, dietary, repairs and maintenance, insurance and community level administrative costs, increased by 4.1% for the three months ended

27


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



March 31, 2019 compared to the same period in 2018 primarily due to an increase in repairs and maintenance and certain consulting and other purchased services expenses, partially offset by the sale of four senior living communities to SNH, which we are currently managing for SNH's account, and the sale of one SNF to a third party during the first half of 2018. The 4.7% increase in other senior living operating expenses at the communities that we have operated continuously since January 1, 2018 was primarily due to an increase in repairs and maintenance and certain consulting and other purchased services expenses.

Rent expense. Rent expense increased by 4.4% for the three months ended March 31, 2019 compared to the same period in 2018 primarily due to additional rent related to senior living community capital improvements we sold to SNH since January 1, 2018 pursuant to our leases with SNH. Pursuant to the Transaction Agreement, our rent payable to SNH was reduced by a total of approximately $14.4 million in aggregate for February and March 2019 and we did not pay that amount to SNH. However, because the Transaction Agreement was not entered into until April 1, 2019, our rent expense for the three months ended March 31, 2019 was not adjusted for the rent reduction for February and March 2019.

General and administrative expenses. General and administrative expenses increased by 32.8% for the three months ended March 31, 2019 compared to the same period in 2018 primarily due to $7.7 million of transaction costs incurred in connection with the Transaction Agreement.
 
Depreciation and amortization expense. Depreciation and amortization expense decreased by 7.8% for the three months ended March 31, 2019 compared to the same period in 2018 primarily due to the sale of four senior living communities to SNH, which we are currently managing for SNH's account, and the sale of one SNF to a third party during the first half of 2018, partially offset by capital expenditures we made at our owned and leased communities (net of our sales of capital improvements to SNH at our leased communities).

Gain on sale of senior living communities. A gain on sale of senior living communities of $5.7 million was recorded primarily in connection with our sale of two senior living communities to SNH during the first quarter of 2018.

Long lived asset impairment. For the three months ended March 31, 2019, we recorded non-cash charges for long lived asset impairment of $3.1 million to reduce the carrying value of certain of our long lived assets to their estimated fair values.
 
Interest, dividend and other income. Interest, dividend and other income decreased by 6.6% for the three months ended March 31, 2019 compared to the same period in 2018 primarily due to lower investable cash and cash equivalents balances.
 
Interest and other expense. Interest and other expense increased by 28.9% for the three months ended March 31, 2019 compared to the same period in 2018 primarily due to increased borrowings under our credit facility, partially offset by SNH's assumption of two mortgage notes in connection with our sale of three senior living communities during the first half of 2018.

Unrealized gain (loss) on equity investments. Unrealized gain (loss) on equity investments represents our unrealized gain (loss) on our equity investments.

Realized gain on sale of debt and equity investments, net of tax. Realized gain on sale of debt and equity investments represents our realized gain on investments, net of applicable taxes. 

Provision for income taxes. For the three months ended March 31, 2019 and 2018, we recognized a provision for income taxes of $1.5 million and $0.3 million, respectively. The provision for income taxes for the three months ended March 31, 2019 is due to state income taxes, partially offset by the intraperiod tax allocation benefit related to unrealized gains on available for sale securities, and the provision for income taxes for the same period in 2018 is due to state income taxes.
 
Equity in earnings of an investee, net of tax. Equity in earnings of an investee represents our proportionate share of earnings from AIC.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2019, we had $49.7 million of unrestricted cash and cash equivalents and no availability for further borrowing under our credit facility.
 
Our principal sources of funds to meet operating and capital expenses and debt service obligations are cash flows from operating activities, unrestricted cash balances, borrowings under our credit facilities and proceeds from our sales to SNH of qualified capital improvements we may make to communities that we lease from SNH for increased rent pursuant to our leases

28


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



with SNH. As noted elsewhere, we have been experiencing substantial operating and liquidity challenges that raised a substantial doubt about our ability to continue as a going concern.

Based on our cash balance at March 31, 2019 and projected cash needs for the next 12 months, our management believes that we will need to increase our revenues, reduce our costs and/or pursue other transactions to be able to continue to fund our operating and capital requirements.

In order to address the operating and liquidity challenges we face, we entered into the Transaction Agreement. The transactions contemplated by the Transaction Agreement are subject to conditions, including among others, the receipt of approval by our stockholders of the Share Issuances and certain regulatory approvals. We are also currently evaluating options to refinance our existing credit facility with unrelated lenders, which is scheduled to expire on June 28, 2019. We cannot be sure that we will obtain any renewed or restructured credit facility, and our ability to do so will likely depend on the lenders’ belief that our prospects, operating leverage and expected future operating results, including the potential impact of the modifications of our existing business arrangements with SNH, will permit us to continue as a going concern and to fund our operations, capital investments and debt service and other obligations.

If the transactions contemplated by the Transaction Agreement are not completed and if we do not renew or restructure our credit facility, we do not expect to be able to fund our operating and capital expenses or debt service obligations. In addition, the Transaction Agreement and any renewed or restructured credit facility, if completed and obtained, may not result in our realizing improved operating results or liquidity and may not be sufficient to enable us to continue as a going concern.

For more information regarding our Transaction Agreement, our evaluation of options to refinance our credit facility, our operating and liquidity challenges and going concern, see Notes 1 and 13 to our condensed consolidated financial statements included in Part I, Item 1 and “—2019 Transaction Agreement with SNH” in Part I, Item 2 of this Quarterly Report on Form 10-Q.

Assets and Liabilities

At March 31, 2019, we had $49.7 million of unrestricted cash and cash equivalents compared to $29.5 million at December 31, 2018. Our total current and long term assets were $161.7 million and $1,702.4 million, respectively, at March 31, 2019 compared to