DIVERSIFIED HEALTHCARE TRUST 10-Q

Item 1. Financial Statements. DIVERSIFIED HEALTHCARE TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data) (unaudited) June 30, December 31, 2021 2020 Assets Real estate properties: Land $ 793,261 $ 789,125 Buildings and improvements 6,731,677 6,621,605 Total real estate properties, gross 7,524,938 7,410,730 Accumulated depreciation ( 1,792,472 ) ( 1,694,901 ) Total real estate properties, net 5,732,466 5,715,829 Assets of properties held for sale — 112,437 Cash and cash equivalents 849,079 74,417 Restricted cash 59,010 16,432 Acquired real estate leases and other intangible assets, net 263,657 286,513 Other assets, net 275,640 270,796 Total assets $ 7,179,852 $ 6,476,424 Liabilities and Equity Revolving credit facility $ 800,000 $ — Term loan, net — 199,049 Senior unsecured notes, net 2,803,497 2,608,189 Secured debt and finance leases, net 689,895 691,573 Liabilities of properties held for sale — 3,525 Accrued interest 32,690 23,772 Assumed real estate lease obligations, net 63,487 67,830 Other liabilities 285,134 263,264 Total liabilities 4,674,703 3,857,202 Commitments and contingencies Equity: Equity attributable to common shareholders: Common shares of beneficial interest, $ .01 par value: 300,000,000 shares authorized, 238,374,572 and 238,268,478 shares issued and outstanding, respectively 2,384 2,383 Additional paid in capital 4,614,748 4,613,904 Cumulative net income 1,811,382 1,913,109 Cumulative distributions ( 4,038,325 ) ( 4,033,559 ) Total equity attributable to common shareholders 2,390,189 2,495,837 Noncontrolling interest: Total equity attributable to noncontrolling interest 114,960 123,385 Total equity 2,505,149 2,619,222 Total liabilities and equity $ 7,179,852 $ 6,476,424 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenues: Rental income $ 102,394 $ 106,207 $ 205,152 $ 216,705 Residents fees and services 243,947 304,104 503,913 636,073 Total revenues 346,341 410,311 709,065 852,778 Expenses: Property operating expenses 264,632 301,915 552,023 618,500 Depreciation and amortization 67,888 68,825 134,041 137,255 General and administrative 9,126 7,312 16,668 16,144 Acquisition and certain other transaction related costs 12,071 87 12,071 750 Impairment of assets — 31,175 ( 174 ) 42,409 Total expenses 353,717 409,314 714,629 815,058 Gain (loss) on sale of properties 30,760 ( 168 ) 30,638 2,614 Gains and losses on equity securities, net ( 3,849 ) 11,974 ( 12,188 ) 2,031 Interest and other income 16,038 7,736 18,873 7,874 Interest expense (including net amortization of debt premiums, discounts and issuance costs of $ 3,017 , $ 1,617 , $ 5,829 and $ 3,126 , respectively) ( 67,657 ) ( 43,974 ) ( 127,748 ) ( 85,624 ) Gain on lease termination — — — 22,896 Loss on early extinguishment of debt ( 370 ) ( 181 ) ( 2,410 ) ( 427 ) Loss from continuing operations before income tax expense ( 32,454 ) ( 23,616 ) ( 98,399 ) ( 12,916 ) Income tax expense ( 191 ) ( 1,126 ) ( 429 ) ( 683 ) Net loss ( 32,645 ) ( 24,742 ) ( 98,828 ) ( 13,599 ) Net income attributable to noncontrolling interest ( 1,577 ) ( 1,330 ) ( 2,899 ) ( 2,738 ) Net loss attributable to common shareholders $ ( 34,222 ) $ ( 26,072 ) $ ( 101,727 ) $ ( 16,337 ) Weighted average common shares outstanding (basic) 237,871 237,700 237,853 237,684 Weighted average common shares outstanding (diluted) 237,871 237,700 237,853 237,684 Per common share amounts (basic and diluted): Net loss attributable to common shareholders $ ( 0.14 ) $ ( 0.11 ) $ ( 0.43 ) $ ( 0.07 ) 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, 2020: 238,268,478 $ 2,383 $ 4,613,904 $ 1,913,109 $ ( 4,033,559 ) $ 2,495,837 $ 123,385 $ 2,619,222 Net (loss) income — — — ( 67,505 ) — ( 67,505 ) 1,322 ( 66,183 ) Distributions — — — — ( 2,383 ) ( 2,383 ) — ( 2,383 ) Share grants — — 228 — — 228 — 228 Distributions to noncontrolling interest — — — — — — ( 5,694 ) ( 5,694 ) Balance at March 31, 2021: 238,268,478 2,383 4,614,132 1,845,604 ( 4,035,942 ) 2,426,177 119,013 2,545,190 Net (loss) income — — — ( 34,222 ) — ( 34,222 ) 1,577 ( 32,645 ) Distributions — — — — ( 2,383 ) ( 2,383 ) — ( 2,383 ) Share grants 120,000 1 675 — — 676 — 676 Share repurchases ( 13,906 ) — ( 59 ) — — ( 59 ) — ( 59 ) Distributions to noncontrolling interest — — — — — — ( 5,630 ) ( 5,630 ) Balance at June 30, 2021: 238,374,572 $ 2,384 $ 4,614,748 $ 1,811,382 $ ( 4,038,325 ) $ 2,390,189 $ 114,960 $ 2,505,149 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 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 CASH FLOWS (dollars in thousands) (unaudited) Six Months Ended June 30, 2021 2020 Cash flows from operating activities: Net loss $ ( 98,828 ) $ ( 13,599 ) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization 134,041 137,255 Net amortization of debt premiums, discounts and issuance costs 5,829 3,126 Straight line rental income ( 2,125 ) ( 2,538 ) Amortization of acquired real estate leases ( 3,715 ) ( 3,703 ) Loss on early extinguishment of debt 2,410 51 Gain on lease termination — ( 22,896 ) Impairment of assets ( 174 ) 42,409 Gain on sale of properties ( 30,638 ) ( 2,614 ) Gains and losses on equity securities, net 12,188 ( 2,031 ) Other non-cash adjustments, net ( 982 ) ( 1,885 ) Change in assets and liabilities: Deferred leasing costs, net ( 8,258 ) ( 4,140 ) Other assets ( 7,937 ) ( 24,441 ) Accrued interest 8,918 3,085 Other liabilities 16,317 2,594 Net cash provided by operating activities 27,046 110,673 Cash flows from investing activities: Real estate acquisitions and deposits — ( 2,526 ) Real estate improvements ( 83,468 ) ( 71,762 ) Proceeds from sale of properties, net 103,057 66,604 Distributions in excess of earnings from Affiliates Insurance Company — 287 Net cash provided by (used in) investing activities 19,589 ( 7,397 ) Cash flows from financing activities: Proceeds from issuance of senior unsecured notes, net 492,500 985,000 Proceeds from borrowings on revolving credit facility 800,000 405,500 Repayments of borrowings on revolving credit facility — ( 943,000 ) Repayment of senior unsecured notes ( 300,000 ) ( 200,000 ) Repayment of term loan ( 200,000 ) ( 250,000 ) Repayment of other debt ( 1,558 ) ( 4,455 ) Loss on early extinguishment of debt settled in cash — ( 376 ) Payment of debt issuance costs ( 4,188 ) ( 4,926 ) Repurchase of common shares ( 59 ) ( 29 ) Distributions to noncontrolling interest ( 11,324 ) ( 11,383 ) Distributions to shareholders ( 4,766 ) ( 38,063 ) Net cash provided by (used in) financing activities 770,605 ( 61,732 ) Increase in cash and cash equivalents and restricted cash 817,240 41,544 Cash and cash equivalents and restricted cash at beginning of period 90,849 52,224 Cash and cash equivalents and restricted cash at end of period $ 908,089 $ 93,768 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 (CONTINUED) (dollars in thousands) (unaudited) Six Months Ended June 30, 2021 2020 Supplemental cash flow information: Interest paid $ 113,933 $ 80,131 Income taxes paid $ 1,880 $ — Non-cash investing activities: Five Star Senior Living Inc. common stock $ — $ 97,896 Restructuring transaction additional consideration $ — $ ( 75,000 ) Real estate improvements accrued, not paid $ 20,860 $ 18,353 Capitalized interest $ 932 $ 718 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 June 30, 2021 2020 Cash and cash equivalents $ 849,079 $ 78,485 Restricted cash (1) 59,010 15,283 Total cash and cash equivalents and restricted cash shown in our condensed consolidated statements of cash flows $ 908,089 $ 93,768 (1) As of June 30, 2021, restricted cash consists of amounts from dispositions held as collateral pursuant to the agreement governing our revolving credit facility, or our credit agreement. We may use these funds to pay for approved expenditures in accordance with our credit agreement. Restricted cash also 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 the life science property 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. 5 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, 2020, 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 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 the Financial Accounting Standards Board, or FASB, Accounting Standards Codification 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 are party to a joint venture arrangement with an institutional investor. This joint venture arrangement owns a life science property 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 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 $ 946,564 and $ 970,142 as of June 30, 2021 and December 31, 2020, respectively, and consist primarily of the net real estate owned by the joint venture. The liabilities of this VIE were $ 692,489 and $ 697,129 as of June 30, 2021 and December 31, 2020, 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 6 for further information about this joint venture. Note 2. Real Estate Properties As of June 30, 2021, we owned 392 properties located in 36 states and Washington, D.C., including 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 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) 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. During the six months ended June 30, 2021, we recorded a reversal of impairment charges of $ 174 related to the estimated costs to sell 10 senior living communities that were classified as held for sale as of December 31, 2020 and changed the status of those communities from held for sale to held and used as of March 31, 2021. Acquisitions and Dispositions: During the six months ended June 30, 2021, we sold five properties for an aggregate sales price of $ 104,500 , excluding closing costs, as presented in the table below. The sales of these properties do not represent significant dispositions, individually or in the aggregate, and we do not believe these sales represent a strategic shift in our business. As a result, the results of operations 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 Sales Price (1) Gain (Loss) on Sale February 2021 Pennsylvania Medical Office 1 92,000 $ 9,000 $ ( 122 ) April 2021 Florida Life Science and Medical Office 4 263,656 95,500 30,760 5 $ 104,500 $ 30,638 (1) Sales price excludes closing costs. In June 2021, we terminated a previously announced agreement to acquire a property which is adjacent to one of our existing properties located in Silver Springs, Maryland. Note 3. 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 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 $ 1,321 and $ 1,385 for the three months ended June 30, 2021 and 2020, respectively, and $ 2,125 and $ 2,538 for the six months ended June 30, 2021 and 2020, respectively. Rents receivable, excluding receivables related to our properties classified as held for sale, if any, include $ 106,501 and $ 104,803 of straight line rent receivables at June 30, 2021 and December 31, 2020, 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. Such payments totaled $ 18,476 and $ 18,263 for the three months ended June 30, 2021 and 2020, respectively, of which tenant reimbursements totaled $ 18,440 and $ 18,209 , respectively, and $ 36,704 and $ 38,291 for the six months ended June 30, 2021 and 2020, respectively, of which tenant reimbursements totaled $ 36,620 and $ 38,192 , respectively. Certain of our tenants requested relief from their obligations to pay rent due to us in response to the current economic conditions resulting from the COVID-19 pandemic. In most cases, these tenants granted deferrals were obligated to pay the deferred rents in 12 equal monthly installments beginning in September 2020. As of June 30, 2021 and December 31, 2020, deferred payments totaling $ 442 and $ 1,486 , respectively, are included in other assets, net in our condensed consolidated 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) balance sheets. These deferred amounts did not negatively impact our operating results for the three or six months ended June 30, 2021 or 2020. 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 $ 4,195 and $ 4,381 , respectively, as of June 30, 2021, and $ 4,237 and $ 4,410 , respectively, as of December 31, 2020. 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 4. Indebtedness Our principal debt obligations at June 30, 2021 were: (1) outstanding borrowings under our $ 800,000 revolving credit facility; (2) $ 2,850,000 outstanding principal amount of senior unsecured notes; and (3) $ 683,502 aggregate principal amount of mortgage notes secured by seven properties, of which $ 620,000 is related to the life science property owned by a joint venture arrangement in which we own a 55 % equity interest. These seven mortgaged properties had a gross book value of $ 948,269 at June 30, 2021. We also had two properties subject to finance leases with lease obligations totaling $ 7,234 at June 30, 2021; these two properties had gross book value and accumulated depreciation of $ 35,998 and $ 17,826 , respectively, at June 30, 2021, and $ 35,676 and $ 17,579 , respectively, at December 31, 2020, and the finance leases expire in 2026. We have a $ 800,000 revolving credit facility that is available for general business purposes. The maturity date of our revolving credit facility is January 2022, and, subject to the payment of an extension fee and meeting other conditions, we have two , one year options to extend the maturity date of the facility to January 2024. 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 June 30, 2021, our revolving credit facility required interest to be paid on borrowings at the annual rate of 2.9 %, 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 2.9 % and 1.8 % for the three months ended June 30, 2021 and 2020, respectively, and 2.9 % and 2.2 % for the six months ended June 30, 2021 and 2020, respectively. The interest rate premium and facility fee are each subject to adjustment based upon changes to our credit ratings. On March 31, 2021, we borrowed $ 800,000 under our revolving credit facility as a precautionary measure to increase our cash position and preserve financial flexibility in light of continued uncertainties related to the COVID-19 pandemic. As of June 30, 2021 and August 2, 2021, we were fully drawn under our revolving credit facility. In February 2021, we issued $ 500,000 aggregate principal amount of our 4.375 % senior notes due 2031 in an underwritten public offering raising net proceeds of $ 491,357 , after deducting estimated offering expenses and underwriters' discounts. These notes are guaranteed by all of our subsidiaries, except for certain excluded subsidiaries, including pledged subsidiaries under our credit agreement, and require semi-annual interest payments through maturity. We used the net proceeds from this offering to prepay in full in February 2021 our $ 200,000 term loan which was scheduled to mature in September 2022. The weighted average interest rate under our $ 200,000 term loan was 2.9 % for the period from January 1, 2021 to February 7, 2021 and 2.3 % and 2.7 % for the three and six months ended June 30, 2020, respectively. As a result of the prepayment of our $ 200,000 term loan, we recorded a loss on early extinguishment of debt of $ 1,477 for the six months ended June 30, 2021. In June 2021, we used the remaining net proceeds from this offering and cash on hand to redeem all of our outstanding 6.75 % senior notes due 2021 for a redemption price equal to the principal amount of $ 300,000 plus accrued and unpaid interest of $ 10,125 , when these notes became redeemable with no prepayment premium. In connection with this redemption, we recorded a loss on early extinguishment of debt of $ 370 for the six months ended June 30, 2021. 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) In January 2021, we amended the agreements governing our revolving credit facility and our $ 200,000 term loan, or collectively, our credit and term loan agreements, in order to provide us with certain flexibility in light of continued uncertainties related to the COVID-19 pandemic. Pursuant to the amendments: • certain of the financial covenants under our credit and term loan agreements, including covenants that require us to maintain certain financial ratios, have been waived through June 2022, or the Amendment Period; • the revolving credit facility commitments have been reduced from $ 1,000,000 to $ 800,000 , and as a result of the reduction in commitments, we recorded a loss on early extinguishment of debt of $ 563 for the six months ended June 30, 2021; • we pledged certain equity interests of subsidiaries owning properties to secure our obligations under our credit and term loan agreements and agreed to provide first mortgage liens on 62 medical office and life science properties with an aggregate gross book value of real estate assets of $ 1,038,174 as of June 30, 2021 to secure our obligations, which pledges and/or mortgage liens may be removed or new ones may be added during the Amendment Period based on outstanding debt amounts, among other things; • we had the ability to fund $ 250,000 of capital expenditures per year, which increased to $ 350,000 per year following the repayment of our term loan in February 2021, and are restricted in our ability to acquire real property as defined in our credit agreement; • the interest rate premium over LIBOR under our revolving credit facility and term loan increased by 30 basis points; • certain covenants and restrictions on distributions to common shareholders, share repurchases, capital expenditures, acquiring additional properties and incurring additional indebtedness (in each case subject to various exceptions), and the minimum liquidity requirement of $ 200,000 will remain in place during the Amendment Period; and • we are generally required to apply the net cash proceeds from the disposition of assets, capital markets transactions, and debt financings to the repayment of any amounts outstanding under our revolving credit facility. Our credit agreement 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 agreement, 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 agreement 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 agreement restricts our ability to make distributions under certain circumstances. As of June 30, 2021, our ratio of consolidated income available for debt service to debt service was below the 1.5 x incurrence requirement under our revolving credit facility and our public debt covenants as the effects of the COVID-19 pandemic continued to adversely impact our operations. We are not allowed to incur additional debt while this ratio is below 1.5 x. We believe we were in compliance with the remaining terms and conditions of the respective covenants under our credit agreement and our senior unsecured notes indentures and their supplements at June 30, 2021. 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. Continued availability of borrowings under our revolving credit facility is subject to our satisfying certain financial covenants and other credit facility conditions. If our operating results and financial condition are significantly negatively impacted by economic conditions or otherwise, we may fail to satisfy covenants and conditions under our credit agreement or fail to satisfy our public debt covenants. 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) Note 5. Fair Value of Assets and Liabilities The following table presents certain of our assets that are measured at fair value at June 30, 2021, 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) $ 61,584 $ 61,584 $ — $ — (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). Our adjusted cost basis for these shares was $ 44,448 as of June 30, 2021. During the three months ended June 30, 2021 and 2020, we recorded an unrealized loss of $ 3,849 and an unrealized gain of $ 11,974 , respectively, and during the six months ended June 30, 2021 and 2020, we recorded an unrealized loss of $ 12,188 and an unrealized gain of $ 2,031 , respectively, which are included in gains and losses on equity securities, net in 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 11 for further information about our investment in Five Star. In addition to the assets described in the table above, our financial instruments at June 30, 2021 and December 31, 2020 included cash and cash equivalents, restricted cash, other assets, our revolving credit facility, term loan, 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 June 30, 2021 As of December 31, 2020 Description Carrying Amount (1) Estimated Fair Value Carrying Amount (1) Estimated Fair Value Senior unsecured notes, 6.750 % coupon rate, due 2021 $ — $ — $ 299,273 $ 303,891 Senior unsecured notes, 4.750 % coupon rate, due 2024 249,208 256,911 249,068 256,258 Senior unsecured notes, 9.750 % coupon rate, due 2025 986,131 1,112,840 984,359 1,135,800 Senior unsecured notes, 4.750 % coupon rate, due 2028 491,562 497,425 490,925 502,648 Senior unsecured notes, 4.375 % coupon rate, due 2031 491,698 479,265 — — Senior unsecured notes, 5.625 % coupon rate, due 2042 341,993 338,660 341,802 330,120 Senior unsecured notes, 6.250 % coupon rate, due 2046 242,905 248,000 242,762 245,000 Secured debts (2) (3) 689,895 709,149 691,573 716,185 $ 3,493,392 $ 3,642,250 $ 3,299,762 $ 3,489,902 (1) Includes unamortized net 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 secured debts for the life science property owned by a joint venture arrangement in which we own a 55 % equity interest. The amounts listed in the table for these debts have not been adjusted to reflect the equity interests in the joint venture that we do not own. 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 June 30, 2021. We estimated the fair values of our four issuances of senior unsecured notes due 2024, 2025, 2028 and 2031 using an average of the bid and ask price on Nasdaq on or about June 30, 2021 (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 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) 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. Note 6. Noncontrolling Interest We are party to 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 $ 1,577 and $ 1,330 for the three months ended June 30, 2021 and 2020, respectively, and $ 2,899 and $ 2,738 for the six months ended June 30, 2021 and 2020, 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 $ 5,630 and $ 5,616 for the three months ended June 30, 2021 and 2020, respectively, and $ 11,324 and $ 11,383 for the six months ended June 30, 2021 and 2020, respectively, which are reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated balance sheets. As of June 30, 2021, this joint venture held real estate assets with an aggregate net book value of $ 695,287 , 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. Note 7. Shareholders' Equity Common Share Awards: On June 3, 2021, in accordance with our Trustee compensation arrangements, we awarded to each of our six Trustees 20,000 of our common shares, valued at $ 3.70 per share, the closing price of our common shares on Nasdaq on that day . Common Share Repurchases: During the six months ended June 30, 2021, we purchased an aggregate of 13,906 of our common shares, valued at the closing price of our common shares on Nasdaq on the purchase date, from certain 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. Distributions: During the six months ended June 30, 2021, we declared and paid quarterly distributions to common shareholders as follows: Declaration Date Record Date Payment Date Distribution Per Share Total Distributions January 14, 2021 January 25, 2021 February 18, 2021 $ 0.01 $ 2,383 April 15, 2021 April 26, 2021 May 20, 2021 0.01 2,383 $ 0.02 $ 4,766 On July 15, 2021, we declared a quarterly distribution to common shareholders of record on July 26, 2021 of $ 0.01 per share, or approximately $ 2,384 in aggregate. We expect to pay this distribution on or about August 19, 2021. 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) Note 8. 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 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 a manager to operate the communities. We also report “non-segment” operations, which consists of triple net leased senior living communities that are leased to operators 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 June 30, 2021 Office Portfolio SHOP Non-Segment Consolidated Revenues: Rental income $ 92,804 $ — $ 9,590 $ 102,394 Residents fees and services — 243,947 — 243,947 Total revenues 92,804 243,947 9,590 346,341 Expenses: Property operating expenses 31,321 233,311 — 264,632 Depreciation and amortization 32,497 32,538 2,853 67,888 General and administrative — — 9,126 9,126 Acquisition and certain other transaction related costs — — 12,071 12,071 Total expenses 63,818 265,849 24,050 353,717 Gain on sale of properties 30,760 — — 30,760 Losses on equity securities, net — — ( 3,849 ) ( 3,849 ) Interest and other income — 15,748 290 16,038 Interest expense ( 5,992 ) ( 525 ) ( 61,140 ) ( 67,657 ) Loss on early extinguishment of debt — — ( 370 ) ( 370 ) Income (loss) from continuing operations before income tax expense 53,754 ( 6,679 ) ( 79,529 ) ( 32,454 ) Income tax expense — — ( 191 ) ( 191 ) Net income (loss) 53,754 ( 6,679 ) ( 79,720 ) ( 32,645 ) Net income attributable to noncontrolling interest ( 1,577 ) — — ( 1,577 ) Net income (loss) attributable to common shareholders $ 52,177 $ ( 6,679 ) $ ( 79,720 ) $ ( 34,222 ) 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) For the Six Months Ended June 30, 2021 Office Portfolio SHOP Non-Segment Consolidated Revenues: Rental income $ 186,127 $ — $ 19,025 $ 205,152 Residents fees and services — 503,913 — 503,913 Total revenues 186,127 503,913 19,025 709,065 Expenses: Property operating expenses 62,614 489,409 — 552,023 Depreciation and amortization 64,435 63,899 5,707 134,041 General and administrative — — 16,668 16,668 Acquisition and certain other transaction related costs — — 12,071 12,071 Impairment of assets — ( 174 ) — ( 174 ) Total expenses 127,049 553,134 34,446 714,629 Gain on sale of properties 30,638 — — 30,638 Losses on equity securities, net — — ( 12,188 ) ( 12,188 ) Interest and other income — 18,181 692 18,873 Interest expense ( 11,931 ) ( 1,053 ) ( 114,764 ) ( 127,748 ) Loss on early extinguishment of debt — — ( 2,410 ) ( 2,410 ) Income (loss) from continuing operations before income tax expense 77,785 ( 32,093 ) ( 144,091 ) ( 98,399 ) Income tax expense — — ( 429 ) ( 429 ) Net income (loss) 77,785 ( 32,093 ) ( 144,520 ) ( 98,828 ) Net income attributable to noncontrolling interest ( 2,899 ) — — ( 2,899 ) Net income (loss) attributable to common shareholders $ 74,886 $ ( 32,093 ) $ ( 144,520 ) $ ( 101,727 ) 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 a 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. We have recognized $ 18,181 and $ 7,346 as other income with respect to our SHOP segment for the six months ended June 30, 2021 and 2020, respectively. 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. As of June 30, 2021 Office Portfolio SHOP Non-Segment Consolidated Total assets $ 2,997,668 $ 2,949,629 $ 1,232,555 $ 7,179,852 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) For the Three Months Ended June 30, 2020 Office Portfolio SHOP Non-Segment Consolidated Revenues: Rental income $ 95,510 $ — $ 10,697 $ 106,207 Residents fees and services — 304,104 — 304,104 Total revenues 95,510 304,104 10,697 410,311 Expenses: Property operating expenses 30,893 271,022 — 301,915 Depreciation and amortization 32,234 33,773 2,818 68,825 General and administrative — — 7,312 7,312 Acquisition and certain other transaction related costs — — 87 87 Impairment of assets 538 30,637 — 31,175 Total expenses 63,665 335,432 10,217 409,314 Loss on sale of properties — ( 168 ) — ( 168 ) Gains on equity securities, net — — 11,974 11,974 Interest and other income — 7,346 390 7,736 Interest expense ( 6,020 ) ( 560 ) ( 37,394 ) ( 43,974 ) Loss on early extinguishment of debt ( 155 ) — ( 26 ) ( 181 ) Income (loss) from continuing operations before income tax expense 25,670 ( 24,710 ) ( 24,576 ) ( 23,616 ) Income tax expense — — ( 1,126 ) ( 1,126 ) Net income (loss) 25,670 ( 24,710 ) ( 25,702 ) ( 24,742 ) Net income attributable to noncontrolling interest ( 1,330 ) — — ( 1,330 ) Net income (loss) attributable to common shareholders $ 24,340 $ ( 24,710 ) $ ( 25,702 ) $ ( 26,072 ) 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) For the Six Months Ended June 30, 2020 Office Portfolio SHOP Non-Segment Consolidated Revenues: Rental income $ 194,280 $ — $ 22,425 $ 216,705 Residents fees and services — 636,073 — 636,073 Total revenues 194,280 636,073 22,425 852,778 Expenses: Property operating expenses 63,599 554,901 — 618,500 Depreciation and amortization 64,397 66,815 6,043 137,255 General and administrative — — 16,144 16,144 Acquisition and certain other transaction related costs — — 750 750 Impairment of assets 6,756 35,653 — 42,409 Total expenses 134,752 657,369 22,937 815,058 Gain (loss) on sale of properties 2,782 ( 168 ) — 2,614 Gains on equity securities, net — — 2,031 2,031 Interest and other income — 7,346 528 7,874 Interest expense ( 12,072 ) ( 1,124 ) ( 72,428 ) ( 85,624 ) 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 49,837 ( 15,242 ) ( 47,511 ) ( 12,916 ) Income tax expense — — ( 683 ) ( 683 ) Net income (loss) 49,837 ( 15,242 ) ( 48,194 ) ( 13,599 ) Net income attributable to noncontrolling interest ( 2,738 ) — — ( 2,738 ) Net income (loss) attributable to common shareholders $ 47,099 $ ( 15,242 ) $ ( 48,194 ) $ ( 16,337 ) As of December 31, 2020 Office Portfolio SHOP Non-Segment Consolidated Total assets $ 3,092,289 $ 2,912,570 $ 471,565 $ 6,476,424 Note 9. Leases and Management Agreements with Five Star 2020 Restructuring of our Business Arrangements with Five Star. Effective as of January 1, 2020: • 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 with new management agreements and a related omnibus agreement. These new management and omnibus agreements were subsequently replaced in June 2021, as described below; • 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; • 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 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) $ 22,896 for the six months ended June 30, 2020 in our condensed consolidated statements of comprehensive income (loss); and • 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 our applicable management agreements with Five Star. Effective January 1, 2020, we determined that Five Star was not a VIE and we account for our 33.7 % 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. 2021 Amendments to our Management Arrangements with Five Star. On June 9, 2021, we amended our management arrangements with Five Star. The principal changes to the management arrangements include: • that Five Star is cooperating with us in transitioning 108 of our senior living communities with approximately 7,500 living units to other third party managers without our payment of any termination fee to Five Star; • that we no longer have the right to sell up to an additional $ 682,000 of senior living communities currently managed by Five Star and terminate Five Star's management of those communities without our payment of a fee to Five Star upon sale; • that Five Star is continuing to manage 120 of our senior living communities with approximately 18,000 living units, and that the skilled nursing units in all of our continuing care retirement communities that Five Star is continuing to manage, which then included approximately 1,500 living units, are being closed and repositioned; • that beginning in 2025, we will have the right to terminate up to 10 % of the senior living communities that Five Star is continuing to manage, based on total revenues per year for failure to meet 80 % of a target EBITDA for the applicable period; • that the incentive fee that Five Star may earn in any calendar year for the senior living communities that Five Star is continuing to manage is no longer subject to a cap and that any senior living communities that are undergoing a major renovation or repositioning are excluded from the calculation of the incentive fee; • that RMR LLC will oversee any major renovation or repositioning activities at the senior living communities that Five Star is continuing to manage; and • that the term of our management agreements with Five Star for our senior living communities that Five Star is continuing to manage was extended by two years to December 31, 2036. Pursuant to these changes, we and Five Star entered into an amended and restated master management agreement, or the Master Management Agreement, for the senior living communities that Five Star is continuing to manage and interim management agreements for the senior living communities that we and Five Star agreed to transition to new operators. These agreements replaced our prior management and omnibus agreements with Five Star. In addition, Five Star delivered to us a related amended and restated guaranty agreement pursuant to which Five Star is continuing to guarantee the payment and performance of each of its applicable subsidiary's obligations under the applicable management agreements. We expect that the transition of the management of the 108 senior living communities from Five Star to other third party managers will be completed before year end 2021. As of August 3, 2021, we had executed agreements with four new third party managers to transition 76 senior living communities. Of these 76 senior living communities, 41 have been transitioned to new third party managers. We lease our senior living communities that have been transitioned to new managers to our taxable REIT subsidiaries, or TRSs. We also expect to incur costs related to retention and other transition costs for these communities, which costs may be significant. For the three and six months ended June 30, 2021, we recorded $ 11,914 of these costs to acquisition and certain other transaction related costs in our condensed consolidated statements of comprehensive income (loss). 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) Our Senior Living Communities Managed by Five Star . Five Star managed 235 and 241 of our senior living communities as of June 30, 2021 and 2020, respectively, which included seven closed senior living communities for the 2021 period. We lease our senior living communities that are managed by Five Star to our TRSs. We incurred management fees payable to Five Star of $ 12,927 and $ 15,706 for the three months ended June 30, 2021 and 2020, respectively, and $ 26,777 and $ 32,756 for the six months ended June 30, 2021 and 2020, respectively. For the three months ended June 30, 2021 and 2020, $ 12,212 and $ 15,262 , respectively, of the total management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 715 and $ 444 , respectively, were capitalized in our condensed consolidated balance sheets and are being depreciated over the estimated useful lives of the related capital assets. For the six months ended June 30, 2021 and 2020, $ 25,228 and $ 31,850 , respectively, of the total management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 1,549 and $ 906 , respectively, were capitalized in our condensed consolidated balance sheets and are being depreciated over the estimated useful lives of the related capital assets. The following table presents residents fees and services revenue disaggregated by type of contract and payer: Three Months Ended June 30, Six Months Ended June 30, Revenue from contracts with customers: 2021 2020 2021 2020 Basic housing and support services $ 188,169 $ 218,783 $ 376,198 $ 450,299 Medicare and Medicaid programs 24,907 42,910 60,855 92,578 Private pay and other third party payer SNF services 30,871 42,411 66,860 93,196 Total residents fees and services $ 243,947 $ 304,104 $ 503,913 $ 636,073 We incurred fees of $ 2,630 and $ 5,814 for the three months ended June 30, 2021 and 2020, respectively, and $ 8,071 and $ 13,871 for the six months ended June 30, 2021 and 2020, respectively, with respect to rehabilitation services Five Star provided at our senior living communities it manages 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 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. We and Five Star voluntarily disclosed this matter 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. In January 2021, we and Five Star settled this matter with the OIG and we agreed to pay approximately $ 5,763 in exchange for a customary release, but we and Five Star did not admit any liability. We recognized that amount in our consolidated statement of comprehensive income (loss) during the year ended December 31, 2020 and paid that amount to the OIG in January 2021. Five Star refunded to us approximately $ 115 of management fees it previously received relating to the Medicare payments we refunded to the OIG. 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. See Note 3 to the consolidated financial statements contained in our Annual Report for further information regarding these sales. We lease to Five Star space at certain of our senior living communities that Five Star manages where Five Star provides certain outpatient rehabilitation and wellness services clinics. We recorded $ 398 and $ 488 for the three months ended June 30, 2021 and 2020, respectively, and $ 795 and $ 782 for the six months ended June 30, 2021 and 2020, respectively, with respect to these leases. Note 10. 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 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) operations of our medical office and life science properties and major renovation or repositioning activities at our senior living communities. We also have a subsidiary level management agreement with RMR LLC related to the life science property 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 management fees directly, which fees are credited against the business management fees payable by us to RMR LLC. See Note 11 for further information regarding our relationship, agreements and transactions with RMR LLC. We recognized net business management fees of $ 6,324 and $ 4,841 for the three months ended June 30, 2021 and 2020, respectively, and $ 11,641 and $ 10,610 for the six months ended June 30, 2021 and 2020, respectively. The net business management fees we recognized include $ 725 and $ 1,450 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 six months ended June 30, 2021 and 2020, respectively. Based on our common share total return, as defined in our business management agreement, as of each of June 30, 2021 and 2020, no estimated incentive fees are included in the net business management fees we recognized for the three or six months ended June 30, 2021 or 2020. The actual amount of annual incentive fees for 2021, 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, 2021, and will be payable in January 2022. We did not incur any incentive fee payable for the year ended December 31, 2020. We recognize business management and incentive fees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). We recognized aggregate net property management and construction supervision fees payable to RMR LLC of $ 3,191 and $ 3,407 for the three months ended June 30, 2021 and 2020, respectively. Of those amounts, for the three months ended June 30, 2021 and 2020, $ 2,465 and $ 2,481 , respectively, of property management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 726 and $ 926 , respectively, were capitalized as building improvements in our condensed consolidated balance sheets and are being depreciated over the estimated useful lives of the related capital assets. We recognized aggregate net property management and construction supervision fees of $ 6,345 and $ 6,599 for the six months ended June 30, 2021 and 2020, respectively. Of those amounts, for the six months ended June 30, 2021 and 2020, $ 4,950 and $ 5,077 , respectively, of property management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 1,395 and $ 1,522 , respectively, were capitalized as building improvements in our condensed consolidated balance sheets and are being depreciated over the estimated useful lives of the related capital assets. 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 employment and related expenses of RMR LLC's employees assigned to work exclusively or partly at our 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 our internal audit function, 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 $ 3,202 and $ 3,419 for these expenses and costs for the three months ended June 30, 2021 and 2020, respectively, and $ 6,499 and $ 6,862 for the six months ended June 30, 2021 and 2020, respectively. These amounts are included in property operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income (loss). On June 9, 2021, we and RMR LLC amended our property management agreement to, among other things, provide for RMR LLC's oversight of any major capital projects and repositionings at our senior living communities, including our senior living communities which Five Star is continuing to manage, and that RMR LLC will receive the same fee previously paid to Five Star for such services, which is equal to 3 % of the cost of any such major capital project or repositioning. Note 11. Related Person Transactions We have relationships and historical and continuing transactions with RMR LLC, The RMR Group Inc., or 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 D. 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 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) and a managing director of Five Star. Jennifer F. Francis, our other Managing Trustee and our President and Chief Executive Officer is an executive vice president of RMR Inc. and she and our Chief Financial Officer and Treasurer are also employees and officers of RMR LLC. Jennifer B. Clark, our Secretary and former Managing Trustee, 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. Certain of Five Star's officers are officers and employees 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 officers, serve as managing trustees, managing directors or officers of certain of these companies. In addition, officers of RMR LLC and RMR Inc. serve as our officers and officers of other companies to which RMR LLC or its subsidiaries provide management services. Five Star. We are currently Five Star's largest stockholder. As of June 30, 2021, we owned 10,691,658 Five Star common shares, or approximately 33.7 % of Five Star's outstanding common shares. Five Star currently manages most of the senior living communities we own. RMR LLC provides management services to both us and Five Star. See Note 9 for further information regarding our relationships, agreements and transactions with Five Star and Note 5 for further information regarding our investment in Five Star. As of June 30, 2021, 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. Our Manager, RMR LLC. We have two agreements with RMR LLC to provide management services to us. See Note 10 for further information regarding our management agreements with RMR LLC. For further information about these and other such relationships and certain other related person transactions, see our Annual Report. Note 12. Income Taxes We have elected to be taxed as a real estate investment trust, or 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 June 30, 2021 and 2020, we recognized income tax expense of $ 191 and $ 1,126 , respectively, and during the six months ended June 30, 2021 and 2020, we recognized income tax expense of $ 429 and $ 683 , respectively. Note 13. 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 June 30, 2021 and 2020, 17 and 346 unvested common shares, respectively, and for the six months ended June 30, 2021 and 2020, 19 and 234 unvested common shares, respectively, were not included in the calculation of diluted earnings per share because to do so would have been antidilutive. 19 Table of Contents