Item 1.01. Entry into a Material Definitive Agreement.
Pursuant to our previously announced transaction
agreement with Five Star, dated as of April 1, 2019, or the Transaction Agreement, on January 1, 2020, effective at 12:00:01 a.m.,
Eastern Time, we restructured our business arrangements with Five Star as follows:
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our five then existing master leases with Five Star for all of our senior living communities that Five Star leased from us
at such time, as well as our then existing management agreements and pooling agreements with Five Star for our senior living communities
that Five Star managed for us at such time, were terminated and replaced, or the Conversion, with new management agreements for
all of these senior living communities and a related omnibus agreement, or collectively, the New Management Agreements;
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(a) Five Star issued to us 10,268,158 of its shares of common stock, or Five Star Common Shares, which, when considered
together with the 423,500 Five Star Common Shares then owned by us, caused us to own approximately 33.9% of the then
outstanding Five Star Common Shares, and (b) pursuant to a pro rata distribution that we declared on December 3, 2019 to
holders of record of our common shares of beneficial interest as of December 13, 2019 of the right to receive an aggregate
of
approximately
51.1% of the then outstanding Five Star Common Shares, Five Star issued to such holders, on a pro rata basis,
an aggregate of 16,119,563 Five Star Common Shares, subject to cash being paid in lieu of any fractional shares (such share
issuances together
being referred
to in this
Current Report
on Form 8-K as
the Share
Issuances), with the noted percentage ownership amounts being post-issuance, giving effect to
the Share Issuances; and
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as consideration for the Share Issuances, we provided Five Star with $75 million of additional consideration, by way of our
payment or assumption of $75 million in certain current and future working capital liabilities of Five Star, pursuant to the terms
of the Transaction Agreement (with our provision of such consideration to Five Star, collectively with the Conversion and the Share
Issuances, being referred to in this Current Report on Form 8-K as the Restructuring Transaction).
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Pursuant to the New Management Agreements,
Five Star will receive a management fee equal to 5% of the gross revenues realized at the applicable senior living communities
plus reimbursement for its direct costs and expenses related to such communities, as well as an annual incentive fee equal to 15%
of the amount by which the annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of all communities
on a combined basis exceeds the target EBITDA for all communities on a combined basis for such calendar year, provided that in
no event shall the incentive fee be greater than 1.5% of the gross revenues realized at all communities on a combined basis for
such calendar year.
The New Management Agreements provide for
15 year terms, subject to Five Star’s right to extend for two consecutive five year terms if it achieves certain performance
targets for the combined managed communities portfolio. The New Management Agreements also provide us with the right to terminate
the New Management Agreement for any community that does not earn 90% of the target EBITDA for such community for two consecutive
calendar years or in any two of three consecutive calendar years, with the measurement period commencing January 1, 2021 (and the
first termination not possible until the beginning of calendar year 2023), provided we may not in any calendar year terminate communities
representing more than 20% of the combined revenues for all communities for the calendar year prior to such termination. Pursuant
to a guaranty agreement dated as of January 1, 2020, or the Guaranty, made by Five Star in favor of our applicable subsidiaries,
Five Star has guaranteed the payment and performance of each of its applicable subsidiary’s obligations under the applicable
New Management Agreements.
Also on January 1, 2020, the agreement governing
the $25 million line of credit that we extended to Five Star pursuant to the Transaction Agreement, or the Credit Agreement, terminated
in accordance with its terms. There were no borrowings outstanding under this credit facility when the Credit Agreement was terminated.
The foregoing descriptions of the Restructuring
Transaction, the Transaction Agreement, the New Management Agreements and the Guaranty are qualified in their entirety by reference
to the full text of the Transaction Agreement (including the forms of New Management Agreements and Guaranty attached as exhibits
thereto), a copy of which is filed as Exhibit 10.1 to this Current Report on Form 8-K and is incorporated herein by reference.
Information Regarding Certain Relationships and Related Person
Transactions
Five Star was our 100%
owned subsidiary until we distributed its common shares to our shareholders in 2001. We are currently Five Star’s
largest stockholder, owning, as of January 2, 2020, 10,691,658 Five Star Common Shares, or approximately 33.9% of the
outstanding Five Star Common Shares. Five Star is the manager of most of our senior living communities and prior to the
completion of Restructuring Transaction was our largest tenant and a manager of our senior living communities. The RMR Group
LLC, or RMR LLC, provides management services to both us and Five Star. The RMR Group Inc. is the managing member of RMR LLC.
Prior to the Share Issuances, ABP Acquisition LLC, a subsidiary of ABP Trust, the controlling shareholder of The RMR Group
Inc., was Five Star’s largest stockholder, owning approximately 34.9% of the then outstanding Five Star Common Shares.
As a result of the Share Issuances, ABP Acquisition LLC and ABP Trust currently collectively own approximately 6.3% of the
outstanding Five Star Common Shares. Adam D. Portnoy, the Chair of our Board of Trustees and one of our Managing Trustees, is
the sole trustee, an officer and the controlling shareholder of ABP Trust and the chair of the board of directors and
a managing director of Five Star. Our other Managing Trustee also serves as secretary of Five Star. Five Star’s
president and chief executive officer and executive vice president, chief financial officer and treasurer are also officers
and employees of RMR LLC.
For further information about these and
other such relationships and related person transactions, please see our Annual Report on Form 10-K for the year ended December
31, 2018, or our Annual Report, including Notes 5, 6 and 7 to our consolidated financial statements included in our Annual Report,
our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, or our Quarterly Report, including Notes 10, 11 and
12 to our consolidated financial statements included in our Quarterly Report and the sections captioned “Business”,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions”
and “Warning Concerning Forward Looking Statements” of our Annual Report and our Quarterly Report, and our other filings
with the Securities and Exchange Commission, or the SEC. In addition, please see the section captioned “Risk Factors”
of our Annual Report for a description of risks that may arise as a result of these and other such relationships and related person
transactions. Our filings with the SEC and copies of certain of our agreements with these related parties, including our prior
master leases, management agreements and pooling agreements with Five Star, are publicly available as exhibits to our public filings
with the SEC and accessible at the SEC’s website, www.sec.gov.