DIVERSIFIED HEALTHCARE TRUST 10-Q

Item 1. Financial Statements. DIVERSIFIED HEALTHCARE TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data) (unaudited) September 30, December 31, 2020 2019 Assets Real estate properties: Land $ 792,343 $ 793,123 Buildings and improvements 6,579,388 6,668,463 Total real estate properties, gross 7,371,731 7,461,586 Accumulated depreciation ( 1,651,864 ) ( 1,570,801 ) Total real estate properties, net 5,719,867 5,890,785 Assets of properties held for sale 164,363 209,570 Cash and cash equivalents 82,241 37,357 Restricted cash 16,134 14,867 Acquired real estate leases and other intangible assets, net 298,429 337,875 Other assets, net 254,084 163,372 Total assets $ 6,535,118 $ 6,653,826 Liabilities and Equity Unsecured revolving credit facility $ — $ 537,500 Unsecured term loans, net 198,913 448,741 Senior unsecured notes, net 2,606,550 1,820,681 Secured debt and finance leases, net 692,385 694,739 Liabilities of properties held for sale 7,834 6,758 Accrued interest 53,681 24,060 Assumed real estate lease obligations, net 70,046 76,705 Other liabilities 264,003 167,592 Total liabilities 3,893,412 3,776,776 Commitments and contingencies Equity: Equity attributable to common shareholders: Common shares of beneficial interest, $ .01 par value: 300,000,000 shares authorized, 238,268,478 and 237,897,163 shares issued and outstanding, respectively 2,383 2,379 Additional paid in capital 4,613,501 4,612,511 Cumulative net income 1,929,337 2,052,562 Cumulative distributions ( 4,031,177 ) ( 3,930,933 ) Total equity attributable to common shareholders 2,514,044 2,736,519 Noncontrolling interest: Total equity attributable to noncontrolling interest 127,662 140,531 Total equity 2,641,706 2,877,050 Total liabilities and equity $ 6,535,118 $ 6,653,826 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents DIVERSIFIED HEALTHCARE TRUST CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (amounts in thousands, except per share data) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenues: Rental income $ 104,238 $ 148,011 $ 320,943 $ 459,349 Residents fees and services 290,101 107,816 926,174 324,767 Total revenues 394,339 255,827 1,247,117 784,116 Expenses: Property operating expenses 315,650 125,083 934,150 362,498 Depreciation and amortization 67,211 73,368 204,466 219,522 General and administrative 6,988 9,604 23,132 28,287 Acquisition and certain other transaction related costs 53 2,492 803 11,209 Impairment of assets 64,202 33,099 106,611 41,518 Total expenses 454,104 243,646 1,269,162 663,034 (Loss) gain on sale of properties ( 211 ) 4,183 2,403 21,893 Dividend income — — — 1,846 Gains and losses on equity securities, net 12,510 40 14,541 ( 41,476 ) Interest and other income 134 238 8,008 590 Interest expense (including net amortization of debt premiums, discounts and issuance costs of $ 2,448 , $ 1,421 , $ 5,574 and $ 4,592 , respectively) ( 58,091 ) ( 44,817 ) ( 143,715 ) ( 136,840 ) Gain on lease termination — — 22,896 — Loss on early extinguishment of debt — — ( 427 ) ( 17 ) Loss from continuing operations before income tax (expense) benefit and equity in earnings of an investee ( 105,423 ) ( 28,175 ) ( 118,339 ) ( 32,922 ) Income tax (expense) benefit ( 365 ) 146 ( 1,048 ) 47 Equity in earnings of an investee — 83 — 617 Net loss ( 105,788 ) ( 27,946 ) ( 119,387 ) ( 32,258 ) Net income attributable to noncontrolling interest ( 1,100 ) ( 1,444 ) ( 3,838 ) ( 4,279 ) Net loss attributable to common shareholders $ ( 106,888 ) $ ( 29,390 ) $ ( 123,225 ) $ ( 36,537 ) Other comprehensive (loss) income: Equity in unrealized (loss) gain of an investee — ( 46 ) — 91 Other comprehensive (loss) income — ( 46 ) — 91 Comprehensive loss ( 105,788 ) ( 27,992 ) ( 119,387 ) ( 32,167 ) Comprehensive income attributable to noncontrolling interest ( 1,100 ) ( 1,444 ) ( 3,838 ) ( 4,279 ) Comprehensive loss attributable to common shareholders $ ( 106,888 ) $ ( 29,436 ) $ ( 123,225 ) $ ( 36,446 ) Weighted average common shares outstanding (basic) 237,752 237,608 237,707 237,585 Weighted average common shares outstanding (diluted) 237,752 237,608 237,707 237,585 Per common share amounts (basic and diluted): Net loss attributable to common shareholders $ ( 0.45 ) $ ( 0.12 ) $ ( 0.52 ) $ ( 0.15 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents DIVERSIFIED HEALTHCARE TRUST CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (dollars in thousands) (unaudited) Number of Shares Common Shares Additional Paid In Capital Cumulative Net Income Cumulative Distributions Total Equity Attributable to Common Shareholders Total Equity Attributable to Noncontrolling Interest Total Equity Balance at December 31, 2019: 237,897,163 $ 2,379 $ 4,612,511 $ 2,052,562 $ ( 3,930,933 ) $ 2,736,519 $ 140,531 $ 2,877,050 Net income — — — 9,735 — 9,735 1,408 11,143 Distributions — — — — ( 35,684 ) ( 35,684 ) — ( 35,684 ) Distribution to common shareholders of the right to receive Five Star Senior Living Inc. common stock — — — — ( 59,801 ) ( 59,801 ) — ( 59,801 ) Share grants — — 249 — — 249 — 249 Share repurchases ( 3,438 ) — ( 21 ) — — ( 21 ) — ( 21 ) Distributions to noncontrolling interest — — — — — — ( 5,767 ) ( 5,767 ) Balance at March 31, 2020: 237,893,725 2,379 4,612,739 2,062,297 ( 4,026,418 ) 2,650,997 136,172 2,787,169 Net (loss) income — — — ( 26,072 ) — ( 26,072 ) 1,330 ( 24,742 ) Distributions — — — — ( 2,379 ) ( 2,379 ) — ( 2,379 ) Share grants 60,000 1 415 — — 416 — 416 Share repurchases ( 1,757 ) — ( 8 ) — — ( 8 ) — ( 8 ) Distributions to noncontrolling interest — — — — — — ( 5,616 ) ( 5,616 ) Balance at June 30, 2020: 237,951,968 2,380 4,613,146 2,036,225 ( 4,028,797 ) 2,622,954 131,886 2,754,840 Net (loss) income — — — ( 106,888 ) — ( 106,888 ) 1,100 ( 105,788 ) Distributions — — — — ( 2,380 ) ( 2,380 ) — ( 2,380 ) Share grants 360,000 3 503 — — 506 — 506 Share repurchases ( 42,180 ) — ( 142 ) — — ( 142 ) — ( 142 ) Share forfeitures ( 1,310 ) — ( 6 ) — — ( 6 ) — ( 6 ) Distributions to noncontrolling interest — — — — — — ( 5,324 ) ( 5,324 ) Balance at September 30, 2020: 238,268,478 $ 2,383 $ 4,613,501 $ 1,929,337 $ ( 4,031,177 ) $ 2,514,044 $ 127,662 $ 2,641,706 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents DIVERSIFIED HEALTHCARE TRUST CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) (dollars in thousands) (unaudited) Number of Shares Common Shares Additional Paid In Capital Cumulative Net Income Cumulative Other Comprehensive Income (Loss) Cumulative Distributions Total Equity Attributable to Common Shareholders Total Equity Attributable to Noncontrolling Interest Total Equity Balance at December 31, 2018: 237,729,900 $ 2,377 $ 4,611,419 $ 2,140,796 $ ( 266 ) $ ( 3,731,214 ) $ 3,023,112 $ 156,758 $ 3,179,870 Net income — — — 30,082 — — 30,082 1,422 31,504 Other comprehensive income — — — — 66 — 66 — 66 Distributions — — — — — ( 92,714 ) ( 92,714 ) — ( 92,714 ) Share grants — — 215 — — — 215 — 215 Distributions to noncontrolling interest — — — — — — — ( 5,503 ) ( 5,503 ) Balance at March 31, 2019: 237,729,900 2,377 4,611,634 2,170,878 ( 200 ) ( 3,823,928 ) 2,960,761 152,677 3,113,438 Net (loss) income — — — ( 37,229 ) — — ( 37,229 ) 1,413 ( 35,816 ) Other comprehensive income — — — — 71 — 71 — 71 Distributions — — — — — ( 35,659 ) ( 35,659 ) — ( 35,659 ) Share grants 15,000 — 395 — — — 395 — 395 Share repurchases ( 3,529 ) — ( 33 ) — — — ( 33 ) — ( 33 ) Share forfeitures ( 610 ) — ( 3 ) — — — ( 3 ) — ( 3 ) Distributions to noncontrolling interest — — — — — — — ( 5,684 ) ( 5,684 ) Balance at June 30, 2019: 237,740,761 2,377 4,611,993 2,133,649 ( 129 ) ( 3,859,587 ) 2,888,303 148,406 3,036,709 Net (loss) income — — — ( 29,390 ) — — ( 29,390 ) 1,444 ( 27,946 ) Other comprehensive loss — — — — ( 46 ) — ( 46 ) — ( 46 ) Distributions — — — — — ( 35,661 ) ( 35,661 ) — ( 35,661 ) Share grants 187,500 2 530 — — — 532 — 532 Share repurchases ( 27,984 ) — ( 259 ) — — — ( 259 ) — ( 259 ) Distributions to noncontrolling interest — — — — — — — ( 5,107 ) ( 5,107 ) Balance at September 30, 2019: 237,900,277 $ 2,379 $ 4,612,264 $ 2,104,259 $ ( 175 ) $ ( 3,895,248 ) $ 2,823,479 $ 144,743 $ 2,968,222 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents DIVERSIFIED HEALTHCARE TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Nine Months Ended September 30, 2020 2019 Cash flows from operating activities: Net loss $ ( 119,387 ) $ ( 32,258 ) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization 204,466 219,522 Amortization of debt issuance costs and debt discounts and premiums 5,574 4,592 Straight line rental income ( 3,029 ) ( 3,550 ) Amortization of acquired real estate leases and other intangible assets ( 5,559 ) ( 4,922 ) Loss on early extinguishment of debt 51 17 Gain on lease termination ( 22,896 ) — Impairment of assets 106,611 41,518 Gain on sale of properties ( 2,403 ) ( 21,893 ) Gains and losses on equity securities, net ( 14,541 ) 41,476 Other non-cash adjustments, net ( 1,662 ) ( 2,828 ) Equity in earnings of an investee — ( 617 ) Change in assets and liabilities: Other assets ( 39,358 ) ( 6,139 ) Accrued interest 29,604 4,126 Other liabilities 21,508 ( 43,374 ) Net cash provided by operating activities 158,979 195,670 Cash flows from investing activities: Real estate acquisitions and deposits ( 2,526 ) — Real estate improvements ( 118,141 ) ( 175,146 ) Proceeds from sale of properties, net 78,244 50,355 Proceeds from sale of RMR Inc. common shares, net — 98,557 Distributions in excess of earnings from Affiliates Insurance Company 287 — Net cash used in investing activities ( 42,136 ) ( 26,234 ) Cash flows from financing activities: Proceeds from issuance of senior unsecured notes, net 985,000 — Proceeds from borrowings on revolving credit facility 430,500 803,000 Repayments of borrowings on revolving credit facility ( 968,000 ) ( 353,000 ) Repayment of senior unsecured notes ( 200,000 ) ( 400,000 ) Repayment of unsecured term loan ( 250,000 ) — Repayment of other debt ( 5,189 ) ( 45,438 ) Loss on early extinguishment of debt settled in cash ( 376 ) — Payment of debt issuance costs ( 5,306 ) — Repurchase of common shares ( 171 ) ( 292 ) Distributions to noncontrolling interest ( 16,707 ) ( 16,294 ) Distributions to shareholders ( 40,443 ) ( 164,034 ) Net cash used in financing activities ( 70,692 ) ( 176,058 ) Increase (decrease) in cash and cash equivalents and restricted cash 46,151 ( 6,622 ) Cash and cash equivalents and restricted cash at beginning of period 52,224 70,071 Cash and cash equivalents and restricted cash at end of period $ 98,375 $ 63,449 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents DIVERSIFIED HEALTHCARE TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (dollars in thousands) (unaudited) Nine Months Ended September 30, 2020 2019 Supplemental cash flow information: Interest paid $ 109,689 $ 129,010 Income taxes paid $ 381 $ 452 Non-cash investing activities: Five Star Senior Living Inc. common stock $ 97,896 $ — Transaction Agreement additional consideration ( 75,000 ) — Capitalized interest $ 1,152 $ 888 Non-cash financing activities: Distribution to common shareholders of the right to receive Five Star Senior Living Inc. common stock $ ( 59,801 ) $ — Supplemental disclosure of cash and cash equivalents and restricted cash: The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within our condensed consolidated balance sheets to the amount shown in our condensed consolidated statements of cash flows: As of September 30, 2020 2019 Cash and cash equivalents $ 82,241 $ 49,462 Restricted cash (1) 16,134 13,987 Total cash and cash equivalents and restricted cash shown in our condensed consolidated statements of cash flows $ 98,375 $ 63,449 (1) Restricted cash consists of amounts escrowed for real estate taxes, insurance and capital expenditures at certain of our mortgaged properties and cash held for the operations of one of our life science properties that is owned in a joint venture arrangement in which we own a 55 % equity interest. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) Note 1. Basis of Presentation The accompanying condensed consolidated financial statements of Diversified Healthcare Trust and its subsidiaries, or we, us, or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2019, or our Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and impairments of real estate and intangible assets. We have made reclassifications to the financial statements of prior periods to conform to the current period presentation. These reclassifications had no effect on net income (loss) or equity. 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 FASB 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. We have a joint venture arrangement with an institutional investor for one of our life science properties located in Boston, Massachusetts. The investor owns a 45 % equity interest in the joint venture, and we own the remaining 55 % equity interest in the joint venture. We have determined that this joint venture is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification. We concluded that we must consolidate this VIE because we are the entity with the power to direct the activities that most significantly impact the VIE's economic performance and we have the obligation to absorb losses of, and the right to receive benefits from, the VIE that could be significant to the VIE, and therefore are the primary beneficiary of the VIE. The assets of this VIE were $ 981,204 and $ 1,015,661 as of September 30, 2020 and December 31, 2019, respectively, and consist primarily of the net real estate owned by the joint venture. The liabilities of this VIE were $ 698,667 and $ 704,344 as of September 30, 2020 and December 31, 2019, respectively, and consist primarily of mortgage debts secured by the property. The investor's interest in this consolidated entity is reflected as a noncontrolling interest in our condensed consolidated financial statements. See Note 7 for further information about this joint venture. Note 2. Recent Events and Accounting Pronouncements Recent Events. In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic and, in response to the outbreak, the U.S. Health and Human Services Secretary declared a public health emergency in the United States and many states and municipalities declared public health emergencies. Various governmental and market responses attempting to contain and mitigate the spread of the virus have negatively impacted, and continue to negatively impact, the global economy, including the U.S. economy, and our results of operations, financial position and cash flow. In the United States, individuals are being encouraged to practice social distancing, are generally restricted from gathering in groups and, in 7 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) some areas, either have been or are subject to stay at home orders, which restrict or prohibit social gatherings, travel and non-essential activities outside of their homes. We do not know when these restrictions will abate. Our result of operations and cash flows from our senior living communities are dependent on our operators' ability to generate returns to us. Senior living community operators have experienced disruptions, including limitations on in-person tours and new move-ins, and are experiencing challenges in attracting new residents to our communities. In addition, our operators are experiencing increased expenses due to increased labor costs, including higher health benefits costs, and increased costs and consumption of supplies, including personal protective equipment, which costs reduce our returns. As a result of the disruptions caused by the pandemic, we have taken various measures to improve our liquidity and financial flexibility. Since March 2020, we have reduced our quarterly cash distribution rate on our common shares to $ 0.01 per common share, reduced our planned capital expenditures, issued $ 1,000,000 of senior notes, repaid all amounts outstanding under our $ 1,000,000 unsecured revolving credit facility, sold assets for aggregate sales prices of $ 120,776 and entered agreements to sell additional properties for $ 167,392 . In addition, on June 30, 2020, we amended the agreements that govern our revolving credit facility and our $ 200,000 term loan. Among other things, the amendments require that we maintain $ 200,000 of unrestricted cash and/or undrawn availability under our revolving credit facility and restrict our ability to incur additional debt (with the exception of borrowings under our revolving credit facility). Recent Accounting Pronouncements. In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326) : Measurement of Credit Losses on Financial Instruments , which requires that entities use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. We adopted this standard which was effective as of January 1, 2020 using the modified retrospective approach. The implementation of this standard did not have a material impact in our condensed consolidated financial statements. Note 3. Real Estate Properties As of September 30, 2020, we owned 407 properties located in 37 states and Washington, D.C., including 22 properties classified as held for sale, 10 properties scheduled for closure and/or sale and one life science property owned in a joint venture arrangement in which we own a 55 % equity interest. We regularly evaluate our assets for indicators of impairment. Impairment indicators may include declining tenant or resident occupancy, weak or declining profitability from the property, decreasing tenant cash flows or liquidity, our decision to dispose of an asset before the end of its estimated useful life, and legislative, market or industry changes that could permanently reduce the value of an asset. If indicators of impairment are present, we evaluate the carrying value of the affected assets by comparing it to the expected future cash flows to be generated from those assets. The future cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the asset to its estimated fair value. Acquisition Activities: In January 2020, we acquired a vacant land parcel adjacent to a property we own in our portfolio of medical office and life science properties, or our Office Portfolio, segment located in Tempe, Arizona for $ 2,600 , excluding acquisition costs. Disposition Activities: During the nine months ended September 30, 2020, we sold 17 properties for an aggregate sales price of $ 80,601 , excluding closing costs, as presented in the table below. The sales of these properties do not represent significant dispositions individually or in the aggregate, nor do we believe they represent a strategic shift in our business. As a result, the results of the 8 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) operation for these properties are included in continuing operations through the date of sale of such properties in our condensed consolidated statements of comprehensive income (loss). Date of Sale Location Type of Property Number of Properties Square Feet or Number of Units Sales Price (1) Gain (loss) on Sale Impairment of Assets January 2020 Louisiana Medical Office 6 40,575 sq. ft. $ 5,925 $ ( 81 ) $ — February 2020 Pennsylvania Medical Office 1 50,000 sq. ft. 2,900 — ( 47 ) March 2020 Texas Medical Office 1 70,229 sq. ft. 8,779 2,863 — April 2020 California Managed Senior Living 3 599 units 47,000 ( 168 ) 5,465 June 2020 South Carolina Medical Office 1 49,242 sq. ft. 3,550 — 2,753 July 2020 Texas Medical Office 1 6,849 sq. ft. 2,072 ( 30 ) — July 2020 Connecticut Medical Office 1 32,162 sq. ft. 625 ( 25 ) 267 August 2020 Mississippi Managed Senior Living 2 116 units 2,500 ( 42 ) 227 September 2020 Mississippi Medical Office 1 78,747 sq. ft. 7,250 ( 114 ) 148 17 $ 80,601 $ 2,403 $ 8,813 (1) Sales price excludes closing costs. As of September 30, 2020, we had 22 properties classified as held for sale in our condensed consolidated balance sheet as follows: Type of Property Number of Properties Gross Book Value Impairment of Assets (1) Managed Senior Living 14 $ 52,958 $ 33,356 Medical Office 5 69,230 1,524 Triple Net Leased, Senior Living 3 43,603 — 22 $ 165,791 $ 34,880 (1) We recorded an aggregate of $ 34,880 impairment of real estate during the nine months ended September 30, 2020 to adjust the carrying values of certain of these properties to their estimated fair values less costs to sell. In October and November 2020, the three triple net leased senior living communities and one of the 14 managed senior living communities classified as held for sale in the table above were sold for an aggregate sales price of $ 49,000 , excluding closing costs. We recorded impairment charges of $ 3,071 related to six medical office properties and one senior living community that were classified as held for sale during the three months ended March 31, 2020. These properties were subsequently reclassified to held and used as of June 30, 2020. We also recorded impairment charges of $ 59,847 during the three and nine months ended September 30, 2020 related to nine of the 10 senior living communities that were scheduled for closure and/or sale as of September 30, 2020. As of November 2, 2020, we had 21 properties under agreements to sell for an aggregate sales price of approximately $ 167,392 , excluding closing costs. We may not complete the sales of any or all of the properties we currently plan to sell. Also, we may sell some or all of these properties at amounts that are less than currently expected and/or less than the carrying values of such properties and we may incur losses on any such sales as a result. Note 4. Leases We are a lessor of medical office and life science properties, senior living communities and other healthcare related properties. Our leases provide our tenants with the contractual right to use and economically benefit from all of the premises demised under the leases; therefore, we have determined to evaluate our leases as lease arrangements. Certain of our leases provide for base rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market based indices, is recognized on a straight line basis over 9 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. We increased rental income to record revenue on a straight line basis by $ 491 and $ 1,186 for the three months ended September 30, 2020 and 2019, respectively, and $ 3,029 and $ 3,550 for the nine months ended September 30, 2020 and 2019, respectively. Rents receivable, excluding properties classified as held for sale, include $ 102,691 and $ 99,297 of straight line rent receivables at September 30, 2020 and December 31, 2019, respectively, and are included in other assets, net in our condensed consolidated balance sheets. We do not include in our measurement of our lease receivables certain variable payments, including changes in the index or market based indices after the inception of the lease, certain tenant reimbursements and other income until the specific events that trigger the variable payments have occurred. We recognized such payments totaling $ 18,501 and $ 19,317 for the three months ended September 30, 2020 and 2019, respectively, of which tenant reimbursements totaled $ 1,428 and $ 1,506 , respectively, and $ 56,792 and $ 57,687 for the nine months ended September 30, 2020 and 2019, respectively, of which tenant reimbursements totaled $ 3,522 and $ 3,906 , respectively. Certain of our tenants have requested relief from their obligations to pay rent due to us in response to the current economic conditions resulting from the COVID-19 pandemic. As of November 2, 2020, we granted requests for certain of our tenants to defer rent payments totaling $ 2,152 . These tenants are obligated to pay, in most cases, the deferred rents in 12 equal monthly installments beginning in 2020. We have elected to use the FASB relief package regarding the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. The FASB relief package provides entities with the option to account for lease concessions resulting from the COVID-19 pandemic outside of the existing lease modification guidance if the resulting cash flows from the modified lease are substantially the same as the original lease. Because the majority of the deferred rents referenced above will generally be repaid, the cash flows from the respective leases are substantially the same as before the rent deferrals. These deferred amounts did not negatively impact our operating results for the three and nine months ended September 30, 2020 and, as of September 30, 2020, we recognized $ 4,467 in our accounts receivable related to these deferred amounts. Right of Use Asset and Lease Liability . For leases where we are the lessee, we recognized a right of use asset and a lease liability equal to the present value of the minimum lease payments with rental payments being applied to the lease liability and the right of use asset being amortized over the term of the lease. The values of the right of use asset and related liability representing our future obligation under the lease arrangement for which we are the lessee were $ 4,256 and $ 4,423 , respectively, as of September 30, 2020, and $ 4,319 and $ 4,461 , respectively, as of December 31, 2019. The right of use asset and related lease liability are included within other assets, net and other liabilities, respectively, within our condensed consolidated balance sheets. In addition, we lease equipment at certain of our managed senior living communities. These leases are short term in nature, are cancelable with no fee or do not result in an annual expense in excess of our capitalization policy and, as a result, are not recorded on our condensed consolidated balance sheets. Note 5. Indebtedness Our principal debt obligations at September 30, 2020 were: (1) $ 2,650,000 outstanding principal amount of senior unsecured notes; (2) $ 200,000 outstanding principal amount under our term loan; and (3) $ 684,962 aggregate principal amount of mortgage notes (excluding premiums, discounts and net debt issuance costs) secured by seven properties, of which $ 620,000 is related to a joint venture arrangement in which we own a 55 % equity interest. These seven mortgaged properties had a gross book value of $ 946,037 at September 30, 2020. We also had two properties subject to finance leases with lease obligations totaling $ 8,084 at September 30, 2020; these two properties had gross book value and accumulated depreciation of $ 35,611 and $ 17,429 , respectively, at September 30, 2020, and the finance leases expire in 2026. We have a $ 1,000,000 unsecured revolving credit facility that is available for general business purposes. The maturity date of our revolving credit facility is January 15, 2022, and, subject to the payment of an extension fee and meeting other conditions, we have the option to extend the maturity date of the facility for an additional year. Our revolving credit facility provides that we can borrow, repay and re-borrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of September 30, 2020, our revolving credit facility required interest to be paid on 10 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) borrowings at the annual rate of 2.6 %, plus a facility fee of 30 basis points per annum on the total amount of lending commitments under the facility. The weighted average annual interest rates for borrowings under our revolving credit facility were 2.6 % and 3.5 % for the three months ended September 30, 2020 and 2019, respectively, and 2.2 % and 3.5 % for the nine months ended September 30, 2020 and 2019, respectively. The interest rate premium and facility fee are each subject to adjustment based upon changes to our credit ratings. As of September 30, 2020 and November 2, 2020, we had no outstanding borrowings and $ 1,000,000 available for borrowing under our revolving credit facility. We have a $ 200,000 unsecured term loan that matures in September 2022 and is prepayable without penalty at any time. At September 30, 2020, the annual interest rate payable on amounts outstanding under this term loan was 2.8 %. The weighted average annual interest rate for amounts outstanding under this term loan was 2.7 % and 3.6 % for the three months ended September 30, 2020 and 2019, respectively, and 2.7 % and 3.8 % for the nine months ended September 30, 2020 and 2019, respectively. The interest rate premium is subject to adjustment based upon changes to our credit ratings. In February 2020, we prepaid a mortgage note secured by one of our life science properties with an outstanding principal balance of approximately $ 1,554 , a maturity date in March 2026 and an annual interest rate of 6.25 %. As a result of this prepayment, we recorded a loss on early extinguishment of debt of $ 246 for the nine months ended September 30, 2020. We prepaid this mortgage using cash on hand and borrowings under our revolving credit facility. In April 2020, we redeemed all of our outstanding 6.75 % senior notes due 2020 for a redemption price equal to the principal amount of $ 200,000 plus accrued and unpaid interest of $ 6,750 . We funded this redemption with cash on hand and borrowings under our revolving credit facility. In May 2020, we prepaid a mortgage note secured by one of our medical office properties with an outstanding principal balance of approximately $ 1,213 , a maturity date in January 2022 and an annual interest rate of 7.49 %. As a result of the prepayment of this mortgage note, we recorded a loss on early extinguishment of debt of $ 155 for the nine months ended September 30, 2020. We prepaid this mortgage using cash on hand and borrowings under our revolving credit facility. In June 2020, we issued $ 1,000,000 aggregate principal amount of our 9.75 % senior notes due 2025 in an underwritten public offering raising net proceeds of $ 982,300 , after deducting estimated offering expenses and underwriters' discounts. These notes are guaranteed by all of our subsidiaries, except for certain excluded subsidiaries, and require semi-annual interest payments through maturity. Prior to June 15, 2022, we may, at our option, redeem all or a portion of these notes at a redemption price equal to the outstanding principal amount of these notes, plus accrued and unpaid interest, plus the make-whole amount set forth in the indenture which governs these notes, as supplemented, or our 2025 Notes Indenture. Prior to June 15, 2022, we may also, at our option, redeem up to 40 % of the aggregate principal amount of these notes with the net proceeds of certain equity offerings at the redemption price set forth in the 2025 Notes Indenture, so long as at least 50 % of the original aggregate principal amount of these notes remains outstanding after each such redemption. In addition, we have the option to redeem all or a portion of these notes at any time on or after June 15, 2022 at the redemption prices set forth in the 2025 Notes Indenture. We used the net proceeds from this offering to prepay in full our $ 250,000 unsecured term loan which was scheduled to mature in June 2020 and to reduce amounts outstanding under our revolving credit facility. The weighted average interest rate under our $ 250,000 senior unsecured term loan was 2.4 % for the period from January 1, 2020 to June 2, 2020. As a result of the repayment of our $ 250,000 senior unsecured term loan, we recorded a loss on early extinguishment of debt of $ 26 for the nine months ended September 30, 2020. In June 2020, we amended the agreements governing our $ 1,000,000 unsecured revolving credit facility and $ 200,000 unsecured term loan, or collectively, our credit and term loan agreements. The amendments modify certain of the financial covenants under our credit and term loan agreements through June 30, 2021, or the Amendment Period, during which, subject to certain conditions, we will continue to have access to undrawn amounts under our revolving credit facility. We have the right to terminate the Amendment Period prior to June 30, 2021, subject to certain conditions. During the Amendment Period: • our interest rate premium over LIBOR under our revolving credit facility and term loan increased by 50 basis points; 11 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) • we will generally be required to apply the net cash proceeds from the disposition of assets, capital markets transactions, debt financings or COVID-19 government stimulus programs, if allowed, to the repayment of outstanding loans under the revolving credit facility, if any; • we will be subject to certain additional covenants, including additional restrictions on our ability to incur indebtedness (with exceptions for borrowings under our revolving credit facility and certain other categories of secured and unsecured indebtedness), and to acquire real property or make other investments (with exceptions for, among other things, certain categories of capital expenditures and costs); • we will be required to maintain unrestricted liquidity (unrestricted cash and undrawn availability under our revolving credit facility) of not less than $ 200,000 ; and • our ability to pay distributions on our common shares will be limited to paying a cash dividend of $ 0.01 per common share per quarter and amounts required to maintain our qualification for taxation as a real estate investment trust, or REIT, and to avoid the payment of certain income and excise taxes. Our credit and term loan agreements and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our credit and term loan agreements, a change of control of us, as defined, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business and property manager. Our credit and term loan agreements and our senior unsecured notes indentures and their supplements also contain covenants, including covenants that restrict our ability to incur debts, and generally require us to maintain certain financial ratios, and our credit and term loan agreements restrict our ability to make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our credit and term loan agreements and our senior unsecured notes indentures and their supplements at September 30, 2020. Although we have taken steps to enhance our ability to maintain sufficient liquidity, as noted elsewhere in this Quarterly Report on Form 10-Q, a protracted negative economic impact resulting from the COVID-19 pandemic may cause increased pressure on our ability to satisfy financial and other covenants. Note 6. Fair Value of Assets and Liabilities The following table presents certain of our assets that are measured at fair value at September 30, 2020, categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset. Fair Value at Reporting Date Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Description Total (Level 1) (Level 2) (Level 3) Recurring Fair Value Measurements Assets: Investment in Five Star (1) $ 54,207 $ 54,207 $ — $ — Non-Recurring Fair Value Measurements Assets: Real estate properties held for sale (2) $ 56,673 $ — $ 56,673 $ — Real estate properties at fair value (3) $ 31,010 $ — $ — $ 31,010 (1) Our 10,691,658 shares of common stock of Five Star Senior Living Inc., or Five Star, are included in other assets, net in our condensed consolidated balance sheets, and are reported at fair value, which is based upon quoted market prices on The Nasdaq Stock Market LLC, or Nasdaq, (Level 1 inputs). On April 1, 2019, we entered into a transaction agreement with Five Star, or the Transaction Agreement, to restructure our business arrangements with Five Star, or the Restructuring Transaction. Pursuant to the Transaction Agreement, on January 1, 2020, Five Star issued 10,268,158 Five Star common shares to us. The fair value and initial cost basis of the Five Star common shares issued to us on January 1, 2020 was $ 38,095 . Our adjusted cost basis inclusive of the 423,500 Five Star common shares we owned as of December 31, 2019 and the 10,268,158 Five Star common shares issued to us on January 1, 2020 was $ 44,448 as of September 30, 2020. During the three and nine months ended September 30, 2020, we recorded unrealized gains of $ 12,510 and $ 14,541 , respectively, which is included in gains and losses on equity securities, net in 12 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) our condensed consolidated statements of comprehensive income (loss), to adjust the carrying value of our investment in Five Star common shares to their fair value. See Note 12 for further information about our investment in Five Star. (2) We have assets in our condensed consolidated balance sheets that are measured at fair value on a nonrecurring basis. During the nine months ended September 30, 2020, we recorded impairment charges of $ 1,524 to reduce the carrying value of one medical office property that is classified as held for sale to its estimated sales price, less estimated costs to sell of $ 160 , based on the sales price under a purchase and sale agreement that we have entered into with a third party buyer for this medical office property of $ 3,875 . We also recorded impairment charges of $ 33,356 to reduce the carrying value of 14 senior living communities that are classified as held for sale to their estimated sales price, less estimated costs to sell of $ 1,142 , based on the aggregate sales prices under the purchase and sale agreements that we have entered into with third party buyers for these senior living communities of $ 54,100 . See Note 3 for further information about impairment charges and these and other properties we have classified as held for sale. (3) We recorded impairment charges of $ 59,847 to reduce the carrying value of nine of our senior living communities scheduled for closure and/or sale to their estimated fair value of $ 31,010 based upon a combination of the market approach and the income approach and unobservable inputs such as estimated market rent, operating expense assumptions, vacancy data and capitalization rates. We also engaged an external third party to assist us in our estimation of fair value of these communities. The valuation techniques and significant unobservable inputs used in the valuation of these communities are considered Level 3 inputs as defined in the fair value hierarchy under GAAP. In addition to the assets described in the table above, our financial instruments at September 30, 2020 and December 31, 2019 included cash and cash equivalents, restricted cash, other assets, our revolving credit facility, term loans, senior unsecured notes, secured debt and finance leases and other unsecured obligations and liabilities. The fair values of these financial instruments approximated their carrying values in our condensed consolidated financial statements as of such dates, except as follows: As of September 30, 2020 As of December 31, 2019 Description Carrying Amount (1) Estimated Fair Value Carrying Amount (1) Estimated Fair Value Senior unsecured notes $ 2,606,550 $ 2,558,483 $ 1,820,681 $ 1,890,386 Secured debts (2) (3) 692,385 705,503 697,729 697,142 $ 3,298,935 $ 3,263,986 $ 2,518,410 $ 2,587,528 (1) Includes unamortized debt issuance costs, premiums and discounts. (2) We assumed certain of these secured debts in connection with our acquisition of certain properties. We recorded the assumed mortgage notes at estimated fair value on the date of acquisition and we are amortizing the fair value adjustments, if any, to interest expense over the respective terms of the mortgage notes to adjust interest expense to the estimated market interest rates as of the date of acquisition. (3) Includes $ 3,015 of principal mortgage obligations and $ 25 of unamortized debt issuance costs for properties classified as held for sale as of December 31, 2019. These debts are included in liabilities of properties held for sale in our condensed consolidated balance sheet as of December 31, 2019. We estimated the fair value of our two issuances of senior unsecured notes due 2042 and 2046 based on the closing price on Nasdaq (Level 1 input) as of September 30, 2020. We estimated the fair values of our four issuances of senior unsecured notes due 2021, 2024, 2025 and 2028 using an average of the bid and ask price on Nasdaq on or about September 30, 2020 (Level 2 inputs as defined in the fair value hierarchy under GAAP). We estimated the fair values of our secured debts by using discounted cash flows analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair values may differ materially from the actual fair values. 13 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) Realized and unrealized gains and losses for our equity securities for the three and nine months ended September 30, 2020 and 2019 were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Realized gains and losses on equity securities sold (1) $ — $ — $ — $ ( 41,436 ) Unrealized gains and losses on equity securities held 12,510 40 14,541 ( 40 ) Gains and losses on equity securities, net $ 12,510 $ 40 $ 14,541 $ ( 41,476 ) (1) This amount relates to our sale of our former investment in The RMR Group Inc., or RMR Inc., on July 1, 2019. For further information about our former investment in RMR Inc. see our Annual Report. Note 7. Noncontrolling Interest We have a joint venture arrangement with an institutional investor for one of our life science properties located in Boston, Massachusetts. The investor owns a 45 % equity interest in the joint venture, and we own the remaining 55 % equity interest in the joint venture. We continue to control this property and therefore continue to account for this property on a consolidated basis in our condensed consolidated financial statements under the VIE model. The portion of the joint venture's net income and comprehensive income not attributable to us, or $ 1,100 and $ 1,444 for the three months ended September 30, 2020 and 2019, respectively, and $ 3,838 and $ 4,279 for the nine months ended September 30, 2020 and 2019, respectively, is reported as a noncontrolling interest in our condensed consolidated statements of comprehensive income (loss). The joint venture made aggregate cash distributions to the other joint venture investor of $ 5,324 and $ 5,107 for the three months ended September 30, 2020 and 2019, respectively, and $ 16,707 and $ 16,294 for the nine months ended September 30, 2020 and 2019, respectively, which are reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated balance sheets. As of September 30, 2020, this joint venture held real estate assets with an aggregate net book value of $ 710,001 , subject to mortgage notes of $ 620,000 . In assessing whether we have a controlling interest in this joint venture arrangement and are required to consolidate the accounts of the joint venture entity, we considered the members' rights to residual gains and obligations to absorb losses, which activities most significantly impact the economic performance of the entity and which member has the power to direct those activities. 14 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) Note 8. Shareholders' Equity Common Share Awards: During the nine months ended September 30, 2020, we awarded our common shares, valued at the closing price of our common shares on Nasdaq on the applicable award date, as follows: Date Awarded Number of Shares Price per Share May 19, 2020 (1) 60,000 $ 2.94 September 17, 2020 (2) 360,000 $ 3.77 (1) In accordance with our Trustee compensation arrangements, we awarded to each of our six Trustees 10,000 of our common shares. (2) We awarded under our equity compensation plan an aggregate of 360,000 of our common shares to our officers and certain other employees of RMR LLC. Common Share Purchases: During the nine months ended September 30, 2020, we purchased our common shares from our officers and certain current and former officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares, valued at the closing price of our common shares on Nasdaq on the purchase dates, as follows: Date Purchased Number of Shares Price per Share January 9, 2020 1,938 $ 8.10 March 13, 2020 1,500 $ 3.79 June 30, 2020 1,757 $ 4.43 September 21, 2020 42,180 $ 3.38 Distributions: During the nine months ended September 30, 2020, we declared and paid quarterly distributions to common shareholders as follows: Record Date Payment Date Distribution Per Share Total Distributions January 27, 2020 February 20, 2020 $ 0.15 $ 35,684 April 13, 2020 May 21, 2020 $ 0.01 $ 2,379 July 27, 2020 August 20, 2020 $ 0.01 $ 2,380 On October 15, 2020, we declared a quarterly distribution payable to our common shareholders of record on October 26, 2020 in the amount of $ 0.01 per share, or approximately $ 2,382 . We expect to pay this distribution on or about November 19, 2020. As described in Note 10, pursuant to the Transaction Agreement, on January 1, 2020, Five Star issued an aggregate of 16,118,849 of its common shares, with a value of $ 59,801 , to our shareholders of record as of December 13, 2019. We recorded this issuance as a non-cash distribution in our condensed consolidated financial statements. Note 9. Segment Reporting We operate in, and report financial information for, the following two segments: Office Portfolio and senior housing operating portfolio, or SHOP. We aggregate each of these two reporting segments based on their similar operating and economic characteristics. Our Office Portfolio segment consists of medical office properties leased to medical providers and other medical related businesses, as well as life science properties leased to biotech laboratories and other similar tenants. Our 15 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) SHOP segment consists of managed senior living communities that provide short term and long term residential living and in some instances care and other services for residents where we pay fees to the operator to manage the communities for our account. In addition, prior to January 1, 2020, our SHOP segment included triple net leased senior living communities that provided short term and long term residential living and in some instances care and other services for residents and from which we received rents from Five Star. Pursuant to the Restructuring Transaction, effective January 1, 2020, our previously existing master leases and management and pooling agreements with Five Star were terminated and replaced with new management and related agreements, or collectively, the New Management Agreements, for all of our senior living communities operated by Five Star. Prior periods have been recast to reflect these reportable segments for all periods presented. We also report “non-segment” operations, which consists of triple net leased senior living communities, which are leased to operators other than Five Star from which we receive rents, and wellness centers, which we do not consider to be sufficiently material to constitute a separate reporting segment, and any other income or expenses that are not attributable to a specific reporting segment. For the Three Months Ended September 30, 2020 Office Portfolio SHOP (1) Non-Segment Consolidated Revenues: Rental income $ 94,235 $ — $ 10,003 $ 104,238 Residents fees and services — 290,101 — 290,101 Total revenues 94,235 290,101 10,003 394,339 Expenses: Property operating expenses 33,448 282,202 — 315,650 Depreciation and amortization 32,816 31,570 2,825 67,211 General and administrative — — 6,988 6,988 Acquisition and certain other transaction related costs — — 53 53 Impairment of assets 1,334 62,868 — 64,202 Total expenses 67,598 376,640 9,866 454,104 Loss on sale of properties ( 169 ) ( 42 ) — ( 211 ) Gains on equity securities, net — — 12,510 12,510 Interest and other income — — 134 134 Interest expense ( 6,068 ) ( 552 ) ( 51,471 ) ( 58,091 ) Income (loss) from continuing operations before income tax expense 20,400 ( 87,133 ) ( 38,690 ) ( 105,423 ) Income tax expense — — ( 365 ) ( 365 ) Net income (loss) 20,400 ( 87,133 ) ( 39,055 ) ( 105,788 ) Net income attributable to noncontrolling interest ( 1,100 ) — — ( 1,100 ) Net income (loss) attributable to common shareholders $ 19,300 $ ( 87,133 ) $ ( 39,055 ) $ ( 106,888 ) (1) Residents fees and services for the three months ended September 30, 2020 for our SHOP segment is net of a $ 4,005 reserve for an estimated Medicare refund we expect to pay. Property operating expenses for the three months ended September 30, 2020 for our SHOP segment includes $ 2,167 of estimated penalties, compliance costs and professional fees, net of management fees reimbursable by Five Star, related to the Medicare refund we expect to pay. 16 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) For the Nine Months Ended September 30, 2020 Office Portfolio SHOP (1) Non-Segment Consolidated Revenues: Rental income $ 288,515 $ — $ 32,428 $ 320,943 Residents fees and services — 926,174 — 926,174 Total revenues 288,515 926,174 32,428 1,247,117 Expenses: Property operating expenses 97,047 837,103 — 934,150 Depreciation and amortization 97,213 98,385 8,868 204,466 General and administrative — — 23,132 23,132 Acquisition and certain other transaction related costs — — 803 803 Impairment of assets 8,090 98,521 — 106,611 Total expenses 202,350 1,034,009 32,803 1,269,162 Gain (loss) on sale of properties 2,613 ( 210 ) — 2,403 Gains on equity securities, net — — 14,541 14,541 Interest and other income — 7,346 662 8,008 Interest expense ( 18,140 ) ( 1,676 ) ( 123,899 ) ( 143,715 ) Gain on lease termination — — 22,896 22,896 Loss on early extinguishment of debt ( 401 ) — ( 26 ) ( 427 ) Income (loss) from continuing operations before income tax expense 70,237 ( 102,375 ) ( 86,201 ) ( 118,339 ) Income tax expense — — ( 1,048 ) ( 1,048 ) Net income (loss) 70,237 ( 102,375 ) ( 87,249 ) ( 119,387 ) Net income attributable to noncontrolling interest ( 3,838 ) — — ( 3,838 ) Net income (loss) attributable to common shareholders $ 66,399 $ ( 102,375 ) $ ( 87,249 ) $ ( 123,225 ) (1) Residents fees and services for the nine months ended September 30, 2020 for our SHOP segment is net of a $ 4,005 reserve for an estimated Medicare refund we expect to pay. Property operating expenses for the nine months ended September 30, 2020 for our SHOP segment includes $ 2,167 of estimated penalties, compliance costs and professional fees, net of management fees reimbursable by Five Star, related to the Medicare refund we expect to pay. Under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, the U.S. Department of Health and Human Services, or HHS, established the Provider Relief Fund. Retention and use of the funds received under the CARES Act are subject to certain terms and conditions. The terms and conditions require that the funds be utilized to compensate for lost revenues that are attributable to the COVID-19 pandemic and for eligible costs to prevent, prepare for and respond to the COVID-19 pandemic that are not covered by other sources. Further, fund recipients are required to be participating in Medicare at the time of distribution and are subject to certain other terms and conditions, including quarterly reporting requirements. In addition, fund recipients are required to have billed Medicare during 2019 and to continue to provide care after January 31, 2020 for diagnosis, testing or care for individuals with possible or actual COVID-19 cases. Any funds not used in accordance with the terms and conditions must be returned to HHS. As of September 30, 2020, we had received $ 15,459 in funds from the Provider Relief Fund to be used to support the operations of our managed senior living communities; we have currently determined that $ 7,346 of such funds meet the required terms and conditions. We have recognized $ 7,346 as other income with respect to our SHOP segment for the nine months ended September 30, 2020. We currently expect to return the remaining $ 8,113 of such funds to HHS in November 2020 unless and to the extent we determine that such funds meet the required terms and conditions and have therefore included that amount in other liabilities in our condensed consolidated financial statements as of September 30, 2020. We have applied for additional funds that may be available under the CARES Act Provider Relief Fund; however, we may not receive any additional funding. 17 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) As of September 30, 2020 Office Portfolio SHOP Non-Segment Consolidated Total assets $ 3,105,760 $ 2,914,966 $ 514,392 $ 6,535,118 For the Three Months Ended September 30, 2019 Office Portfolio SHOP Non-Segment Consolidated Revenues: Rental income $ 100,010 $ 32,738 $ 15,263 $ 148,011 Residents fees and services — 107,816 — 107,816 Total revenues 100,010 140,554 15,263 255,827 Expenses: Property operating expenses 34,184 90,899 — 125,083 Depreciation and amortization 33,801 34,901 4,666 73,368 General and administrative — — 9,604 9,604 Acquisition and certain other transaction related costs — — 2,492 2,492 Impairment of assets 26,037 718 6,344 33,099 Total expenses 94,022 126,518 23,106 243,646 Gain on sale of properties 4,183 — — 4,183 Gains on equity securities, net — — 40 40 Interest and other income — — 238 238 Interest expense ( 6,239 ) ( 585 ) ( 37,993 ) ( 44,817 ) Income (loss) from continuing operations before income tax benefit and equity in earnings of an investee 3,932 13,451 ( 45,558 ) ( 28,175 ) Income tax benefit — — 146 146 Equity in earnings of an investee — — 83 83 Net income (loss) 3,932 13,451 ( 45,329 ) ( 27,946 ) Net income attributable to noncontrolling interest ( 1,444 ) — — ( 1,444 ) Net income (loss) attributable to common shareholders $ 2,488 $ 13,451 $ ( 45,329 ) $ ( 29,390 ) 18 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) For the Nine Months Ended September 30, 2019 Office Portfolio SHOP Non-Segment Consolidated Revenues: Rental income $ 307,616 $ 105,451 $ 46,282 $ 459,349 Residents fees and services — 324,767 — 324,767 Total revenues 307,616 430,218 46,282 784,116 Expenses: Property operating expenses 98,886 263,612 — 362,498 Depreciation and amortization 104,939 100,080 14,503 219,522 General and administrative — — 28,287 28,287 Acquisition and certain other transaction related costs — — 11,209 11,209 Impairment of assets 26,133 9,041 6,344 41,518 Total expenses 229,958 372,733 60,343 663,034 Gain on sale of properties 6,686 15,207 — 21,893 Dividend income — — 1,846 1,846 Losses on equity securities, net — — ( 41,476 ) ( 41,476 ) Interest and other income — — 590 590 Interest expense ( 18,257 ) ( 2,481 ) ( 116,102 ) ( 136,840 ) Loss on early extinguishment of debt — ( 17 ) — ( 17 ) Income (loss) from continuing operations before income tax benefit and equity in earnings of an investee 66,087 70,194 ( 169,203 ) ( 32,922 ) Income tax benefit — — 47 47 Equity in earnings of an investee — — 617 617 Net income (loss) 66,087 70,194 ( 168,539 ) ( 32,258 ) Net income attributable to noncontrolling interest ( 4,279 ) — — ( 4,279 ) Net income (loss) attributable to common shareholders $ 61,808 $ 70,194 $ ( 168,539 ) $ ( 36,537 ) As of December 31, 2019 Office Portfolio SHOP Non-Segment Consolidated Total assets $ 3,165,577 $ 3,044,989 $ 443,260 $ 6,653,826 Note 10. Leases and Management Agreements with Five Star As of December 31, 2019, we leased 166 senior living communities to Five Star. As of that date, we also leased to our taxable REIT subsidiaries, or TRSs, 78 communities that we owned and that were managed by Five Star for our account. Restructuring of our Business Arrangements with Five Star The Transaction Agreement with Five Star . Pursuant to the Transaction Agreement, effective January 1, 2020, or the Conversion Time: • our previously existing master leases with Five Star for all of our senior living communities that Five Star leased, as well as our previously existing management agreements and pooling agreements with Five Star for our senior living communities that Five Star managed, were terminated and replaced, or the Conversion, with the New Management Agreements; 19 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) • Five Star issued to us 10,268,158 Five Star common shares and an aggregate of 16,118,849 Five Star common shares to our shareholders of record as of December 13, 2019; and • as consideration for these share issuances, we provided Five Star with $ 75,000 of additional consideration by assuming certain of Five Star's working capital liabilities and through cash payments, resulting in a gain on lease termination of $ 22,896 for the nine months ended September 30, 2020 in our condensed consolidated statements of comprehensive income (loss). Also pursuant to the Transaction Agreement: (1) commencing February 1, 2019, the aggregate amount of monthly minimum rent payable to us by Five Star under our previously existing master leases with Five Star was set at $ 11,000 as of February 1, 2019, subject to adjustment, and subsequently reduced in accordance with the Transaction Agreement as a result of our subsequent sales of certain of the leased senior living communities, and no additional rent was payable to us by Five Star from such date until the Conversion Time; and (2) as of April 1, 2019, we purchased from Five Star $ 49,155 of unencumbered Qualifying PP&E (as defined in the Transaction Agreement) related to our senior living communities leased and operated by Five Star. Pursuant to the New Management Agreements, Five Star receives a management fee equal to 5 % of the gross revenues realized at the applicable senior living communities plus reimbursement for its direct costs and expenses related to such communities, as well as an annual incentive fee equal to 15 % of the amount by which the annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of all communities on a combined basis exceeds the target EBITDA for all communities on a combined basis for such calendar year, provided that in no event shall the incentive fee be greater than 1.5 % of the gross revenues realized at all communities on a combined basis for such calendar year. The New Management Agreements expire in 2034, subject to Five Star's right to extend for two consecutive five year terms if Five Star achieves certain performance targets for the combined managed communities portfolio, unless earlier terminated. The New Management Agreements also provide us with the right to terminate the New Management Agreement for any community that does not earn 90 % of the target EBITDA for such community for two consecutive calendar years or in any two of three consecutive calendar years, with the measurement period commencing January 1, 2021 (and the first termination not possible until the beginning of calendar year 2023), provided we may not in any calendar year terminate communities representing more than 20 % of the combined revenues for all communities for the calendar year prior to such termination. Pursuant to a guaranty agreement dated as of January 1, 2020 made by Five Star in favor of our applicable subsidiaries, Five Star has guaranteed the payment and performance of each of its applicable subsidiary's obligations under the applicable New Management Agreements. On April 1, 2019, we concluded that the Restructuring Transaction constituted a reconsideration event requiring us to assess whether we held a controlling financial interest in Five Star. As a result of this assessment, we determined that Five Star was a VIE effective as of the date of the Transaction Agreement. We determined not to consolidate Five Star in our condensed consolidated financial statements, as we do not have the power to direct the activities of Five Star that most significantly impact Five Star's economic performance and therefore are not the primary beneficiary of Five Star. Effective January 1, 2020, we determined that Five Star is not a VIE and we will account for our 33.9 % investment in Five Star using the equity method of accounting because we are deemed to exert significant influence, but not control, over Five Star's most significant activities. We have elected to use the fair value option to account for our investment in Five Star. Our Senior Living Communities Formerly Leased by Five Star . Prior to the Conversion Time, we leased senior living communities to Five Star pursuant to five master leases with Five Star, each of which was terminated as of January 1, 2020 pursuant to the Transaction Agreement. Under our previously existing leases with Five Star, Five Star paid us annual rent plus percentage rent equal to 4.0 % of the increase in gross revenues at certain of our senior living communities over base year gross revenues as specified in the applicable leases. We recognized rental income payable by Five Star of $ 32,738 and $ 105,451 for the three and nine months ended September 30, 2019, respectively. Rental income for the nine months ended September 30, 2019 includes $ 538 of percentage rent payments we received from Five Star. Rental income from Five Star represented 12.8 % and 13.4 % of our total revenues for the three and nine months ended September 30, 2019, respectively, and the properties Five Star leased from us represented 27.0 %, excluding properties held for sale, of our real estate investments, at cost, as of September 30, 2019. Pursuant to the Transaction Agreement, commencing February 1, 2019, no percentage rent was payable to us by Five Star and annual 20 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) rent payable to us by Five Star was adjusted as noted above. We previously determined percentage rent due under these leases annually and recognized it when all contingencies were met, which was typically at year end. Our previously existing leases with Five Star were “triple net” leases, which generally required Five Star to pay rent and all property operating expenses, to indemnify us from liability which may arise by reason of our ownership of the properties, to maintain the properties at Five Star's expense, to remove and dispose of hazardous substances on the properties in compliance with applicable law and to maintain insurance on the properties for Five Star's and our benefit. For the nine months ended September 30, 2019, we funded $ 97,480 of improvements to communities leased to Five Star, including $ 49,155 of fixed assets and improvements that we purchased pursuant to the Transaction Agreement as discussed above. Also pursuant to the Transaction Agreement, Five Star's rent did not increase as a result of these purchases. Our Senior Living Communities Managed by Five Star . Five Star managed 239 and 77 senior living communities for our account as of September 30, 2020 and 2019, respectively. We lease our senior living communities that are managed by Five Star to our TRSs, and Five Star manages these communities pursuant to long term management agreements. As described above, pursuant to the Transaction Agreement, effective January 1, 2020, we replaced our long term management and pooling agreements with Five Star with the New Management Agreements, the terms of which are described above. We incurred management fees payable to Five Star of $ 15,182 and $ 3,832 for the three months ended September 30, 2020 and 2019, respectively, and $ 47,937 and $ 11,492 for the nine months ended September 30, 2020 and 2019, respectively. These amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements. The following table presents residents fees and services revenue disaggregated by type of contract and payer: Three Months Ended September 30, Nine Months Ended September 30, Revenue from contracts with customers: 2020 2019 2020 2019 Basic housing and support services $ 208,941 $ 88,623 $ 659,240 $ 265,117 Medicare and Medicaid programs 38,882 6,902 131,460 23,333 Private pay and other third party payer SNF services 42,278 12,291 135,474 36,317 Total residents fees and services $ 290,101 $ 107,816 $ 926,174 $ 324,767 In addition to providing management services to us, Five Star also provides certain other services to residents at some of the senior living communities it manages for us, such as rehabilitation services. At senior living communities Five Star manages for us where Five Star provides rehabilitation services on an outpatient basis, the residents, third party payers or government programs pay Five Star for those rehabilitation services. At senior living communities Five Star manages for us where Five Star provides both inpatient and outpatient rehabilitation services, we generally pay Five Star for those rehabilitation services and charges for these services are included in amounts charged to residents, third party payers or government programs. We incurred fees of $ 5,972 and $ 1,478 for the three months ended September 30, 2020 and 2019, respectively, and $ 19,843 and $ 4,666 for the nine months ended September 30, 2020 and 2019, respectively, with respect to rehabilitation services Five Star provided at senior living communities it manages for us that are payable by us. These amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income (loss). As a result of routine monitoring protocols that are a part of Five Star's compliance program activities related to Medicare billing, Five Star discovered potentially inadequate documentation at a skilled nursing facility at one of our senior living communities that Five Star manages. This monitoring was not initiated in response to any specific complaint or allegation but rather was of the type that Five Star periodically undertakes to test its compliance with applicable Medicare billing rules. As a result of this discovery, we and Five Star made an initial voluntary disclosure 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. Five Star has since completed its review and assessment of these matters and we and Five Star will submit a final supplemental disclosure to the OIG in November 2020. At September 30, 2020, we had accrued a revenue reserve of $ 4,005 for historical Medicare payments we received that we expect to repay as a result of the inadequate documentation Five Star identified. In addition, we have recorded expenses for additional costs incurred or expected to be incurred, including OIG-imposed penalties, 21 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) as a result of this matter totaling $ 2,167 for the three and nine months ended September 30, 2020, of which the entire $ 2,167 remained accrued and not paid at September 30, 2020. Since January 1, 2020, we sold certain senior living communities that were then managed by Five Star. We and Five Star terminated our management agreements for these senior living communities in connection with these sales. We have also identified additional senior living communities for sale that are currently managed by Five Star. If these sales are consummated, we and Five Star will terminate the management agreements for these senior living communities. See Note 3 for further information regarding these sales. In addition, we and Five Star have determined to close and/or sell 10 of our senior living communities that Five Star manages. We lease to Five Star space at certain of our senior living communities that Five Star manages, which it uses to provide certain inpatient and outpatient rehabilitation and wellness services. We recognized a reduction in property operating expenses of $ 393 and $ 1,175 for the three and nine months ended September 30, 2020, respectively, with respect to these leases. Note 11. Business and Property Management Agreements with RMR LLC We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to the property level operations of our medical office and life science properties. We also have a subsidiary level management agreement with RMR LLC related to one of our life science properties located in Boston, Massachusetts, which we entered in connection with the joint venture arrangement for that life science property. Under that agreement, our subsidiary pays RMR LLC certain business management fees directly, which fees are credited against the business management fees payable by us to RMR LLC. See Note 12 for further information regarding our relationship, agreements and transactions with RMR LLC. Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $ 5,004 and $ 6,616 for the three months ended September 30, 2020 and 2019, respectively, and $ 15,614 and $ 20,917 for the nine months ended September 30, 2020 and 2019, respectively. The net business management fees we recognized include $ 725 and $ 2,175 of management fees related to our subsidiary level management agreement with RMR LLC entered in connection with our joint venture arrangement for the three and nine months ended September 30, 2020 and 2019, respectively. Based on our common share total return, as defined in our business management agreement, as of each of September 30, 2020 and 2019, no estimated incentive fees are included in the net business management fees we recognized for the three or nine months ended September 30, 2020 or 2019. The actual amount of annual incentive fees for 2020, if any, will be based on our common share total return as defined in our business management agreement, for the three -year period ending December 31, 2020, and will be payable in 2021. We did not incur any incentive fee payable for the year ended December 31, 2019. We recognize business management and incentive fees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $ 3,477 and $ 3,289 for the three months ended September 30, 2020 and 2019, respectively, and $ 10,076 and $ 9,844 for the nine months ended September 30, 2020 and 2019, respectively. These amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements. We are generally responsible for all our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf. We are generally not responsible for payment of RMR LLC's employment, office or administrative expenses incurred to provide management services to us, except for the applicable employment and related expenses of RMR LLC's employees assigned to work exclusively or partly at our medical office and life science properties, our share of the wages, benefits and other related costs of RMR LLC's centralized accounting personnel, our share of RMR LLC's costs for providing internal audit services, or as otherwise agreed. Our property level operating expenses are generally incorporated into the rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC. We reimbursed RMR LLC $ 3,571 and $ 3,419 for these expenses and costs for the three months ended September 30, 2020 and 2019, respectively, and $ 10,433 and $ 10,145 for the nine months ended September 30, 2020 and 2019, respectively. These amounts are included in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income (loss). 22 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) Note 12. Related Person Transactions We have relationships and historical and continuing transactions with RMR LLC, RMR Inc., Five Star and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR Inc. is the managing member of RMR LLC. The Chair of our Board and one of our Managing Trustees, Adam Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., a managing director and the president and chief executive officer of RMR Inc., an officer and employee of RMR LLC and the chair of the board of directors and a managing director of Five Star. Jennifer Clark, our other Managing Trustee and our Secretary, also serves as a managing director and the executive vice president, general counsel and secretary of RMR Inc., an officer and employee of RMR LLC, an officer of ABP Trust and a managing director and the secretary of Five Star, and each of our officers is also an officer and employee of RMR LLC. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy serves as the chair of the boards of trustees or boards of directors of several of these public companies and as a managing director or managing trustee of these companies. Other officers of RMR LLC, including Ms. Clark and certain of our other officers, serve as managing trustees, managing directors or officers of certain of these companies. Five Star. We are currently Five Star's largest stockholder. As of September 30, 2020, we owned 10,691,658 Five Star common shares, or approximately 33.9 % of Five Star's outstanding common shares. Five Star manages for us most of the senior living communities we own. RMR LLC provides management services to both us and Five Star. Five Star participates in our property insurance program for the senior living communities Five Star owns and leases. The premiums Five Star pays for this coverage are allocated pursuant to a formula based on the profiles of the properties included in the program. Five Star's program cost for the policy year ending June 30, 2021 is $ 500 . See Note 10 for further information regarding our relationships, agreements and transactions with Five Star and Note 6 for further information regarding our investment in Five Star. As of September 30, 2020, ABP Acquisition LLC, a subsidiary of ABP Trust, the controlling shareholder of RMR Inc., together with ABP Trust, owned approximately 6.4 % of Five Star's outstanding common shares. RMR LLC provides management services to both us and Five Star and Adam Portnoy is the chair of the board of directors and a managing director of Five Star. Jennifer Clark is a managing director and the secretary of Five Star. Five Star's president and chief executive officer and executive vice president, chief financial officer and treasurer are officers and employees of RMR LLC. Our Manager, RMR LLC. We have two agreements with RMR LLC to provide management services to us. RMR LLC also leases office space from us pursuant to a lease agreement that is terminable on 30 days' notice, subject to certain conditions. See Note 11 for further information regarding our management agreements with RMR LLC. See Note 8 for information relating to the annual share awards we made in September 2020 to our officers and certain other employees of RMR LLC and common shares we purchased from our officers and certain current and former officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares to them. We include amounts recognized as expense for share awards to RMR LLC employees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). AIC. Until its dissolution in February 2020, we, ABP Trust, Five Star and four other companies to which RMR LLC provides management services owned Affiliates Insurance Company, or AIC, an Indiana insurance company, in equal amounts. Certain of our Trustees and certain directors or trustees of the other AIC shareholders served on the board of directors of AIC until its dissolution. We and the other AIC shareholders historically participated in a combined property insurance program arranged and insured or reinsured in part by AIC. The policies under that program expired on June 30, 2019, and we and the other AIC shareholders elected not to renew the AIC property insurance program; we have instead purchased standalone property insurance coverage with unrelated third party insurance providers. As of each of September 30, 2020 and December 31, 2019, our investment in AIC had a carrying value of $ 11 and $ 298 , respectively. These amounts are included in other assets, net in our condensed consolidated balance sheets. In June 2020, we received an additional liquidating distribution of approximately $ 287 from AIC in connection with its dissolution. We did not recognize any income related to our investment in AIC for the three and nine months ended September 30, 2020 and recognized 23 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) $ 83 and $ 617 related to our investment in AIC for the three and nine months ended September 30, 2019, respectively. These amounts are presented as equity in earnings of an investee in our condensed consolidated statements of comprehensive income (loss). Our other comprehensive income (loss) included our proportionate share of unrealized gains (losses) on securities that were owned by AIC, related to our investment in AIC. For further information about these and other such relationships and certain other related person transactions, see our Annual Report. Note 13. Income Taxes We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and, as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We do, however, lease our managed senior living communities to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated federal corporate income tax return and are subject to federal and state income taxes. Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state income taxes we incur despite our taxation as a REIT. During the three months ended September 30, 2020 and 2019, we recognized income tax expense of $ 365 and benefit of $ 146 , respectively, and during the nine months ended September 30, 2020 and 2019, we recognized income tax expense of $ 1,048 and benefit of $ 47 , respectively. Note 14. Weighted Average Common Share s (share amounts in thousands) We calculate basic earnings per common share by dividing net income (loss) by the weighted average number of our common shares outstanding during the period. We calculate diluted earnings per share using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive common shares, and the related impact on earnings, are considered when calculating diluted earnings per share. For the three months ended September 30, 2020 and 2019, 237 and 42 unvested common shares, respectively, and for the nine months ended September 30, 2020 and 2019, 235 and 26 unvested common shares, respectively, were not included in the calculation of diluted earnings per share because to do so would have been antidilutive. 24 Table of Contents