FIVE STAR QUALITY CARE INC (Form: 10-Q, Received: 05/11/2015 16:27:20)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON , DC 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-16817

FIVE STAR QUALITY CARE, INC.

(Exact Name of Registrant as Specified in Its Charter)


Maryland	04-3516029
(State of Incorporation)	(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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated file r , ” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Number of registrant ’ s shares of common stock, $.01 par value , outstanding as of May 7, 2015 : 48,996,115 .

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Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET S

(in thousands, except share data)

(unaudited)


	March 31,		December 31,
	2015		2014
ASSETS
Current assets:
Cash and cash equivalents	$	26,670	$	20,988
Accounts receivable, net of allowance of $4,371 and $3,416 at March 31, 2015 and December 31, 2014, respectively		39,258		38,814
Due from related persons		7,945		12,641
Investments in available for sale securities, of which $9,506 and $8,352 are restricted as of March 31, 2015 and December 31, 2014, respectively		24,797		23,436
Restricted cash		3,130		2,945
Prepaid and other current assets		17,913		21,494
Assets of discontinued operations		2,451		1,463
Total current assets		122,164		121,781

Property and equipment, net		354,880		357,186
Equity investment of an investee		6,945		6,827
Restricted cash		1,811		2,170
Restricted investments in available for sale securities		16,396		19,835
Goodwill and other intangible assets		25,713		25,904
Other long term assets		2,653		1,270
	$	530,562	$	534,973
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Revolving credit facilities	$	30,000	$	35,000
Accounts payable and accrued expenses		86,830		85,606
Accrued compensation and benefits		40,223		34,171
Due to related persons		19,056		20,338
Mortgage notes payable		1,810		1,786
Accrued real estate taxes		9,279		11,282
Security deposits and current portion of continuing care contracts		7,315		7,235
Other current liabilities		23,097		19,470
Liabilities of discontinued operations		1,907		504
Total current liabilities		219,517		215,392

Long term liabilities:
Mortgage notes payable		48,911		49,373
Continuing care contracts		1,443		1,370
Accrued self-insurance obligations		33,842		37,268
Other long term liabilities		4,594		4,788
Total long term liabilities		88,790		92,799

Commitments and contingencies

Shareholders’ equity:
Common stock, par value $.01: 75,000,000 shares authorized, 48,996,115 and 48,997,315 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively		490		490
Additional paid in capital		357,351		357,051
Accumulated deficit		(139,751)		(134,449)
Accumulated other comprehensive income		4,165		3,690
Total shareholders’ equity		222,255		226,782
	$	530,562	$	534,973

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATION S

(in thousands, except per share data)

(unaudited)


	Three Months Ended March 31,
	2015		2014
Revenues:
Senior living revenue	$	275,173	$	271,781
Management fee revenue		2,523		2,425
Reimbursed costs incurred on behalf of managed communities		56,277		54,205
Total revenues		333,973		328,411

Operating expenses:
Senior living wages and benefits		133,253		132,783
Other senior living operating expenses		72,225		72,817
Costs incurred on behalf of managed communities		56,277		54,205
Rent expense		49,628		49,074
General and administrative		17,982		19,748
Depreciation and amortization		8,095		7,276
Total operating expenses		337,460		335,903

Operating loss		(3,487)		(7,492)

Interest, dividend and other income		220		196
Interest and other expense		(1,354)		(1,218)
Gain on sale of available for sale securities reclassified from other comprehensive income		20		313

Loss from continuing operations before income taxes and equity in earnings (loss) of an investee		(4,601)		(8,201)
(Provision for) benefit from income taxes		(304)		2,431
Equity in earnings (loss) of an investee		72		(97)
Loss from continuing operations		(4,833)		(5,867)
Loss from discontinued operations		(469)		(892)

Net loss	$	(5,302)	$	(6,759)


Weighted average shares outstanding—basic and diluted		48,364		48,002

Basic and diluted loss per share from:
Continuing operations	$	(0.10)	$	(0.12)
Discontinued operations		(0.01)		(0.02)
Net loss per share—basic and diluted	$	(0.11)	$	(0.14)

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2015		2014
Net loss	$	(5,302)	$	(6,759)
Other comprehensive income:
Unrealized gain on investments in available for sale securities, net of tax of $0 and $155 , respectively		450		253
Equity in unrealized gain of an investee, net of tax		45		19
Realized gain on investments in available for sale securities reclassified and included in net loss, net of tax of $0 and $119 , respectively		(20)		(194)
Other comprehensive income		475		78
Comprehensive loss	$	(4,827)	$	(6,681)

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW S

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2015		2014
Cash flows from operating activities:
Net loss	$	(5,302)	$	(6,759)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		8,501		7,548
Loss from discontinued operations before income tax		469		1,365
Gain on sale of available for sale securities		(20)		(313)
Loss on disposal of property and equipment		7		—
Equity in (earnings) loss of an investee		(72)		97
Stock-based compensation		300		256
Deferred income taxes		—		(3,763)
Provision for losses on receivables		1,696		1,234
Changes in assets and liabilities:
Accounts receivable		(2,140)		(1,860)
Prepaid expenses and other assets		1,853		(2,218)
Accounts payable and accrued expenses		2,385		4,796
Accrued compensation and benefits		6,052		6,386
Due to related persons, net		4,175		3,885
Other current and long term liabilities		(1,916)		(1,672)
Cash provided by operating activities		15,988		8,982

Cash flows from investing activities:
Deposits into restricted cash and investment accounts, net		174		11,303
Acquisition of property and equipment		(11,550)		(13,058)
Purchases of available for sale securities		(234)		(9,512)
Proceeds from sale of property and equipment to Senior Housing Properties Trust		4,060		8,614
Proceeds from sale of available for sale securities		2,736		4,336
Cash (used in) provided by investing activities		(4,814)		1,683

Cash flows from financing activities:
Repayments of borrowings on credit facilities		(5,000)		(20,000)
Repayments of mortgage notes payable		(438)		(283)
Cash used in financing activities		(5,438)		(20,283)

Cash flows from discontinued operations:
Net cash (used in) provided by operating activities		(42)		7,275
Net cash used in investing activities		(12)		—
Net cash flows (used in) provided by discontinued operations		(54)		7,275

Change in cash and cash equivalents		5,682		(2,343)
Cash and cash equivalents at beginning of period		20,988		23,628
Cash and cash equivalents at end of period	$	26,670	$	21,285

Supplemental cash flow information:
Cash paid for interest	$	969	$	821
Cash paid (refunded) for income taxes, net	$	182	$	(21)

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 1. Basis of Presentation and Organizatio n

General

The accompanying condensed consolidated financial statements of Five Star Quality Care, Inc. and its subsidiaries, or we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles 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, 2014, 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.

We operate senior living communities, including independent living communities, assisted living communities and skilled nursing facilities, or SNFs. As of March 31, 2015, we operated 258 senior living communities located in 31 states with 30,389 living units, including 227 primarily independent and assisted living communities with 27,582 living units and 31 SNFs with 2,807 living units. As of March 31, 2015, we own ed and operated 31 communities ( 3,064 living units), we leased and operate d 181 communities ( 20,035 living units) and we manage d 46 communities ( 7,290 living units). Our 258 senior living communities , as of March 31, 2015, included 10,586 independent living apartments, 14,619 assisted living suites and 5,184 skilled nursing units. The foregoing numbers exclude: (i) one assisted living community with 32 living units that we own which is being offered for sale and is classified as a discontinued operation; and (ii ) three SNFs with a total of 167 living units that we lease from Senior Housing Properties Trust or its subsidiaries, or SNH, that are being offered for sale and are classified as discontinued operations .

Segment Information

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 third parties independent living communities, assisted living communities and SNFs that are subject to centralized oversight and provide housing and services to elderly residents. Our rehabilitation and wellness operating segment does not meet any of the quantitative thresholds of a reportable segment as prescribed under Financial Accounting Standards Board, or FASB, Accounting Standards Codification TM , or ASC, Topic 280, and therefore, we have 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 liability and automobile insurance programs.

Note 2. Recent Accounting Pronouncements

In April 2015, the FASB issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs , which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. This update is effective for interim and annual reporting periods beginning after December 15, 2015 and requires retrospective application. The implementation of this update is not expected to cause any material changes to our consolidated financial statements.

In June 2014, the FASB issued Accounting Standards Update 2014 ‑09, Revenue from Contracts with Customers (Topic 606) , or ASU 2014 ‑09. ASU 2014 ‑09 aims to clarify the principles for recognizing revenue by, among other things, removing inconsistencies in revenue requirements, improving comparability of revenue recognition practices across entities and industries and providing improved disclosure requirements . We are required to retrospectively adopt ASU 2014 ‑09 for fiscal periods beginning after December 15, 2016 and are evaluating the impact the adoption of this ASU will have on our consolidated financial statements. In April 2015, the FASB voted to propose a deferral of the effective date of this ASU by one year, but to permit entities to adopt one year earlier if they choose to do so. We are monitoring the outcome of this proposal.

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 3. Property and Equipment

Property and equipment consists of the following:


	March 31,		December 31,
	2015		2014
Land	$	24,172	$	24,172
Buildings and improvements		308,079		308,779
Furniture, fixtures and equipment		143,093		136,839
Property and equipment, at cost		475,344		469,790
Accumulated depreciation		(120,464)		(112,604)
Property and equipment, net	$	354,880	$	357,186

For the three months ended March 31, 2015 and 2014, we recorded depreciation expense of $7,867 and $6,993 respectively, relating to our property and equipment.

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 ass et to its estimated fair value. We determine estimated fair value based on input from mark et participants, our experience selling similar assets, market conditions and internally developed cash flow models that our asset s or asset groups are expected to generate. We did not record impairment charges to any of our long-lived assets in continuing operations for the three months ended March 31, 201 5 or 201 4.

As of March 31, 2015 , we had $5,828 of assets included in our property and equipment that we expect to request that SNH purchase from us for an increase in future rent; however, we are not obligated to make these sales and SNH is not obligated to fund such amounts.

See Note 13 for information regarding two senior living communities we agreed to acquire in March 2015.

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, 2015 :


	Equity Investment of an Investee		Investments in Available for Sale Securities			Accumulated Other Comprehensive Income
Balance at January 1, 2015	$	50	$	3,640	$	3,690
Unrealized gain on investments, net of tax		—		450		450
Equity in unrealized gain of an investee		45		—		45
Reclassification adjustment:
Realized gain on investments, net of tax		—		(20)		(20)
Balance at March 31, 2015	$	95	$	4,070		4,165

Accumulated other comprehensive income represents the unrealized appreciation of our investments, net of tax, and our share of other comprehensive income of Affiliates Insurance Company, or AIC.

Note 5. Income Taxes

For the three months ende d March 31, 2015, we recognized tax expense from continuing operations of $304 . As of December 31, 2014, our federal net operating loss carry forward s , which are scheduled to begin expir ing in 2026 if unused, w ere approximately $112,182 and our tax credit carry forward s , which begin expir ing in 2022 if unused, w ere approximately $17,191 . We have an additional $333 of federal net operating loss carry forwards not included in the

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

$112,182 , that are attributable to unvested stock grants which will be recorded as an increase to additional paid in capital after they are realized in accordance with FASB ASC Topic 718. Our net operating loss carry forwards and tax credit carry forwards are subject to possible audit s and adjustments by the Internal Revenue Service.

During the year ended December 31, 2014, we determined it wa s more likely than not that our net deferred tax assets would not be realized and concluded that a full valuation allowance is required. 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.

Note 6 . Earnings Per Share

We computed basic earnings per common share, or EPS, for the three months ended March 31, 2015 and 201 4 using the weighted average number of shares of our common stock, $.01 par value per share, or our common shares, outstanding during the periods. Diluted EPS reflects the more dilutive earnings per common share amount calculated using the two-class method or the treasury stock method. Unvested shares issued under our equity compensation plans are deemed participating securities because they participate equally in earnings with all of our other common shares and are included in the calculation of diluted EPS.

The following table provides a reconciliation of loss from continuing operations and loss from discontinued operations and the number of common shares used in the c omputation s of diluted EPS :


	Three Months Ended March 31,
	2015					2014
	Income			Per		Income			Per
	(loss)		Shares	Share		(loss)		Shares	Share
Loss from continuing operations	$	(4,833)	48,364	$	(0.10)	$	(5,867)	48,002	$	(0.12)
Dilutive effect of unvested restricted shares		—	—				—	—
Diluted loss from continuing operations	$	(4,833)	48,364	$	(0.10)	$	(5,867)	48,002	$	(0.12)
Diluted loss from discontinued operations	$	(469)	48,364	$	(0.01)	$	(892)	48,002	$	(0.02)

Note 7. Fair Values of Assets and Liabilities

Our assets recorded at fair value have been categorized based upon 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.

Recurring Fair Value Measures

The table s below present the assets measured at fair value at March 31, 2015 and December 31, 2014 categorized by the level of inputs used in the valuation of each asset.

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)


	As of March 31, 2015
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Cash equivalents (1)	$	4,524	$	4,524	$	—	$	—
Available for sale securities: (2)
Equity securities
Financial services industry		4,131		4,131		—		—
REIT industry		346		346		—		—
Other		3,866		3,866		—		—
Total equity securities		8,343		8,343		—		—
Debt securities
International bond fund (3)		2,409		—		2,409		—
High yield fund (4)		2,399		—		2,399		—
Industrial bonds		6,113		—		6,113		—
Government bonds		9,911		4,936		4,975		—
Financial bonds		2,732		—		2,732		—
Other		9,286		—		9,286		—
Total debt securities		32,850		4,936		27,914		—
Total available for sale securities		41,193		13,279		27,914		—
Total	$	45,717	$	17,803	$	27,914	$	—


	As of December 31, 2014
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Cash equivalents (1)	$	4,632	$	4,632	$	—	$	—
Available for sale securities: (2)
Equity securities
Financial services industry		4,059		4,059		—		—
REIT industry		330		330		—		—
Other		3,841		3,841		—		—
Total equity securities		8,230		8,230		—		—
Debt securities
International bond fund (3)		2,385		—		2,385		—
High yield fund (4)		2,352		—		2,352		—
Industrial bonds		6,577		—		6,577		—
Government bonds		11,371		5,683		5,688		—
Financial bonds		2,704		—		2,704		—
Other		9,652		—		9,652		—
Total debt securities		35,041		5,683		29,358		—
Total available for sale securities		43,271		13,913		29,358		—
Total	$	47,903	$	18,545	$	29,358	$	—

(1)

Cash equivalents, consisting of short term, highly liquid investments and money market funds held principally for obligations arising from our self-insurance programs. Cash equivalents are reported on our balance sheet as cash and cash equivalents and current and long term restricted cash. Cash equivalents include $2,627 and $2,792 of balances that are restricted at March 31, 2015 and December 31, 2014, respectively.

(2)

Investments in available for sale securities are reported on our balance sheet as current and long term investments in available for sale securities and are reported at fair value of $24,797 and $16,396 , respectively, at March 31, 2015, and $23,436 and $19,835 , respectively, at December 31, 2014. Our investments in available for sale securities had amortized costs of $38,466 and $40,974 as of March 31, 2015 and December 31, 2014, respectively, had unrealized gains of $2,884 and $2,455 as of March 31, 2015 and December 31, 2014, respectively, and had unrealized losses of $157 as of March 31, 2015 and December 31, 2014. At March 31, 2015, 14 of the securities we hold, with a fair value of $3,014 , have been in a loss position for less than 12 months and eight of the securities we hold, with a fair value of $1,445 , have been in a loss position for greater than 12 months. We do not believe these securities 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 securities remain strong with solid fundamentals, or we intend to hold these securities until recovery, and other factors that support our conclusion that the loss is temporary. During the three months ended March 31, 2015 and 2014, we

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

received gross proceeds of $2,736 and $4,336 , respectively, in connection with the sales of available for sale securities and recorded gross realized gains totaling $20 and $324 , respectively, and gross realized losses totaling $0 and $11 , respectively. We record gains and losses on the sales of our available for sale securities using the specific identification method.

(3)

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 U.S. dollar investment grade fixed income securities. There are no unfunded commitments and the investment can be redeemed weekly.

(4)

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, 2015, 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, 2015.

The carrying values of accounts receivable and accounts payable approximate fair value as of March 31, 2015 and December 31, 2014. The carrying value and fair value of our mortgage notes payable were $50,721 and $56,088 , respectively, as of March 31, 2015 and $51,159 and $56,099 , respectively, as of December 31, 2014, 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 long-lived 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 a discussion of fair value measurements related to impairments of our long-lived assets.

We evaluate the recoverability of goodwill assets in the fourth quarter of each fiscal year, or more frequently if events or changes in circumstances indicate that goodwill or other intangible assets may be impaired. As of October 1, 2014, we evaluated our goodwill for impairment and determined that the fair value of our reporting units exceeded their carrying values on that date. As of March 31, 2015, no events or changes in circumstances had occurred since October 1, 2014, that would trigger the need for an additional impairment review.

Goodwill was valued primarily using discounted cash flow models that incorporate assumptions for each reporting unit’s short and long term revenue growth rates, operating margins, and discount rates, which represent our best estimates of current and forecasted market conditions, current cost structure, and the implied rate of return that management believes a market participant would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed.

The fair value of assets held for sale is determined based on the use of appraisals, input from market participants, our experience selling similar assets and/or internally developed cash flow models, all of which are considered to be Level 3 fair value measurements.

Note 8 . Indebtedness

We have a $25,000 revolving secured line of credit, or our Credit Agreement, that is available for general business purposes, including acquisitions. The maturity date of our Credit Agreement is March 18, 2016. Borrowings under our Credit Agreement typically bear interest at LIBOR plus a premium of 250 basis points, or 2.68% as of March 31, 2015. We are also required to pay a quarterly commitment fee of 0.35% per annum on the unused part of our borrowing availability under the Credit Agreement. We may draw, repay and redraw funds until maturity, and no principal

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

repayment is due until maturity. We made no borrowings under our Credit Agreement during either of the three months ended March 31, 2015 and 2014 and, as of March 31, 2015, we had no amounts outstanding under our Credit Agreement. We incurred interest expense and other associated costs related to our Credit Agreement of $4 8 for each of the three months ended March 31, 2015 and 2014.

We are the borrower under our Credit Agreement and certain of our subsidiaries guarantee our obligations under our Credit Agreement, which is secured by our and our guarantor subsidiaries’ accounts receivable and related collateral. Our Credit Agreement provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, including a change of control of us, which includes termination of our business management and shared services agreement, or our business management agreement, with Reit Management & Research LLC, or RMR.

We also have a $150,000 secured revolving credit facility, or our Credit Facility, that is available for general business purposes, including acquisitions. The maturity date of our Credit Facility wa s initially April 13, 2015, but , subject to the payment of extension fees and meeting certain other conditions, our Credit Facility includes options for us to extend its stated maturity date for two consecutive one -year periods. In April 2015, we exercised our first one-year option and extended the maturity date of our Credit Facility to April 13, 2016, for which we paid a fee of $300 . Borrowings under our Credit Facility typically bear interest at LIBOR plus a premium of 250 basis points, or 2.68% as of March 31, 2015. We are also required to pay a quarterly commitment fee of 0.35% per annum on the unused part of our borrowing availability under our Credit Facility. We may draw, repay and redraw funds until maturity, and no principal repayment is due until maturity. The weighted average interest rate for borrowings under our Credit Facility was 2.74% and 2.83% for the three months ended March 31, 2015 and 2014, respectively. As of March 31, 2015, we had $30,000 outstanding under our Credit Facility. We incurred interest expense and other associated costs related to our Credit Facility of $609 and $593 for the three months ended March 31, 2015 and 2014, respectively.

We are the borrower under our Credit Facility, and certain of our subsidiaries guarantee our obligations under our Credit Facility, which is secured by real estate mortgages on 15 senior living communities with 1,549 living units owned by our guarantor subsidiaries and our guarantor subsidiaries’ accounts receivable and related collateral. Our Credit Facility provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, including a change of control of us.

Our Credit Agreement and our Credit Facility contain a number of financial and other covenants, including covenants that restrict our ability to incur indebtedness or to pay dividends or make other distributions under certain circumstances and require us to maintain financial ratios and a minimum net worth. On March 13, 2015, we and the lenders under our Credit Agreement entered into Amendment No. 3 to the Credit and Security Agreement, which amended the defined term for EBITDA set forth in the Credit Agreement by excluding from the calculation of EBITDA certain costs associated with Medicare compliance deficiencies and made certain changes to the representations and warranties in the Credit Agreement to except certain failures to comply with Medicare billing, recordkeeping, reporting and related practices from events which may cause our default.

At March 31, 2015 , five of our senior living communities were encumbered by mortgage notes with an aggregate outstanding principal balance of $50,721 : ( 1) two of our communities w ere encumbered by Federal National Mortgage Association, or FNMA, mortgage note s and (2) three of our communities were encumbered by Federal Home Loan Mortgage Corporation, or FMCC, mortgage notes. These mortgages con tain FNMA and FMCC standard mortgage covenants, respectively. We recorded a mortgage premium in connection with our assumption of the FNMA and FMCC mortgage notes a s part of our acquisitions of the encumbered communities in order to record the assumed mortgage notes at their estimated fair value. We are amortizing the mortgage premiums as a reduction of interest expense until the maturity of the respective mortgage notes. The weighted average interest rate on these five notes was 6.76% as of March 31, 2015. Payments of principal and interest are due monthly under these mortgage notes until maturities at vary ing dates ranging from June 2018 to September 2032. We incurred mortgage interest expense, including premium amortization, of $697 and $577 for the three months ended March 31, 2015 and 2014, respectively. Our mortgages

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

require m onthly payments into escrows for taxes, insurance and property replacement funds; withdrawals from these escrows require applicable FNMA and FMCC approval s . As of March 31, 2015 , we believe we were in compliance with all applicable covenants under these mortgages.

See Note 13 for information regarding mortgage debt we expect to assume in connection with our pending acquisition of two senior living communities.

Note 9 . Off Balance Sheet Arrangements

We have pledged our accounts receivable and certain other assets, with a carrying value, as of March 31, 2015 , of $13,603 , arising from our operation of 26 properties owned by SNH and leased to us to secure SNH’s borrowings from its lender, FNMA. As of March 31, 2015 , we had no other off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition , revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Note 10. Related Person Transactions

SNH: As of March 31, 2015, we leased 180 senior living communities from SNH. Our total minimum annual rent payable to SNH as of March 31, 2015 and 2014 was $191,007 and $190,614 , respectively , excluding percentage rent. Our total rent expense under our leases with SNH, net of lease inducement amortization, was $48,941 and $48,758 for the three months ended March 31, 2015 and 2014, respectively. As of March 31, 2015 and December 31, 2014, we had outstanding rent due and payable to SNH of $17,324 and $17,310 , respectively. During the three months ended March 31, 2015 and 2014, pursuant to the terms of our leases with SNH, we sold $4,060 and $8,614 , respectively, of improvements made to properties leased from SNH, and, as a result, our annual rent payable to SNH increased by approximately $328 and $689 , respectively. As of March 31, 2015, our property and equipment included $5,828 for similar improvements we have made to properties we lease from SNH that we typically request that SNH purchase from us for an increase in future rent; however, we are not obligated to make these sales and SNH is not obligated to fund such amounts.

In February 2015, SNH acquired a land parcel adjacent to a senior living community we lease from SNH for $490 . This property was added to the lease for that senior living community and our annual rent payable to SNH increased by $39 as a result .

In February 2015, we and SNH sold a vacant assisted living communi ty located in Pennsylvania for $250 , and as a result of this sale, our annual minimum rent payable to SNH decreased by $23 in accordance with the terms of the applicable lease.

As of March 31, 2015, we managed 46 senior living communities for SNH. Pursuant to these management agreements with SNH, we earned management fees of $2,523 and $2,425 for the three months ended March 31, 2015 and 2014, respectively.

In April 2015, SNH agreed to acquire a senior living community with 40 private pay independent living units located in Cumming, GA. We expect to enter into a management agreement with SNH to manage this community. This community is adjacent to another community that we manage for SNH. This acquisition is subject to various conditions. Accordingly, we can provide no assurance that SNH will purchase this property, that the acquisition and related expected management arrangement will not be delayed or that the terms will not change.

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

In May 2015, we began managing 14 senior living communities that SNH acquired at that time .

Pursuant to our management agreement with D&R Yonkers LLC, we earned management fees o f $54 and $59 for the three months ended March 31, 2015 and 2014, respectively. SNH’s executive officers are the principals of D&R Yonkers LLC, which was established in order to accommodate certain state licensing requirements.

RMR : Pursuant to our business management agreement with RMR, we recognized business management fees of $2,127 and $2,006 , and administrative and information sys tem service fees of $0 and $1,519 , for the three months ended March 31, 2015 and 2014, respectively. These amounts are included in general and administrative expenses in our condensed consolid ated statements of operations. Our rent expense for our headquarters that we le ase from an affiliate of RMR was $411 and $355 for the three months ended March 31, 2015 and 2014, respectively.

On March 16, 2015, we and RMR entered into an amended and restated business management and shared services agreement, which was approved by our Compensation Committee, comprised solely of our Independent Directors. As amended, RMR may terminate the business management agreement upon 120 days’ written notice, and we continue to have the right to terminate the business management agreement upon 60 days’ written notice, subject to approval by a majority vote of our Independent Directors. As amended, if we terminate or elect not to renew the business management agreement other than for cause, as defined, we are obligated to pay RMR a termination fee equal to 2.875 times the sum of the annual base management fee and the annual internal audit services expense, which amounts are based on averages during the 24 consecutive calendar months prior to the date of notice of nonrenewal or termination. Also, as amended, RMR agrees to provide certain transition services to us for 120 days following termination by us or notice of termination by RMR.

AIC : As of March 31, 2015, o ur investment in AIC had a carrying value of $6,945 . We recognized income (loss) of $72 and $(97) related to our investment in AIC for the three months ended March 31, 2015 and 2014, respectively.

Note 11 . Discontinued Operations

I n June 2013 , we decided to offer for sale one assisted living community we own with 32 living units. We are in the process of of fering this community for sale. As of March 31, 2015, we have three senior living communities that we lease from SNH which are being offered for sale and are included in discontinued operations. We can provide no assurance that we will be able to sell the senior living community that we are offering for sale, or that we and SNH will be able to sell the remaining three senior living communities that we lease from SNH that are being offered for sale, or what the terms or timing of any s ales may be.

We have reclassified our condensed consolidated balance sheets and condensed consolidated statements of operations for all periods presented to show the financial position and results of operations of our senior living communities that have been sold or are expected to be sold as discontinued. Below is a summary of the operating results of these discontinued operations included in the condensed consolidated financial statements for the three months ended March 31, 2015 and 2014:


	Three Months Ended March 31,
	2015		2014
Revenues	$	2,604	$	7,501
Expenses		(3,073)		(8,866)
Benefit from income taxes		—		473
Loss from discontinued operations	$	(469)	$	(892)

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 1 2 . Legal Proceedings and Claims

We have been, are currently, and expect in the future to be involved in claims, lawsuits, and regulatory and other governmental 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 governmental audits, investigations and proceedings may require us to incur significant expense. We account for claims and litigation losses in accordance with ASC Topic 450, Contingencies, or ASC 450. Under ASC 450, loss contingency provisions are recorded for probable and 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; and 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, as a result of our compliance program to review medical records related to our Medicare billing practices, during 2014 we discovered potentially 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 have made a voluntary disclosure of deficiencies to the United States Department of Health and Human Services Office of the Inspector General, or the OIG, pursuant to the OIG’s Provider Self-Disclosure Protocol. We have completed our investigation and assessment of these matters and expect to submit a final supplemental disclosure to the OIG in May 2015. In the first quarter of 2015 we accrued an additional revenue reserve of $2.4 million to account for historical Medicare payments we expect to repay (the total revenue reserve recorded at December 31, 2014 and March 31, 2015 was $4.3 million and $6.7 million, respectively). In addition, we have recorded expense for additional costs we have incurred or we expect to incur, including OIG imposed penalties, as a result of this matter totaling $3.6 million and $2.3 million for the year ending December 31, 2014 and the quarter ending March 31, 2015, respectively, of which $5.1 million remains accrued and not paid at March 31, 2015. As part of the OIG’s Self-Disclosure Protocol, we expect the OIG will review and evaluate our investigation and assessment of these deficiencies. The OIG may not agree with our assessment and also may require additional investigation and assessment of these deficiencies and additional deficiencies may be discovered as a result, which could increase our liability to the OIG and other costs. Potential losses associated with any such disagreement or with such additional investigation and assessment and/or additional compliance deficiencies are reasonably possible but cannot be reasonably estimated at this time.

Note 13. Subsequent Event

In March 2015, we entered into an agreement to acquire two independent living communities with 68 and 84 living units, respectively, located in Tennessee for an aggregate purchase price of approximately $26,000 , including the assumption of approximately $17,000 of mortg age debt. We expect to fund this acquisition with cash on hand and borrowings under our Credit Facility. We expect this transaction to close du ring 2015; however, this acquisition is subject to various conditions. Accordingly, we can provide no assurance that we will acquire these communities, that the acquisition will not be delayed or that the terms or timing will not change.

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

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, or this Quarterly Report, and with our Annual Report.

RESULTS OF OPERATIO NS

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 third parties independent living communities, assisted living communities and SNFs that are subject to centralized oversight and provide housing and services to elderly residents. Our rehabilitation and wellness operating segment does not meet any of the quantitative thresholds of a reportable segment as prescribed under FASB ASC Topic 280, and therefore we have 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 liability and automobile insurance programs.

Key Statistical Data For the Three Months Ended March 31, 2015 and 2014 :

The following tables present a summary of our operations for the three months ended March 31, 2015 and 2014 :


	Three Months Ended March 31,
(dollars in thousands, except average monthly rate)	2015			2014			Change		%/bps Change
Senior living revenue	$	275,173		$	271,781		$	3,392	1.2	%
Management fee revenue		2,523			2,425			98	4.0	%
Reimbursed costs incurred on behalf of managed communities		56,277			54,205			2,072	3.8	%
Total revenue		333,973			328,411			5,562	1.7	%
Senior living wages and benefits		(133,253)			(132,783)			(470)	(0.4)	%
Other senior living operating expenses		(72,225)			(72,817)			592	0.8	%
Costs incurred on behalf of managed communities		(56,277)			(54,205)			(2,072)	(3.8)	%
Rent expense		(49,628)			(49,074)			(554)	(1.1)	%
General and administrative expenses		(17,982)			(19,748)			1,766	8.9	%
Depreciation and amortization expense		(8,095)			(7,276)			(819)	(11.3)	%
Interest, dividend and other income		220			196			24	12.2	%
Interest and other expense		(1,354)			(1,218)			(136)	(11.2)	%
Gain on sale of available for sale securities		20			313			(293)	(93.6)	%
(Provision for) benefit from income taxes		(304)			2,431			(2,735)	(112.5)	%
Equity in earnings (loss) of an investee		72			(97)			169	174.2	%
Loss from continuing operations	$	(4,833)		$	(5,867)		$	1,034	17.6	%

Total number of communities (end of period):
Owned and leased communities		212			211			1	0.5	%
Managed communities		46			44			2	4.5	%
Number of total communities (1)		258			255			3	1.2	%

Total number of living units (end of period):
Owned and leased living units		23,099			22,948	(2)		151	0.7	%
Managed living units		7,290			7,051			239	3.4	%
Number of total living units		30,389			29,999			390	1.3	%

Owned and leased communities:
Occupancy %		85.5	%		85.9	%		n/a	(40)	bps
Average monthly rate (3)	$	4,623		$	4,534		$	89	2.0	%
Percent of senior living revenue from Medicaid		10.7	%		10.9	%		n/a	(20)	bps
Percent of senior living revenue from Medicare		12.0	%		12.4	%		n/a	(40)	bps
Percent of senior living revenue from private and other sources		77.3	%		76.7	%		n/a	60	bps

(1)

Excludes those senior living communities that we have classified as discontinued operations .

(2)

Excludes 38 living units in on e senior living community that w as temporarily closed for a major renovation.

(3)

Average monthly rate is calculated by taking the average daily rate, which is defined as total operating revenues divided by occupied units during the period , and multipl ying it by 30 days.

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

Comparable communities (senior living communities that we have owned, leased or managed and operated continuously since January 1, 2014):


	Three Months Ended March 31,
(dollars in thousands, except average monthly rate)	2015			2014			Change		%/bps Change
Senior living revenue	$	273,933		$	271,781		$	2,152	0.8	%
Management fee revenue		2,445			2,425			20	0.8	%
Senior living wages and benefits		(132,788)			(132,783)			(5)	(0.0)	%
Other senior living operating expenses		(71,923)			(72,817)			894	1.2	%
Total number of communities (end of period):
Owned and leased communities		211			211			n/a	—
Managed communities		44			44			n/a	—
Number of total communities (1)		255			255			n/a	—
Total number of living units (end of period):
Owned and leased living units		22,946			22,948			(2)	—
Managed living units		7,063			7,051			12	—
Number of total living units (2)		30,009			29,999			10	—

Owned and leased communities:
Occupancy %		85.6	%		85.9	%		n/a	(30)	bps
Average monthly rate (3)	$	4,631		$	4,534		$	97	2.1	%
Percent of senior living revenue from Medicaid		10.8	%		10.9	%		n/a	(10)	bps
Percent of senior living revenue from Medicare		12.0	%		12.4	%		n/a	(40)	bps
Percent of senior living revenue from private and other sources		77.2	%		76.7	%		n/a	50	bps

(1)

Excludes those senior living communities that we have classified as discontinued operations .

(2)

Excludes 38 living units in one senior living community that was temporarily closed for a major renovation.

(3)

Average monthly rate is calculated by taking the average daily rate, which is defined as total operating revenues divided by occupied units during the period , and multipl ying it by 30 days.

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

Our senior living revenue increased by 1.2% for the three months ended March 31, 2015 compared to the same period in 2014 primarily due to increased charges to private pay residents, partially offset by a decrease in occupancy an d a $2.4 million increase in a revenue reserve recorded in the 2015 period in connection with an ongoing compliance related assessment at one of our SNFs.

Our management fee revenue and reimbursed costs incurred on behalf of our managed communities increased 4.0% and 3.8% , respectively, for the three months ended March 31, 2015 compared to the same period in 2014 primarily due to an increase in the number of communities we managed from 44 to 46, and an increase in average monthly rates, partially offset by a decrease in occupancy .

Our senior living wages and benefits increased by 0.4% for the three months ended March 31, 2015 compared to the same period in 2014 primarily due to certain higher wage costs and our acquisition of a senior living community during the second quarter of 2014.

Our other senior living operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, decreased by 0.8% due to decreased reserves related to our professional and general liability insurance program, partially offset by increased professional fees , estimated penalties and other costs we have incurred or expect to incur in connection with an ongoing compliance related assessment at one of our SNFs.

Our rent expense increased by 1.1% compared to the same period in 2014 primarily due to additional rent resulting from senior living community capital improvements purchased by SNH since January 1, 2014, pursuant to our leases with SNH, partially offset by annual minimum rent reductions due to SNH as a result of properties that we leased from SNH that were sold during 2014.

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

General and administrative expenses de creased by 8.9% for the three months ended March 31, 2015 compared to the same period in 2014 primarily due to costs we incurred during the 2014 period in connection with the restatement of certain of our previously issued financial statements and the delayed preparation of o ur 2014 financial reporting.

Our depreciation and amortization expense increased by 11.3% for the three months ended March 31, 2015 compared to the same period in 2014 primarily due to our acquisition of a senior living community in the second quarter of 2014 and capital expenditures , including depreciation costs arising from our purchase of furniture and fixtures for our owned communities.

Our interest, dividend and other income increased by 12.2% for the three months ended March 31, 2015 compared to the same period in 2014 primarily due to higher investable cash balances.

Our interest and other expense increased by 11.2% for the three months ended March 31, 2015 compared to the same period in 2014 primarily due to the assumption of a mortgage note in connection with our acquisition of a senior living community in the second quarter of 2014, as well as increased borrowings under our Credit Facility.

Gain on sale of available for sale securities represents our realized gain on investments.

For the three months ended March 31, 2015 , we recognized a tax expense from continuing operations of $0.3 million and for the three months ended March 31, 2014, we recognized a tax benefit of $2.4 million. As of December 31, 2014 , our federal net operating loss carry forward, which begins to expire in 202 6 if unused, was approximately $112.2 million, and our tax credit carry forward, which begins to expire in 2022 if unused, was approximately $17.2 million. For more information about our taxes, see Note 5 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

Equity in earnings (loss) of an investee represents our proportionate share of earnings (loss) from AIC.

Discontinued operations:

We recorded a loss from discontinued operations for the three months ended March 31, 2015 of $0.5 million , compared to a loss of $0.9 million for the same period in 2014. The losses in both periods were primarily due to losses incurred at assisted living communities and SNFs that we have sold or expect to sell.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2015 , we had $26.7 million of unrestricted cash and cash equivalents and $25.0 million and $119.4 million available to borrow under our Credit Agreement and our Credit Facility, respectively. We expect to use the cash flow from our operations, our cash balances, borrowings under our Credit Agreement and our Credit Facility and proceeds from our sales to SNH of qualified capital improvements we may make to properties that we lease from SNH for increased rent pursuant to our leases with SNH to fund our operations, debt repayments, investments in and maintenance of our properties, future property acquisitions and other general business purposes. We also have in the past assumed mortgage debt in connection with certain of our acquisitions and we may do so in the future. We believe such amounts will be sufficient to fund these activities for the next 12 months and for the foreseeable future thereafter. If, however, our occupancies decline from historic levels, the non-government rates we receive for our services decline , government reimbursement rates are reduced and we are unable to generate positive cash flow for an extended period, or for other reasons, we expect that we would explore alternatives to fund our operations. Such alternatives may include reducing our costs, incurring debt under, and perhaps in addition to, our Credit Agreement and our Credit Facility, engaging in sale leaseback transactions of our owned communities, mortgage financing our owned communities that are not subject to existing mortgages and issuing new debt or equity securities.

Assets and Liabilities

At March 31, 2015, we had cash and cash equivalents of $26.7 million compared to $21.0 million at December 31, 2014. Our total current assets at March 31, 2015 were $122.2 million, compared to $121.8 million at December 31, 2014. Our total current and long term liabilities were $219.5 million and $88.8 million, respectively, at March 31, 2015 compared

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

to $215.4 million and $92.8 million, respectively, at December 31, 2014. The increase in our total current liabilities relates primarily to increases in the current portion of our estimated workers’ compensation liabilities, increased accrued compensation costs, increased accrued reserves , compliance and professional costs and penalties in connection with an ongoing compliance related assessment at one of our SNFs and increased liabilities from our discontinued operations, partially offset by repayments we made under our Credit Facility and decreased accrued real estate taxes.

We had cash flows from operating activities of $16.0 million for the three months ended March 31, 2015 compared to $9.0 million for the same period in 2014. Acquisitions of property and equipment , on a net basis after the proceeds from the sales of such assets to SNH, were $7.5 million and $4.4 million for the three months ended March 31, 2015 and 2014, respectively.

Compliance Matters

As previously disclosed, as a result of our compliance program to review medical records related to our Medicare billing practices, during 2014 we discovered potentially 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 have made a voluntary disclosure of deficiencies to the OIG pursuant to the OIG’s Provider Self-Disclosure Protocol. We have completed our investigation and assessment of these matters and expect to submit a final supplemental disclosure to the OIG in May 2015. In the first quarter of 2015 we accrued an additional revenue reserve of $2.4 million to account for historical Medicare payments we expect to repay (the total revenue reserve recorded at December 31, 2014 and March 31, 2015 was $4.3 million and $6.7 million, respectively). In addition, we have recorded expense for additional costs we have incurred or we expect to incur, including OIG imposed penalties, as a result of this matter totaling $3.6 million and $2.3 million for the year ending December 31, 2014 and the quarter ending March 31, 2015, respectively, of which $5.1 million remains accrued and not paid at March 31, 2015. As part of the OIG’s Self-Disclosure Protocol, we expect the OIG will review and evaluate our investigation and assessment of these deficiencies. The OIG may not agree with our assessment and also may require additional investigation and assessment of these deficiencies and additional deficiencies may be discovered as a result, which could increase our liability to the OIG and other costs. Potential losses associated with any such disagreement or with such additional investigation and assessment and/or additional compliance deficiencies are reasonably possible but cannot be reasonably estimated at this time.

Our Leases and Management Agreements with SNH

As of March 31, 2015 , we leased 180 senior living communities (including three that we have classified as discontinued operations) from SNH under four leases. Our total annual rent payable to SNH as of March 31, 2015 was $191.0 million, excluding percentage rent based on increases in gross revenues at certain properties. Our total rent expense under all of our leases with SNH was $48.9 million and $48.8 million for the three months ended March 31, 2015 and 2014 , respectively, which included approximately $1.4 million in percentage rent paid to SNH for the three months ended March 31, 2015 and 2014 .

Upon our request, SNH may purchase capital improvements made at the properties we lease from SNH and increase our rent pursuant to contractual formulas; however, SNH is not obligated to purchase these improvements from us and we are not obligated to sell them to SNH . During the three months ended March 31, 2015 , SNH reimbursed us $4.1 million for capital expenditur es made at the properties we lease from SNH and these purchases resulted in our annual rent being increased by approximately $0.3 million.

For more information regarding our leases and management agreements with SNH, see Note 10 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference, and Note 1 5 to our consolidated financial statements included in Item 15 of our Annual Report.

Acquisition and Disposition Activity

In June 2013, we began to offer for sale an assisted living community we own with 32 living units located in Alabama ; w e are continuing to offer this community for sale.

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

In February 2015, we and SNH sold a vacant assisted living community for $ 0.3 million , and as a result of this sale, our annual minimum rent payable to SNH decreased by $2 2,500 in accordance with the terms of the applicable lease.

In April 2015, SNH agreed to acquire a senior living community with 40 private pay independent living units located in Cumming, GA. This community is adjacent to another community that we manage for SNH. We expect to enter into a management agreement with SNH to manage this community.

The foregoing pending acquisitions are subject to various conditions. A ccordingly , we can provide no assurance that these acquisitions will be completed, that the related expected management arrangements will be entered into , that the acquisitions and the related expected management arrangements will not be delayed or that the terms will not change.

In May 2015, we began managing 14 senior living communities that SNH acquired at that time .

Our Revenues

Our revenues from services to residents at our senior living communities are our primary source of cash to fund our operating expenses, including rent, capital expenditures (net of capital improvements that we sell to SNH for increased rent pursuant to our leases with SNH) and principal and interest payments on our debt.

During the past several years, weak economic conditions throughout the country have negatively affected many businesses both in and outside of our industry. We believe that occupancy in our industry and in our communities was negatively affected by the inability of some potential residents to sell their housing at prices they considered acceptable. Although many of the services that we provide are needs-driven, some of our prospective residents may be deferring their decisions to relocate to senior living communities in light of such economic circumstances. In recent years, economic indicators have begun to reflect an improving housing market; however, even with these improvements, housing sales activity in many locations remains below pre-recession levels and it is unclear how sustainable the improvements will be and whether any such improvements will result in any increased demand for our services.

At some of our senior living communities (principally our SNFs) and our rehabilitation and wellness clinics , Medicare and Medicaid programs provide operating revenues for skilled nursing and rehabilitation services. These programs are discussed in Part I, Item 1 of our Annual Report under the caption “Government Regulation and Reimbursement”. We derived approximately 22.7% and 23.3% of our total revenues from continuing operations from these programs during the three months ended March 31, 2015 and 2014 , respectively.

Our net Medicare revenues from services to senior living community residents from continuing operations totaled $32.8 million and $33.2 million during the three months ended March 31, 2015 and 2014 , respectively. Our net Medicaid revenues from services to senior living community residents from continuing operations totaled $29.4 million and $29.2 million during the three months ended March 31, 2015 and 2014 , respectively. Our Medicare net revenue is impacted by periodic adjustments to the Prospective Payment System, or PPS, by the Centers for Medicare & Medicaid Services, or CMS. PPS is a method of rate setting which CMS uses to make Medicare payments for services based on a predetermined, fixed payment amount in a classification system of service deemed to be appropriate for patients, in contrast to a historical fee-for-service model. CMS updates PPS ra tes by facility type annually. CMS issued updated PPS rates for SNFs for federal fiscal year 2015, which went into effect on October 1, 2014. As part of this rule, CMS is applying a net increase of 2% to Medicare payment rates for SNFs, which takes into account a 2.5% market basket increase for inflation reduced by a 0.5% productivity adjustment and will result in an aggregate increase of approximately $750 million in payments to SNFs in federal fiscal year 2015. O n April 15, 2015, CMS released its proposed rule for the Medicare prospective payment system for SNFs for federal fiscal year 2016, which would take effect on October 1, 2015. As part of this rule, CMS proposes to apply a net increase of 1.4% to Medicare payment rates

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

for SNFs, which takes into account a 2.6% market basket increase for inflation reduced by a 0.6% forecast error and a 0.6% productivity adjustment and would result in an aggregate increase of approximately $500 million in payments to SNFs in federal fiscal year 2016. The Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, discussed below, limits the market basket increase for SNFs to 1.0% in federal fiscal year 2018. It is unclear whether these modest adjustments in Medicare rates will in fact compensate for the increased costs we may incur for services to our residents whose bills are paid by Medicare.

As part of its rule for federal fiscal year 2016, CMS proposes to amend the Medicare and Medicaid conditions of participation to require SNFs to submit staffing information based on payroll and other verifiable data to CMS. CMS also proposes to establish a SNF quality reporting program, as required by the Improving Medicare Post-Acute Transformation Act of 2014. Starting in federal fiscal year 2018, CMS will reduce annual payment updates by 2% for SNFs that fail to submit required quality data. In addition, CMS proposes a 30-day all-cause, all-condition hospital readmission measure for SNFs, to be adopted as part of a new value-based purchasing program that will provide incentive payments to SNFs for quality and efficiency beginning in federal fiscal year 2019, as required by the Protecting Access to Medicare Act of 2014, or PAMA.

The Budget Control Act of 2011 and the Bipartisan Budget Act of 2014 allow for automatic reductions in federal spending by means of a process called sequestration, which has reduced Medicare payments by 2% since April 1, 2014 , and has had an adverse effect on our operations and financial results. Sequestration remains in effect and could result in further reductions to our revenues from Medicare and certain other federal health programs over the next decade. Any future reductions in Medicare payment rates could be adverse and material to our operations and to our future financial results of operations. Furthermore, the Middle Class Tax Relief and Job Creation Act of 2012, which was enacted in February 2012, gradually reduces the SNF reimbursement rate for Medicare bad debt from 100% to 65% by federal fiscal year 2015 for beneficiaries dually-eligible for Medicare and Medicaid. Because nearly 90% of SNF bad debt has historically been related to dual-eligible beneficiaries, this rule has a substantial adverse effect on SNFs, including some of those we operate. The same law also reduced the SNF Medicare bad debt reimbursement rate for Medicare beneficiaries not eligible for Medicaid from 70% to 65% in federal fiscal year 2014 .

Our Medicare Part B outpatient therapy revenue rates are tied to the Medicare Physician Fee Schedule, or MPFS. On April 14, 2015, Congress passed MACRA, which extended the outpatient therapy cap exceptions process from March 31, 2015 until January 1, 2018, further postponing implementation of strict limits on Medicare payments for outpatient therapies. MACRA also repealed the Sustainable Growth Rate, or SGR, formula for calculating updates to MPFS rates, which would have led to a 21.2% rate reduction effective April 1, 2015, and replaced the SGR formula with a different reimbursement methodology.

Although Medicaid is exempt from the sequestration process described above, some of the states in which we operate either have not raised Medicaid rates by amounts sufficient to offset increasing costs or have frozen or reduced, or are expected to freeze or reduce, Medicaid rates. Despite these freezes and reduced payments to states, according to the 2013 Actuarial Report on the Financial Outlook for Medicaid, Medicaid enrollment is projected to increase at an average annual rate of 3.3% through 2022, due in part to the expansion in Medicaid eligibility under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, beginning in 2014. Under the ACA, the federal government will pay for 100% of a state’s Medicaid expansion costs for the first three years (2014-2016) and gradually reduce its subsidy to 90% for 2020 and future years. The U.S. Supreme Court has held, however, that states may choose not to participate in the Medicaid expansion program without risking the loss of federal Medicaid funding. As of April 29, 2015, 17 states have elected not to broaden Medicaid eligibility under the ACA and four remain undecided; those states choosing not to participate in Medicaid expansion are forgoing the federal funds that would otherwise be available for that purpose. It is unclear what the effect of the U.S. Supreme Court ruling may have on future federal funding for states Medic aid programs. We expect the ending of temporary federal payments of otherwise reducing federal funding for states Medicaid programs, as well as other costs and budgetary constraints for state governments, to result in continued challenging state fiscal conditions. Some state budget deficits may increase, and some states may reduce Medicaid payments to healthcare services providers like us as part of an effort to balance their budgets.

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

In addition, on November 7, 2014, the U.S. Supreme Court agreed to hear a lawsuit challenging the legality of an Internal Revenue Service regulation that allows eligible individuals in all states to receive subsidies for health insurance under the ACA, even in states that have not established their own health exchanges. Such subsidies have provided certain eligible taxpayers with the ability to purchase or maintain health insurance. We are unable to predict the outcome of that litigation or its impact on our business.

We cannot predict the type and magnitude of the potential Medicare and Medicaid policy changes, rate reductions or other changes and the impact on us of the possible failure of these programs to increase rates to match our increasing expenses, but they may be adverse and material to our operations and to our future financial results of operations. Similarly, we are unable to predict the impact on us of the insurance changes, payment changes, and healthcare delivery systems changes contained in and to be developed pursuant to the ACA. If the changes to be implemented under the ACA result in reduced payments for our services, or the failure of Medicare, Medicaid or insurance payment rates to cover our costs of providing required services to residents, our future financial results could be materially and adversely affected.

Debt Financings and Covenants

As of March 31, 2015 , we had no outstanding borrowings under our Credit Agreement , $30.0 million outstanding under our Credit Facility and $50.7 million in aggregate principal amount of mortgage notes outstanding. As of March 31, 2015, we believe we were in compliance with all applicable covenants under our debt agreements. As of May 7, 2015 , we had no amounts outstanding and $30.0 million outstanding under our Credit Agreement and Credit Facility, respectively. Our Credit Agreement matures in March 2016. The maturity date of our Credit Facility was initially April 13, 2015, but, subject to the payment of extension fees and meeting certain other conditions, our Credit Facility includes options for us to extend its stated maturity date for two consecutive one-year periods ; and, i n April 2015, we exercised our first one-year option and extended the maturity date of our Credit Facility to April 13, 2016 , for which we paid a fee of $300. There can be no assurance that we will be successful in renewing, refinancing or replacing either facility and any such renewal, refinancing or replacement may be on terms less favorable to us than the current terms. For more information regarding our debt financings and covenants, including terms governing those financings and their maturities, please see Note 8 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly R eport, which is incorporated herein by reference .

Off Balance Sheet Arrangements

We have pledged certain of our assets, including accounts receivable , with a carrying value, as of March 31, 2015 of $13.6 million, arising from our operation of 26 properties owned by SNH and leased to us to secure SNH’s borrowings from its lender, FNMA. As of March 31, 2015 , we had no other off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources .

Related Person Transactions

We have relationships and historical and continuing transactions with SNH and RMR a nd others affiliated with RMR, including other companies to which RMR provides management services and which have directors, trustees and officers who are also directors or officers of us or RMR. For further information about these and other such relationships and related person transactions, please see Note 10 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference, our Annual Report, our definitive Proxy Statement for our 2015 Annual Meeting of Stockholders and our other filings with the Securities and Exchange Commission, or 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 related person transactions and relationships. Our filings with the SEC are available at the SEC’s website at www.sec.gov . Copies of certain of our agreements with these related parties are publicly available as exhibits to our public filings with the SEC and accessible at the SEC's website, www.sec.gov .

We believe that our agreements with related persons are on commercially reasonable terms. We also believe that our relationships with such related persons and their affiliated and related persons and entities benefit us and, in fact, provide

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

us with competitive advantages in operating and growing our business. We may engage in additional transactions with related persons, including SNH and businesses to which RMR or its affiliates provide management services.

Seasonality

Our senior living business is subject to modest effects of seasonality. During the calendar fourth quarter holiday periods, nursing home and assisted living residents are sometimes discharged to join family celebrations and relocations and admission decisions are often deferred. The first quarter of each calendar year usually coincides with increased illness among nursing home and assisted living residents which can result in increased costs or discharges to hospitals. As a result of these factors, nursing home and assisted living operations sometimes produce greater earnings in the second and third quarters of a calendar year and lower earnings in the first and fourth quarters. We do not believe that this seasonality will cause fluctuations in our revenues or operating cash flow to such an extent that we will have difficulty paying our expenses, including rent, which do not fluctuate seasonally.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting us, see Item 7A. — “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report. Our exposure to market risks has not changed materially from that set forth in our Annual Report.

Item 4. Controls and Procedures

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and Rule 15d-15 under the Securities Exchange Act of 1934 , as amended, or the Exchange Act. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective at March 31, 2015, because we had not completed remediation of the material weakness in our internal control over financial reporting relating to our lack of sufficient personnel with requisite accounting competencies and insufficient level of oversight in the financial statement close process, as described in Item 9A of our Annual Report. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.

Remediation of Material Weaknesses in Internal Control Over Financial Reporting

We are continuing to develop remediation plan s for the mate rial weaknesses described above. Our plans currently include :

recruitment of additional experienced personnel for certain accounting positions;

restructuring of our accounting department; and

providing enhanced training for employees regarding our accounting policies and procedures.

We have begun to implement these remediation plan s while they evolve . To date, we have:

added qualified and experienced personnel by filling a newly created senior level accounting position and hiring additional personnel who are qualified as certified public accountants;

engaged consultants to supplement our existing accounting staff and to provide additional layers of review by qualified persons; and

begun restructuring our accounting and tax functions.

Successful remediation of the material weaknesses described above requires review and evidence of the effectiveness of the related internal control processes as part of our periodic assessments of our internal controls over financial reporting. As we continue to evaluate and work to enhance our internal control over financial reporting, we may determine that additional measures should be taken to address the material weaknesses described above or other control deficiencies, or that we should modify the remediation plan s . We expect that the remediation of the material weaknesses described above will be completed by December 31, 2015.

Changes in Internal Control Over Financial Reporting

Except as noted above under “ Remediation of Material Weaknesses in Internal Control Over Financial Reporting ”, t here have been no changes in our internal control over financial reporting during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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WARNIN G CONCERNING FORWARD LOOKING STATEMENTS

THIS QUARTERLY REPORT CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE” OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. FORWARD LOOKING STATEMENTS IN THIS REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:

OUR ABILITY TO OPERATE OUR SENIOR LIVING COMMUNITIES PROFITABLY,

OUR ABILITY TO COMPLY AND TO REMAIN IN COMPLIANCE WITH APPLICABLE MEDICARE, MEDICAID AND OTHER FEDERAL AND STATE REGULATORY, RULE MAKING AND RATE SETTING REQUIREMENTS,

OUR ABILITY TO MEET OUR RENT AND DEBT OBLIGATIONS,

OUR ABILITY TO RAISE EQUITY OR DEBT CAPITAL,

OUR ABILITY TO COMPETE FOR ACQUISITIONS EFFECTIVELY, TO MANAGE ADDITIONAL SENIOR LIVING COMMUNITIES AND TO SELL PROPERTIES WE OFFER FOR SALE,

THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR CREDIT FACILITIES,

THE IMPACT OF THE ACA AND OTHER EXISTING OR PROPOSED LEGISLATION OR REGULATIONS ON US, AND

OTHER MATTERS.

OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:

CHANGES IN MEDICARE AND MEDICAID POLICIES, INCLUDING THOSE THAT MAY RESULT FROM THE IMPACT OF THE ACA AND OTHER RECENTLY ENACTED, ADOPTED OR PROPOSED LEGISLATION OR REGULATIONS, WHICH COULD RESULT IN REDUCED RATES OF PAYMENT TO US,

THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR RESIDENTS AND OTHER CUSTOMERS,

COMPETITION WITHIN THE SENIOR LIVING SERVICES BUSINESS,

INCREASES IN INSURANCE AND TORT LIABILITY COSTS,

INCREASES IN OUR LABOR COSTS OR IN COSTS WE PAY FOR GOODS AND SERVICES,

ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR MANAGING DIRECTORS, SNH, RMR, AIC AND THEIR RELATED PERSONS AND ENTITIES,

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DELAYS OR NONPAYMENTS OF GOVERNMENT PAYMENTS TO US THAT COULD RESULT FROM GOVERNMENT SHUTDOWNS, PAYMENT DEFAULTS OR PAYMENT DELAYS,

COMPLIANCE WITH, AND CHANGES TO FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS THAT COULD AFFECT OUR SERVICES OR IMPOSE REQUIREMENTS, COSTS AND ADMINISTRATIVE BURDENS THAT MAY REDUCE OUR ABILITY TO PROFITABLY OPERATE OUR BUSINESS, AND

ACTS OF TERRORISM, OUTBREAKS OF SO CALLED PANDEMICS OR OTHER MANMADE OR NATURAL DISASTERS BEYOND OUR CONTROL.

FOR EXAMPLE:

THE VARIOUS GOVERNMENTS WHICH PAY US FOR THE SERVICES WE PROVIDE TO OUR RESIDENTS ARE CURRENTLY EXPERIENCING BUDGETARY CONSTRAINTS AND MAY LOWER THE MEDICARE, MEDICAID AND OTHER RATES THEY PAY US. BECAUSE WE OFTEN CANNOT ETHICALLY LOWER THE QUALITY OF THE SERVICES WE PROVIDE TO MATCH THE AVAILABLE MEDICARE, MEDICAID AND OTHER RATES WE ARE PAID, WE MAY EXPERIENCE LOSSES AND SUCH LOSSES MAY BE MATERIAL,

WE MAY ENTER INTO ADDITIONAL OR CHANGED MANAGEMENT ARRANGEMENTS WITH SNH SIMILAR TO THOSE CURRENTLY IN EFFECT FOR US TO MANAGE ADDITIONAL SENIOR LIVING COMMUNITIES SNH MAY ACQUIRE IN THE FUTURE. HOWEVER, THERE CAN BE NO ASSURANCE THAT SNH WILL ACQUIRE ADDITIONAL COMMUNITIES OR THAT WE AND SNH WILL ENTER INTO ANY ADDITIONAL MANAGEMENT AGREEMENTS,

OUR ABILITY TO OPERATE AND MANAGE NEW SENIOR LIVING COMMUNITIES PROFITABLY DEPENDS UPON MANY FACTORS, INCLUDING OUR ABILITY TO INTEGRATE NEW COMMUNITIES INTO OUR EXISTING OPERATIONS AND SOME FACTORS WHICH ARE BEYOND OUR CONTROL SUCH AS THE DEMAND FOR OUR SERVICES ARISING FROM ECONOMIC CONDITIONS GENERALLY AND COMPETITION FROM OTHER PROVIDERS OF SENIOR LIVING SERVICES. WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE NEW COMMUNITIES OR OPERATE AND MANAGE NEW COMMUNITIES PROFITABLY,

OUR BELIEF THAT THE AGING OF THE U.S. POPULATION WILL INCREASE DEMAND FOR SENIOR LIVING COMMUNITIES MAY NOT BE REALIZED OR MAY NOT RESULT IN INCREASED DEMAND FOR OUR SERVICES,

AT MARCH 31, 2015 WE HAD $26.7 MILLION OF CASH AND CASH EQUIVALENTS , $30.0 MILLION OF BORROWINGS OUTSTANDING UNDER OUR CREDIT FACILITIES AND $144.4 MILLION OF REMAINING AVAILABILITY UNDER THESE CREDIT FACILITIES , AND WE HAVE IN THE PAST SOLD IMPROVEMENTS TO SNH AND EXPECT TO REQUEST TO SELL ADDITIONAL IMPROVEMENTS TO SNH FOR INCREASED RENT PURSUANT TO OUR LEASES WITH SNH . THESE FACTS MAY IMPLY THAT WE HAVE ABUNDANT CASH LIQUIDITY. HOWEVER, OUR OPERATIONS AND BUSINESS REQUIRE SIGNIFICANT AMOUNTS OF WORKING CASH AND REQUIRE US TO MAKE SIGNIFICANT CAPITAL EXPENDITURES TO MAINTAIN OUR COMPETITIVENESS. ACCORDINGLY, WE MAY NOT HAVE SUFFICIENT CASH LIQUIDITY,

DURING THE PAST SEVERAL YEARS, WEAK ECONOMIC CONDITIONS THROUGHOUT THE COUNTRY HAVE NEGATIVELY AFFECTED MANY ENTITIES BOTH IN AND OUTSIDE OF OUR INDUSTRY, AND THESE CONDITIONS HAVE RESULTED IN, AMONG OTHER THINGS, A DECREASE IN OUR COMMUNITIES’ OCCUPANCY ; HOWEVER IN RECENT YEARS ECONOMIC INDICATORS REFLECT AN IMPROVING HOUSING MARKET AND MANY OF TH E SERVICES WE PROVIDE ARE NEEDS- DRIVEN. TH E S E FACTORS MAY IMPLY THAT ECONOMIC CONDITIONS WILL IMPROVE, THAT THERE MAY BE PENT UP DEMAND FOR SERVICES THAT WE PROVIDE AND THAT OUR REVENUES AND PROFITABILITY WILL IMPROVE AS A RESULT. HOWEVER,

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THERE CAN BE NO ASSURANCE THAT ECONOMIC CONDITIONS WILL IMPROVE, THAT THERE EXISTS ANY PENT UP DEMAND FOR SERVICES WE PROVIDE OR THAT, EVEN IF THERE IS SUCH DEMAND, THAT WE WOULD BE SUCCESSFUL IN ATTRACTING SUCH DEMAND, OR THAT OUR REVENUES AND PROFITS W I L L IMPROVE,

RESIDENTS WHO PAY FOR OUR SERVICES WITH THEIR PRIVATE RESOURCES MAY BECOME UNABLE TO AFFORD OUR SERVICES WHICH COULD RESULT IN DECREASED OCCUPANCY AND DECREASED REVENUES AT OUR SENIOR LIVING COMMUNITIES AND INCREASED RELIANCE ON LOWER RATES FROM GOVERNMENT S AND OTHER PAYERS,

WE MAY BE UNABLE TO REPAY OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE,

THE AMOUNT OF AVAILABLE BORROWINGS UNDER OUR CREDIT FACILITIES IS SUBJECT TO OUR HAVING QUALIFIED COLLATERAL, WHICH IS PRIMARILY BASED ON THE VALUE OF THE ACCOUNTS RECEIVABLE SECURING OUR $25.0 MILLION CREDIT AGREEMENT AND THE VALUE OF THE PROPERTIES SECURING OUR $150.0 MILLION CREDIT FACILITY. ACCORDINGLY, THE AVAILABILITY OF BORROWINGS UNDER OUR CREDIT FACILITIES AT ANY TIME MAY BE LESS THAN $ 2 5.0 MILLION AND $150.0 MILLION, RESPECTIVELY. A DDITIONALLY, THE AVAILABILITY OF BORROWINGS UNDER OUR CREDIT FACILITIES IS SUBJECT TO OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND MEETING OTHER CUSTOMARY CONDITIONS,

ACTUAL COSTS UNDER OUR CREDIT FACILITIES WILL BE HIGHER THAN LIBOR PLUS A PREMIUM BECAUSE OF OTHER FEES AND EXPENSES ASSOCIATED WITH OUR CREDIT FACILITIES,

WE HAVE MADE A VOLUNTARY DISCLOSURE OF CERTAIN MEDICARE BILLING DEFICIENCIES RELATED TO ME DICARE RECORDS AND OTHER MATTERS TO THE OIG, AND WE HAVE COMPLETED OUR ASSESSMENT OF THESE MATTERS AND EXPECT TO SUBMIT A FINAL SUPPLEMENTAL DISCLOSURE TO THE OIG IN MAY 2015. ALTHOUGH WE HAVE ACCRUED A REVENUE RESERVE TO ACCOUNT FOR MEDICARE PAYMENTS WE EXPECT TO REPAY AND WE HAVE ACCRUED A RESERVE FOR ADDITIONAL ASSOCIATED COSTS WE EXPECT TO INCUR, INCLUDING OIG IMPOSED PENALTIES, THERE CAN BE NO ASSURANCE THAT OUR RESERVES WILL BE ADEQUATE TO COVER THE PAYMENT OBLIGATIONS WE ARE ULTIMATELY DETERMINED TO OWE OR ADDITIONAL ASSOCIATED COSTS. ALSO, ADDITIONAL DEFICIENCIES MAY BE DISCOVERED THAT COULD INCREASE OUR LIABILITY TO THE OIG AND THE ASSOCIATED COSTS ,

WE AND SNH HAVE DECIDED TO OFFER FOR SALE CERTAIN SENIOR LIVING COMMUNITIES THAT WE LEASE FROM SNH, WHICH HAVE NOT YET BEEN SOLD, AND WE HAVE DECIDED TO OFFER FOR SALE ONE COMMUNITY WHICH WE OWN. WE AND SNH MAY BE UNABLE TO SELL ANY OF THOSE COMMUNITIES WE LEASE FROM SNH, AND WE MAY BE UNABLE TO SELL THE ONE COMMUNITY WE OWN, ON ACCEPTABLE TERMS. ACCORDINGLY, WE CAN PROVIDE NO ASSURANCE THAT THESE COMMUNITIES WILL BE SOLD OR WHAT THE TERMS OR TIMING OF ANY SALE WOULD BE,

CONTINGENCIES IN OUR AND SNH’S PENDING AND FUTURE ACQUISITION AND SALE AGREEMENTS MAY NOT BE SATISFIED AND OUR AND SNH’S PENDING ACQUISITIONS OR SALES AND ANY RELATED MANAGEMENT AGREEMENTS MAY NOT OCCUR, MAY BE DELAYED OR THE TERMS OF SUCH TRANSACTIONS MAY CHANGE, AND

WE BELIEVE THAT OUR RELATIONSHIPS WITH OUR RELATED PARTIES, INCLUDING SNH, RMR AND AIC AND OTHERS AFFILIATED WITH THEM, BENEFIT US AND PROVIDE US WITH COMPETITIVE ADVANTAGES IN OPERATING AND GROWING OUR BUSINESS. IN FACT, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY NOT MATERIALIZE.

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THESE RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH ARE BEYOND OUR CONTROL, SUCH AS NATURAL DISASTERS, ACTS OF TERRORISM, CHANGED MEDICARE AND MEDICAID RATES, NEW LEGISLATION, REGULATIONS OR RULE MAKING AFFECTING OUR BUSINESS , OR CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY.

THE INFORMATION CONTAINED ELSEWHERE IN THIS QUARTE RLY REPORT AND IN OUR FILINGS WITH THE SEC INCLUDING UNDER THE CAPTION “RISK FACTORS”, OR INCORPORATED HEREIN OR THEREIN, IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE DIFFERENCES FROM OUR FORWARD LOOKING STATEMENTS. OUR FILINGS WITH THE SEC ARE AVAILABLE ON THE SEC’S WEBSITE AT WWW.SEC.GOV.

YOU SHOULD NOT PLACE UNDUE RELIANCE UPON OUR FORWARD LOOKING STATEMENTS.

EXCEPT AS REQUIRED BY LAW, WE DO NOT INTEND TO UPDATE OR CHANGE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

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Part II. Other Information

Item 6. E xhib its


Exhibit Number		Description
3.1		Composite Copy of Articles of Amendment and Restatement, dated December 5, 2001, as amended to date. (Incorporated by reference to the Company’s Quarterly Report on Form 10 ‑ Q for the quarter ended June 30, 2011.)
3.2		Articles Supplementary, as corrected by Certificate of Correction, dated March 19, 2004. (Incorporated by reference to the Company’s registration statement on Form 8 ‑ A dated March 19, 2004 and the Company’s Quarterly Report on Form 10 ‑ Q for the quarter ended March 31, 2004, respectively, File Number 001 ‑ 16817.)
3.3		Articles Supplementary, dated April 16, 2014. (Incorporated by reference to the Company’s Current Report on Form 8 ‑ K dated April 16, 2014.)
3.4		Amended and Restated Bylaws of the Company, adopted February 14, 2012, as amended to date. (Incorporated by reference to the Company’s Quarterly Report on Form 10 ‑ Q for the quarter ended March 31, 2014.)
4.1		Form of Common Stock Certificate. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.)
31.1		Rule 13a-14(a) Certification of Chief Executive Officer. (Filed herewith.)
31.2		Rule 13a-14(a) Certification of Chief Financial Officer. (Filed herewith.)
32.1		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. (Furnished herewith.)
99.1		Representative f orm of Management Agreement , dated March 30, 2015, between FVE Managers, Inc. and certain subsidiaries of Senior Housing Properties Trust . (Filed herewith.)
101.1		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Loss, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) related notes to these financial statements, tagged as blocks of text and in detail. (Filed herewith.)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FIVE STAR QUALITY CARE, INC.
	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	President and Chief Executive Officer
	Dated: May 11, 2015

	/s/ Paul V. Hoagland
	Paul V. Hoagland
	Treasurer and Chief Financial Officer
	(Principal Financial and Accounting Officer)
	Dated: May 11, 2015

Exhibit 31.1

CERTIFICATION PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)

I, Bruce J. Mackey Jr., certify that:

I have reviewed this Quarterly Report on Form 10-Q of Five Star Quality Care, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 11, 2015	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)

I, Paul V. Hoagland, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Five Star Quality Care, Inc.;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 11, 2015	/s/ Paul V. Hoagland
	Paul V. Hoagland
	Treasurer and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SEC. 1350

In connection with the filing by Five Star Quality Care, Inc. (the “Company”) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 201 5 (the “Report”), each of the undersigned hereby certifies, to the best of his knowledge:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	President and Chief Executive Officer

	/s/ Paul V. Hoagland
	Paul V. Hoagland
	Treasurer and Chief Financial Officer


Date: May 11, 2015

Exhibit 99.1

MANAGEMENT AGREEMENT

FOR

4461 N. Crossover road
fayetteville, arkansas

MARCH 30, 2015

Table of Contents

Page


ARTICLE I DEFINITIONS	1
ARTICLE II APPOINTMENT OF MANAGER	6
Section 2.01. Appointment of Manager	6
ARTICLE III PAYMENTS TO MANAGER; WORKING CAPITAL; CAPITAL REPLACEMENTS; INSUFFICIENT FUNDS	7
Section 3.01. Management Fees	7
Section 3.02. Working Capital	7
Section 3.03. Capital Replacements	7
Section 3.04. Insufficient Funds	8
ARTICLE IV MANAGEMENT SERVICES	8
Section 4.01. Authority of Manager and Management Services	8
Section 4.02. Hiring and Training of Staff	8
Section 4.03. Manager’s Home Office Personnel	9
Section 4.04. Resident Agreements	9
Section 4.05. Contracts with Affiliates	9
Section 4.06. Legal Requirements.	9
ARTICLE V COLLECTIONS AND PAYMENTS	10
Section 5.01. Collection and Priorities for Distribution of Gross Revenues	10
Section 5.02. Timing of Payments	10
Section 5.03. Credits and Collections	11
Section 5.04. Depositories for Funds	11
Section 5.05. Impositions	11
ARTICLE VI ACCOUNTING; FINANCIAL STATEMENTS; AUDIT	11
Section 6.01. Accounting	11
Section 6.02. Financial Statements and Reports	11
Section 6.03. Audit Rights.	12
ARTICLE VII ANNUAL OPERATING BUDGET	12
Section 7.01. Annual Operating Budget	12
ARTICLE VIII TAX MATTERS; REIT QUALIFICATION	12
Section 8.01. Tax Matters	13
Section 8.02. REIT Qualification.	13
Section 8.03. Further Compliance with Section 856(d) of the Code	13
Section 8.04. Adverse Regulatory Event.	14
ARTICLE IX FINANCING; INSPECTION	15
Section 9.01. Financing of the Facility	15
Section 9.02. SNH TRS’s Right To Inspect	15
ARTICLE X REPAIRS AND MAINTENANCE	15
Section 10.01. Repairs, Maintenance and Capital Replacements	15
Section 10.02. Emergency Repairs	15
Section 10.03. Liens	15
Section 10.04. Ownership	16
Section 10.05. Casualty or Condemnation	16
ARTICLE XI INSURANCE	16
Section 11.01. General Insurance Requirements	16
Section 11.02. Waiver of Subrogation	16
Section 11.03. Risk Management	17
ARTICLE XII TERM AND TERMINATION	17
Section 12.01. Term	17
Section 12.02. Early Termination	17
ARTICLE XIII TRANSITION ON TERMINATION	17
Section 13.01. Termination	17

Table of Contents

Page

ARTICLE XIV DEFAULTS	18
Section 14.01. Default by Manager	18
Section 14.02. Default by SNH TRS	18
Section 14.03. Remedies of SNH TRS	19
Section 14.04. Remedies of Manager	19
Section 14.05. No Waiver of Default	19
ARTICLE XV GOVERNING LAW, ARBITRATION, LIABILITY OF MANAGER AND INDEMNITY	19
Section 15.01. Governing Law, Etc	19
Section 15.02. Arbitration.	19
Section 15.03. Consent to Jurisdiction and Forum	21
Section 15.04. Standard of Care	21
Section 15.05. Indemnity	21
Section 15.06. Limitation of Liability	22
ARTICLE XVI PROPRIETARY MARKS; INTELLECTUAL PROPERTY	22
Section 16.01. Proprietary Marks	22
Section 16.02. Ownership of Proprietary Marks	22
Section 16.03. Intellectual Property	22
ARTICLE XVII MISCELLANEOUS PROVISIONS	22
Section 17.01. Notices	23
Section 17.02. Severability	23
Section 17.03. Gender and Number	23
Section 17.04. Headings and Interpretation	23
Section 17.05. Estoppel Certificates	23
Section 17.06. Confidentiality of Business Information	24
Section 17.07. Confidentiality of Patient Information	24
Section 17.08. Assignment	24
Section 17.09. Entire Agreement/Amendment	24
Section 17.10. Third Party Beneficiaries	24
Section 17.11. Survival	25
Section 17.12. Relationship Between the Parties	25

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MANAGEMENT AGREEMENT

THIS MANAGEMENT AGREEMENT (“ Agreement ”) is entered into as of March 30, 2015, by and between FVE Managers, Inc., a Maryland corporation (“ Manager ”), and SNH AL AIMO Tenant, Inc., a Maryland corporation (“ SNH TRS ”).

RECITALS:

WHEREAS, SNH AL AIMO, Inc. (“ Owner ”) intends to acquire certain real estate and personal property described in Exhibit A, attached hereto (the “ Facility ”), which Owner will lease to SNH TRS and which will be licensed as an assisted living facility; and

WHEREAS, SNH TRS wishes to appoint Manager as manager of the Facility and Manager desires to accept such appointment and manage the Facility effective upon Owner’s acquisition thereof and the lease to SNH TRS, all on the terms and conditions herein provided;

NOW, THEREFORE, the parties hereto agree as follows:

ARTICLE I
DEFINITIONS

The following terms shall have the following meanings when used in this Agreement:

Section 1.01. “Accountants” means McGladrey LLP or such other firm of independent certified public accountants as may be approved by SNH TRS and Manager.

Section 1.02. “Adverse Regulatory Event” is defined in Section 8.04(b).

Section 1.03. “Affiliate” means with respect to any Person, (i) any Person who directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with a Person or (ii) any Person of which a Person is the beneficial owner of a twenty-five percent (25%) or greater interest or (iii) any Person who acquires all or substantially all of the assets of a Person. A Person shall be deemed to control another Person if such Person, directly or indirectly, has the power to direct the management, operations or business of such Person. The term “beneficial owner” for this and other definitions, having the meaning given such term in Rule 13d-3 under the Securities Exchange Act of 1934, as amended.

Section 1.04. “Agreement” means this Management Agreement between SNH TRS and Manager, and any amendments hereto.

Section 1.05. “Annual Operating Budget” is defined in Section 7.01.

Section 1.06. “Approved Budget” is defined in Section 7.01.

Section 1.07. “Bankruptcy” means, with reference to either party:

(a) the filing by a party of a voluntary petition in bankruptcy or insolvency or a petition for reorganization under any bankruptcy law, or the admission by a party that it is unable to pay its debts as they become due, or the institution of any proceeding by a party for its dissolution;

(b) the consent by a party to an involuntary petition in bankruptcy or the party’s failure to vacate, within ninety (90) days from the date of entry thereof, any order approving an involuntary petition with respect to such party; or

(c) the entering of an order, judgment or decree by any court of competent jurisdiction, on the application of a creditor, adjudicating a party as bankrupt or insolvent or approving a petition seeking reorganization or appointing a receiver, trustee, or liquidator of all or a substantial part of a party’s assets, and such order, judgment or decree’s continuing unstayed and in effect for an aggregate of sixty (60) days (whether or not consecutive) in any 12 month period.

Section 1.08. “Base Fee” is defined in Section 3.01.

Section 1.09. “Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks in the Commonwealth of Massachusetts are authorized to close.

Section 1.10. “Capital Replacements” means replacements and renewals of FF&E at the Facility and such repairs, maintenance, alterations, improvements, renewals and replacements to the Facility building and its mechanical systems which are classified as capital expenditures under GAAP.

Section 1.11. “Change in Control” means (a) the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission) of 9.8% or more, or rights, options or warrants to acquire 9.8% or more, of the outstanding shares of voting stock or other voting interests of Manager or SNH TRS, as the case may be (either, a “ Relevant Person ”) or of any direct or indirect parent of a Relevant Person (“ Parent ”), or the power to direct the management and policies of a Relevant Person or Parent, directly or indirectly, (b) the merger or consolidation of a Relevant Person or Parent with and into any Person or the merger or consolidation of any Person with and into a Relevant Person or any Parent (other than the merger or consolidation of any Person into a Relevant Person or Parent that does not result in a Change in Control of a Relevant Person or Parent under clauses (a), (c), (d), (e) or (f) of this definition), (c) any one or more sales, conveyances, dividends or distributions to any Person of all or any material portion of the assets (including capital stock or other equity interests) or business of a Relevant Person or Parent, whether or not otherwise a Change in Control, (d) the cessation, for any reason, of the individuals who at the beginning of any twenty-four (24) consecutive month period (commencing on the date hereof) constituted the board of directors of a Relevant Person or any Parent (together with any new directors whose election by such board or whose nomination for election by the shareholders of a Relevant Person or any Parent was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of any such period or whose election or nomination for election was previously so approved, but excluding any individual whose initial nomination for, or assumption of, office as a member of such board of directors occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any Person other than a solicitation for the election of one or more directors by or on behalf of the board of directors) to constitute a majority of the board of directors of a Relevant Person or any Parent then in office, or (e) the adoption of any proposal (other than a precatory proposal) by a Relevant Person or any Parent not approved by vote of a majority of the directors of a Relevant Person or any Parent, as the case may be, in office immediately prior to the making of such proposal, or (f) the election to the board of directors of a Relevant Person or any Parent of any individual not nominated or appointed by vote of a majority of the directors of a Relevant Person or any Parent in office immediately prior to the nomination or appointment of such individual.

Section 1.12. “Code” means the Internal Revenue Code of 1986, as amended.

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Section 1.13. “Condemnation” means a taking by Governmental Authority in an eminent domain, condemnation, compulsory acquisition or similar proceeding for any public or quasi-public use or purpose.

Section 1.14. “Discount Rate” means the yield reported as of 10:00 A.M. on the Business Day prior to the date of termination of this Agreement on the display designated as “Page PX1” (or such other display as may replace Page PX1 on Bloomberg Financial Markets (“Bloomberg”) or, if Page PX1 (or its successor screen on Bloomberg) is unavailable, the Telerate Access Service screen which corresponds most closely to Page PX1) for the most recently issued actively traded U.S. Treasury securities having a maturity equal to the number of years between the date of termination and the scheduled expiration date of the Term (including any extension of the Term, but not in excess of twenty (20) years in any event), plus 300 basis points, or if such yields shall not be reported as of such time or the yields reported as of such time shall not be ascertainable (including by way of interpolation), the Treasury Constant Maturity Series Yields reported for the latest day for which such yields shall have been so reported as of the Business Day prior to the date of termination of this Agreement in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having the same maturity, plus 300 basis points. If necessary, U.S. Treasury bill quotations shall be converted to bond equivalent yields in accordance with accepted financial practice and interpolating linearly between reported yields.

Section 1.15. “Event of Default” is defined in Section 14.01, as to Manager, and in Section 14.02, as to SNH TRS.

Section 1.16. “Facility” is defined in the recitals to this Agreement.

Section 1.17. “Facility Expenses” means all costs and expenses related to the maintenance, operation, repair, renovation, replacement and staffing of the Facility that are normally charged as operating expense under GAAP, including: (a) costs of inventory and supplies (including Household Replacements) used in the operation of the Facility; (b) amounts payable to third parties or expenses otherwise incurred with respect to the marketing, advertising, leasing, use, repair or maintenance of the Facility and any expense incurred in order to obtain or maintain any operating permits, licenses, approvals or certifications, including any licensing or registration fees and expenses associated therewith; (c) amounts payable to third parties for billing and collections of amounts due for goods and services provided to patients and Residents, including for the collection of delinquent rentals and other costs required in connection with the enforcement of any lease or resident agreement; (d) amounts payable to third parties under service contracts; (e) amounts payable to third parties for auditing (including any audits that may be required pursuant to Section 6.02), tax preparation, accounting and risk management services and legal fees; (f) all Personnel Costs incurred by Manager for all personnel employed, and independent contractors who provide services, at the Facility or whose services are entirely allocable to the Facility (or a pro rata share of such Personnel Costs in the case of services provided by a regional business manager or a Shared Employee (defined below)); (g) costs of all utilities serving the Facility; (h) costs of insurance premiums for insurance at the Facility; (i) the Base Fee payable to Manager; (j) costs incurred by Manager for electronic data processing equipment, systems, software or services used at the Facility; (k) all Impositions and all related costs (subject to the requirements of Section 5.05); (l) all expenses, including settlement payments, penalties, fines, repayments, consultant or legal fees and any other costs incurred, related to audits, investigations, inquiries or reviews of the Facility or SNH TRS or Owner by a Governmental Authority, accreditation body or a contractor of a Governmental Authority; (m) any other recoupments, repayments, adjustments, reconciliations or other payments made or returned to Residents or third party payors of the Facility and any related consultant and legal fees; (n) costs payable to prevent, cure or correct any violation of Legal Requirements with respect to the Facility or SNH TRS or Owner; and (o) costs incurred to litigate, negotiate and/or settle any civil claim, action or litigation, including any amounts payable pursuant to a settlement, judgment or damages award and related legal fees.

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If any Facility Expenses (e.g., advertising, information technology, reporting and other systems for the operation of the Facility and personnel training), but not including Personnel Costs, are shared with other senior housing facilities managed or operated by Manager or its Affiliates (the “Shared Expenses”), whether owned by SNH TRS or its Affiliates or other parties, Manager shall identify such Shared Expenses in the Annual Operating Budget and the basis for allocation. In addition, Manager may allocate as a Facility Expense a pro rata share of the Personnel Costs Manager incurs with respect to any employee or independent contractor, including for Home Office Personnel to the extent allowed by Section 4.03, who provides services at the Facility and at other senior housing facilities managed or operated by Manager (a “Shared Employee”) in accordance with an allocation formula approved by the SNH TRS, which approval shall not be unreasonably withheld, conditioned or delayed.

Facility Expenses shall not include, unless otherwise approved by SNH TRS: costs for Home Office Personnel (except as allowed by Section 4.03), costs for Manager’s in-house accounting and reporting systems, software or services to the extent used exclusively at Manager’s home office, other home office and corporate level expenses and travel expenses of personnel assigned to work exclusively at the Facility, except for such Facility related travel expenses as are generally reimbursed or paid pursuant to the Facility’s policies and procedures.

Section 1.18. “FF&E” means furniture, fixtures, furnishings, soft goods, case goods, vehicles, systems and equipment.

Section 1.19. “GAAP” means generally accepted accounting principles as adopted by the American Institute of Certified Public Accountants.

Section 1.20. “Governmental Authority” means any United States federal, state or local government or political subdivision thereof, or any court, administrative agency or commission or other quasi-governmental authority or instrumentality or any subdivision thereof.

Section 1.21. “Gross Revenues” means all revenues derived from operating the Facility, determined in accordance with GAAP, including: income (from both cash and credit transactions, net of any fee therefor and net of any contractual allowances granted to third party payors) from community fees, monthly occupancy fees, health care fees, third party reimbursement or payments and any and all other fees and payments received from or on behalf of Residents; income from food and beverage and catering sales; income from vending machines, and proceeds, if any, from business interruption insurance and all other revenues from the operation of the Facility; provided that, Gross Revenues shall not include: (i) gratuities to employees at the Facility, (ii) federal, state or municipal excise, sales or use taxes or similar taxes imposed at the point of sale and collected directly from Residents or guests of the Facility or included as part of the sales price of any goods or services, (iii) proceeds from the sale of FF&E and any other capital asset, (iv) interest received or accrued with respect to the monies in any accounts referred to in Section 5.04, (v) proceeds of any financing or refinancing of the Facility, (vi) proceeds of any insurance policy (except business interruption insurance) or condemnation or other taking, (vii) any cash refunds, rebates or discounts to Residents of the Facility, cash discounts and credits of a similar nature, given, paid or returned in the course of obtaining Gross Revenues or components thereof to the extent not reflected in contractual allowances, (viii) proceeds from any sale of the Facility or any other capital transaction, (ix) Resident funds on deposit or security deposits until such time and to the extent as the same are applied to current fees due for services rendered, (x) awards of damages, settlement proceeds and other payments received by SNH TRS in respect of any litigation other than litigation to collect fees due for services rendered at the Facility and (xi) payments under any policy of title insurance. Any community fees or deposits that are refunded to a Resident shall be deducted from Gross Revenues during the month in which such refunds are made, if previously included in Gross Revenues.

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Section 1.22. “Home Office Personnel” is defined in Section 4.03.

Section 1.23. “Household Replacements” means supply items including linen, china, glassware, silver, uniforms, and similar items.

Section 1.24. “Impositions” means all levies, assessments and similar charges, including: all water, sewer or similar fees, rents, rates, charges, excises or levies, vault license fees or rentals; license and regulatory approval fees; inspection fees and other authorization fees and other governmental charges of any kind or nature whatsoever (and all interest and penalties thereon), which at any time during or in respect of the Term may be assessed, levied, confirmed or imposed on the Facility, SNH TRS or Manager with respect to the Facility or the operation thereof, or otherwise in respect of or be a lien upon the Facility (including, on any of the inventories or Household Replacements now or hereafter located therein). Impositions shall not include (i) any income or franchise taxes payable by SNH TRS or Manager or (ii) any franchise, corporate, capital levy or transfer tax imposed on SNH TRS or Manager.

Section 1.25. “Incentive Fee” is defined in Section 3.01.

Section 1.26. “Intellectual Property” means (i) all software developed and owned by Manager or an Affiliate of Manager; and (ii) all written manuals, instructions, policies, procedures and directives issued by Manager to its employees at the Facility regarding the procedures and techniques to be used in operation of the Facility.

Section 1.27. “Interest Rate” means an annual rate of 8%, but not higher than the highest rate permitted by law.

Section 1.28. “Invested Capital” means an amount equal to the purchase price of the Facility paid by Owner (including acquisition expenses and the principal amount of any indebtedness secured by a Mortgage and any refinancing thereof), increased by any amounts paid by SNH TRS, or Owner, for Capital Replacements (and excluding amounts funded by SNH TRS for Working Capital) as reflected on the books and records of Owner and SNH TRS, less any amounts representing proceeds from the sale of Capital Replacements or any other capital asset, and in all events, subject to adjustment based on any audit conducted pursuant to Section 6.03(b).

Section 1.29. “Lease” is defined in Section 8.02(a).

Section 1.30. “Legal Requirements” means any permit, license, certificate, law, code, rule, ordinance, regulation or order of any Governmental Authority, Board of Fire Underwriters or any body similar to any of the foregoing having jurisdiction over the business or operation of the Facility or the matters which are the subject of this Agreement, including any Resident care or health care, building, zoning or use laws, ordinances, regulations or orders, environmental protection laws and fire department rules.

Section 1.31. “Manager” is defined in the initial paragraph of this Agreement.

Section 1.32. “Management Fees” means the Base Fee and the Incentive Fee.

Section 1.33. “Mortgage” means any mortgage or deed of trust recorded against the Facility.

Section 1.34. “Net Operating Income” means the excess (if any) of Gross Revenues over Facility Expenses, calculated on an accrual basis.

Section 1.35. “Owner” is defined in the Recitals to this Agreement .

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Section 1.36. “Person” means any natural person, corporation, limited liability company, trust, joint venture, partnership, Governmental Authority or other entity.

Section 1.37. “Personnel Costs” means total cash compensation, costs of training programs, hiring expenses, severance payments, payroll taxes, workers’ compensation, travel expenses, incentive programs (e.g., workers’ compensation and risk management related incentive programs) and employee fringe benefits payable to such personnel.

Section 1.38. “Proprietary Marks” means all trademarks, trade names, symbols, logos, slogans, designs, insignia, emblems, devices and service marks which are used by Manager to identify the Facility, whether they are now or hereafter owned by Manager or any of its Affiliates, and whether or not they are registered under the laws of the United States.

Section 1.39. “Residents” means the individuals residing at the Facility.

Section 1.40. “SNH TRS” is defined in the initial paragraph to this Agreement.

Section 1.41. “SNH TRS Priority Return” means an annual amount equal to eight percent (8%) of Invested Capital.

Section 1.42. “SNH TRS Residual Payment” means an amount equal to the Net Operating Income remaining after payment of the SNH TRS Priority Return and the Incentive Fee.

Section 1.43. “State” means the state in which the Facility is located and any regulatory agencies within the State with overview authority or other authority over the Facility, and any other state that asserts regulatory authority over the Facility or with respect to its Residents, to the extent thereof.

Section 1.44. “ Term” is defined in Section 12.01.

Section 1.45. “Termination Fee” means, if this Agreement is terminated under Section 14.04 after December 31, 2016, an amount equal to the present value of the payments that would have been made to Manager between the date of termination and the scheduled expiration date of the Term (including any extension of the Term, but not for a period in excess of twenty (20) years in any event) as Management Fees if this Agreement had not been terminated, calculated based upon the average of the Management Fees earned in each of the three (3) calendar years ended prior to the Termination Date, discounted at an annual rate equal to the Discount Rate.

Section 1.46. “Unsuitable for Use” means, as a result of damage, destruction or partial Condemnation, the Facility cannot be reasonably expected to be restored to its prior condition within nine (9) months and/or, in the good faith judgment of Manager, after restoration or partial Condemnation the Facility cannot be operated on a commercially practicable basis.

Section 1.47. “Working Capital” means funds used in the day-to-day operation of the Facility.

ARTICLE II
APPOINTMENT OF MANAGER

Section 2.01. Appointment of Manager . Effective on Owner’s acquisition of the Facility and the lease to SNH TRS, subject to the terms and conditions of this Agreement, SNH TRS hereby appoints

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Manager as the sole and exclusive Manager for the daily operation and management of the Facility. Manager accepts such appointment and further agrees to:

(a) perform the duties of Manager under this Agreement in compliance with this Agreement, including Section 4.06;

(b) (i) supervise and direct the management and operation of the Facility in a financially sound, cost-effective and efficient manner; and (ii) establish and maintain programs to promote the most effective utilization of the Facility’s services and maximize occupancy and Gross Revenues;

(c) provide quality services to Residents in a manner complying with all Legal Requirements and the form of resident agreement in use at the Facility;

(d) establish appropriate marketing programs;

(e) maintain well trained, quality staff, in sufficient number, at the Facility;

(f) institute (i) a sound financial accounting system for the Facility, (ii) adequate internal fiscal controls through proper budgeting, accountant procedures and timely financial performance and (iii) sound billing and collection procedures and methods; and

(g) diligently monitor and assure physical plant maintenance and housekeeping consistent with a first class assisted living facility (or such other type of senior living facility as the Facility may then be operated as).

ARTICLE III
PAYMENTS TO MANAGER; WORKING CAPITAL; CAPITAL REPLACEMENTS; INSUFFICIENT FUNDS

Section 3.01. Management Fees . As compensation for the services to be rendered by Manager under this Agreement, Manager shall receive a management fee (“ Base Fee ”) during the Term equal to three percent (3%) of the Gross Revenues of the Facility and an additional fee (“ Incentive Fee ”) equal to thirty-five percent (35%) of Net Operating Income after payment of the SNH TRS Priority Return. No amount paid hereunder is intended to be, nor shall it be construed to be, an inducement or payment for referral of patients by either party or any of its Affiliates to the other party or any of its Affiliates. The compensation being paid constitutes the fair market value of the services being provided in light of the costs being incurred and the time, energy, training, expertise and skills required therefor, and is consistent with amounts that would result from arm’s-length negotiations between unrelated parties.

Section 3.02. Working Capital . Upon execution of this Agreement, SNH TRS will advance to Manager, as Working Capital, an amount equal to $1,500, multiplied by the number of units at the Facility. Manager may, from time to time, request SNH TRS to fund additional amounts as Working Capital to pay Facility Expenses and if the parties do not agree on such additional amounts, the matter shall be referred to arbitration.

Section 3.03. Capital Replacements . The cost of all Capital Replacements in an Approved Budget shall be funded by SNH TRS. Funding will be made by SNH TRS from time to time, after receipt by SNH TRS of such information from Manager regarding the acquisition, initiation or implementation of any Capital Replacements and the progress and performance thereof as SNH TRS may reasonably require.

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Section 3.04. Insufficient Funds . If at any time available Working Capital is insufficient to pay Facility Expenses and SNH TRS has not timely funded additional amounts for such purpose or SNH TRS has not timely funded Capital Replacements, Manager shall have no obligation to advance its own funds therefor and is relieved of any obligation to pay Facility Expenses or the cost of Capital Replacements to such extent. If Manager does advance its own funds, at such time as SNH TRS advances funds to reimburse Manager, whether by agreement or pursuant to an Award, SNH TRS shall pay Manager interest on such amounts at the Interest Rate from the date of Manager’s advance of funds to the date of reimbursement. If the Award includes interest, SNH TRS shall be entitled to offset such interest against its obligation under this Section 3.04.

ARTICLE IV
MANAGEMENT SERVICES

Section 4.01. Authority of Manager and Management Services . Subject to the terms of this Agreement, Manager shall have discretion and control, free from interference, interruption or disturbance from SNH TRS or those claiming by, through or under SNH TRS, in all matters relating to the day-to-day management and operation of the Facility. Such discretion and control shall include the authority to negotiate and execute contracts in its own name, in the name of and on behalf of SNH TRS and/or the Facility, in each case, subject to the terms of this Agreement. Manager shall implement all aspects of the operation of the Facility in accordance with the terms of this Agreement, and shall have responsibility and commensurate authority for all such activities. Without limiting the generality of the foregoing, in addition to any other services set forth in this Agreement, Manager shall, consistent with the Approved Budget:

(a) enter into all contracts, leases and agreements required in the ordinary course of business for the supply, operation, maintenance of and provision of services to the Facility (including food procurement, building services (including cleaning, trash removal, snow plowing, landscaping, carpet cleaning and pest control), utilities and licenses and concessions for commercial space in the Facility); provided that, unless specifically set forth in the Approved Budget, Manager shall obtain the written consent of SNH TRS before entering into any contract, lease or agreement not terminable on ninety (90) days notice without payment of premium or penalty, which consent shall not be unreasonably withheld, conditioned or delayed;

(b) purchase such inventories, provisions, food, supplies, Household Replacements and other expendable items as are necessary to operate and maintain the Facility in the manner required pursuant to this Agreement;

(c) provide care to Residents in compliance with the resident agreements in use at the Facility and set all Resident fees and charges including those for accommodation, food services and care services;

(d) in its own name and on behalf of and, with the consent of SNH TRS, in the name of SNH TRS, which consent shall not be unreasonably withheld, conditioned or delayed, to institute and/or defend, as the case may be, any and all legal actions or proceedings relating to the management and operation of the Facility;

(e) prepare a marketing plan and direct all the marketing efforts; and

(f) oversee, manage and direct all day-to-day operations.

Section 4.02. Hiring and Training of Staff . Manager shall have in its employ or under contract at all times a sufficient number of capable employees or independent contractors meeting all Legal

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Requirements, to enable it to properly, adequately, safely and economically manage, operate, maintain and account for the Facility. All matters pertaining to the retention, employment, supervision, compensation, training, promotion and discharge of such employees or independent contractors are the responsibility of Manager. All such individuals shall be employees or independent contractors of Manager. Manager shall comply with all applicable Legal Requirements having to do with employers including, worker’s compensation, unemployment insurance, hours of labor, wages, working conditions and withholding of taxes from employee wages. Manager shall have the power to hire, dismiss or transfer the executive director at the Facility, provided Manager shall keep SNH TRS informed with respect to the Manager’s intentions to transfer or terminate the executive director and shall consult with SNH TRS with respect to the hiring of a replacement, it being understood that any final decision shall be made by Manager. If SNH TRS becomes dissatisfied with the performance of the executive director, SNH TRS shall have the right to confer with representatives of Manager to discuss the replacement of the executive director or other action, which shall be within the discretion of Manager.

Section 4.03. Manager’s Home Office Personnel . Manager may, in its discretion, provide its services under this Agreement through its Home Office Personnel, provided that the Personnel Costs for such Home Office Personnel shall not be a Facility Expense unless agreed to in advance by SNH TRS. Manager shall further make its Home Office Personnel available for consultation and advice related to the Facility without charge other than its Management Fee. If SNH TRS requests a type, form or level of service from Manager’s Home Office Personnel of a nature that would otherwise be a Facility Expense, Manager shall provide such services by Home Office Personnel for an additional cost to be agreed to in advance by Manager and SNH TRS, which shall be a Facility Expense. The term “ Home Office Personnel ” shall include Manager’s home office staff with experience in areas such as accounting, budgeting, finance, legal, human resources, construction, development, marketing, food service and purchasing, among other areas.

Section 4.04. Resident Agreements . Manager shall submit any forms of resident agreements or other occupancy agreements used in conjunction with the Facility for SNH TRS’s approval before they are used. Manager shall act as an authorized representative of SNH TRS in executing resident agreements and occupancy agreements, but Manager shall not enter into such agreements for a duration of more than one year without the prior consent of SNH TRS, which consent shall not be unreasonably withheld, conditioned or delayed.

Section 4.05. Contracts with Affiliates . Except for those Affiliates listed on Schedule 4.05, Manager shall not engage or pay any compensation to any Affiliate of Manager for the provision of services in connection with this Agreement unless (a) such party is fully qualified and experienced to provide the required services, (b) both the scope of services and the compensation payable to such Affiliate for the services are consistent with then current market standards or comparable arm’s-length transactions, and (c) Manager discloses such engagement to SNH TRS as a transaction with an Affiliate of Manager.

Section 4.06. Legal Requirements .

(a) Subject to SNH TRS’s discharge of its obligations under Section 4.06(b), Manager shall obtain and maintain on behalf of and in the name of the Facility and/or SNH TRS (as applicable) all permits, licenses and certificates required by any Governmental Authority for the use, operation or management of the Facility as a licensed assisted living facility (or such other type of senior living facility as the Facility may then be operated as) providing personal care services in the State.

(b) SNH TRS agrees: (i) to sign promptly all applications for permits, licenses, and certificates necessary for the use, operation and management of the Facility required by any Governmental Authority and all cost reports and other submissions for reimbursement or other payments related to the

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goods and services furnished to patients and Residents at the Facility and (ii) to provide promptly such information and perform such acts as are required in order for Manager to complete any such application and/or obtain and/or maintain any such permits, licenses, or certificates and/or prepare, complete and/or file any such cost reports or other submissions for payments related to the goods and services furnished to patients and Residents at the Facility.

(c) Manager shall cause all things to be done in and about the Facility as may be reasonably necessary to comply with all applicable Legal Requirements respecting the use, operation and management of the Facility. Manager shall keep its corporate organization in good standing in the State and shall maintain all corporate permits and licenses required by the State.

(d) If either party receives any written notice, report or other correspondence from a Governmental Authority which asserts a deficiency relating to the operation of the Facility or otherwise relates to the actual or threatened suspension, revocation, or any other action adverse to any permit, license or certificate required or necessary to use, operate or maintain the Facility, such party shall give the other party prompt notice thereof and not later than three (3) Business Days after receipt.

ARTICLE V
COLLECTIONS AND PAYMENTS

Section 5.01. Collection and Priorities for Distribution of Gross Revenues . Manager shall collect all Gross Revenues and shall apply the Gross Revenues in the following order of priority:

First, to pay all Facility Expenses (excluding the Base Fee),

Second, to pay Manager all accrued but unpaid Base Fee,

Third, to pay SNH TRS all accrued but unpaid SNH TRS Priority Return,

Fourth, to pay Manager the Incentive Fee, and

Fifth, to pay SNH TRS the SNH TRS Residual Payment.

Section 5.02. Timing of Payments . Payment of the Facility Expenses, excluding the Base Fee, shall be made in the ordinary course of business to the extent of available Gross Revenues and Working Capital. The Base Fee shall be paid on the first Business Day of each calendar month, in advance, based upon the Manager’s then estimate of the prior month’s Gross Revenues. The SNH TRS Priority Return shall be paid on the first Business Day of each calendar month, in advance in approximately equal monthly installments, based upon Invested Capital most recently reported to Manager by SNH TRS. The Base Fee and SNH TRS Priority Return shall be subject to adjustment by increasing or decreasing the payment due in the following month based upon the Gross Revenues reflected in the monthly financial statements and the increases in Capital Replacements reported to Manager by SNH TRS for the month just ended. If any installment of the Base Fee or the SNH TRS Priority Return is not paid when due, it shall accrue interest at the Interest Rate. The Incentive Fee and SNH TRS Residual Payment shall be paid on the last Business Day of the calendar month following the month to which such Incentive Fee and SNH TRS Residual Payment relate, in arrears, and based upon the monthly financial statements. Additional adjustments to all payments will be made on an annual basis based upon the financial statements for the full calendar year and any audits conducted pursuant to Section 6.03.

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Section 5.03. Credits and Collections . Manager shall adopt credit and collection policies and procedures. Manager shall institute monthly billing by the Facility and take all steps necessary to collect accounts and monies owed to the Facility, which may include the institution of legal proceedings.

Section 5.04. Depositories for Funds . Manager shall maintain one or more accounts in the name of SNH TRS in one or more banks selected by Manager and approved by SNH TRS and may deposit therein all Gross Revenues and other funds collected or received by Manager and due to SNH TRS as owner of the Facility. Manager shall be authorized to access the accounts without the approval of SNH TRS, subject to any limitation on the maximum amount of any check, if any, established between Manager and SNH TRS as part of the Annual Operating Budget. SNH TRS shall be a signatory on all accounts maintained with respect to the Facility, and SNH TRS shall have the right to require that SNH TRS’s signature be required on all checks/withdrawals after the occurrence of an Event of Default by Manager under this Agreement. SNH TRS shall provide such instructions to the applicable bank(s) as are necessary to permit Manager to implement the Manager’s rights and obligations under this Agreement provided, the failure of SNH TRS to provide such instructions shall relieve Manager of its obligations hereunder until such time as such failure is cured.

Section 5.05. Impositions . All Impositions which accrue during the Term (or are properly allocable to such Term under GAAP) shall be paid by Manager before any fine, penalty or interest is added thereto or lien placed upon the Facility or this Agreement, unless payment thereof is stayed. SNH TRS shall within five (5) Business Days after the receipt of any invoice, bill, assessment, notice or other correspondence relating to any Imposition, furnish Manager with a copy thereof. Either SNH TRS or Manager may initiate proceedings to contest any Imposition (in which case each party agrees to sign the required applications and otherwise cooperate with the other party in expediting the matter). Unless part of an Approved Budget, incurrence of all costs by Manager of any negotiations or proceedings with respect to any such contest shall be subject to SNH TRS’s prior consent, which shall not be unreasonably withheld, conditioned or delayed. Nothing in this Agreement is intended to modify the respective responsibility that the parties would otherwise have to pay such Impositions as may be due and payable.

ARTICLE VI
ACCOUNTING; FINANCIAL STATEMENTS; AUDIT

Section 6.01. Accounting . Manager shall establish and administer accounting procedures and controls and systems for the development, preparation and safekeeping of records and books of accounting relating to the business and financial affairs of the Facility, including payroll, accounts receivable and accounts payable.

Section 6.02. Financial Statements and Reports . Not later than ten (10) Business Days after the end of each calendar month, Manager shall prepare and deliver to SNH TRS a balance sheet and related statement of income and expense for such calendar month and for the then current calendar year to date, certified by Manager’s Controller on a monthly basis and by Manager’s Chief Financial Officer on a quarterly basis as being true and correct to the best of his/her knowledge, with a comparison to the Approved Budget.

The monthly financial statements shall be in such format as SNH TRS may reasonably require. Manager shall provide such other financial statements as SNH TRS may from time to time reasonably request. In addition, at the request of SNH TRS, any or all of the financial statements shall be audited by the Accountants as soon as practicable after such request.

Upon request, Manager shall also provide SNH TRS with information relating to the Facility, Manager and its Affiliates that (i) may be required in order for SNH TRS or its Affiliates to prepare financial

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statements and to comply with any applicable tax and securities laws and regulations, (ii) may be required for SNH TRS or any of its Affiliates to prepare federal, state, provincial or local tax returns or (iii) is of the type that Manager customarily prepares for other owners of facilities it manages, and such other or special reports as Manager may from time to time determine are necessary or as SNH TRS may reasonably request.

Section 6.03. Audit Rights .

(a) SNH TRS and its representatives shall have the right at all reasonable times during usual business hours to audit, examine, and make copies of books of account (including copying any records contained in electronic media) maintained by Manager with respect to the Facility, which audit or examination may cover any time period during the Term at SNH TRS’s discretion. Such right may be exercised through any agent or employee designated by SNH TRS or by an independent public accountant designated by SNH TRS.

(b) Manager and its representatives shall have the right at all reasonable times during usual business hours to audit, examine, and make copies of books of account (including copying any records contained in electronic media) maintained by SNH TRS with respect to the Invested Capital and Capital Requirements, which audit or examination may cover any time period during the Term at Manager’s discretion. Such right may be exercised through any agent or employee designated by Manager or by an independent public accountant designated by Manager.

ARTICLE VII
ANNUAL OPERATING BUDGET

Section 7.01. Annual Operating Budget . Manager shall, on or before December 20 in each calendar year during the Term, deliver to SNH TRS for SNH TRS’s approval, an annual operating budget for the Facility for the next calendar year (the “ Annual Operating Budget ”) which shall include separate line items for Capital Replacements and set forth an estimate, on a monthly basis, of Gross Revenues and Facility Expenses, together with an explanation of anticipated changes to Resident charges, payroll rates and positions, non-wage cost increases, the proposed methodology and formula employed by Manager in allocating shared Facility Expenses, and all other factors differing from the then current calendar year. The Annual Operating Budget shall be accompanied by a narrative description of operating objectives and assumptions. If SNH TRS does not approve an Annual Operating Budget or any portion thereof, it shall do so, to the extent practicable, on a line item basis. Manager and SNH TRS shall cooperate to resolve disputed items, provided if the Annual Operating Budget is not approved by SNH TRS within thirty (30) days of SNH TRS’s receipt, Manager shall operate under the expired Annual Operating Budget until a new Annual Operating Budget is approved, provided that line items for Impositions, insurance premiums and utilities shall be the amounts actually incurred for such items. If agreement on the Annual Operating Budget cannot be reached within forty-five (45) days of SNH TRS’s receipt (which time may be extended upon mutual agreement of the parties), the matter shall be resolved by arbitration. The Annual Operating Budget as approved by SNH TRS, or as resolved by arbitration, will be the “ Approved Budget ” for the applicable calendar year. Manager will obtain SNH TRS’s prior approval for any expenditure which will, or is reasonably expected to, result in a variance of 5% or more of any Approved Budget. For that portion of the Term ending December 31, 2015, except as otherwise agreed by SNH TRS and Manager, the Approved Budget will be the budget of the prior manager of the Facility, a copy of which has been previously provided to Manager.

ARTICLE VIII
TAX MATTERS; REIT QUALIFICATION

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Section 8.01. Tax Matters . Manager shall use commercially reasonable efforts to operate the Facility in a manner to best assure that SNH TRS and the Facility receive all benefits of applicable tax exemptions and/or credits available thereto from any Governmental Authority. Manager will prepare or cause to be prepared all tax returns required in the operation of the Facility, which include payroll, sales and use tax returns, personal property tax returns and business, professional and occupational license tax returns. Manager shall timely file or cause to be filed such returns as required by the State; provided that, SNH TRS shall promptly provide all relevant information to Manager upon request, and any late fees or penalties resulting from delays caused by SNH TRS shall be borne by SNH TRS. Manager shall not be responsible for the preparation of SNH TRS’s federal or state income tax returns, provided Manager shall cooperate fully with SNH TRS as may be necessary to enable SNH TRS to file such federal or state income tax returns, including by preparing data reasonably requested by SNH TRS and submitting it to SNH TRS as soon as reasonably practicable following such request.

Section 8.02. REIT Qualification .

(a) Manager shall take all commercially reasonable actions reasonably requested by SNH TRS or Owner for the purpose of qualifying Owner’s rental income from SNH TRS under the lease between Owner and SNH TRS for the Facility (“ Lease ”) as “rents from real property” pursuant to Sections 856(d)(2), 856(d)(8)(B) and 856(d)(9) of the Code. Manager shall not be liable if such reasonably requested actions, once implemented, fail to have the desired result of qualifying Owner’s rental income from SNH TRS under the Lease as “rents from real property” pursuant to Sections 856(d)(2), 856(d)(8)(B) and 856(d)(9) of the Code. This Section 8.02 shall not apply in situations where an Adverse Regulatory Event has occurred; instead, Section 8.04 shall apply.

(b) If SNH TRS or Owner wish to invoke the terms of Section 8.02(a), SNH TRS or Owner (as appropriate) shall contact Manager and the parties shall meet with each other to discuss the relevant issues and to develop a mutually-agreed upon plan for implementing such reasonably requested actions.

(c) Any additional out-of-pocket costs or expenses incurred by Manager in complying with such a request shall be borne by SNH TRS (and shall not be a Facility Expense). SNH TRS shall reimburse Manager for such expense or cost promptly, but not later than five (5) Business Days after such expense or cost is incurred.

Section 8.03. Further Compliance with Section 856(d) of the Code . Commencing with the date of this Agreement and continuing throughout the Term, Manager intends to qualify as an “eligible independent contractor” as defined in Section 856(d)(9)(A) of the Code, and:

(a) Manager shall use commercially reasonable efforts not to cause the Facility to fail to qualify as “qualified health care property” as defined in Section 856(e)(6)(D)(i) for purposes of Section 856(d)(8)(B) and Section 856(d)(9) of the Code;

(b) Manager shall not own, directly or indirectly or constructively (within the meaning of Section 856(d)(5) of the Code), more than thirty-five percent (35%) of the shares of Senior Housing Properties Trust, a Maryland real estate investment trust, whether by vote, value or number of shares, and Manager shall otherwise comply with any regulations or other administrative or judicial guidance existing under said Section 856(d)(5) of the Code with respect to such ownership limits; Manager shall cause its ultimate parent, Five Star Quality Care, Inc. to enforce the restrictions in its charter documents regarding five percent (5%) or greater owners;

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(c) Manager shall be actively engaged (or shall, within the meaning of Section 856(d)(9)(F) of the Code, be related to a person that is so actively engaged) in the trade or business of operating “qualified health care property” (defined below) for a person who is not a “related person” within the meaning of Section 856(d)(9)(F) of the Code with respect to Owner or SNH TRS. For these purposes, the parties agree that the activities, as of the date of this Agreement, of Manager’s affiliate, FSQ, Inc., a Delaware corporation and a related person as to Manager within the meaning of Section 856(d)(9)(F) of the Code, including in particular the six management contracts pursuant to which FSQ, Inc. has been and is formally engaged as manager by other affiliates (but not subsidiaries) of Manager, render Manager in compliance with the previous sentence. Manager, without the prior consent of SNH TRS, shall not permit or suffer FSQ, Inc.’s level of management activity in respect of “qualified health care properties” to be materially less than its level of such activity on the date of this Agreement;

(d) A “qualified health care property” is defined by reference to Section 856(e)(6)(D)(i) of the Code and means any real property, and any personal property incident to such real property, which is a “health care facility” described in Section 856(e)(6)(D)(ii) or is necessary or incidental to the use of a health care facility. A “health care facility” means: a hospital; a nursing facility; an assisted living facility; a congregate care facility; a qualified continuing care facility; or another licensed facility which extends medical or nursing or ancillary services to patients and which is operated by a provider of such services eligible for participation in the Medicare program under title XVIII of the Social Security Act with respect to such facility; and

(e) Manager, without the prior consent of SNH TRS, which consent shall not be unreasonably withheld, conditioned or delayed, shall not permit or suffer:

(i) Manager to fail to continue as a corporation under state law and taxable under the Code as an association;

(ii) Manager’s affiliate, FSQ, Inc., a Delaware corporation, to fail to be a corporation under state law and taxable under the Code as an association; or

(iii) for so long as Owner or SNH TRS or any Affiliate of Owner or SNH TRS shall seek to qualify as a “real estate investment trust” under the Code, Manager to be reorganized, restructured, combined, merged or amalgamated with any Affiliate (as to Manager) in such manner that any such Affiliate would, or could, be expected to adversely affect (including, e.g., by application of any Person’s actual “disregarded entity” status under the Code) the status that Manager has as a Code Section 856(d)(9)(A) “eligible independent contractor” at a “qualified health care property” owned or leased by Owner or SNH TRS.

Section 8.04. Adverse Regulatory Event .

(a) In the event of an Adverse Regulatory Event arising from or in connection with this Agreement, SNH TRS and Manager shall work together in good faith to amend this Agreement to eliminate the impact of such Adverse Regulatory Event; provided, however, Manager shall have no obligation to materially reduce its rights or materially increase its obligations under this Agreement, all taken as a whole, or to bear any out-of-pocket costs or expenses under this Section 8.04. Manager shall not be liable if any such amendment, once operative, fails to have the desired result of eliminating the impact of an Adverse Regulatory Event.

(b) For purposes of this Agreement, the term “Adverse Regulatory Event” means any time that a new law, statute, ordinance, code, rule, regulation or an administrative or judicial ruling imposes,

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or could impose in Owner’s or SNH TRS’s reasonable opinion, any material threat to Senior Housing Properties Trust’s status as a “real estate investment trust” under the Code or to the treatment of amounts paid to Owner under the Lease as “rents from real property” under Section 856(d) of the Code.

(c) SNH TRS shall promptly inform Manager of any Adverse Regulatory Event of which it is aware and which it believes likely to impair compliance with respect to Section 856(d) of the Code.

ARTICLE IX
FINANCING; INSPECTION

Section 9.01. Financing of the Facility . Manager shall cooperate with Owner and SNH TRS in connection with any financing by Owner of the Facility.

Section 9.02. SNH TRS’s Right To Inspect . SNH TRS or its employees, representatives, lenders or agents shall have access to the Facility and the files, books, accounts, and records of Manager related to the Facility at any and all reasonable times during usual business hours for the purpose of inspection or showing the Facility to prospective purchasers, investors, Residents or mortgagees.

ARTICLE X
REPAIRS AND MAINTENANCE

Section 10.01. Repairs, Maintenance and Capital Replacements . Manager shall maintain the Facility in good, orderly, clean and safe repair and condition consistent with a first class assisted living facility (or such other type of senior living facility as the Facility may then be operated as), and in conformity with Legal Requirements. Manager shall make such routine and preventive maintenance, repairs and minor alterations, the cost of which can be expensed under GAAP, as it, from time to time, deems necessary for such purposes, consistent with the Approved Budget. The cost of such maintenance, repairs and alterations shall be paid from Gross Revenues. Manager shall make such Capital Replacements as are contemplated by the Approved Budget and funded by SNH TRS. The cost of such Capital Replacements shall be funded by SNH TRS.

Section 10.02. Emergency Repairs . If either party has actual knowledge of, or receives a written order or notice from a Governmental Authority, pertaining to a violation or potential violation of any Legal Requirement relating to the physical condition of the Facility or the continued safe operation of the Facility, such party shall give the other party prompt notice thereof and not later than three (3) Business Days after obtaining such knowledge or in the case of an order or notice from a Governmental Authority, receipt. Manager shall recommend appropriate remedial action to SNH TRS and subject to SNH TRS’s consent (which shall not be unreasonably withheld, conditioned or delayed), take such remedial action, provided Manager shall be authorized to take appropriate remedial action consisting of repairs or maintenance to the Facility without receiving SNH TRS’s prior consent: (a) in an emergency threatening the safety of such Facility or its Residents, invitees or employees or imminent material physical damage to the Facility, or (b) if the continuation of the given condition will subject Manager and/or SNH TRS to regulatory, civil, or criminal liability or result in the suspension or revocation of a material permit, license or certificate. Any disagreement regarding the necessity of taking such remedial action and/or the funding of the cost thereof that is not resolved by the parties within ten (10) Business Days shall be resolved by arbitration.

Section 10.03. Liens . Manager shall use commercially reasonable efforts to prevent any liens from being filed against the Facility which arise from any maintenance, repairs, alterations, improvements, renewals or replacements in or to the Facility. Manager shall not file any lien against the Facility.

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Section 10.04. Ownership . All repairs, replacements, alterations and additions shall be the property of Owner or SNH TRS, as may be provided in the lease of the Facility.

Section 10.05. Casualty or Condemnation . If, during the Term, the Facility is (a) totally destroyed by fire or other casualty or there is a Condemnation or (b) partially destroyed by fire or other casualty or there is a partial Condemnation and as a result the Facility is Unsuitable for Use, either Manager or SNH TRS may terminate this Agreement by sixty (60) days written notice to the other and SNH TRS and/or Owner shall be entitled to retain the insurance proceeds or Condemnation award, as the case may be.

If, as a result of partial destruction or partial Condemnation, the Facility is not rendered Unsuitable for Use, SNH TRS shall (or shall cause the Owner to) make the insurance proceeds or award received by SNH TRS and/or Owner available to Manager as necessary to repair or restore the destroyed or untaken portion of the Facility to the same condition as existed previously, provided Manager shall have the right to discontinue operating all or a portion of the Facility pending completion of the repairs or restoration as necessary to comply with Legal Requirements or for the safe and orderly operation of the Facility.

If the cost of repair or restoration is less than the insurance proceeds or award received by SNH TRS and/or Owner, SNH TRS shall (or shall cause the Owner to) make available the funds necessary to permit the Facility or the untaken portion to be repaired and restored. If the cost of the repair or restoration exceeds the amount of insurance proceeds or award, Manager shall give notice to SNH TRS and Owner setting forth in reasonable detail the nature of such deficiency, and SNH TRS and Owner shall promptly advise Manager whether SNH TRS and/or Owner will fund the deficiency. If neither SNH TRS nor Owner elect to fund the deficiency, Manager may terminate this Agreement by notice to SNH TRS.

Any obligation of SNH TRS and/or Owner to make funds available to Manager to repair or restore the Facility is subject to the requirements of any Mortgage.

Notwithstanding any provisions of this Section 10.05 to the contrary, if partial destruction or a partial Condemnation occurs during the last twelve (12) months of the Term (including any renewal) and if full repair and restoration would not reasonably be expected to be completed prior to the date that is nine (9) months prior to the end of the Term (including any renewal), the provisions of this Section 10.05 shall apply as if the Facility had been rendered Unsuitable for Use.

ARTICLE XI
INSURANCE

Section 11.01. General Insurance Requirements . Manager shall, at all times during the Term, keep (or cause to be kept) the Facility and all property located therein or thereon, insured against the risks and in such amounts as is against such risks and in such amounts as SNH TRS shall reasonably require and as may be commercially reasonable. Any disputes regarding such matters not resolved by the parties within ten (10) Business Days (which period may be extended upon mutual agreement of the parties) shall be resolved by arbitration.

Section 11.02. Waiver of Subrogation . SNH TRS and Manager agree that (insofar as and to the extent that such agreement may be effective without invalidating or making it impossible to secure insurance coverage from responsible insurance companies doing business in the State) with respect to any property loss which is covered by insurance then being carried by SNH TRS or Manager, the party carrying such insurance and suffering said loss releases the others of and from any and all claims with respect to such loss; and they further agree that their respective insurance companies (and, if SNH TRS or Manager shall self insure in accordance with the terms hereof, SNH TRS or Manager, as the case may be) shall have

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no right of subrogation against the other on account thereof, even though extra premium may result therefrom. If any extra premium is payable by Manager as a result of this provision, SNH TRS shall not be liable for reimbursement to Manager for such extra premium.

Section 11.03. Risk Management . Manager shall be responsible for the provision of risk management oversight at the Facility.

ARTICLE XII
TERM AND TERMINATION

Section 12.01. Term . The Term of this Agreement shall begin on the date hereof and end December 31, 2030 (“ Term ”), provided the Term will be automatically extended for two consecutive periods of fifteen (15) years each unless notice of non-renewal is given by Manager at least twenty-four (24) months prior to the end of the then current Term, unless sooner terminated as provided in this Agreement. Upon sixty (60) days notice given at any time during the final twenty-four (24) months of the then current Term, if Manager has given notice of non-renewal, or of the second extension period, as the case may be, SNH TRS may terminate this Agreement.

Section 12.02. Early Termination . Either party may terminate this Agreement, effective as of December 31, 2016, for any reason or for no reason at all, by written notice given to the other at least 180 days in advance.

ARTICLE XIII
TRANSITION ON TERMINATION

Section 13.01. Termination . Upon any termination of this Agreement, except as otherwise provided in Section 14.04, Manager shall be compensated for its services only through the date of termination and all amounts remaining in any accounts maintained by Manager pursuant to Section 5.04, after payment of such amounts as may be due to Manager hereunder, shall be distributed to SNH TRS. In the event of any termination, both parties shall fully cooperate with one another to ensure a smooth transition of management. Upon termination, Manager will deliver to SNH TRS the following:

(i) a final accounting, reflecting the balance of income and expenses of the Facility as of the date of termination, to be delivered as soon as reasonably possible but not later than sixty (60) days after such termination,

(ii) after payment of any amounts as may be due to Manager hereunder, any balance of monies of SNH TRS or Resident deposits, or both, held by Manager with respect to the Facility, to be delivered as soon as reasonably possible, but not later than sixty (60) days after such termination,

(iii) all records, contracts, leases, resident agreements, tenant correspondence, files, receipts for deposits, unpaid bills and other papers, documents or computer disks or information which pertain in any way to the Facility to be delivered as soon as reasonably possible, but not later than sixty (60) days after such termination, and

(iv) Manager shall cooperate reasonably in all respects to achieve a transfer of any license and/or certificate (or to obtain a new license and/or certificate, if necessary) required in connection with the operation of the Facility, but shall not be required to incur any monetary expenditures in connection therewith (unless SNH TRS agrees to reimburse Manager therefor).

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ARTICLE XIV
DEFAULTS

Section 14.01. Default by Manager . An Event of Default with respect to Manager shall occur in the event of any of the following:

(a) the Bankruptcy of the Manager,

(b) the gross negligence or willful misconduct of Manager with respect to its duties and obligations under this Agreement,

(c) the permit(s), license(s) or certificate(s) required for use, operation or management of the Facility are at any time suspended, terminated or revoked and not reinstated within the applicable appeal period, if any, for any reason due solely to the acts or omissions of Manager,

(d) Manager’s failure to keep, observe or perform any material covenant, agreement, term or provision of this Agreement to be kept, observed or performed by Manager, which failure shall continue (i) for a period of five (5) Business Days after Manager receives notice from SNH TRS in case of monetary defaults or (ii) for a period of twenty (20) Business Days after Manager receives notice from SNH TRS in the case of non-monetary defaults, in each case, specifying the default; provided, however, that if such non-monetary default cannot be cured within such twenty (20) Business Day period, then Manager shall be entitled to such additional time as shall be reasonable, provided the default is curable and Manager has promptly proceeded to commence cure of such default within said period, and thereafter diligently prosecutes the cure to completion; provided, however, that in no event shall such additional time exceed ninety (90) days,

(e) a Change in Control of Manager to which SNH TRS does not consent,

(f) a default by Manager or any Affiliate of Manager under any other agreement between Manager or an Affiliate of Manager and SNH TRS or an Affiliate of SNH TRS, which continues beyond any applicable notice and cure period.

Section 14.02. Default by SNH TRS . An Event of Default with respect to SNH TRS shall occur in the event of any of the following:

(a) the Bankruptcy of SNH TRS;

(b) the gross negligence or willful misconduct of SNH TRS with respect to its obligations under this Agreement;

(d) SNH TRS shall fail to (i) timely fund Working Capital or to fund Capital Replacements pursuant to an Approved Budget and such failure shall continue for a period of ten (10) Business Days after notice thereof by Manager or (ii) keep, observe or perform any other material covenant, agreement, term or provision of this Agreement to be kept, observed or performed by SNH TRS and such failure shall continue (x) for a period of five (5) Business Days after SNH TRS receives notice from Manager in case of monetary defaults or (y) for a period of twenty (20) Business Days after SNH TRS

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receives notice from Manager in the case of non-monetary defaults, in each case specifying the default; provided, however, if such default cannot be cured within such twenty (20) Business Day period, then SNH TRS shall be entitled to such additional time as shall be reasonable, provided the default is curable, SNH TRS has promptly proceeded to commence cure of such non-monetary default within said period, and thereafter diligently prosecutes the cure to completion; provided, however, that in no event shall such additional time to cure non-monetary defaults exceed ninety (90) days.

Section 14.03. Remedies of SNH TRS . Upon the occurrence of an Event of Default by Manager, SNH TRS may terminate this Agreement immediately upon notice and shall be entitled to exercise any other rights at law or in equity.

Section 14.04. Remedies of Manager . Upon the occurrence of an Event of Default by SNH TRS described in Section 14.02, Manager may terminate this Agreement on thirty (30) days notice and SNH TRS shall pay Manager the Termination Fee within thirty (30) days of the effective date of termination if the termination occurs after December 31, 2016, as liquidated damages and in lieu of any other remedy of Manager at law or in equity, as well as any accrued but unpaid fees owed to Manager pursuant to Section 5.01.

Section 14.05. No Waiver of Default . The failure by SNH TRS or Manager to insist upon the strict performance of any one of the terms or conditions of this Agreement or to exercise any right, remedy or election herein contained or permitted by law shall not constitute or be construed as a waiver or relinquishment for the future of such term, condition, right, remedy or election, but the same shall continue and remain in full force and effect. All rights and remedies that SNH TRS or Manager may have at law, in equity or otherwise for any breach of any term or condition of this Agreement shall be distinct, separate and cumulative rights and remedies and no one of them, whether or not exercised by SNH TRS or Manager, shall be deemed to be in exclusion of any right or remedy of SNH TRS or Manager.

ARTICLE XV
GOVERNING LAW, ARBITRATION, LIABILITY OF MANAGER AND INDEMNITY

Section 15.01. Governing Law, Etc . This Agreement shall be interpreted, construed, applied and enforced in accordance with the laws of the Commonwealth of Massachusetts applicable to contracts between residents of Massachusetts which are to be performed entirely within Massachusetts, regardless of (i) where this Agreement is executed or delivered; or (ii) where any payment or other performance required by this Agreement is made or required to be made; or (iii) where any breach of any provision of this Agreement occurs, or any cause of action otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, citizenship, domicile, principal place of business, or jurisdiction of organization or domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise would apply the laws of a jurisdiction other than Massachusetts; or (vii) any combination of the foregoing.

Section 15.02. Arbitration .

(a) Any disputes, claims or controversies between the parties (i) arising out of or relating to this Agreement, or (ii) brought by or on behalf of any shareholder of any party or a direct or indirect parent of a party (which, for purposes of this Section 15.02, shall mean any shareholder of record or any beneficial owner of shares of any party, or any former shareholder of record or beneficial owner of shares of any party), either on his, her or its own behalf, on behalf of any party or on behalf of any series or class of shares of any party or shareholders of any party against any party or any member, trustee, officer, manager (including Reit Management & Research LLC or its successor), agent or employee of any party, including disputes, claims or controversies relating to the meaning, interpretation, effect, validity,

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performance or enforcement of this Agreement, including this arbitration provision, or the declarations of trust, limited liability company agreements or bylaws of any party hereto (all of which are referred to as “ Disputes ”), or relating in any way to such a Dispute or Disputes shall, on the demand of any party to such Dispute be resolved through binding and final arbitration in accordance with the Commercial Arbitration Rules (the “ Rules ”) of the American Arbitration Association (“ AAA ”) then in effect, except as those Rules may be modified in this Section 15.02. For the avoidance of doubt, and not as a limitation, Disputes are intended to include derivative actions against trustees, officers or managers of any party and class actions by a shareholder against those individuals or entities and any party. For the avoidance of doubt, a Dispute shall include a Dispute made derivatively on behalf of one party against another party. For purposes of this Article XV, the term “party” shall include any direct or indirect parent of a party.

(b) There shall be three arbitrators. If there are only two parties to the Dispute, each party shall select one arbitrator within fifteen (15) days after receipt of a demand for arbitration. Such arbitrators may be affiliated or interested persons of such parties. If there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand, shall each select, by the vote of a majority of the claimants or the respondents, as the case may be, one arbitrator within fifteen (15) days after receipt of a demand for arbitration. Such arbitrators may be affiliated or interested persons of the claimants or the respondents, as the case may be. If either a claimant (or all claimants) or a respondent (or all respondents) fail to timely select an arbitrator then the party (or parties) who has selected an arbitrator may request the AAA to provide a list of three proposed arbitrators in accordance with the Rules (each of whom shall be neutral, impartial and unaffiliated with any party) and the party (or parties) that failed to timely appoint an arbitrator shall have ten (10) days from the date the AAA provides such list to select one of the three arbitrators proposed by AAA. If such party (or parties) fail to select such arbitrator by such time, the party (or parties) who have appointed the first arbitrator shall then have ten (10) days to select one of the three arbitrators proposed by AAA to be the second arbitrator; and, if he/they should fail to select such arbitrator by such time, the AAA shall select, within fifteen (15) days thereafter, one of the three arbitrators it had proposed as the second arbitrator. The two arbitrators so appointed shall jointly appoint the third and presiding arbitrator (who shall be neutral, impartial and unaffiliated with any party) within fifteen (15) days of the appointment of the second arbitrator. If the third arbitrator has not been appointed within the time limit specified herein, then the AAA shall provide a list of proposed arbitrators in accordance with the Rules, and the arbitrator shall be appointed by the AAA in accordance with a listing, striking and ranking procedure, with each party having a limited number of strikes, excluding strikes for cause.

(d) There shall be only limited documentary discovery of documents directly related to the issues in dispute, as may be ordered by the arbitrators.

(e) In rendering an award or decision (the “ Award ”), the arbitrators shall be required to follow the laws of The Commonwealth of Massachusetts. Any arbitration proceedings or Award rendered hereunder and the validity, effect and interpretation of this arbitration agreement shall be governed by the Federal Arbitration Act, 9 U.S.C. §1 et seq. The Award shall be in writing and may, but shall not be required to, briefly state the findings of fact and conclusions of law on which it is based.

(f) Except to the extent expressly provided by this Agreement or as otherwise agreed by the parties, each party involved in a Dispute shall bear its own costs and expenses (including attorneys’ fees), and the arbitrators shall not render an award that would include shifting of any such costs or expenses (including attorneys’ fees) or, in a derivative case or class action, award any portion of a party’s award to the claimant or the claimant’s attorneys. Each party (or, if there are more than two parties to the Dispute,

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all claimants, on the one hand, and all respondents, on the other hand, respectively) shall bear the costs and expenses of its (or their) selected arbitrator and the parties (or, if there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand) shall equally bear the costs and expenses of the third appointed arbitrator.

(g) An Award shall be final and binding upon the parties thereto and shall be the sole and exclusive remedy between such parties relating to the Dispute, including any claims, counterclaims, issues or accounting presented to the arbitrators. Judgment upon the Award may be entered in any court having jurisdiction. To the fullest extent permitted by law, no application or appeal to any court of competent jurisdiction may be made in connection with any question of law arising in the course of arbitration or with respect to any award made except for actions relating to enforcement of this agreement to arbitrate or any arbitral award issued hereunder and except for actions seeking interim or other provisional relief in aid of arbitration proceedings in any court of competent jurisdiction.

(h) Any monetary award shall be made and payable in U.S. dollars free of any tax, deduction or offset. Each party against which the Award assesses a monetary obligation shall pay that obligation on or before the 30th day following the date of the Award or such other date as the Award may provide.

(i) This Section 15.02 is intended to benefit and be enforceable by the shareholders, members, direct and indirect parents, trustees, directors, officers, managers (including Reit Management & Research LLC or its successor), agents or employees of any party and the parties and shall be binding on the shareholders of any party and the parties, as applicable, and shall be in addition to, and not in substitution for, any other rights to indemnification or contribution that such individuals or entities may have by contract or otherwise.

Section 15.03. Consent to Jurisdiction and Forum . This Section 15.03 is subject to, and shall not in any way limit the application of, Section 15.02; in case of any conflict between this Section 15.03 and Section 15.02, Section 15.02 shall govern. Notwithstanding anything to the contrary in Section 15.02, the exclusive jurisdiction and venue in any action brought by any party hereto pursuant to this Agreement shall lie in any federal or state court located in Boston, Massachusetts. By execution and delivery of this Agreement, each party hereto irrevocably submits to the jurisdiction of such courts for itself and in respect of its property with respect to such action. The parties irrevocably agree that venue would be proper in such court, and hereby waive any objection that such court is an improper or inconvenient forum for the resolution of such action. The parties further agree and consent to the service of any process required by any such court by delivery of a copy thereof in accordance with Section 17.01 and that any such delivery shall constitute valid and lawful service of process against it, without necessity for service by any other means provided by statute or rule of court.

Section 15.04. Standard of Care . Manager shall discharge its duties in good faith, and agrees to exercise, with respect to all services provided by Manager under this Agreement, a standard of care, skill, prudence and diligence under the circumstances then existing as is consistent with the prevailing practices of institutional property managers that manage properties comparable to the Facility in the same market and in no event with less care, skill, prudence or diligence as Manager would customarily utilize in the conduct of its business, and as is necessary to comply with all Legal Requirements.

Section 15.05. Indemnity . In any action, proceeding or claim brought or asserted by a third party, Manager will defend, indemnify and hold SNH TRS (and any of its Affiliates, their respective directors, trustees, officers, shareholders, employees and agents) harmless from and against any claims, losses, expenses, costs, suits, actions, proceedings, demands or liabilities that are asserted against, or sustained or incurred by them because of Manager’s breach of any material term of this Agreement, or arising from

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Manager’s failure to act or not act in accordance with SNH TRS’s reasonable instructions or gross negligence, fraud, or willful misconduct, except to the extent caused by SNH TRS’s breach of any material term of this Agreement, gross negligence, fraud or willful misconduct. SNH TRS will defend, indemnify, and hold Manager (and any of its Affiliates, their respective directors, trustees, officers, shareholders, employees and agents) harmless, from and against any and all claims, expenses, costs, suits, actions, proceedings, demands, or liabilities that are asserted against, or sustained or incurred by them in connection with the performance of Manager’s duties under this Agreement or otherwise while acting within the scope of the agency established by the parties to this Agreement and in accordance with Section 15.04, or in the case of an action, proceeding or claim brought or asserted by a third party against any of them as a result of SNH TRS’s breach of any material term of this Agreement, violation of Legal Requirements, instructions to Manager to act or not act with respect to the relevant matter or gross negligence, fraud or willful misconduct, except to the extent caused by Manager’s breach of any material term of this Agreement, failure to act or not act in accordance with SNH TRS’s reasonable instructions, gross negligence, fraud or willful misconduct. The scope of the foregoing indemnities includes any and all costs and expenses properly incurred in connection with any proceedings to defend any indemnified claim, or to enforce the indemnity, or both. Recovery upon an indemnity contained in this Agreement shall be reduced dollar-for-dollar by any applicable insurance collected by the indemnified party with respect to the claims covered by such indemnity.

Section 15.06. Limitation of Liability . To the maximum extent permitted by applicable law, no shareholder, member, officer, director, trustee, employee or agent of any party to this Agreement (and of any Affiliate of such party that is not a party to this Agreement) shall have any personal liability with respect to the liabilities or obligations of such party under this Agreement or any document executed by such party pursuant to this Agreement.

ARTICLE XVI
PROPRIETARY MARKS; INTELLECTUAL PROPERTY

Section 16.01. Proprietary Marks . During the Term of this Agreement, the Facility shall be known as a “Five Star Senior Living” community, with such additional identification as may be necessary and agreed to by SNH TRS and Manager to provide local identification or to comply with local licensing or consumer protection laws.

Section 16.02. Ownership of Proprietary Marks . The Proprietary Marks shall in all events remain the exclusive property of Manager, and except as expressly set forth in this Agreement, nothing contained herein shall confer on SNH TRS the right to use the Proprietary Marks. Except as provided below in this section, upon termination, any use of or right to use the Proprietary Marks by SNH TRS shall cease forthwith, and SNH TRS shall promptly remove, at Manager’s expense, from the Facility any signs or similar items that contain the Proprietary Marks. Upon termination, SNH TRS shall have the right to use any inventory or Household Replacement items marked with the Proprietary Marks exclusively in connection with the Facility until they are consumed.

Section 16.03. Intellectual Property . All Intellectual Property shall at all times be proprietary to Manager or its Affiliates, and shall be the exclusive property of Manager or its Affiliates. During the Term, Manager shall be entitled to take all reasonable steps to ensure that the Intellectual Property remains confidential. Upon termination, all Intellectual Property shall be removed from the Facility by Manager, without compensation to SNH TRS.

ARTICLE XVII
MISCELLANEOUS PROVISIONS

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Section 17.01. Notices . All notices, demands, consents, approvals, and requests given by either party to the other hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, upon confirmation of receipt when transmitted by facsimile transmission, or on the next business day if transmitted by nationally recognized overnight courier, to the parties at the following addresses:

SNH AL AIMO Tenant, Inc.
c/o Senior Housing Properties Trust

Two Newton Place

255 Washington Street, Suite 300

Newton, Massachusetts 02458

Attn: David J. Hegarty

Telephone: (617) 796-8104

Facsimile: (617) 796-8349

FVE Managers, Inc.

400 Centre Street

Newton, Massachusetts 02458

Attn: Bruce J. Mackey Jr.

Telephone: (617) 796-8214

Facsimile: (617) 796-8243

or to such other address and to the attention of such other person as either party may from time to time designate in writing. Notices properly given as described above shall be effective upon receipt.

Section 17.02. Severability . If any term or provision of this Agreement or the application thereof in any circumstance is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof.

Section 17.03. Gender and Number . Whenever the context of this Agreement requires, the gender of all words herein shall include the masculine, feminine, and neuter, and the number of all words herein shall include the singular and plural.

Section 17.04. Headings and Interpretation . The descriptive headings in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. References to “Section” in this Agreement shall be a reference to a Section of this Agreement unless otherwise indicated. Whenever the words “include,” “includes” or “including” are used in this Agreement they shall be deemed to be followed by “without limitation.” The words “hereof,” “herein,” “hereby,” and “hereunder,” when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision unless otherwise indicated. The word “or” shall not be exclusive. This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting.

Section 17.05. Estoppel Certificates . Each party to this Agreement shall at any time and from time to time, upon not less than thirty (30) day’s prior notice from the other party, execute, acknowledge and deliver to such other party, or to any third party specified by such other party, a statement in writing: (i) certifying that this Agreement is unmodified and in full force and effect (or if there have been modifications, that the same, as modified, is in full force and effect and stating the modifications); (ii) stating whether or not to the best knowledge of the certifying party: (x) there is a continuing default by the non-certifying party in the performance or observation of any covenant, agreement or condition contained

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in this Agreement; or (y) there shall have occurred any event which, with the giving of Notice or the passage of time or both, would become such a default, and, if so, specifying such default or occurrence of which the certifying party may have knowledge; and (iii) stating such other information as the non-certifying party may reasonably request. Such statement shall be binding upon the certifying party and may be relied upon by the non-certifying party and/or such third party specified by the non-certifying party as aforesaid. The obligations set forth in this Section 17.05 shall survive Termination (that is, each party shall, on request, within the time period described above, execute and deliver to the non-certifying party and to any such third party a statement certifying that this Agreement has been terminated).

Section 17.06. Confidentiality of Business Information . Manager and SNH TRS agree to keep confidential and not to use or to disclose to others, any of their respective secrets or confidential or proprietary information, customer lists, or trade secrets, or any matter or items relating to this Agreement, the management of the Facility or their association with each other except (a) to their respective Affiliates, which may in turn disclose to any holder of a Mortgage, any prospective lender, purchaser or prospective purchaser of the Facility, (b) to any rating agencies, lenders, stock analysts, accountants, lawyers and other like professionals, (c) as expressly consented to in writing by the other party, (d) as required by law or the rules of any national securities exchange or automated quotation system to which SNH TRS or Manager, or any Affiliate of either, is or becomes subject, or (e) as required by law or the applicable regulators with respect to any initial, renewal or other required application for licensure, Medicare or Medicaid participation or other approval or certification of the Facility.

Section 17.07. Confidentiality of Patient Information . The parties shall only use or disclose patient information, including Protected Health Information (as such term is defined by the Standards for Privacy of Individually Identifiable Health Information, 45 C.F.R. Part 160 and Subparts A and E of Part 164, as promulgated from time to time by the Department of Health and Human Services (the “ Privacy Standards ”)), in compliance with the Privacy Standards and other applicable law. The parties shall further reasonably safeguard the confidentiality, integrity and availability of patient information, including Protected Health Information, as required by applicable law, including the Privacy Standards and the Security Standards (45 C.F.R. Part 160 and Subparts A and E of Part 164). In the event that patient information (including Protected Health Information) is disclosed by a party or its agents to the other party, its employees, contractors, subcontractors or agents, such other party agrees to take reasonable steps to maintain, and to require its employees, contractors, subcontractors and agents receiving such information to maintain, the privacy and confidentiality of such information consistent with applicable law. In connection with the Manager’s services hereunder, the parties shall enter into a Business Associate Agreement in a form acceptable to both parties.

Section 17.08. Assignment . SNH TRS may assign this Agreement to any Affiliate (but only as such term is defined in Section 1.03(i) or (iii)) of SNH TRS without Manager’s consent. Manager shall not assign or transfer its interest in this Agreement without the prior written consent of SNH TRS which may be withheld in SNH TRS’s sole and absolute discretion. If SNH TRS consents to an assignment of this Agreement by Manager, no further assignment shall be made without the express consent in writing of SNH TRS.

Section 17.09. Entire Agreement/Amendment . This Agreement supersedes all previous contracts and understandings between the parties and constitutes the entire Agreement between the parties with respect to the subject matter hereof. This Agreement may not be modified, altered or amended in any manner except by an amendment in writing, duly executed by the parties hereto.

Section 17.10. Third Party Beneficiaries . The terms and conditions of this Agreement shall inure to the benefit of, and be binding upon, the respective successors, heirs, legal representatives or permitted assigns of each of the parties hereto and except for Owner, which is an intended third party beneficiary, and

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as otherwise provided in Section 15.05, no Person other than the parties hereto and their successors and permitted assigns is intended to be a beneficiary of this Agreement.

Section 17.11. Survival . The following provisions shall survive termination or expiration of this Agreement: Sections 11.02, 13.01, 14.03, 14.04 and 14.05, Article XV and Article XVII.

Section 17.12. Relationship Between the Parties . The relationship between SNH TRS and Manager pursuant to this Agreement shall not be one of general agency, but shall be that of an independent contractor relationship, provided with respect to those specific and limited circumstances in which (a) Manager is holding funds for the account of SNH TRS or (b) Manager is required or authorized to act as authorized representative for SNH TRS with respect to agreements with Residents, filings with and applications to governmental bodies or pursuant to licenses or Legal Requirements, the relationship between SNH TRS and Manager shall be that of trustee and authorized representative (with limited agency), respectively. Neither this Agreement nor any agreements, instruments, documents or transactions contemplated hereby shall in any respect be interpreted, deemed or construed as making SNH TRS a partner or joint venturer with Manager or as creating any similar relationship or entity, and each party agrees that it will not make any contrary assertion, contention, claim or counterclaim in any action, suit or other legal proceeding involving the other.

[Signatures on the following page]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal by their duly authorized officers, all as of the day and year first above written.


Manager:
FVE Managers, Inc.

By:	/s/ Bruce J. Mackey Jr.
	Name:	Bruce J. Mackey Jr.
	Title:	President

SNH TRS:
SNH AL AIMO Tenant, Inc.

By:	/s/ Richard A. Doyle
	Name:	Richard A. Doyle
	Title:	President

[Signature Page: Management Agreement]

Exhibit A

4461 N. Crossover Road

Fayetteville, Arkansas

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Schedule 4.05

Five Star Rehabilitation and Wellness Services, LLC

Senior Living Insurance Company

Affiliates Insurance Company

Reit Management & Research LLC

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Schedule to Exhibit 99.1

There are 14 management agreements with FVE Managers, Inc., a representative form of which is filed herewith. The other management agreements, with the respective entity and applicable to the respective community listed below, are substantially identical in all material respects to the representative form of management agreement filed herewith.


Entity	Community
SNH AL AIMO Tenant, Inc.	Morningside of Jonesboro 4210 S. Caraway Road Jonesboro, Arkansas

	Morningside of Springdale 672 Jones Road Springdale, Arkansas

	Morningside of Branson Meadows 5351 Gretna Road Branson, Missouri

	Morningside of Chesterfield Village 2410 W. Chesterfield Boulevard Springfield, Missouri

	Morningside of Springfield 3540 East Cherokee Street Springfield, Missouri

	Morningside of Sterling 2705 Avenue E. Sterling, Illinois

	Morningside of Pekin 2700 14th Street Pekin, Illinois

	Morningside of Washington 100 Grand Victorian Place Washington, Illinois

SNH AL AIMO Tenant II, Inc.	Morningside of Nevada 640 E. Highland Avenue Nevada, Missouri

SNH AL TRS, Inc.	The Lodge Assisted Living and Memory Care Community 2200 East Long Street Carson City, Nevada

	Morningside of Godfrey 1373 D’Adrian Professional Park Godfrey, Illinois


	Amber Ridge Assisted Living 900 43rd Avenue Moline, Illinois

	Amber Ridge Memory Care 221 11th Avenue Moline, Illinois


PART I	Financial Information	Page

Item 1.	Condensed Consolidated Financial Statements (unaudited)	1

	Condensed Consolidated Balance Sheets – March 31, 2015 and December 31, 2014	1

	Condensed Consolidated Statements of Operations – Three Months Ended March 31, 2015 and 201 4	2

	Condensed Consolidated Statements of Comprehensive Loss – Three Months Ended March 31, 2015 and 201 4	3

	Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2015 and 201 4	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	22

	Warning Concerning Forward Looking Statements	23

PART II	Other Information

Item 6.	Exhibits	27

	Signatures	28