Item 1.01. Entry into a Material Definitive Agreement.
Pursuant to our previously announced transaction
agreement with DHC, dated as of April 1, 2019, or the Transaction Agreement, on January 1, 2020, effective at 12:00:01 a.m., Eastern
Time, we restructured our business arrangements with DHC as follows:
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our five then existing master leases with DHC for all of the senior living communities that we leased from DHC at such time,
as well as our then existing management agreements and pooling agreements with DHC for the senior living communities that we managed
for DHC at such time, were terminated and replaced, or the Conversion, with new management agreements for all of these senior living
communities and a related omnibus agreement, or collectively, the New Management Agreements;
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(a) we issued to DHC 10,268,158 of our shares of common stock, or Common Shares, which, when considered together with
the 423,500
Common Shares then owned by DHC, caused DHC to own approximately 33.9% of the then outstanding Common Shares, and (b)
pursuant to a pro rata distribution that DHC declared on December 3, 2019 to holders of record of its common shares of
beneficial interest as of December 13, 2019 of the right to receive an aggregate of approximately 51.1% of the then
outstanding Common Shares, we issued to such holders, on a pro rata basis, an aggregate of 16,119,563 Common Shares,
subject to cash being paid in lieu of any fractional shares (such share issuances together being referred to in this Current
Report on Form
8-K as
the Share
Issuances),
with the
noted
percentage
ownership amounts being post-issuance, giving effect to the Share Issuances; and
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as consideration for the Share Issuances, DHC provided us with $75 million of additional consideration, by way of its payment
or assumption of $75 million in certain of our current and future working capital liabilities, pursuant to the terms of the Transaction
Agreement (with DHC’s provision of such consideration to us, collectively with the Conversion and the Share Issuances, being
referred to in this Current Report on Form 8-K as the Restructuring Transaction).
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Also pursuant to the Transaction Agreement,
we have agreed to expand our Board of Directors within six months following the Conversion to add an Independent Director (as defined
in our bylaws) reasonably satisfactory to DHC.
Pursuant to the New Management Agreements,
we will receive a management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement
for our direct costs and expenses related to such communities, as well as an annual incentive fee equal to 15% of the amount by
which the annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of all communities on a combined basis
exceeds the target EBITDA for all communities on a combined basis for such calendar year, provided that in no event shall the incentive
fee be greater than 1.5% of the gross revenues realized at all communities on a combined basis for such calendar year.
The New Management Agreements provide for
15 year terms, subject to our right to extend for two consecutive five year terms if we achieve certain performance targets for
the combined managed communities portfolio. The New Management Agreements also provide DHC with the right to terminate the New
Management Agreement for any community that does not earn 90% of the target EBITDA for such community for two consecutive calendar
years or in any two of three consecutive calendar years, with the measurement period commencing January 1, 2021 (and the first
termination not possible until the beginning of calendar year 2023), provided DHC may not in any calendar year terminate communities
representing more than 20% of the combined revenues for all communities for the calendar year prior to such termination. Pursuant
to a guaranty agreement dated as of January 1, 2020, or the Guaranty, made by us in favor of DHC’s applicable subsidiaries,
the Company has guaranteed the payment and performance of each of our applicable subsidiary’s obligations under the applicable
New Management Agreements.
Also on January 1, 2020, the agreement governing
the $25 million line of credit that DHC extended to us pursuant to the Transaction Agreement, or the Credit Agreement, terminated
in accordance with its terms. There were no borrowings outstanding under this credit facility when the Credit Agreement was terminated.
The foregoing descriptions of the Restructuring
Transaction, the Transaction Agreement, the New Management Agreements and the Guaranty are qualified in their entirety by reference
to the full text of the Transaction Agreement (including the forms of New Management Agreements and Guaranty attached as exhibits
thereto), a copy of which is filed as Exhibit 10.1 to this Current Report on Form 8-K and is incorporated herein by reference.
Information Regarding Certain Relationships and Related Person
Transactions
We were DHC’s 100%
owned subsidiary until DHC distributed the Common Shares it then owned to its shareholders in 2001. DHC is currently our
largest stockholder, owning, as of January 2, 2020, 10,691,658 Common Shares, or approximately 33.9% of our outstanding
Common Shares. We manage most of DHC’s senior living communities and prior to the completion of Restructuring
Transaction we were DHC’s largest tenant and a manager of DHC’s senior living communities. The RMR Group LLC, or
RMR LLC, provides management services to both us and DHC. The RMR Group Inc. is the managing member of RMR LLC. Prior to the
Share Issuances, ABP Acquisition LLC, a subsidiary of ABP Trust, the controlling shareholder of The RMR Group Inc., was our
largest stockholder, owning approximately 34.9% of our then outstanding Common Shares. As a result of the Share Issuances,
ABP Acquisition LLC and ABP Trust currently collectively own approximately 6.3% of our outstanding Common Shares. Adam D.
Portnoy, the Chair of our Board of Directors and one of our Managing Directors, is the sole trustee, an officer and the
controlling shareholder of ABP Trust and the chair of the board of trustees and a managing trustee of DHC. Our Secretary also
serves as the other managing trustee of DHC. Our President and Chief Executive Officer and Executive Vice President, Chief
Financial Officer and Treasurer are also officers and employees of RMR LLC.
For further information about these and
other such relationships and related person transactions, please see our Annual Report on Form 10-K for the year ended December
31, 2018, or our Annual Report, including Notes 9, 13 and 14 to our consolidated financial statements included in our Annual Report,
our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, or our Quarterly Report, including Notes 9, 10 and
11 to our consolidated financial statements included in our Quarterly Report and the sections captioned “Business”,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions”
and “Warning Concerning Forward Looking Statements” of our Annual Report and our Quarterly Report, and our other filings
with the Securities and Exchange Commission, or the SEC. In addition, please see the section captioned “Risk Factors”
of our Annual Report for a description of risks that may arise as a result of these and other such relationships and related person
transactions. Our filings with the SEC and copies of certain of our agreements with these related parties, including our prior
master leases, management agreements and pooling agreements with DHC, are publicly available as exhibits to our public filings
with the SEC and accessible at the SEC’s website, www.sec.gov.
