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Five Star Quality Care, Inc. Settles Litigation Against Sunrise:

Stocks in this article: FVE

Five Star Quality Care, Inc. (NYSE: FVE) today announced that it has agreed to settle its long running litigation with Sunrise Senior Living, Inc. (NYSE: SRZ) in return for a payment from Sunrise to Five Star of $4 million.

Thirty-one (31) senior living communities now operated by Five Star were formerly managed by Marriott Senior Living Services, Inc. (MSLS), a subsidiary of Marriott International, Inc. (NYSE: MAR). Marriott sold MSLS to Sunrise in 2003 and these communities began to participate in insurance programs operated by Sunrise. During 2005 and 2006, Five Star terminated Sunrise’s management contracts and began direct operations of these 31 senior living communities. In 2008, Five Star learned of excess insurance charges by Sunrise during the period these 31 communities were managed by Sunrise, and Five Star demanded a refund. When Sunrise denied liability and refused to pay, Five Star brought suit against Sunrise. The $4 million payment from Sunrise to Five Star announced today settles this litigation.

During their settlement negotiations, Five Star and Sunrise also reached an agreement whereby Sunrise will terminate its leases for 10 senior living communities owned by Senior Housing Properties Trust (NYSE: SNH) and Five Star will begin to manage those 10 communities for SNH’s account. These 10 communities include 2,472 living units and are located in six states: 2 in Arizona (293 living units); 1 in California (393 living units); 4 in Florida (1,163 living units); 1 in Illinois (364 living units); 1 in Texas (145 living units); and 1 in Virginia (114 living units). These communities had gross revenues in 2011 of approximately $115.6 million. Five Star will manage these communities under contracts with terms similar to the terms under which it manages other communities for SNH, including a minimum annual management fee equal to three percent (3%) of gross revenues plus an incentive fee equal to thirty-five percent (35%) of annual net operating income (as defined) after SNH receives a return equal to its 2011 rents from Sunrise. Also, these management contracts will be combined, or pooled, for purposes of calculating incentive fees and otherwise with other management contracts between SNH and Five Star, including the contracts under which Five Star manages the former Vi ®Classic Residences (f/k/a Classic Residences by Hyatt).

Five Star currently expects to begin managing each of these 10 communities before year end 2012 after all appropriate regulatory approvals are obtained.

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