Sonida Senior Living, Inc.

2018 ANNUAL REPORT

To Our Shareholders:

As you are likely aware, I was appointed President and Chief Executive Officer at Capital Senior Living, effec-
tive January 7, 2019. I joined on the heels of a year that was challenging for both the senior housing industry and
our Company.

Having served on the Board for five years prior to my appointment, I brought to my new role a plan for improv-
ing operational performance and strengthening the Company’s financial foundation.

The Year in Review

During 2018, new supply continued to outpace demand industry-wide, placing pressure on both occupancy and
the rates we charge our residents. Concurrently, low unemployment drove higher labor costs. As a result, occu-
pancy for 2018 declined 160 basis points when compared with 2017. Revenue decreased $7 million, or 1.5%,
from 2017, to $460.0 million, for the year ended December 31, 2018. The Company also experienced decreases
in Adjusted EBITDAR and Adjusted CFFO, which were $147.7 million and $36.1 million, respectively, for full
year 2018. While we are deeply disappointed in these results, plans are underway to impact change.

Time for Change

Upon my joining, we began instituting a new plan and subsequent actions, which can be summarized under four
key strategies: STABILIZE, INVEST, NURTURE and GROW, or “SING”.

The primary focus of our transformational efforts in 2019 will be to STABILIZE our operations. We recognize
that the issues that led to our disappointing performance in 2018 must be addressed, and we are doing so with a
tremendous sense of urgency. To this end, we already implemented several immediate actions and will continue
to add performance-enhancing initiatives as we move through 2019.

To establish our best path forward, I determined that a change in our operations leadership was necessary. Imme-
diately upon making this change, we launched a search for a new chief operating officer.

The Company also instituted a robust management system that utilizes detailed analytics to drive organizational
discipline and accountability. This is intended to improve our enterprise-wide analytical competency and accel-
erate corrective actions. We implemented community-centered staffing standards and labor utilization targets,
allowing the Company to reduce the organization by approximately 250 positions. We made other organizational
changes in our operational and sales management structure to provide better support to our community leadership
teams.

In late 2018, we completed the enterprise-wide implementations of two major business systems, which we
believe will provide greater transparency, deeper insights and keener tracking into our key performance
indicators, thus enabling implementation of timely strategic actions. Furthermore, in December 2018, we closed
on a master credit facility that addressed our near-term maturities, limited our interest rate risk and strengthened
our cash position.

Noteworthy Accomplishments

We continue to focus on providing resident-centric care, along with engaging programming, to provide seniors
the freedom and opportunity to successfully, comfortably and happily age in place at our communities.

This can be evidenced by the recognition the Company earned in 2018 from J.D. Power, a global marketing
information services company which conducts surveys of customer satisfaction, product quality, and buyer
behavior for various industries. Capital Senior Living was named one of the top senior living providers in the
nation in J.D. Power’s 2018 Senior Living Satisfaction Study, based on: community staff; convenient location;
food and beverage; room, building and grounds; senior service; and, activities. We are very proud that our com-
mitment to our residents and their satisfaction was recognized by this prestigious firm.

Furthermore, two of our communities worked vigorously to restore their locations on the heels of the devastation
of Hurricane Harvey. The Waterford at Deer Park in Deer Park, Texas, and The Waterford at Baytown in Bay-
town, Texas, both located in Houston suburbs, witnessed severe flood and infrastructure damage. The tireless
efforts of our staff at these communities is reflected in their urgency to repair and restore the facilities so they

could swiftly re-open and welcome residents back to their Capital Senior Living homes. In fact, The Waterford at
Deer Park was named Business of the Year in 2018 by The Deer Park Chamber of Commerce, acknowledging
the community for their comeback efforts in rebuilding in the aftermath of the hurricane.

Another highlight during 2018 included our Waterford on Huebner community in San Antonio, Texas, being
awarded Best Senior Living (independent/retirement) community in the San Antonio area in Senior Resource
Guide’s 2018 Readers’ Choice Awards. The Waterford on Huebner received the most votes cast by readers,
recognizing the community for its excellence.

We continue to hold ourselves to high standards for clinical, operational and financial performance, and our
communities are focused on continually improving in these areas.

Looking Ahead

In 2019, we plan to INVEST in talent and the resident experience across all our communities. To begin, we cre-
ated the role of chief revenue officer. This position will focus on leading marketing, sales support, corporate
partnerships and commercial excellence activities. Investing in the Company’s the top line growth is critical, and
by establishing this important role, we expect to quickly improve the Company’s focus in this area.

We also designed and implemented more attractive and affordable health and wellness benefits for our employ-
ees. We redesigned and deployed new compensation programs for our community leadership personnel to better
align each person’s role, key business objectives, activities and performance with overall Company goals.

To further enhance the resident experience at our communities, we will invest in expanding our health and well-
ness programs. We also plan to make disciplined investments in capital expenditures to upgrade resident units
and improve common gathering areas at certain communities in addition to maintaining the physical infra-
structure of our real estate throughout our portfolio.

While we will be primarily engaged in these activities of stabilization and investment in 2019, we will also
execute in parallel on commercial excellence activities to NURTURE and GROW each of our communities. We
are already engaging in many successful and impactful activities that provide significant value to our residents.
The initial commercial excellence activities we will employ will focus on leveraging existing best practices
across our portfolio to foster change and deliver results.

Although we expect current, tough industry conditions to continue for the next 12–18 months, we are confident
in our abilities to encourage significant progress throughout our operations and position Capital Senior Living for
accelerated growth in the years ahead. We thank our valued and talented employees for their unrelenting dedi-
cation to our Company. Their commitment to providing outstanding care to our residents provides assurance
about the future prospects for our Company and our ability to create long-term value for all our shareholders and
other stakeholders. We thank our shareholders for their support as we work toward implementing change and
affecting positive outcomes.

We look forward to keeping you apprised of our developments and sharing relevant successes with you as our
operations begin to SING.

Respectfully,

Kimberly S. Lody
President and Chief Executive Officer

Note: A Non-GAAP reconciliation is provided on Attachment A.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)

Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

Or

OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from

to

Commission file number: 1-13445

Capital Senior Living Corporation

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

14160 Dallas Parkway, Suite 300
Dallas, Texas
(Address of principal executive offices)

75-2678809
(I.R.S. Employer
Identification No.)

75254
(Zip Code)

Registrant’s telephone number, including area code:
(972) 770-5600

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Common Stock, $.01 par value per share

Name of each exchange
on which registered

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ‘
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes Í

No Í

No Í

No ‘

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted to Rule 405 of Regulation S-T dur-

ing the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes Í

No ‘

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of

registrant’s knowledge, in definitive proxy statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Í

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer ‘
Non-accelerated filer ‘

Í
Accelerated filer
Smaller reporting company ‘
Emerging growth company ‘
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or

revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘
The aggregate market value of the 24,435,305 shares of the Registrant’s common stock, par value $0.01 per share (“Common Stock”), held by non-affiliates
(defined to exclude all of the Registrant’s executive officers, directors, and certain significant stockholders) on June 30, 2018, based upon the adjusted closing price of
the Registrant’s Common Stock as reported by the New York Stock Exchange on such date was approximately $260.7 million. As of February 22, 2019, the Registrant
had 31,316,105 shares of Common Stock outstanding.

No Í

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement pertaining to its 2019 Annual Meeting of Stockholders and filed or to be filed not later than 120 days after

the end of the fiscal year pursuant to Regulation 14A are incorporated herein by reference into Part III of this report.

CAPITAL SENIOR LIVING CORPORATION

TABLE OF CONTENTS

PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

Item 5. Market for Registrant’s Common Equity; Related Stockholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stock-
Item 12.
holder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
PART IV

Page
Number

2
18
26
26
26
26

27
30
30
48
49
49
49
50

51
51

51
51
51

Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

51
55
F-1

i

ITEM 1.

BUSINESS.

Overview

PART I

Capital Senior Living Corporation, a Delaware corporation (together with its subsidiaries, the “Company”),
is one of the largest operators of senior housing communities in the United States in terms of resident capacity.
The Company and its predecessors have provided senior housing since 1990. As of December 31, 2018, the
Company operated 129 senior housing communities in 23 states with an aggregate capacity of approximately
16,500 residents, including 83 senior housing communities which the Company owned and 46 senior housing
communities the Company leased. During 2018, approximately 94.6% of total revenues for the senior housing
communities operated by the Company were derived from private pay sources.

The Company’s operating strategy is to provide value to its senior living residents by providing quality
senior living services at reasonable prices, while achieving and sustaining a strong, competitive position within
its geographically concentrated regions, as well as continuing to enhance the performance of its operations. The
Company provides senior living services to the elderly, including independent living, assisted living, and
memory care services. Many of the Company’s communities offer a continuum of care to meet its residents’
needs as they change over time by integrating independent living, assisted living, and memory care, and is
bridged by home care through independent home care agencies, sustaining residents’ autonomy and
independence based on their physical and mental abilities.

Website

The Company’s Internet website www.capitalsenior.com contains an Investor Relations section, which
provides links to the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, proxy statements, Section 16 filings and any amendments to those reports and filings. These
reports and filings are available through the Company’s Internet website free of charge as soon as reasonably
practicable after such material is electronically filed with or furnished to the Securities and Exchange Commis-
sion (“SEC”).

Industry Background

The senior living industry encompasses a broad and diverse range of living accommodations and supportive

services that are provided primarily to persons 75 years of age or older.

For the elderly who require limited services, independent living residences supplemented at times by home
health care, offers a viable option. Most independent living communities typically offer community living pack-
aged with basic services consisting of meals, housekeeping, laundry, 24-hour staffing, transportation, social and
recreational activities and health care monitoring. Independent living residents typically are not reliant on assis-
tance with activities of daily living (“ADLs”) although some residents may contract out for those services.

As a senior’s need for assistance increases, care in an assisted living residence is often preferable and more
cost-effective than home-based care or nursing home care. Typically, assisted living represents a combination of
housing and support services designed to aid elderly residents with ADLs such as ambulation, bathing, dressing,
eating, grooming, personal hygiene and monitoring or assistance with medications. Certain assisted living resi-
dences may also provide assistance to residents with low acuity medical needs, or may offer higher levels of
personal assistance for incontinent residents or residents with Alzheimer’s disease or other cognitive or physical
frailties. Generally, assisted living residents require higher levels of care than residents of independent living
residences and retirement living centers, but require lower levels of care than patients in skilled nursing facilities.
For seniors who need the constant attention of a skilled nurse or medical practitioner, a skilled nursing facility
may be required.

According to the American Seniors Housing Association, Seniors Housing Construction Monitor – Winter
2019 Report, as of the fourth quarter of fiscal 2018, 21.7% of the age-restricted seniors housing supply in the
United States were assisted living units, 22.3% were independent living units, 48.8% were nursing care units, and
7.2% were memory care units.

2

The senior living industry is highly fragmented and characterized by numerous small operators. Moreover,
the scope of senior living services varies substantially from one operator to another. Many smaller senior living
providers do not operate purpose-built residences, do not have extensive professional training for staff and pro-
vide only limited assistance with ADLs. The Company believes that many senior living operators do not provide
the required comprehensive range of senior living services designed to permit residents to “age in place” within
the community as residents develop further physical or cognitive frailties. The Company believes that as one of
the nation’s largest operators it has scale and resources that provide it with certain competitive advantages.

The Company believes that a number of demographic, regulatory and other trends will contribute to the

continued growth in the senior living market, including the following:

Consumer Preference

The Company believes that senior housing communities are increasingly becoming the setting preferred by
prospective residents and their families for the care of the elderly. Senior living offers residents greater
independence and allows them to “age in place” in a residential setting, which the Company believes results in a
higher quality of life than that experienced in more institutional or clinical settings.

The likelihood of living alone increases with age. Most of this increase is due to an aging population in
which women outlive men. Societal changes, such as high divorce rates and the growing numbers of persons
choosing not to marry, have further increased the number of Americans living alone. This growth in the number
of elderly living alone has resulted in an increased demand for services that historically have been provided by a
spouse, other family members or live-in caregivers.

Demographics

The primary market for the Company’s senior living services is comprised of persons aged 75 and older.
This age group is one of the fastest growing segments of the United States population. The older population itself
is increasingly older. In 2011, the 75-84 age group in the United States (12.8 million persons) was 16 times larger
than in 1900 and the 85 and over age group in the United States (5.7 million persons) was 40 times larger. The 85
and over population in the United States is projected to more than double from 5.7 million persons in 2011 to
14.1 million persons in 2040. As the number of persons aged 75 and older continues to grow, the Company
believes that there will be corresponding increases in the number of persons who need assistance with ADLs.

Senior Affluence

The average net worth of senior citizens is typically higher than non-senior citizens, partially as a result of
accumulated equity through home ownership. The Company believes that a substantial portion of the senior
population has historically accumulated significant resources available for their retirement and long-term care
needs. The Company’s target population is comprised of moderate to upper income seniors who have, either
directly or indirectly through familial support, the financial resources to pay for senior housing communities,
including an assisted living alternative to traditional long-term care.

Reduced Reliance on Family Care

Historically, the family has been the primary provider of care for seniors. The Company believes that the
increase in the percentage of women in the work force, the reduction of average family size, and overall
increased mobility in society is reducing the role of the family as the traditional caregiver for aging parents. The
Company believes that these factors will make it necessary for many seniors to look outside the family for assis-
tance as they age.

Restricted Supply of Nursing Beds

Several states in the United States have adopted Certificate of Need (“CON”) or similar statutes generally
requiring that, prior to the addition of new skilled nursing beds, the addition of new services, or the making of
certain capital expenditures, a state agency must determine that a need exists for the new beds or the proposed

3

activities. The Company believes that this CON process tends to restrict the supply and availability of licensed
nursing facility beds. High construction costs, limitations on government reimbursement, and start-up expenses
also act to constrain growth in the supply of such facilities. At the same time, nursing facility operators are con-
tinuing to focus on improving occupancy and expanding services to sub-acute patients generally of a younger age
and requiring significantly higher levels of nursing care. As a result, the Company believes that there has been a
decrease in the number of skilled nursing beds available to patients with lower acuity levels and that this trend
should increase the demand for the Company’s senior housing communities, including, particularly, the Compa-
ny’s assisted living communities.

Cost-Containment Pressures

In response to rapidly rising health care costs, governmental and private pay sources have adopted cost
containment measures that have reduced admissions and encouraged reduced lengths of stays in hospitals and
other acute care settings. Private insurers have begun to limit reimbursement for medical services in general to
predetermined charges, and managed care organizations (such as health maintenance organizations) are attempt-
ing to limit hospitalization costs by negotiating for discounted rates for hospital and acute care services and by
monitoring and reducing hospital use. In response, hospitals are discharging patients earlier and referring elderly
patients, who may be too sick or frail to manage their lives without assistance, to nursing homes and assisted
living residences where the cost of providing care is typically lower than hospital care. In addition, third-party
payors are increasingly becoming involved in determining the appropriate health care settings for their insureds
or clients, based primarily on cost and quality of care. Based on industry data, the typical day-rate in an assisted
living facility is one-fourth of the cost for comparable care in a nursing home and two-thirds of the cost of living
at home with a third-party home health care provider.

Operating Strategy

The Company’s operating strategy is to provide value to its senior living residents by providing quality
senior living services at reasonable prices, while achieving and sustaining a strong, competitive position within
its geographically concentrated regions, as well as continuing to enhance the performance of its operations. The
Company is implementing its operating strategy principally through the following methods:

Provide a Broad Range of Quality Personalized Care

Central to the Company’s operating strategy is its focus on providing quality care and services that are per-
sonalized and tailored to meet the individual needs of each community resident. The Company’s residences and
services are designed to provide a broad range of care that permits residents to thrive and “age in place” as their
needs change and as they develop further physical or cognitive frailties. By creating an environment that max-
imizes resident autonomy and provides individualized service programs, the Company seeks to attract seniors at
an earlier stage, before they need the higher level of care provided in a skilled nursing facility. The Company also
maintains a comprehensive quality assurance program designed to ensure the satisfaction of its residents and
their family members. The Company conducts annual resident satisfaction surveys that allow residents at each
community to express whether they are “very satisfied,” “satisfied” or “dissatisfied” with all major areas of a
community, including, housekeeping, maintenance, activities and transportation, food service, security and
management. In fiscal 2018, the Company achieved 93.5% overall approval ratings from the residents’ sat-
isfaction surveys. In addition, the Company ranked third among senior living operators nationally in 2018
according to J.D. Powers 2018 Senior Living Satisfaction Study. The study measured resident and family overall
satisfaction across factors important to them including community staff, convenience of location, food and
beverage, room, building and grounds, senior service and activities among others.

Offer Services Across a Range of Pricing Options

The Company’s range of products and services is continually expanding to meet the evolving needs of its
residents. The Company has developed a menu of products and service programs that may be further customized
to serve both the moderate and upper income markets of a particular targeted geographic area. By offering a
range of pricing options that are customized for each target market, the Company believes that it can develop

4

synergies, economies of scale and operating efficiencies in its efforts to serve a larger percentage of the elderly
population within a particular geographic market.

Improve Occupancy Rates

The Company continually seeks to maintain and improve occupancy rates by: (i) retaining residents as they
“age in place” by extending optional care and service programs; (ii) attracting new residents through the use of
technology to enhance Internet marketing and on-site marketing programs focused on residents and family
members; (iii) selecting communities in underserved markets; (iv) aggressively seeking referrals from senior care
referral services, professional community outreach sources, including area religious organizations, senior social
service programs, civic and business networks, as well as the medical community; and (v) continually refurbish-
ing and renovating its communities.

Improve Operating Efficiencies

The Company seeks to improve operating efficiencies at its communities by actively monitoring and manag-
ing operating costs and by moving to a more centralized operating platform. By having an established portfolio
of communities in geographically concentrated regions throughout the United States with regional management
in place, the Company believes it has established a platform to achieve operating efficiencies through economies
of scale in the purchase of bulk items, such as food and supplies, and in the spreading of fixed costs, such as
corporate overhead, over a larger revenue base, and to provide more effective management supervision and
financial controls.

Emphasize Employee Training and Retention

The Company devotes special attention to the hiring, screening, training, supervising and retention of its
employees and caregivers to ensure that quality standards are achieved. In addition to normal on-site training, the
Company conducts national management meetings and encourages sharing of expertise among managers. The
Company has also implemented a comprehensive online training program that addresses the specific challenges
of working within the senior living environment. The Company’s commitment to the total quality management
concept is emphasized throughout its training programs. This commitment to the total quality management con-
cept means identification of the “best practices” in the senior living market and communication of those “best
practices” to the Company’s executive directors and their staff. The identification of best practices is realized by
a number of means, including: emphasis on regional and executive directors keeping up with professional trade
publications; interaction with other professionals and consultants in the senior living industry through seminars,
conferences and consultations; visits to other properties; leadership and participation at national and local trade
organization events; and information derived from marketing studies and resident satisfaction surveys. This
information is continually processed by regional managers and the executive directors and communicated to the
Company’s employees as part of their training. The Company hires an executive director for each of its commun-
ities and provides them with autonomy, responsibility and accountability. The Company’s staffing of each
community with an executive director allows it to hire more professional employees at these positions, while the
Company’s developed career path helps it to retain the professionals it hires.

Senior Living Services

The Company provides senior living services to the elderly, including independent living, assisted living,
and memory care services. By offering a variety of services and encouraging the active participation of the resi-
dent and the resident’s family and medical consultants, the Company is able to customize its service plan to meet
the specific needs and desires of each resident. Additionally, the Company is actively working to expand service
offerings through conversions of existing units to higher levels of care. As a result, the Company believes that it
is able to maximize customer satisfaction and avoid the high cost of delivering unnecessary services to residents.

The Company’s operating philosophy is to provide quality senior housing communities and services to
senior citizens and deliver a continuum of care for its residents as their needs change over time coordinated with
third party post-acute care providers. This continuum of care, which integrates independent living, assisted

5

living, and memory care services and is bridged by home care, sustains residents’ autonomy and independence
based on their physical and mental abilities. As residents age, in many of the Company’s communities, they are
able to obtain the additional services they need within the same community, avoiding the disruptive and often
traumatic move to a different facility.

Independent Living Services

The Company provides independent living services to seniors who typically do not yet need assistance or
support with ADLs, but who prefer the physical and psychological comfort of a residential community that offers
health care and other services. As of December 31, 2018, the Company owned 40 communities and leased 15
communities that provide independent living services, which include communities that combine assisted living
and other services, with an aggregate capacity for approximately 6,900 residents.

Independent living services provided by the Company include daily meals, transportation, social and recrea-
tional activities, laundry, housekeeping and 24-hour staffing. The Company also fosters the wellness of its resi-
dents by offering access to health screenings (such as blood pressure checks), periodic special services (such as
influenza inoculations), dietary and similar programs, as well as ongoing exercise and fitness classes. Classes are
given by health care professionals to keep residents informed about health and disease management. Subject to
applicable government regulation, personal care and medical services are available to independent living resi-
dents through either the community staff or through the Company’s agency or other independent home care
agencies. The Company’s independent living residents pay an average fee of $2,800 per month, in general,
depending on the specific community, program of services, size of the unit and amenities offered. The Compa-
ny’s contracts with its independent living residents are generally for a term of one year and are typically termi-
nable by either party, under certain circumstances, upon providing 30 days’ notice unless state law stipulates
otherwise.

Assisted Living Services

The Company offers a wide range of assisted living care and services, including personal care services,
24-hour staffing, support services, and supplemental services. As of December 31, 2018, the Company owned 67
communities and leased 40 communities that provide assisted living services, which include communities that
combine independent living and other services, with an aggregate capacity for approximately 9,600 residents.
The residents of the Company’s assisted living residences generally need help with some or all ADLs, but do not
require the more acute medical care traditionally given in nursing homes. Upon admission to the Company’s
assisted living communities, and in consultation with the resident, the resident’s family and medical consultants,
each resident is assessed to determine his or her health status, including functional abilities and need for personal
care services. The resident also completes a lifestyles assessment to determine the resident’s preferences. From
these assessments, a care plan is developed for each resident to ensure that all staff members who render care
meet the specific needs and preferences of each resident where possible. Each resident’s care plan is reviewed
periodically to determine whether a change in care is needed.

The Company has adopted a philosophy of assisted living care that allows a resident to maintain a dignified
independent lifestyle. Residents and their families are encouraged to be partners in the residents’ care and to take
as much responsibility for their well-being as possible. The basic types of assisted living services offered by the
Company include the following:

Personal Care Services.

These services include assistance with ADLs such as ambulation, bathing,

dressing, eating, grooming, personal hygiene, and monitoring or assistance with medications.

Support Services.

These services include meals, assistance with social and recreational activities,

laundry services, general housekeeping, maintenance services and transportation services.

Supplemental Services.

These services include extra transportation services, personal maintenance,
extra laundry services, and special care services, such as services for residents with certain forms of
dementia. Certain of these services require extra charges.

6

The Company’s assisted living residents pay an average fee of $4,000 per month, in general, depending on
the specific community, the level of personal care services, support service and supplemental services provided
to the resident, size of the unit and amenities offered. The Company’s contracts with its assisted living residents
are generally for a term of one year and are typically terminable by either party, under certain circumstances,
upon providing 30 days’ notice unless state law stipulates otherwise.

Memory Care Services

The Company maintains programs and special living accommodations at some of its communities for resi-
dents with certain forms of dementia, which provide the attention, care and services needed to help those resi-
dents maintain a higher quality of life. Specialized services include assistance with ADLs, behavior management
and life skills-based activities programs, the goal of which is to provide a normalized environment that supports
residents’ remaining functional abilities. Special living accommodations for residents with certain forms of
dementia are located in a separate area of the community and have their own dining facilities, resident lounge
areas, and specially trained staff. The special care areas are designed to allow residents the freedom to ambulate
as they wish, while keeping them safely contained within a secure area with a minimum of disruption to other
residents. Resident fees for these programs and special living accommodations are dependent on the level of
services provided.

The Company’s memory care residents pay an average fee of $5,200 per month, in general, depending on
the specific community, the level of personal care services, support service and supplemental services provided
to the resident, size of the unit and amenities offered. The Company’s contracts with its memory care residents
are generally for a term of one year and are typically terminable by either party, under certain circumstances,
upon providing 30 days’ notice unless state law stipulates otherwise.

Home Care Services

As of December 31, 2018, the Company made home care services available to clients at a majority of its
senior housing communities through third-party providers. The Company believes that the provision of private
pay, home care services is an attractive adjunct to its independent living services because it allows the Company
to make available more services to its residents as they age in place and increases the length of stay in the
Company’s communities. In addition, the Company makes available to residents certain customized physician,
dentistry, podiatry and other health-related rehabilitation and therapy services that may be offered by third-party
providers.

Operating Communities

The table below sets forth certain information with respect to senior housing communities operated by the

Company as of December 31, 2018.

Community

Owned:

Location

Units

IL

AL

Total Ownership of Operations2

Resident Capacity1

Commencement

Aspen Grove . . . . . . . . . . . . . . . . . . . . . . . Lamberville, MI
Autumn Glen . . . . . . . . . . . . . . . . . . . . . . . Greencastle, IN
Brookview Meadows . . . . . . . . . . . . . . . . Green Bay, WI
Canton Regency . . . . . . . . . . . . . . . . . . . . Canton, OH
Chateau of Batesville . . . . . . . . . . . . . . . . Batesville, IN
Cottonwood Village . . . . . . . . . . . . . . . . . Cottonwood, AZ
Country Charm . . . . . . . . . . . . . . . . . . . . . Greenwood, IN
Courtyards at Lake Granbury . . . . . . . . . . Granbury, TX
Georgetowne Place . . . . . . . . . . . . . . . . . . Fort Wayne, IN
Good Tree Retirement and Memories . . . . Stephenville, TX
Gramercy Hill . . . . . . . . . . . . . . . . . . . . . . Lincoln, NE
Greenbriar Village . . . . . . . . . . . . . . . . . . . Indianapolis, IN

7

163

83
78 —
64
49 —
78 — 156
145
162
239
43
41 —
58
131
89 — 166
81 — 112
0
242
159
75
20
60
143
113
34
124 — 134

83
64
156
307
43
189
166
112
242
95
147
134

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

03/14
06/13
01/15
03/91
10/12
03/91
10/12
03/12
10/05
03/12
10/98
08/15

Community

Location

Units

IL

AL

Total Ownership of Operations2

Resident Capacity1

Commencement

Harbor Court . . . . . . . . . . . . . . . . . . . . . . . Rocky River, OH
Harrison at Eagle Valley . . . . . . . . . . . . . . Indianapolis, IN
Heritage at the Plains at Parish

Homestead . . . . . . . . . . . . . . . . . . . . . . . Oneonta, NY

Independence Village of Peoria . . . . . . . . Peoria, IL
Keystone Woods Assisted Living . . . . . . . Anderson, IN
Laurel Hurst Laurel Woods . . . . . . . . . . . . Columbus, NC
Marquis Place of Elkhorn . . . . . . . . . . . . . Elkhorn, NE
Middletown . . . . . . . . . . . . . . . . . . . . . . . . Middletown, OH
Montclair . . . . . . . . . . . . . . . . . . . . . . . . . . Springfield, MO
North Pointe . . . . . . . . . . . . . . . . . . . . . . . Anderson, SC
Park-Oak Grove . . . . . . . . . . . . . . . . . . . . Roanoke, VA
River Crossing Assisted Living . . . . . . . . Charlestown, IN
Riverbend Independent and Assisted

Living . . . . . . . . . . . . . . . . . . . . . . . . . . Jeffersonville, IN

Remington at Valley Ranch . . . . . . . . . . . Irving, TX
Residence of Chardon . . . . . . . . . . . . . . . . Chardon, OH
Rose Arbor . . . . . . . . . . . . . . . . . . . . . . . . Maple Grove, MN
Rosemont Assisted Living and Memory

. . . . . . . . . . . Corpus Christi, TX

Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . Humble, TX
Sugar Grove . . . . . . . . . . . . . . . . . . . . . . . Plainfield, IN
Summit Place . . . . . . . . . . . . . . . . . . . . . . Anderson, SC
Summit Point Living . . . . . . . . . . . . . . . . . Macedonia, OH
Towne Centre Retirement Community . . . Merrillville, IN
Vintage Gardens . . . . . . . . . . . . . . . . . . . . St. Joseph, MO
Waterford at Baytown . . . . . . . . . . . . . . . . Baytown, TX
Waterford at Bridle Brook . . . . . . . . . . . . Mahomet, IL
Waterford at Carpenter’s Creek . . . . . . . . Pensacola, FL
Waterford at Colby . . . . . . . . . . . . . . . . . . Colby, TX
Waterford at College Station . . . . . . . . . . . College Station, TX
Waterford at Columbia . . . . . . . . . . . . . . . Columbia, SC
Waterford at Corpus Christi
Waterford at Creekside . . . . . . . . . . . . . . . Pensacola, FL
Waterford at Deer Park . . . . . . . . . . . . . . . Deer Park, TX
Waterford at Dillon Pointe . . . . . . . . . . . . Spartanburg, SC
Waterford at Edison Lakes . . . . . . . . . . . . South Bend, IN
Waterford at Fairfield . . . . . . . . . . . . . . . . Fairfield, OH
Waterford at Fitchburg . . . . . . . . . . . . . . . Fitchburg, WI
Waterford at Fort Worth . . . . . . . . . . . . . . Fort Worth, TX
Waterford at Hartford . . . . . . . . . . . . . . . . Hartford, WI
Waterford at Hidden Lake . . . . . . . . . . . . . Canton, GA
Waterford at Highland Colony . . . . . . . . . Jackson, MS
Waterford at Ironbridge . . . . . . . . . . . . . . Springfield, MO
Waterford at Levis Commons . . . . . . . . . . Toledo, OH
Waterford at Mansfield . . . . . . . . . . . . . . . Mansfield, OH
Waterford at Mesquite . . . . . . . . . . . . . . . Mesquite, TX
Waterford at Oakwood . . . . . . . . . . . . . . . Oakwood, GA

8

122 — 144
0
138
104

108
158

97
53
158 —

58 —
102

70
60
69
75
178 —

70
65 —
61 —
156

70
64 —
93 — 164
100 — 106

97 — 114
158 —
127

42 —
146

86

52
87

96 — 120
116
48
164
89
19
80
98
126
163
75
163
210
92
44
95
132
18
129
78 — 120
94 — 105
48
44 —
87
53 —
141 —
117

50 —
84 —

56
98
144 —

119

51 —
55
116 — 138
120

140 —

82 — 150
177 —
154

39 —
43 —
119
118
146
118
153

53
98
143 —
142 —
44
163
45
97
176 —

64 —

70

144
138

150
158
70
130
69
75
178
70
164
106

114
158
52
173

120
164
108
224
238
136
150
120
105
48
87
141
56
98
144
55
138
140
150
177
53
98
143
142
207
142
176
70

100%
100%

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

12/12
03/91

05/15
08/00
07/11
10/11
03/13
09/13
12/12
10/11
08/14
12/13

03/12
04/12
10/12
06/06

09/16
12/13
10/11
08/11
03/91
05/13
03/15
09/15
02/16
01/16
03/12
11/00
10/12
02/16
11/00
12/13
12/00
11/00
10/13
06/00
05/15
12/14
11/00
06/01
04/09
10/00
09/99
09/13

Community

Location

Units

IL

AL

Total Ownership of Operations2

Resident Capacity1

Commencement

. . . . . . . . . . . . . . . . Arlington, TX

Waterford at Oshkosh . . . . . . . . . . . . . . . . Oshkosh, WI
Waterford at Pantego . . . . . . . . . . . . . . . . Pantego, TX
Waterford at Park Falls . . . . . . . . . . . . . . . Park Falls, WI
Waterford at Plano . . . . . . . . . . . . . . . . . . Plano, TX
Waterford at Plymouth . . . . . . . . . . . . . . . Plymouth, WI
Waterford at Richmond Heights . . . . . . . . Richmond Heights, OH
Waterford at Thousand Oaks . . . . . . . . . . San Antonio, TX
Waterford at Virginia Beach . . . . . . . . . . . Virginia Beach, VA
Waterford at West Bend . . . . . . . . . . . . . . West Bend, WI
Waterford at Wisconsin Rapids . . . . . . . . Wisconsin Rapids, WI
Waterford on Cooper
Waterford on Huebner
. . . . . . . . . . . . . . . San Antonio, TX
Wellington at Arapaho . . . . . . . . . . . . . . . Richardson, TX
Wellington at Conroe . . . . . . . . . . . . . . . . Conroe, TX
Wellington at Dayton . . . . . . . . . . . . . . . . Dayton, OH
Wellington at Kokomo . . . . . . . . . . . . . . . Kokomo, IN
Wellington at North Bend Crossing . . . . . Cincinnati, OH
122
Wellington at North Richland Hills . . . . . North Richland Hills, TX 118
Wellington at Southport
. . . . . . . . . . . . . . Indianapolis, IN
Wellington at Springfield . . . . . . . . . . . . . Springfield, MA
Whispering Pines Village . . . . . . . . . . . . . Columbiana, OH
Whitcomb House . . . . . . . . . . . . . . . . . . . . Milford, MA
Woodlands of Columbus . . . . . . . . . . . . . . Columbus, OH
Woodlands of Hamilton . . . . . . . . . . . . . . Hamilton, OH
Woodlands of Shaker Heights . . . . . . . . . . Shaker Heights, OH
Woodview Assisted Living . . . . . . . . . . . . Fort Wayne, IN
Wynnfield Crossing Assisted Living . . . . Rochester, IN

91 — 109
143 —
118

36
57
82
117
110
135 —

36 —
135
109
69 —
148
119
111 — 138
41
40 —
66
58 —
105 — 151
135 —
119
57
113
140
35
25
44
94
146
149
96 — 138
54
146
139 —

64 — 105
117
119
235
88
68
24
87
87 —
116 — 117
77 — 100
66 —
85
88 — 153
79
50 —

109
143
36
166
82
227
135
138
41
66
151
135
170
60
240
138
200
139
105
236
112
87
117
100
85
153
79

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

08/14
12/00
01/16
12/00
08/14
04/09
05/00
10/15
05/15
01/16
03/12
04/99
05/02
03/12
08/08
07/11
11/16
01/02
10/12
09/16
07/15
10/13
10/12
10/12
10/12
12/13
07/11

8,475 4,474 6,293 10,767

Leased:

Ventas:

Amberleigh . . . . . . . . . . . . . . . . . . . . . . Buffalo, NY
Crown Pointe . . . . . . . . . . . . . . . . . . . . . Omaha, NE
Independence Village of East

267
136

387
85

66
80

453
165

N/A
N/A

01/92
08/00

Lansing . . . . . . . . . . . . . . . . . . . . . . . East Lansing, MI

146

161 —

161

N/A

08/00

Independence Village of Olde

Raleigh . . . . . . . . . . . . . . . . . . . . . . . Raleigh, NC

Villa Santa Barbara . . . . . . . . . . . . . . . . Santa Barbara, CA
West Shores . . . . . . . . . . . . . . . . . . . . . . Hot Springs, AR
Whitley Place . . . . . . . . . . . . . . . . . . . . Keller, TX

Welltower:

177 —

167
125
137

64
131
47 —

62
42
65

Azalea Trails Assisted Living . . . . . . . . Tyler, TX
Buffalo Creek Assisted Living . . . . . . . Waxahachie, TX
Dogwood Trails Assisted Living . . . . . Palestine, TX
Hawkins Creek Assisted Living . . . . . . Longview, TX
Hearth at Prestwick . . . . . . . . . . . . . . . . Avon, IN
Hearth at Windermere . . . . . . . . . . . . . . Fishers, IN

70
56 —
70
56 —
75
65 —
56 —
70
132 — 150
128 — 150

9

177
126
173
65

70
70
75
70
150
150

N/A
N/A
N/A
N/A

N/A
N/A
N/A
N/A
N/A
N/A

08/00
08/00
08/00
02/08

09/10
09/10
09/10
09/10
08/06
08/06

Community

Location

Units

IL

AL

Total Ownership of Operations2

Resident Capacity1

Commencement

Heritage Oaks Assisted Living . . . . . . Conroe, TX
Keepsake Village of Columbus . . . . . . Columbus, IN
Magnolia Court Assisted Living . . . . . Nacogdoches, TX
Martin Crest Assisted Living . . . . . . . Weatherford, TX
Pecan Point Assisted Living . . . . . . . . Sherman, TX
Santa Fe Trails Assisted Living . . . . . Cleburne, TX
Spring Lake Assisted Living . . . . . . . . Paris, TX
Spring Meadows Libertyville . . . . . . . Libertyville, IL
Spring Meadows Naperville . . . . . . . . Naperville, IL
Spring Meadows at Summit
Spring Meadows at Trumbull . . . . . . . Trumbull, CT
Stonefield Assisted Living . . . . . . . . . McKinney, TX
Walnut Creek Assisted Living . . . . . . Mansfield, TX
Waterford at Ames . . . . . . . . . . . . . . . Ames, IA
Waterford at Miracle Hills . . . . . . . . . Omaha, NE
Waterford at Roxbury Park . . . . . . . . . Omaha, NE
Waterford at Van Dorn . . . . . . . . . . . . Lincoln, NE
Waterford at Woodbridge . . . . . . . . . . Plattsmouth, NE

. . . . . . . . Summit, NJ

HCP:

Atrium of Carmichael . . . . . . . . . . . . . Sacramento, CA
Charlotte Square . . . . . . . . . . . . . . . . . Charlotte, NC
Chesapeake Place . . . . . . . . . . . . . . . . Chesapeake, VA
Covenant Place of Abilene . . . . . . . . . Abilene, TX
Covenant Place of Burleson . . . . . . . . Burleson, TX
Covenant Place of Waxahachie . . . . . . Waxahachie, TX
Crescent Place . . . . . . . . . . . . . . . . . . . Cedar Hill, TX
Crescent Point . . . . . . . . . . . . . . . . . . . Cedar Hill, TX
Crosswood Oaks . . . . . . . . . . . . . . . . . Sacramento, CA
Good Place . . . . . . . . . . . . . . . . . . . . . North Richland Hills, TX
Greenville Place . . . . . . . . . . . . . . . . . Greenville, SC
Meadow Lakes . . . . . . . . . . . . . . . . . . North Richland Hills, TX
Myrtle Beach Estates . . . . . . . . . . . . . Myrtle Beach, SC
Tesson Heights . . . . . . . . . . . . . . . . . . St. Louis, MO
Veranda Club . . . . . . . . . . . . . . . . . . . Boca Raton, FL

75 —
42 —
56 —
56 —
56 —
56 —
56 —
198
193

90
48
70
86
70
86
70
45
45
98
56
182
90
75 —
56 —
70
49 — 122
70
54 —
70
55 —
84
63 —
45
40 —

208
186
89 —
152

155 —

151
118 — 150
103 — 153
55
80
55
85
134 —
127 —

50 —
74 —
50 —
80 —
111
121

72 —
80
85 — 153
118
145 —
101 — 156
72
134
182
97
129
186

90 N/A
48 N/A
70 N/A
86 N/A
70 N/A
86 N/A
70 N/A
253 N/A
231 N/A
98 N/A
238 N/A
90 N/A
70 N/A
122 N/A
70 N/A
70 N/A
84 N/A
45 N/A

155 N/A
150 N/A
153 N/A
55 N/A
80 N/A
55 N/A
85 N/A
134 N/A
127 N/A
80 N/A
153 N/A
145 N/A
156 N/A
206 N/A
226 N/A

09/10
08/06
09/10
09/10
09/10
09/10
09/10
04/11
04/11
04/11
04/11
09/10
09/10
02/06
03/06
02/06
02/06
02/06

01/92
12/06
12/06
08/04
08/04
08/04
11/05
08/04
01/92
08/04
12/06
08/04
12/06
10/98
01/92

Total . . . . . . . . . . . . . . . . . . . . . .

4,541 2,405 3,351 5,756

13,016 6,879 9,644 16,523

(1) Independent living (IL) residences and assisted living (AL) residences based on community licensure.

(2) Indicates the date on which the Company acquired or commenced operating the community. The Company
operated certain of its communities pursuant to management agreements prior to acquiring interests in or
leasing the communities.

10

Operations

The Company believes that the fragmented nature of the senior living industry and the limited capital
resources available to many small, private operators provide an attractive opportunity for competitive differ-
entiation. The Company believes that its current operations with geographic concentrations throughout the
United States serve as the foundation on which the Company can build senior living networks in targeted geo-
graphic markets and thereby provide a broad range of high-quality care in a cost-efficient manner.

The following are the principal elements of the Company’s clear and differentiated operating strategy:

Portfolio Optimization

The Company intends to continue to focus on its occupancy, rents and operating margins of its stabilized
communities. The Company continually seeks to improve occupancy rates and increase average rents by:
(i) retaining residents as they “age in place” by extending optional care and service programs and converting
existing units to higher levels of care; (ii) attracting new residents through the use of technology to enhance
Internet marketing and on-site marketing programs focused on residents and family members; (iii) seeking
referrals from senior care referral services, professional community outreach sources, including area religious
organizations, senior social service programs, civic and business networks, as well as the medical community;
and (iv) continually refurbishing and renovating its communities.

Expand Referral Networks

The Company intends to continue to develop relationships with local and regional hospital systems, man-
aged care organizations and other referral sources to attract new residents to the Company’s communities. In
certain circumstances these relationships may involve strategic alliances or joint ventures. The Company believes
that such arrangements or alliances, which could range from joint marketing arrangements to priority transfer
agreements, will enable it to be strategically positioned within the Company’s markets if, as the Company
believes, senior living programs become an integral part of the evolving health care delivery system.

Centralized Management

The Company centralizes its corporate and other administrative functions so that the community-based
management and staff can focus their efforts on resident care. The Company maintains centralized accounting,
finance, human resources, training and other operational functions at its national corporate office in Dallas,
Texas. The Company’s corporate offices are generally responsible for: (i) establishing Company-wide policies
and procedures relating to, among other things, resident care and operations; (ii) performing accounting func-
tions;
(iv) coordinating human resources;
(v) coordinating marketing functions; and (vi) providing strategic direction. In addition, financing, development,
including feasibility and market studies, and community design,
construction and acquisition activities,
development, and construction management are conducted at the Company’s corporate offices.

(iii) developing employee training programs and materials;

The Company seeks to control operational expenses for each of its communities through proprietary
reporting and centralized controls of capital
expense management systems, standardized management
expenditures, asset replacement tracking, and purchasing for larger and more frequently used supplies and food
inventories through group purchasing programs. Community expenditures are monitored by regional and district
managers who are accountable for the resident satisfaction and financial performance of the communities in their
region.

Regional Management

The Company provides oversight and support to each of its senior housing communities through experi-
enced regional and district managers. A district manager will generally oversee the marketing and operations of
three to seven communities clustered in a small geographic area. A regional manager will generally cover a
larger geographic area consisting of eight to thirteen communities. In most cases, the district and regional

11

managers will office out of the Company’s senior housing communities. Currently, there are district and regional
managers based in the East, Central Plains, South Central, Dallas, Indiana, Midwest, Texas, Southwest, and West
regions.

The executive director at each community reports to a regional or district manager. The regional and district
managers report on the operations of each community directly to senior management at the Company’s corporate
office. The district and regional managers make regular site visits to each of their assigned communities. The site
visits involve a physical plant inspection, quality assurance review, staff training, financial and systems audits,
regulatory compliance, and team building.

Community-Based Management

An executive director manages the day-to-day operations at each senior housing community, including
oversight of the quality of care, delivery of resident services, and monitoring of financial performance. The
executive director is also responsible for all personnel, including food service, maintenance, activities, security,
assisted living, housekeeping, and, where applicable, nursing or care services. In most cases, each community
also has department managers who direct
the environmental services, nursing or care services, business
management functions, dining services, activities, transportation, housekeeping, and marketing functions.

The assisted living component of the senior housing communities is managed by licensed professionals,
such as a nurse and/or a licensed administrator. These licensed professionals have many of the same operational
responsibilities as the Company’s executive directors, but their primary responsibility is to oversee resident care.
Many of the Company’s senior housing communities are part of a campus setting, which may include
independent living and/or memory care. This campus arrangement allows for cross-utilization of certain support
personnel and services, including administrative functions that result in greater operational efficiencies and lower
costs than freestanding facilities.

The Company actively recruits personnel to maintain adequate staffing levels at its existing communities
and hires new staff for new or acquired communities prior to opening. The Company has adopted comprehensive
recruiting and screening programs for management positions that utilize corporate office team interviews and
thorough background and reference checks. The Company offers system-wide training and orientation for all of
its employees at the community level through a combination of Company-sponsored seminars and conferences.

Quality Assurance

Quality assurance programs are coordinated and implemented by the Company’s corporate and regional
staff. The Company’s quality assurance is targeted to achieve maximum resident and resident family member
satisfaction with the care and services delivered by the Company. The Company’s primary focus in quality con-
trol monitoring includes routine in-service training and performance evaluations of caregivers and other support
employees. The Company has established a Corporate Quality Assurance Committee which consists of the
Executive Vice-President, Senior Vice-President, and Vice-President of Operations, Quality and Clinical Direc-
tors, and General Counsel. The purpose of the committee is to monitor and evaluate the processes by which care
is delivered to our residents and the appropriateness and quality of care provided within each of our communities.
Additional quality assurance measures include:

Resident and Resident’s Family Input. On a routine basis, the Company provides residents and their fam-
ily members the opportunity to provide valuable input regarding the day-to-day delivery of services. On-site
management at each community has fostered and encouraged active resident councils and resident committees
who meet independently. These resident bodies meet with on-site management on a monthly basis to offer input
and suggestions as to the quality and delivery of services. Additionally, at each community the Company con-
ducts annual resident satisfaction surveys to further monitor the satisfaction levels of both residents and their
family members. These surveys are sent directly to a third-party firm for tabulation, then to the Company’s
corporate headquarters for distribution to onsite staff. In fiscal 2018, the Company achieved 93.5% approval rat-
ings from its residents. For any departmental area of service scoring below 90%, a corrective action plan is
developed jointly by on-site, regional and corporate staff for immediate implementation. In addition, the

12

Company ranked third among senior living operators nationally in 2018 according to J.D. Powers 2018 Senior
Living Satisfaction Study. The study measured resident and family overall satisfaction across factors important to
them including community staff, convenience of location, food and beverage, room, building and grounds, senior
service and activities among others.

Regular Community Inspections.

Each community is inspected, on at least a quarterly basis, by regional
and/or corporate staff. Included as part of this inspection is the monitoring of the overall appearance and main-
tenance of the community interiors and grounds. The inspection also includes monitoring staff professionalism
and departmental reviews of maintenance, housekeeping, activities, transportation, marketing, administration and
food and health care services, if applicable. The inspections also include observing residents in their daily activ-
ities and the community’s compliance with government regulations.

Independent Service Evaluations.

The Company engages the services of outside professional independent
consulting firms to evaluate various components of the community operations. These services include mystery
shops, competing community analysis, pricing recommendations and product positioning. This provides
management with valuable unbiased product and service information. A plan of action regarding any areas
requiring improvement or change is implemented based on information received. At communities where health
care is delivered, these consulting service reviews include the on-site handling of medications, recordkeeping and
general compliance with all applicable governmental regulations.

Sales and Marketing

Most communities are staffed by on-site sales directors and additional sales/marketing staff depending on
the community size and occupancy status. The primary focus of the on-site sales/marketing staff is to create
awareness of the community and its services among prospective residents and family members, professional
referral sources and other key decision makers. These efforts incorporate a strategic plan to include monthly,
quarterly and annual goals for leasing, new lead generation, prospect follow up, community outreach, resident
and family referrals, promotional events, and a market specific media program. On-site sales/marketing depart-
ments perform a competing community assessment quarterly.

Corporate personnel monitor the on-site sales department’s effectiveness and productivity on a weekly
basis. Routine detailed department audits are performed on a quarterly basis or more frequently if deemed neces-
sary. Corporate personnel assist in the development of marketing strategies for each community to address the
continuously changing resident profile and maintain a focus on building brand awareness and increasing Internet
website traffic and leads. The marketing strategies developed utilize the implementation of application program
interface systems with certain website and Internet referral partners and the production of creative media and
necessary marketing collateral. The Company has also implemented numerous web-based initiatives to attract
prospects including certain e-mail and website triggers prompting interactive invitations with on-going
follow-ups, as well as a nurturing program to actively engage prospects throughout the sales/marketing cycle.
Ongoing sales training of on-site staff is implemented by corporate and regional personnel as well as third party
professionals.

Government Regulation

Changes in existing laws and regulations, adoption of new laws and regulations, and new interpretations of
existing laws and regulations could have a material effect on the Company’s operations. Failure by the Company
to comply with applicable regulatory requirements could have a material adverse effect on the Company’s busi-
ness, financial condition, cash flows, and results of operations. Accordingly, the Company monitors legal and
regulatory developments on local and national levels.

The health care industry is subject to extensive regulation and frequent regulatory change. At this time, no
federal laws or regulations specifically regulate assisted or independent living residences. While a number of
states have not yet enacted specific assisted living regulations, certain of the Company’s assisted living commun-
ities are subject to regulation, licensing, CON and permitting by state and local health care and social service
agencies and other regulatory authorities. While such requirements vary from state to state, they typically relate

13

to staffing, training, physical design, patient privacy, required services and the quality thereof and resident charac-
teristics. The Company believes that such regulation will increase in the future. In addition, health care providers
are receiving increased scrutiny under anti-trust laws as integration and consolidation of health care delivery
increases and affects competition. Moreover, robust state and federal enforcement of fraud and abuse laws con-
tinues. Because some of the Company’s communities receive a portion of their funds from Medicaid, such
communities are also subject to state and federal Medicaid standards, the noncompliance with which may result
in the imposition of penalties or sanctions or suspension or exclusion from participation in the Medicaid pro-
gram. The Company’s communities are also subject to various zoning restrictions, local building codes, and other
ordinances, such as fire safety codes. Failure by the Company to comply with applicable regulatory requirements
could have a material adverse effect on the Company’s business, financial condition, and results of operations.
Regulation of the assisted living industry is evolving. The Company is unable to predict the content of new regu-
lations and their effect on its business. There can be no assurance that the Company’s operations will not be
adversely affected by regulatory developments.

The Company believes that its communities are in substantial compliance with applicable regulatory
requirements. However, unannounced surveys or inspections may occur annually or bi-annually, or following a
regulator’s receipt of a complaint about a community. In the ordinary course of business, one or more of the
Company’s communities could be cited for deficiencies resulting from such inspections or surveys. Most
inspection deficiencies are resolved through an agreed upon plan of corrective action relating to the community’s
operations, but the reviewing agency typically has the authority to take further action against a licensed or certi-
fied community, which could result in the imposition of fines, repayment of amounts previously paid, imposition
of a provisional or conditional license, suspension or revocation of a license, suspension or denial of admissions,
loss of certification as a provider under federal health care programs or imposition of other sanctions, including
criminal penalties. Loss, suspension or modification of a license may also cause us to default under our loan or
lease agreements and/or trigger cross-defaults. Sanctions may be taken against providers or facilities without
regard to the providers’ or facilities’ history of compliance. We may also expend considerable resources to
respond to federal and state investigations or other enforcement action under applicable laws or regulations. To
date, none of the deficiency reports received by us has resulted in a suspension, fine or other disposition that has
had a material adverse effect on our revenues. However, any future substantial failure to comply with any appli-
cable legal and regulatory requirements could result in a material adverse effect to our business as a whole. In
addition, states’ Attorneys General vigorously enforce consumer protection laws as those laws relate to the senior
living industry. State Medicaid Fraud and Abuse Units may also investigate assisted living communities even if
the community or any of its residents do not receive federal or state funds.

Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet
certain federal requirements related to access and use by disabled persons. A number of additional federal, state
and local laws exist that also may require modifications to existing and planned properties to permit access to the
properties by disabled persons. While the Company believes that its communities are substantially in compliance
with present requirements or are exempt therefrom, if required changes involve a greater expenditure than antici-
pated or must be made on a more accelerated basis than anticipated, additional costs would be incurred by the
Company. Further legislation may impose additional burdens or restrictions with respect to access by disabled
persons, the costs of compliance with which could be substantial.

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), in conjunction with the
federal regulations promulgated thereunder by the Department of Health and Human Services, has established,
among other requirements, standards governing the privacy and security of certain protected and individually
identifiable health information that is created, received or maintained by a range of covered entities. HIPAA has
also established standards governing uniform health care transactions, the codes and identifiers to be used by the
covered entities and standards governing the security of certain electronic transactions conducted by covered
entities. Penalties for violations can range from civil money penalties for errors and negligent acts to criminal
fines and imprisonment for knowing and intentional misconduct. In addition, the Company may be subject to a
corrective action plan, the cost of compliance of which could be significant.

In addition, the Company is subject to various federal, state and local environmental laws and regulations.
Such laws and regulations often impose liability whether or not the owner or operator knew of, or was respon-

14

sible for, the presence of hazardous or toxic substances. The costs of any required remediation or removal of
these substances could be substantial and the liability of an owner or operator as to any property is generally not
limited under such laws and regulations and could exceed the property’s value and the aggregate assets of the
owner or operator. The presence of these substances or failure to remediate such contamination properly may
also adversely affect the owner’s ability to sell or rent the property, or to borrow using the property as collateral.
Under these laws and regulations, an owner, operator or an entity that arranges for the disposal of hazardous or
toxic substances, such as asbestos-containing materials, at a disposal site may also be liable for the costs of any
required remediation or removal of the hazardous or toxic substances at the disposal site. In connection with the
ownership or operation of its properties, the Company could be liable for these costs, as well as certain other
costs, including governmental fines and injuries to persons or properties. The Company has completed Phase I
environmental audits of substantially all of the communities in which the Company owns interests, typically at
the time of acquisition, and such audits have not revealed any material environmental liabilities that exist with
respect to these communities.

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous
owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or
petroleum product releases at such property, and may be held liable to a governmental entity or to third parties
for property damage and for investigation and clean-up costs. The Company is not aware of any environmental
liability with respect to any of its owned, leased or managed communities that the Company believes would have
a material adverse effect on its business, financial condition, or results of operations. The Company believes that
its communities are in compliance in all material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified
by any governmental authority, and is not otherwise aware of any material non-compliance, liability or claim
relating to hazardous or toxic substances or petroleum products in connection with any of the communities the
Company currently operates.

The Company believes that the structure and composition of government and, specifically, health care regu-
lations will continue to change and, as a result, regularly monitors developments in the law. The Company
expects to modify its agreements and operations from time to time as the business and regulatory environments
change. While the Company believes it will be able to structure all its agreements and operations in accordance
with applicable law, there can be no assurance that its arrangements will not be successfully challenged.

Competition

The senior living industry is highly competitive, and the Company expects that all segments of the industry
will become increasingly competitive in the future. Although there are a number of substantial companies active
in the senior living industry and in the markets in which the Company operates, the industry continues to be very
fragmented and characterized by numerous small operators. The Company primarily competes with national
operators such as Brookdale Senior Living Inc. and Five Star Quality Care, Inc. and other regional and local
independent operators. The Company believes that the primary competitive factors in the senior living industry
are: (i) quality on-site staff; (ii) location; (iii) reputation for and commitment to a high quality of service;
(iv) support service offerings (such as food services); (v) fair price for services provided; and (vi) physical
appearance and amenities associated with the communities. The Company competes with other companies
providing independent living, assisted living, skilled nursing, home health care, and other similar service and
care alternatives, some of whom may have greater financial resources than the Company. Because seniors tend to
choose senior housing communities near their homes, the Company’s principal competitors are other senior liv-
ing and long-term care communities in the same geographic areas as the Company’s communities. The Company
also competes with other health care businesses with respect to attracting and retaining nurses, technicians, aides
and other high quality professional and non-professional employees and managers.

Employees

As of December 31, 2018, the Company employed 7,549 persons (108 of whom are employed at the Compa-
ny’s corporate office), of which 4,541 were full-time employees and 3,008 were part-time employees. None of
the Company’s employees are currently represented by a labor union and the Company is not aware of any union
organizing activity among its employees. The Company believes that its relationship with its employees is good.

15

Executive Officers and Other Key Employees of the Registrant

The following table sets forth certain information concerning each of the Company’s executive officers and

other key employees as of February 28, 2019:

Name

Age

Position(s) with the Company

Kimberly S. Lody . . . . . . . . . . . . . . .
Carey P. Hendrickson . . . . . . . . . . . .
Michael C. Fryar . . . . . . . . . . . . . . . .
David R. Brickman . . . . . . . . . . . . . .
Jeremy D. Falke . . . . . . . . . . . . . . . .
David W. Beathard, Sr. . . . . . . . . . . .
Jeffrey P. Cellucci . . . . . . . . . . . . . . .
John J. Klitsch . . . . . . . . . . . . . . . . . .
Gloria M. Holland . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Joseph G. Solari
Robert F. Hollister
. . . . . . . . . . . . . .
Christopher H. Lane . . . . . . . . . . . . .

53
56
42
60
45
71
31
39
51
54
63
47

President, Chief Executive Officer and Director
Executive Vice President and Chief Financial Officer
Senior Vice President and Chief Revenue Officer
Senior Vice President, Secretary and General Counsel
Senior Vice President — Human Resources
Senior Vice President — Operations
Vice President — Operations
Vice President — Sales/Business Development
Vice President — Finance
Vice President — Corporate Development
Property Controller
Vice President — Financial Reporting

Kimberly S. Lody joined the Company as President and Chief Executive Officer in January 2019, having
served as a director of the Company since May 2014. Her more than 25 years of experience in clinical and
commercial health care settings includes leadership positions in medical devices, healthcare services, and com-
plex regulatory and payor environments. Prior to joining the Company, Ms. Lody served as President of GN
Hearing North America, where she led seven consecutive years of above-market growth and expansion across
multiple channels and brands. Prior to GN Hearing, Ms. Lody served as VP Marketing and then President, US
Chronic Care at Coloplast from 2009 to 2011. From 2004 to 2009, she served as an independent consultant, pro-
viding interim leadership to companies in healthcare, consumer products, and insurance services. Ms. Lody
served as Chief Operating Officer of Senior Home Care from 2003 to 2004, as Chief Marketing Officer of
Gentiva Health Services from 1997 to 2003, and as VP Managed Care Programs for Apria Healthcare from 1994
to 1997. Ms. Lody received a BS in Business from Hiram College and an MBA in Finance from Wake Forest
University.

Carey P. Hendrickson joined the Company in May 2014 and is currently the Executive Vice President and
Chief Financial Officer. From 2010 through 2014, he served as the Senior Vice President/Chief Financial Officer
and Treasurer of Belo Corp., a television company that owned and operated network-affiliated television stations
and their associated websites (“Belo”). Prior to serving in such capacity, Mr. Hendrickson served Belo in various
roles including Senior Vice President/Chief Accounting Officer, Vice President/Human Resources, Vice Presi-
dent/Investor Relations and Corporate Communications, and Vice President/Strategic & Financial Planning. He
began his career with KPMG LLP and was the director of financial planning for Republic Financial Services
before joining Belo in 1992. Mr. Hendrickson received a BBA in Accounting from Baylor University and a
Master of Business Administration in Finance from the University of Texas in Arlington.

Michael C. Fryar joined the Company as Chief Revenue Officer in February 2019. His 20 years of experi-
ence focusing on brands in complex, multi-channel environments includes leadership positions in medical device
and marketing agency settings, with the majority of his career focused in senior healthcare. Prior to joining the
Company, Mr. Fryar served as Vice President of GN Hearing North America, where he was part of a leadership
team responsible for seven consecutive years of above-market growth and expansion across multiple channels
and brands. Prior to GN Hearing, Mr. Fryar served as Senior Director, Marketing at Starkey Hearing Tech-
nologies from 2006 to 2012. From 1998 to 2006, he served as an account director at marketing agency Colle
McVoy, specializing in digital and traditional marketing, advertising and public relations. Mr. Fryar received a
BA in Communications Studies with a minor in Economics Management from Gustavus Adolphus College.

David R. Brickman is currently the Senior Vice President, Secretary, and General Counsel of the Company.
He served as Vice President and General Counsel of the Company and its predecessors since July 1992 and has

16

served as Secretary of the Company since May 2007. From 1989 to 1992, Mr. Brickman served as in-house
counsel with LifeCo Travel Management Company, a corporation that provided travel services to U.S. corpo-
rations. Mr. Brickman earned a Juris Doctor and Masters of Business Administration from the University of
South Carolina and a Masters in Health Administration from Duke University. He currently serves on the Board
of Advisors for the Southern Methodist University Corporate Counsel Symposium. He is also a member of the
National Center for Assisted Living In-house Counsel Roundtable Task Force, as well as the Long-Term Care
Risk Legal Forum. Mr. Brickman has either practiced law or performed in-house counsel functions for 32 years.

Jeremy D. Falke joined the Company as Senior Vice President — Human Resources in February
2018. Mr. Falke held various positions within Tenet Healthcare Corporation (“Tenet”) from November 2004 to
February 2018, serving most recently as the Vice President, Talent, Culture and Performance Systems in Dallas.
In this role, he was responsible for all talent planning, development, and cultural programming and trans-
formation for an organization with over 75 acute-care hospitals and 450 outpatient facilities, employing more
than 125,000 people. Prior to this role, Mr. Falke served as the Senior Director, Strategic Operations, Analytics
and Reporting in Dallas and as the Chief Human Resources Officer for Creighton University Medical Center,
which was then owned by Tenet in Omaha, Nebraska. Mr. Falke received a Bachelor of Science in Business
Management from University of Phoenix in Scottsdale, and a Masters of Business Administration with a concen-
tration in Healthcare Management from the University of Nebraska in Omaha.

David W. Beathard, Sr. is currently the Senior Vice President — Operations of the Company. He served as
Vice President — Operations of the Company and its predecessors from August 1996 to June 2013. Mr. Beathard
joined Life Care Services Corporation in 1977 where he served in various roles including Vice President and
Director of Operations Management. From 1992 to 1996, he owned and operated a consulting firm, which pro-
vided operational, marketing, and feasibility consulting regarding senior housing communities. Mr. Beathard has
served as an Advisory Board Member of the Texas Assisted Living Association. He earned a BA degree from
Miami University where he also attended graduate school with a focus in business administration. Mr. Beathard
has been active in the operational, sales and marketing, and construction oversight aspects of senior housing for
44 years.

Jeffrey P. Cellucci joined the Company as Vice President — Operations in May 2018. Prior to joining the
Company, Mr. Cellucci spent nine years with Kindred Healthcare where he most recently served as Division
Vice President and was responsible for overseeing the operations and strategic planning of nine long-term acute
care hospitals. He also led integration efforts for Kindred’s post-acute care service lines in North Texas which
included Home Health, Hospice and Rehab. Mr. Cellucci held a variety of other leadership roles with Kindred
Hospitals including Hospital CEO and District Chief Operating Officer across the Midwest and North-
east. Mr. Cellucci received his Bachelor of Science in Economics from the Wharton School at the University of
Pennsylvania and his Master of Business Administration from Northwestern University. He is currently the
Board President for the American Lung Association in North Texas and previously served as a Board Trustee for
the DFW Hospital Council. Mr. Cellucci was also selected to the 2018 class of the Texas Hospital Association
Leadership Fellows Program.

John J. Klitsch joined the Company as Vice President — Sales/Business Development in March 2018. Prior
to joining the Company, Mr. Klitsch served as the Interim Chief Operating Officer of Baylor Scott & White
Medical Center — Lake Pointe, part of a joint venture between Baylor Scott & White Health and Tenet Health-
care Corporation. From 2012 to 2017, Mr. Klitsch served Tenet Healthcare as the Associate Administrator of
Operations and the Associate Administrator, Director of Business Development for the Dallas Market. Prior to
joining Tenet, Mr. Klitsch served CIGNA Corporation in various sales leadership roles. Mr. Klitsch received a
Bachelor of Arts in Economics and Business from Lafayette College and a Master of Business Administration in
Health Sector Management from Duke University. Mr. Klitsch serves on the Board of the Garland Independent
School District Education Foundation and is a Fellow of the American College of Healthcare Executives.

Gloria M. Holland has served as Vice President — Finance of the Company since June 2004. From 2001 to
2004, Ms. Holland served as Assistant Treasurer and a corporate officer for Aurum Technology, Inc., a privately
held company that provided technology and outsourcing to community banks. From 1996 to 2001, Ms. Holland
held positions in Corporate Finance and Treasury at Brinker International, an owner and operator of casual dining

17

restaurants. From 1989 to 1996, Ms. Holland was a Vice President in the Corporate Banking division of
NationsBank and predecessor banks. Ms. Holland received a BBA in Finance from the University of Mississippi
in 1989.

Joseph G. Solari joined the Company as Vice President — Corporate Development in September 2010.
Mr. Solari has more than 20 years of experience originating, structuring, negotiating and executing the acquis-
ition, sale and divestiture of healthcare real estate and real estate operating companies. Prior to joining the
Company, from 2007 to 2009, Mr. Solari was Managing Director, Acquisitions for Ventas, Inc., where he was
responsible for the firm’s real estate investment activities in the seniors housing and skilled nursing industries.
Prior to Ventas, Inc., from 1999 to 2007, Mr. Solari spent eight years in the healthcare investment banking group
of Houlihan Lokey, where he was responsible for the origination and execution of merger and acquisition, private
placement and financial restructuring engagements for the firm’s healthcare clients, with particular focus on
facility-based, healthcare services companies. Mr. Solari earned his Masters in Business Administration degree
from Virginia Commonwealth University.

Robert F. Hollister, a Certified Public Accountant, has served as Property Controller for the Company and
its predecessors since April 1992. From 1985 to 1992, Mr. Hollister was Chief Financial Officer and Controller
of Kavanaugh Securities, Inc., a National Association of Securities Dealers broker dealer.

Christopher H. Lane, a Certified Public Accountant, joined the Company in December 2008 and currently
serves as Vice President — Financial Reporting. Prior to joining the Company, Mr. Lane served as a Senior
Manager in the financial services audit practice of KPMG LLP. Mr. Lane earned a Masters in Accounting from
Texas Tech University and is a member of the American Institute of Certified Public Accountants, Texas Society
of Certified Public Accountants and Institute of Management Accountants.

Subsidiaries

Capital Senior Living Corporation is

sub-
sidiaries. Although Capital Senior Living Corporation and its subsidiaries are referred to collectively for ease of
reference in this Form 10-K as the Company, these subsidiaries are separately incorporated and maintain their
legal existence separate and apart from the parent, Capital Senior Living Corporation.

several direct and indirect

the parent company of

ITEM 1A. RISK FACTORS.

Our business involves various risks and uncertainties. When evaluating our business the following
information should be carefully considered in conjunction with the other information contained in our periodic
filings with the SEC. Additional risks and uncertainties not known to us currently or that currently we deem to be
immaterial also may impair our business operations. If we are unable to prevent events that have a negative effect
from occurring, then our business may suffer. Negative events are likely to decrease our revenue, increase our
costs, negatively impact our financial results and/or decrease our financial strength, and may cause our stock
price to decline.

Risks Related to Our Business, Industry, and Operations

We have significant debt and our failure to generate cash flow sufficient to cover required interest and
principal payments could result in defaults of the related debt.

As of December 31, 2018, we had mortgage and other indebtedness, excluding deferred loan costs, totaling
approximately $983.2 million. We cannot assure you that we will generate cash flow from operations or receive
proceeds from refinancings, other financings or the sales of assets sufficient to cover required interest and princi-
pal payments. Any payment or other default could cause the applicable lender to foreclose upon the communities
securing the indebtedness with a consequent loss of income and asset value to us. Further, because some of our
mortgages contain cross-default and cross-collateralization provisions, a payment or other default by us with
respect to one community could affect a significant number of our other communities.

18

We have significant lease obligations and our failure to generate cash flows sufficient to cover these lease
obligations could result in defaults under the lease agreements.

As of December 31, 2018, we leased 46 senior housing communities with future lease obligations totaling
approximately $382.1 million, with minimum lease obligations of $65.6 million in fiscal 2019. We cannot assure
you that we will generate cash flow from operations or receive proceeds from refinancings, other financings or
the sales of assets sufficient to cover these required operating lease obligations. Any payment or other default
under any such lease could result in the termination of the lease, with a consequent loss of income and asset value
to us. Further, because our leases contain cross-default provisions, a payment or other default by us with respect
to one leased community could affect all of our other leased communities with related lessors. Certain of our
leases contain various financial and other restrictive covenants, which could limit our flexibility in operating our
business. Failure to maintain compliance with the lease obligations as set forth in our lease agreements could
have a material adverse impact on us. The termination of a significant portion of our facility lease agreements
could have a material adverse effect on our business, financial condition, cash flows, and results of operations.

Our failure to comply with financial covenants and other restrictions contained in debt instruments and
lease agreements could result in the acceleration of the related debt or lease or in the exercise of other
remedies.

Our outstanding indebtedness and leases are secured by our communities, and, in certain cases, a guaranty
by our Company or by one or more of our subsidiaries. Therefore, an event of default under the outstanding
indebtedness or leases, subject to cure provisions in certain instances, would give the respective lenders or les-
sors, as applicable, the right to declare all amounts outstanding to be immediately due and payable, terminate the
lease, or foreclose on collateral securing the outstanding indebtedness and leases.

There are various financial covenants and other restrictions in certain of our debt instruments and lease

agreements, including provisions which:

• require us to meet specified financial tests at the subsidiary company level, which include, but are not

limited to, tangible net worth requirements;

• require us to meet specified financial tests at the community level, which include, but are not limited to,

lease coverage tests;

• require us to maintain the physical condition of the community and meet certain minimum spending lev-

els for capital and leasehold improvements; and

• require consent for changes in control of us.

If we fail to comply with any of these requirements, then the related indebtedness or lease obligations could
become due and payable prior to their stated dates. We cannot assure that we could pay these debt or lease
obligations if they became due prior to their stated dates.

We will require additional financing and/or refinancings in the future and may issue equity securities.

Our ability to obtain such financing or refinancing on terms acceptable to us could have a material adverse
effect on our business, financial condition, cash flows, and results of operations. Our ability to meet our long-
term capital requirements, including the repayment of certain long-term debt obligations, will depend, in part, on
our ability to obtain additional financing or refinancings on acceptable terms from available financing sources,
including through the use of mortgage financing, joint venture arrangements, by accessing the debt and/or equity
markets and possibly through operating leases or other types of financing, such as lines of credit. Turmoil in the
financial markets can severely restrict the availability of funds for borrowing and may make it more difficult or
costly for us to raise capital. There can be no assurance that financing or refinancings will be available or that, if
available, will be on terms acceptable to us. Moreover, raising additional funds through the issuance of equity
securities could cause existing stockholders to experience dilution and could adversely affect the market price of
our common stock. Disruptions in the financial markets may have a significant adverse effect on the market

19

value of our common stock and other adverse effects on us and our business. Our inability to obtain additional
financing or refinancings on terms acceptable to us could delay or eliminate some or all of our growth plans,
necessitate the sales of assets at unfavorable prices or both, and would have a material adverse effect on our
business, financial condition, cash flows, and results of operations.

Increases in market interest rates and/or the Consumer Price Index (“CPI”) could significantly increase the
costs of our floating rate debt and lease obligations, which could adversely affect our liquidity and earnings.

Our floating rate debt and lease obligations and any future indebtedness and lease obligations, if applicable,
exposes us to interest rate and CPI risk. Therefore, any increase in prevailing interest rates or CPI could increase
our future interest and/or lease payment obligations, which could in the future have a material adverse effect on
our business, financial condition, cash flows, and results of operations.

If we are unable to renovate, reposition, or redevelop our communities in accordance with our plans, our
anticipated revenues, results of operations, and cash flows could be adversely affected.

We are currently working on projects that will renovate, reposition, or redevelop a number of our existing
senior housing communities. These projects are in various stages of development and are subject to a number of
factors, some of which we have little or no control. Our ability to successfully renovate, reposition, or redevelop
our senior housing communities will depend on a number of factors, including, but not limited to, our ability to
acquire suitable sites at reasonable prices; our success in obtaining necessary zoning, licensing, and other
required governmental permits and authorizations; and our ability to control construction costs and accurately
project completion schedules. We anticipate that the renovation, repositioning, or redevelopment of existing
senior housing communities may involve a substantial commitment of capital for a period of time until com-
pletion and are operating and producing revenue. In addition, we may incur substantial costs prior to achieving
stabilized occupancy for each project and cannot assure you that the costs will not be greater than we have
anticipated. Our failure to achieve our renovation, repositioning, and redevelopment plans could adversely
impact our anticipated revenues, results of operations, and cash flows.

Termination of resident agreements and resident attrition could affect adversely our revenues and earnings.

State regulations governing assisted living facilities require written resident agreements with each resident.
Most of these regulations also require that each resident have the right to terminate the resident agreement for
any reason on reasonable notice. Consistent with these regulations, the resident agreements signed by us allow
residents to terminate their lease upon 0 to 30 days’ notice. Thus, we cannot contract with residents to stay for
longer periods of time, unlike typical apartment leasing arrangements that involve lease agreements with speci-
fied leasing periods of up to a year or longer. Our resident agreements generally provide for termination of the
lease upon death or allow a resident to terminate their lease upon the need for a higher level of care not provided
at the community. In addition, the advanced age of our average resident means that the resident turnover rate in
our senior living facilities may be difficult to predict. If a large number of residents elected to or otherwise
terminate their resident agreements at or around the same time, then our revenues and earnings could be
adversely affected.

We largely rely on private pay residents and circumstances that adversely affect the ability of the elderly to
pay for our services could have a material adverse effect on us.

Approximately 94.6% of our total revenues from communities that we operated were attributable to private
pay sources and approximately 5.4% of our revenues from these communities were attributable to reimburse-
ments from Medicaid, in each case, during fiscal 2018. We expect to continue to rely primarily on the ability of
residents to pay for our services from their own or family financial resources. Unfavorable economic conditions
in the housing, financial, and credit markets, inflation, or other circumstances that adversely affect the ability of
the elderly to pay for our services could have a material adverse effect on our business, financial condition, cash
flows, and results of operations.

20

The senior living services industry is very competitive and some competitors may have substantially greater
financial resources than us.

The senior living services industry is highly competitive, and we expect that all segments of the industry
will become increasingly competitive in the future. We compete with other companies providing independent
living, assisted living, home health care and other similar services and care alternatives. We also compete with
other health care businesses with respect to attracting and retaining nurses, technicians, aides and other high
quality professional and non-professional employees and managers. Although we believe there is a need for
senior housing communities in the markets where we operate residences, we expect that competition will
increase from existing competitors and new market entrants, some of whom may have substantially greater
financial resources than us. In addition, some of our competitors operate on a not-for-profit basis or as charitable
organizations and have the ability to finance capital expenditures on a tax-exempt basis or through the receipt of
charitable contributions, neither of which are available to us. Furthermore, if the development of new senior
housing communities outpaces the demand for those communities in the markets in which we have senior hous-
ing communities, those markets may become saturated. Regulation in the independent and assisted living
industry is not substantial. Consequently, development of new senior housing communities could outpace
demand. An oversupply of those communities in our markets could cause us to experience decreased occupancy,
reduced operating margins and lower profitability.

We rely on the services of key executive officers and the transition of management or loss of these officers
or their services could have a material adverse effect on us.

We depend on the services of our executive officers for our management. We have recently undergone
changes in our senior management and may experience further changes in the future. The transition of manage-
ment, loss of any of our executive officers or our inability to attract and retain qualified management personnel in
the future, could affect our ability to manage our business and could adversely affect our business, financial
condition, cash flows, and results of operations.

A significant increase in our labor costs could have a material adverse effect on us.

We compete with other providers of senior living services with respect to attracting and retaining qualified
management personnel responsible for the day-to-day operations of each of our communities and skilled person-
nel responsible for providing resident care. A shortage of nurses or trained personnel may require us to enhance
our wage and benefits package in order to compete in the hiring and retention of these personnel or to hire more
expensive temporary personnel. We also will be dependent on the available labor pool of semi-skilled and
unskilled employees in each of the markets in which we operate. No assurance can be given that our labor costs
will not increase, or that, if they do increase, they can be matched by corresponding increases in rates charged to
residents. Any significant failure by us to control our labor costs or to pass on any increased labor costs to resi-
dents through rate increases could have a material adverse effect on our business, financial condition, cash flows,
and results of operations.

We are subject to risks related to the provision for employee health care benefits and ongoing health care
reform legislation.

We use a combination of insurance and self-insurance for employee health care plans. We record expenses
under these plans based on estimates of the costs of expected claims, administrative costs and stop-loss pre-
miums. These estimates are then adjusted to reflect actual costs incurred. Actual costs under these plans are sub-
ject to variability depending primarily upon participant enrollment and demographics, the actual costs of claims
and whether stop-loss insurance covers these claims. In the event that our cost estimates differ from actual costs,
we could incur additional unplanned health care costs which could have a material adverse effect on our busi-
ness, financial condition, cash flows, and results of operations.

In March 2010, comprehensive health care reform legislation under the Patient Protection and Affordable
Care Act (HR 3590) and the Health Care Education and Affordability Reconciliation Act (HR 4872) was passed
and signed into law. This legislation expands health care coverage to many uninsured individuals and expands

21

health care coverage to those already insured under existing plans. The health care reform legislation includes,
among other things, guaranteed coverage requirements, eliminates pre-existing condition exclusions and annual
and lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new and sig-
nificant taxes on health insurers and health care benefits. Provisions of the health care reform legislation become
effective at various dates over the next several years. The United States Department of Health and Human Serv-
ices, National Association of Insurance Commissioners, Department of Labor and Treasury Department continue
to issue necessary enabling regulations and guidance with respect to the health care reform legislation. Due to the
breadth and complexity of the health care reform legislation, the lack of implementing regulations and inter-
pretative guidance, and the phased-in nature of the implementation, it is difficult to predict the overall impact this
legislation will have over the coming years; however, this legislation could have a material adverse effect on our
business, financial condition, cash flows, and results of operations.

There is an inherent risk of liability in the provision of personal and health care services, not all of which
may be covered by insurance.

The provision of personal and health care services in the long-term care industry entails an inherent risk of
liability. In recent years, participants in the long-term care industry have become subject to an increasing number
of lawsuits alleging negligence or related legal theories, many of which involve large claims and result in the
incurrence of significant defense costs. Moreover, senior housing communities offer residents a greater degree of
independence in their daily living. This increased level of independence may subject the resident and, therefore,
us to risks that would be reduced in more institutionalized settings. We currently maintain insurance in amounts
we believe are comparable to those maintained by other senior living companies based on the nature of the risks,
our historical experience and industry standards, and we believe that this insurance coverage is adequate. How-
ever, we may become subject to claims in excess of our insurance or claims not covered by our insurance, such
as claims for punitive damages, terrorism and natural disasters. A claim against us not covered by, or in excess
of, our insurance could have a material adverse effect upon our business, financial condition, cash flows, and
results of operations.

In addition, our insurance policies must be renewed annually. Based upon poor loss experience, insurers for
the long-term care industry have become increasingly wary of liability exposure. A number of insurance carriers
have stopped writing coverage to this market, and those remaining have increased premiums and deductibles
substantially. Therefore, we cannot assure that we will be able to obtain liability insurance in the future or that, if
that insurance is available, it will be available on acceptable economic terms.

We are subject to government regulations and compliance, some of which are burdensome and some of
which may change to our detriment in the future.

Federal and state governments regulate various aspects of our business. The development and operation of
senior housing communities and the provision of health care services are subject to federal, state and local
licensure, certification and inspection laws that regulate, among other matters, the number of licensed beds, the
provision of services, the distribution of pharmaceuticals, billing practices and policies, equipment, staffing
(including professional licensing), operating policies and procedures, fire prevention measures, environmental
matters, and compliance with building and safety codes. Failure to comply with these laws and regulations could
result in the denial of reimbursement, the imposition of fines, temporary suspension of admission of new resi-
dents, suspension or decertification from the Medicaid program, restrictions on the ability to acquire new com-
munities or expand existing communities and, in extreme cases, the revocation of a community’s license or
closure of a community. We believe that such regulation will increase in the future and we are unable to predict
the content of new regulations or their effect on our business, any of which could materially adversely affect our
business, financial condition, cash flows, and results of operations.

Various states, including several of the states in which we currently operate, control the supply of licensed
beds and assisted living communities through CON or other programs. In those states, approval is required for
the addition of licensed beds and some capital expenditures at those communities. To the extent that a CON or
other similar approval is required for the acquisition or construction of new communities, the expansion of the
number of licensed beds, services, or existing communities, we could be adversely affected by our failure or

22

inability to obtain that approval, changes in the standards applicable for that approval, and possible delays and
expenses associated with obtaining that approval. In addition, in most states, the reduction of the number of
licensed beds or the closure of a community requires the approval of the appropriate state regulatory agency and,
if we were to seek to reduce the number of licensed beds at, or to close, a community, we could be adversely
affected by a failure to obtain or a delay in obtaining that approval.

Federal and state anti-remuneration laws, such as “anti-kickback” laws, govern some financial arrangements
among health care providers and others who may be in a position to refer or recommend patients to those pro-
viders. These laws prohibit, among other things, some direct and indirect payments that are intended to induce
the referral of patients to, the arranging for services by, or the recommending of, a particular provider of health
care items or services. Federal anti-kickback laws have been broadly interpreted to apply to some contractual
relationships between health care providers and sources of patient referral. Similar state laws vary, are sometimes
vague, and seldom have been interpreted by courts or regulatory agencies. Violation of these laws can result in
loss of licensure, civil and criminal penalties, and exclusion of health care providers or suppliers from partic-
ipation in the Medicaid program. There can be no assurance that those laws will be interpreted in a manner con-
sistent with our practices.

Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet
federal requirements related to access and use by disabled persons. A number of additional federal, state and
local laws exist that also may require modifications to existing and planned communities to create access to the
properties by disabled persons. Although we believe that our communities are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated
or must be made on a more accelerated basis than anticipated, additional costs would be incurred by us. Further
legislation may impose additional burdens or restrictions with respect to access by disabled persons, the costs of
compliance with which could be substantial.

The Health Insurance Portability and Accountability Act of 1996, in conjunction with the federal regulations
promulgated thereunder by the Department of Health and Human Services, has established, among other
requirements, standards governing the privacy of certain protected and individually identifiable health
information that is created, received or maintained by a range of covered entities. HIPAA has also established
standards governing uniform health care transactions, the codes and identifiers to be used by the covered entities
and standards governing the security of certain electronic transactions conducted by covered entities. Penalties
for violations can range from civil money penalties for errors and negligent acts to criminal fines and imprison-
ment for knowing and intentional misconduct. HIPAA is a complex set of regulations and many unanswered
questions remain with respect to the manner in which HIPAA applies to businesses such as those operated by us.

An increasing number of legislative initiatives have been introduced or proposed in recent years that would
result in major changes in the health care delivery system on a national or a state level. Among the proposals that
have been introduced are price controls on hospitals, insurance market reforms to increase the availability of
group health insurance to small businesses, requirements that all businesses offer health insurance coverage to
their employees and the creation of government health insurance plans that would cover all citizens and increase
payments by beneficiaries. We cannot predict whether any of the above proposals or other proposals will be
adopted and, if adopted, no assurances can be given that their implementation will not have a material adverse
effect on our business, financial condition or results of operations.

We may be subject to liability for environmental damages.

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous
owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or
petroleum product releases at the property, and may be held liable to a governmental entity or to third parties for
property damage and for investigation and clean-up costs incurred by those parties in connection with the con-
tamination. These laws typically impose clean-up responsibility and liability without regard to whether the owner
knew of or caused the presence of the contaminants, and liability under these laws has been interpreted to be joint
and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs
of investigation, remediation or removal of the substances may be substantial, and the presence of the substances,

23

or the failure to properly remediate the property, may adversely affect the owner’s ability to sell or lease the
property or to borrow using the property as collateral. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in connection with the con-
tamination. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable
for the costs of removal or remediation of the substances at the disposal or treatment facility, whether or not the
facility is owned or operated by the person. Finally, the owner of a site may be subject to common law claims by
third parties based on damages and costs resulting from environmental contamination emanating from a site. If
we become subject to any of these claims the costs involved could be significant and could have a material
adverse effect on our business, financial condition, cash flows, and results of operations.

Damage from catastrophic weather and other natural events could result in losses.

A certain number of our properties are located in areas that have experienced and may experience in the
future catastrophic weather and other natural events from time to time, including snow or ice storms, windstorm,
tornados, hurricanes, fires, earthquakes, flooding or other severe weather. The Company maintains insurance
policies, including coverage for business interruption, designed to mitigate financial losses resulting from such
adverse weather and natural events; however, there can be no assurance that adverse weather or natural events
will not cause substantial damages or losses to our communities that could exceed our insurance coverage. In the
event of a loss in excess of insured limits, such loss could have a material adverse effect on our business, finan-
cial condition, cash flows, and results of operations.

We rely on information technology in our operations, and failure to maintain the security and functionality
of our information technology and computer systems, or to prevent a cybersecurity attack, breach or other
unauthorized access, could adversely affect our business, reputation and relationships with our residents,
employees and referral sources and may subject us to remediation costs, government inquiries and liabilities
under HIPAA and data and consumer protection laws, any of which could materially and adversely impact
our revenues, results of operations, cash flow and liquidity.

We rely upon the proper function and availability of our information technology and computer systems,
including hardware, software, applications and electronic data storage, to communicate with our residents and
patients, their doctors and other healthcare providers, and our employees and vendors and to store, process, safe-
guard and transmit our business information,
including proprietary business information, private health
information and personally identifiable information of our residents and employees. We have taken steps and
expended significant resources to protect the cybersecurity and physical security of our information technology
and computer systems and have developed and implemented policies and procedures to comply with HIPAA and
other applicable privacy laws, rules and regulations. However, there can be no assurance that our security meas-
ures, policies and procedures and disaster recovery plans will prevent damage to, or interruption or breach of, our
information systems or other unauthorized access to private information.

The cybersecurity risks to the Company and our third-party vendors are heightened by, among other things,
the frequently changing techniques used to illegally or fraudulently obtain unauthorized access to systems,
advances in computing technology and cryptogrophy, and the possibility that unauthorized access may be diffi-
cult to detect, which could lead to us or our vendors being unable to anticipate these techniques or implement
adequate preventive measures. In addition, components of our information systems that we develop or procure
from third parties may contain defects in design or manufacture or other problems that could unexpectedly com-
promise the security or functionality of our information systems. Unauthorized parties may also attempt to gain
access to our systems or facilities, or those of third parties with whom we do business or communicate, through
computer viruses, hacking, fraud or other forms of deceiving our employees or contractors such as email phish-
ing attacks. As cyber threats continue to evolve, we may be required to expend significant additional resources to
continue to modify or enhance our cybersecurity or to investigate and remediate any cybersecurity vulner-
abilities, attacks or incidents.

In addition, we rely on software support of third parties to secure and maintain our information systems and
data. Our inability, or the inability of these third parties, to continue to maintain and upgrade our information
systems could disrupt or reduce the efficiency of our operations. Costs and potential problems and interruptions

24

associated with the implementation of new or upgraded systems and technology or with maintenance or adequate
support of existing systems could also disrupt or reduce the efficiency of our operations.

Failure to maintain the security and functionality of our information systems, or to prevent a cybersecurity
attack or other unauthorized access to our information systems, could expose us to a number of adverse con-
sequences, including: (i) interruptions to our business and operations; (ii) the theft, destruction, loss, mis-
appropriation, or release of sensitive information, including proprietary business information and personally
identifiable information of our residents, patients and employees; (iii) significant remediation costs; (iv) negative
publicity that could damage our reputation and our relationships with our residents, patients, employees and
referral sources; (v) litigation and potential liability under privacy, security and consumer protection laws,
including HIPAA, or other applicable laws, rules or regulations; and (vi) government inquiries that may result in
sanctions and other criminal or civil fines or penalties. Any of the foregoing could materially and adversely
impact our revenues, results of operations, cash flow and liquidity.

Risks Related to Our Common Stock

Anti-takeover provisions in our governing documents, governing law and material agreements may dis-
courage, delay or prevent a merger or acquisition that our stockholders may consider favorable or prevent
the removal of our current board of directors and management.

Certain provisions of our amended and restated certificate of incorporation and our amended and restated
by-laws may discourage, delay or prevent a merger or acquisition that our stockholders may consider favorable
or prevent the removal of our current board of directors and management. We have a number of anti-takeover
devices in place that will hinder takeover attempts, including: a staggered board of directors consisting of three
classes of directors, each of whom serve three-year terms; removal of directors only for cause, and only with the
affirmative vote of at least a majority of the voting interest of stockholders entitled to vote; right of our directors
to issue preferred stock from time to time with voting, economic and other rights superior to those of our com-
mon stock without the consent of our stockholders; provisions in our amended and restated certificate of
incorporation and amended and restated by-laws limiting the right of our stockholders to call special meetings of
stockholders; advance notice requirements for stockholders with respect to director nominations and actions to be
taken at annual meetings; requirement for two-thirds stockholder approval for amendment of our by-laws and
certain provisions of our certificate of incorporation; and no provision in our amended and restated certificate of
incorporation for cumulative voting in the election of directors, which means that the holders of a majority of the
outstanding shares of our common stock can elect all the directors standing for election.

Several of our leases, loan documents and other material agreements require approval in case of a change of
control of our company. These provisions may have the effect of delaying or preventing a change of control of
our company even if this change of control would benefit our stockholders.

In addition to the anti-takeover provisions described above, we are subject to Section 203 of the Delaware
General Corporation Law. Section 203 generally prohibits a person beneficially owning, directly or indirectly,
15% or more of our outstanding common stock from engaging in a business combination with us for three years
after the person acquired the stock. However, this prohibition does not apply if (A) our directors approve in
advance the person’s ownership of 15% or more of the shares or the business combination or (B) the business
combination is approved by our stockholders by a vote of at least two-thirds of the outstanding shares not owned
by the acquiring person.

Because we do not presently have plans to pay dividends on our common stock, stockholders must look
solely to appreciation of our common stock to realize a gain on their investment.

It is the policy of our Board of Directors to retain any future earnings to finance the operation and expansion
of the Company’s business. Accordingly, the Company has not and does not currently anticipate declaring or
paying cash dividends on your common stock in the foreseeable future. The payment of cash dividends in the
future will be at the sole discretion of our Board of Directors and will depend on, among other things, the
Company’s earnings, operations, capital requirements, financial condition, restrictions in then existing financing
agreements and other factors deemed relevant by our Board of Directors. Accordingly, stockholders must look

25

solely to appreciation of our common stock to realize a gain on their investment. This appreciation may not
occur.

The price of our common stock has fluctuated substantially over the past several years and may continue to
fluctuate substantially in the future.

Our stock price may continue to be subject to significant fluctuations as a result of a variety of factors,
which are described throughout this Annual report on Form 10-K, including those factors discussed under this
section entitled “Risk Factors.” Some of these factors are beyond our control. We may fail to meet the expect-
ations of our stockholders or securities analysts at some point in the future, and our stock price could decline as a
result.

Future offerings of equity securities by us may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by offering additional equity securities. Addi-
tional equity offerings may dilute the economic and voting rights of our existing stockholders and/or reduce the
market price of our common stock. Our decision to issue equity securities in a future offering will depend on
market conditions and other factors, some of which are beyond our control, we cannot predict or estimate the
amount, timing, or nature of our future offerings. Thus, holders of our common stock bear the risk of our future
offerings reducing the market price of our common stock and diluting their holdings in our Company.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

The executive and administrative offices of the Company are located at 14160 Dallas Parkway, Suite 300,
Dallas, Texas 75254, and consist of approximately 26,000 square feet. The lease on the premises currently
extends through September 2020. The Company believes that its corporate office facilities are adequate to meet
its requirements through at least fiscal 2019 and that suitable additional space will be available, as needed, to
accommodate further physical expansion of corporate operations.

As of December 31, 2018, the Company owned or leased and managed the senior housing communities

referred to in Item 1 above under the caption “Operating Communities.”

ITEM 3. LEGAL PROCEEDINGS.

The Company has claims incurred in the normal course of its business. Most of these claims are believed by
management to be covered by insurance, subject to normal reservations of rights by the insurance companies and
possibly subject to certain exclusions in the applicable insurance policies. Whether or not covered by insurance,
these claims, in the opinion of management, based on advice of legal counsel, should not have a material effect
on the consolidated financial statements of the Company if determined adversely to the Company.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

26

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

(a) Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters.

Market Information and Holders

The Company’s shares of common stock are listed for trading on the New York Stock Exchange (“NYSE”)
under the symbol “CSU”. At February 22, 2019, there were approximately 220 stockholders of record of the
Company’s common stock.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table presents information relating to the Company’s equity compensation plans as of

December 31, 2018:

Plan Category

Equity compensation plans
approved by security
holders . . . . . . . . . . . . . . . .
Equity compensation plans not

approved by security
holders . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . .

Number of Securities to
be Issued Upon
Exercise of Outstanding
Options, Warrants and
Rights

Weighted-Average
Exercise Price of the
Outstanding
Options, Warrants
and Rights

Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in First Column)

—

—

—

$—

—

$—

285,502

—

285,502

27

Performance Graph

The following Performance Graph shows the cumulative total return for the five-year period ended
December 31, 2018, in the value of $100 invested in: (1) the Company’s common stock; (2) the Standard &
Poor’s Broad Market Index (the “S&P 500”); and (3) the common stock of the Peer Group (as defined below) of
companies, whose returns represent the arithmetic average of such companies. The values with each investment
as of the beginning of each year are based on share price appreciation and the reinvestment of any dividends on
the respective ex-dividend dates.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Capital Senior Living Corporation, the S&P 500 Index,
and a Peer Group

Capital Senior Living Corporation

S&P 500

Peer Group

$250

$200

$150

$100

$50

$0

12/13

12/14

12/15

12/16

12/17

12/18

The preceding graph assumes $100 invested at the beginning of the measurement period, including reinvest-
ment of any dividends, in the Company’s common stock, the S&P 500, and the Peer Group and was plotted using
the following data:

Cumulative Total Returns

12/13

12/14

12/15

12/16

12/17

12/18

Capital Senior Living Corporation . . . . . . . . . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peer Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.00
100.00
100.00

103.83
113.69
130.57

86.95
115.26
66.74

66.90
129.05
45.42

56.23
157.22
34.91

28.35
150.33
23.60

The Company’s Peer Group, which was selected in good faith on an industry basis, consists of Brookdale

Senior Living, Inc. and Five Star Quality Care, Inc.

(b) Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.

Not applicable.

28

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

The following information is provided pursuant to Item 703 of Regulation S-K. The information set forth in
the table below reflects information regarding the aggregate shares repurchased by the Company pursuant to its
share repurchase program (as described below) as of December 31, 2018.

Period

Average
Price
Paid per
Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs

Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under the
Plans or Programs (1)

Total Number of
Shares Purchased

Total at September 30, 2018 . . . . . . . . . . . . .
October 1 – October 31, 2018 . . . . . . . . . .
November 1 – November 30, 2018 . . . . . .
December 1 – December 31, 2018 . . . . . .

494,115
—
—
—

Total at December 31, 2018 . . . . . . . . . . . . .

494,115

$6.94
—
—
—

$6.94

494,115
—
—
—

494,115

$6,570,222
6,570,222
6,570,222
6,570,222

$6,570,222

(1) On January 22, 2009, the Company’s board of directors approved a share repurchase program that authorized
the Company to purchase up to $10.0 million of the Company’s common stock. The repurchase program
does not obligate the Company to acquire any particular amount of common stock and the share repurchase
authorization has no stated expiration date. On January 14, 2016, the Company announced that its board of
directors approved a continuation of the share repurchase program. All shares that have been acquired by the
Company under this program were purchased in open-market transactions.

29

ITEM 6. SELECTED FINANCIAL DATA.

The following table presents selected financial data of the Company which has been derived from the aud-
ited consolidated financial statements of the Company. The selected financial data should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the con-
solidated financial statements and related notes thereto included in this Annual Report.

Consolidated Statements of Operations and

At and for the Year Ended December 31,

2018

2017

2016

2015

2014

(In thousands, except per share and other data)

Comprehensive Loss Data:
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 460,018 $ 466,997 $ 447,448 $ 412,177 $383,925
13,900
Income from operations . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(24,126)
Net loss per share:

14,390
(28,017)

7,603
(53,596)

18,835
(14,284)

7,842
(44,168)

Basic net loss per share . . . . . . . . . . . . . . . . . . . $
Diluted net loss per share . . . . . . . . . . . . . . . . . . $

(1.80) $
(1.80) $

(1.50) $
(1.50) $

(0.97) $
(0.97) $

(0.50) $
(0.50) $

(0.83)
(0.83)

Balance Sheet Data:

Cash and cash equivalents (excluding restricted

cash) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Working capital (deficit)(1) . . . . . . . . . . . . . . . . . .
Total assets(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, excluding current portion(1) . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . $

31,309 $
(11,572)
1,149,144
959,408
35,265 $

56,087 $ 39,209
17,646 $
13,113
26,726
(22,954)
891,370
1,019,033
1,182,671
592,884
754,949
938,206
80,433 $ 116,918 $ 135,746 $141,174

34,026 $
638
1,145,781
882,504

Other Data:

Communities (at end of period)

Owned or leased . . . . . . . . . . . . . . . . . . . . . . . . .
Joint ventures & managed . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

129
—

129

129
—

129

129
—

129

121
—

121

117
—

117

Resident capacity:

Owned or leased . . . . . . . . . . . . . . . . . . . . . . . . .
Joint ventures & managed . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16,523
—

16,523

16,523
—

16,523

16,523
—

16,523

15,416
—

15,149
—

15,416

15,149

(1) Working capital (deficit), total assets, and long-term debt, excluding current portion, for fiscal 2018, 2017,
2016 and 2015 excludes $9,458, $9,398, $9,841 and $8,532, respectively, in debt issuance costs, net of
accumulated amortization, and fiscal 2014 was revised from amounts previously reported to reflect the
impact of reclassifying $6,331 in debt issuance costs, net of accumulated amortization, from other assets to
notes payable. This revision was due to the Company’s adoption of ASU 2015-03, Interest—Imputation of
Interest- Simplifying the Presentation of Debt Issuance Costs, during the fourth quarter of fiscal 2015 which
required current and retrospective application to the Company’s Consolidated Balance Sheets for all periods
presented.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS.

Certain information contained in this report constitutes “Forward-Looking Statements” within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of

30

1934, as amended, which can be identified by the use of forward-looking terminology such as “may,” “will,”
“would,” “intend,” “could,” “believe,” “expect,” “anticipate,” “estimate” or “continue” or the negative
thereof or other variations thereon or comparable terminology. Examples of
forward-looking statements,
include, without limitation, those relating to the Company’s future business prospects and strategies, financial
results, working capital, liquidity, capital needs and expenditures, interest costs, insurance availability and con-
tingent liabilities. Forward-looking statements are subject to certain risks and uncertainties that could cause the
Company’s actual results and financial condition to differ materially from those indicated in the forward-looking
statements, including, but not limited to, the Company’s ability to generate sufficient cash flow to satisfy its debt
and lease obligations and to fund the Company’s capital improvement projects to expand, redevelop, and/or
reposition its senior living communities; the Company’s ability to obtain additional capital on terms acceptable
to it; the Company’s ability to extend or refinance its existing debt as such debt matures; the Company’s com-
pliance with its debt and lease agreements, including certain financial covenants, and the risk of cross-default in
the event such non-compliance occurs; the Company’s ability to complete acquisitions and dispositions upon
favorable terms or at all; the risk of oversupply and increased competition in the markets which the Company
operates; the risk of increased competition for skilled workers due to wage pressure and changes in regulatory
requirements; the departure of the Company’s key officers and personnel; the cost and difficulty of complying
with applicable licensure, legislative oversight, or regulatory changes; the risks associated with a decline in
economic conditions generally; the adequacy and continued availability of the Company’s insurance policies and
the Company’s ability to recover any losses it sustains under such policies; changes in accounting principles and
interpretations; and the other risks and factors identified from time to time in the Company’s reports filed with
the SEC.

Overview

The following discussion and analysis addresses (i) the Company’s results of operations on a historical
consolidated basis for the years ended December 31, 2018, 2017, and 2016, and (ii) liquidity and capital
resources of the Company and should be read in conjunction with the Company’s historical consolidated finan-
cial statements and the selected financial data contained elsewhere in this report.

The Company is one of the largest operators of senior housing communities in the United States. The
Company’s operating strategy is to provide value to its senior living residents by providing quality senior living
services at reasonable prices, while achieving and sustaining a strong, competitive position within its geo-
graphically concentrated regions, as well as continuing to enhance the performance of its operations. The Com-
pany provides senior living services to the elderly, including independent living, assisted living, and memory
care services at reasonable prices. Many of the Company’s communities offer a continuum of care to meet its
residents’ needs as they change over time. This continuum of care, which integrates independent living, assisted
living, and memory care, and is bridged by home care through independent home care agencies, sustains resi-
dents’ autonomy and independence based on their physical and mental abilities.

As of December 31, 2018, the Company operated 129 senior housing communities in 23 states with an
aggregate capacity of approximately 16,500 residents, including 83 senior housing communities which the
Company owned and 46 senior housing communities the Company leased.

Significant Financial and Operational Highlights

The Company primarily derives its revenue by providing senior living housing and services to the elderly.
When comparing fiscal 2018 to fiscal 2017,
the Company generated total revenues of approximately
$460.0 million compared to total revenues of approximately $467.0 million, respectively, representing a decrease
of approximately $7.0 million, or 1.5%. Our resident revenue continues to be negatively impacted from the
aftermath of Hurricane Harvey, which resulted in the full evacuation of our residents at two of our senior housing
communities located in southeast Texas during the third quarter of fiscal 2017. Although physical repairs were
substantially completed and both of these communities began accepting residents during the third quarter of fis-
cal 2018, unoccupied units at these communities resulted in a decrease of approximately $4.6 million in our resi-
dent revenue during fiscal 2018 when compared to fiscal 2017. In addition to the decrease in resident revenue

31

from the two senior housing communities negatively impacted by Hurricane Harvey, we also experienced a
decrease in resident revenue at our other remaining senior housing communities of $2.4 million, which was
primarily due to a 1.6% decrease in average financial occupancies.

Excluding the two senior housing communities impacted by Hurricane Harvey, the weighted average finan-
cial occupancy rate for fiscal 2018 and 2017 was 85.2% and 86.8%, respectively. Although our occupancies
declined, we achieved a 1.0% increase in average monthly rental rates when comparing fiscal 2018 to fiscal
2017. The increase in average monthly rental rates during fiscal 2018 was primarily the result of annual rent
increases for our existing residents and the capital improvements we have invested in our communities for unit
conversions which enable us to provide a broader range of senior living services at higher levels of care.

On December 18, 2018, the Company repaid certain mortgage loans associated with 21 of its senior living
communities totaling approximately $170.6 million from Fannie Mae which were scheduled to mature on various
dates beginning August 2021 through April 2026. The repayment of these mortgage loans facilitated the
establishment of a Master Credit Facility (the “MCF”) with Berkadia Commercial Mortgage (“Berkadia”)
whereby the Company obtained approximately $201.0 million of new mortgage financing. The MCF has a
10-year term, is interest only for the first 36 months, and will allow the Company to make future advances,
should the Company decide to do so, assuming certain borrowing conditions are satisfied.

On December 18, 2018, the Company completed mortgage financing of $3.5 million from Berkadia at a
variable interest rate of LIBOR plus 3.75% on one community located in Kokomo, Indiana. The mortgage loan is
interest-only and has an 18-month term maturing in July 2020.

On November 30, 2018, the Company completed supplemental mortgage financing of approximately
$1.8 million from Fannie Mae at a fixed interest rate of 6.30% on one community located in Mesquite, Texas.
The supplemental mortgage loan is coterminous, cross-collateralized and cross-defaulted with the original exist-
ing mortgage debt maturing in July 2024.

As mentioned above, the Company had two of its senior housing communities located in southeast Texas
impacted by Hurricane Harvey during the third quarter of fiscal 2017. We maintain insurance coverage on these
communities which includes damage caused by flooding. The insurance claim for this incident required a deduc-
tible of $100,000 that was expensed as a component of operating expenses in the Company’s Consolidated
Statement of Operations and Comprehensive Loss in the third quarter of fiscal 2017. Physical repairs have been
substantially completed to restore the communities to their condition prior to the incident and these communities
reopened and began accepting residents in July 2018. Through December 31, 2018, we have incurred approx-
imately $6.9 million in clean-up and physical repair costs which we believe are probable of being recovered
through insurance proceeds. In addition to the repairs of physical damage to the buildings, the Company’s
insurance coverage includes loss of business income (“Business Interruption”). Business Interruption includes
reimbursement for lost revenue as well as incremental expenses incurred as a result of the hurricane. The Com-
pany received payments from our insurance underwriters during fiscal 2018 totaling approximately $9.2 million
of which approximately $5.1 million related to Business Interruption, which has been included as a reduction to
operating expenses in the Company’s Consolidated Statement of Operations and Comprehensive Loss.

Facility Leases

As of December 31, 2018, the Company leased 46 senior housing communities from certain real estate
investment trusts (“REITs”). The lease terms are generally for 10-15 years with renewal options for 5-20 years at
the Company’s option. Under these lease agreements, the Company is responsible for all operating costs, main-
tenance and repairs, insurance and property taxes. No new facility leases were entered into by the Company dur-
ing fiscal 2018.

Ventas

As of December 31, 2018, the Company leased seven senior housing communities (collectively the “Ventas
Lease Agreements”) from Ventas, Inc. (“Ventas”). Effective January 31, 2017, the Company acquired from
Ventas the underlying real estate associated with four of its operating leases for a total acquisition price of

32

$85.0 million (the “Four Property Lease Transaction”). The Company obtained interim, interest only, bridge
financing from Berkadia for $65.0 million of the acquisition price with an initial variable interest rate of LIBOR
plus 4.0% and a 36-month term, with an option to extend 6 months, and the balance of the acquisition price paid
from the Company’s existing cash resources. For additional information refer to Note 3, “Acquisitions”, within
the notes to consolidated financial statements. Prior to the Four Property Lease Transaction, the Company pre-
viously leased 11 senior housing communities from Ventas.

During the second quarter of fiscal 2015, the Company executed amendments to the master lease agree-
ments with Ventas to facilitate up to $24.5 million of leasehold improvements for 10 communities within the
Ventas lease portfolio and extend the lease terms until September 30, 2025, with two five-year renewal
extensions available at the Company’s option. During the second quarter of fiscal 2016, the Company executed
amendments to the master lease agreements with Ventas to increase the funds budgeted for leasehold improve-
ments (the “Special Project Funds”) from $24.5 million to $28.5 million and extend the date for completion of
the leasehold improvements to June 30, 2017. During the second quarter of fiscal 2017, the Company executed
amendments to the master lease agreements with Ventas to decrease the Special Project Funds for leasehold
improvements from $28.5 million to approximately $17.0 million due to the Four Property Lease Transaction and
extend the date for completion of the leasehold improvements to June 30, 2018. During the second quarter of
fiscal 2018, the Company executed amendments to the master lease agreements with Ventas to increase the Spe-
cial Project Funds for leasehold improvements from approximately $17.0 million to approximately $20.0 million
and extend the date for completion of the leasehold improvements to June 30, 2019. The initial lease rates under
each of the Ventas Lease Agreements ranged from 6.75% to 8% and are subject to certain conditional escalation
clauses which will be recognized when probable or incurred. The Company initially incurred $11.4 million in
lease acquisition and modification costs related to the Ventas Lease Agreements, of which a portion of these
costs were written-off upon closing the Four Property Lease Transaction leaving $8.7 million in lease acquisition
and modification costs associated with the remaining properties. These deferred lease acquisition and mod-
ification costs are being amortized over the lease terms and are included in facility lease expense in the Compa-
ny’s Consolidated Statement of Operations and Comprehensive Loss. The Company accounts for five of the
Ventas Lease Agreements as an operating lease and two as a capital lease and financing obligation.

HCP

As of December 31, 2018, the Company leased 15 senior housing communities (collectively the “HCP
Lease Agreements”) from HCP, Inc. (“HCP”). During the fourth quarter of fiscal 2013, the Company executed an
amendment to the master lease agreement with HCP to facilitate up to $3.3 million of leasehold improvements
for one community within the HCP lease portfolio and extend the initial lease terms for nine communities until
October 31, 2020, with two 10-year renewal extensions available at the Company’s option. During the second
quarter of fiscal 2015, the Company exercised its right to extend the lease term with HCP for the remaining six
communities in the HCP lease portfolio until April 30, 2026, with one 10-year renewal extension available at the
Company’s option. The initial lease rates under the HCP Lease Agreements ranged from 7.25% to 8% and are
subject to certain conditional escalation clauses, which will be recognized when probable or incurred. The
Company incurred $1.6 million in lease acquisition and modification costs related to the HCP Lease Agreements.
These deferred lease acquisition and modification costs are being amortized over the lease terms and are included
in facility lease expense in the Company’s Consolidated Statements of Operations and Comprehensive Loss. The
Company accounts for each of the HCP Lease Agreements as an operating lease.

Welltower

As of December 31, 2018, the Company leased 24 senior housing communities (collectively the “Welltower
Lease Agreements”) from Welltower, Inc., formerly Health Care REIT, Inc. (“Welltower”). The Welltower
Lease Agreements each have an initial term of 15 years, with one 15-year renewal extension available at the
Company’s option. The initial lease rates under the Welltower Lease Agreements ranged from 7.25% to 8.5%
and are subject to certain conditional escalation clauses, which will be recognized when probable or incurred.
The initial terms on the Welltower Lease Agreements expire on various dates through from April 2025 through
April 2026. The Company incurred $2.1 million in lease acquisition costs related to the Welltower Lease Agree-

33

ments. These deferred lease acquisition costs are being amortized over the lease terms and are included in facility
lease expense in the Company’s Consolidated Statements of Operations and Comprehensive Loss. The Company
accounts for each of the Welltower Lease Agreements as an operating lease.

The following table summarizes each of the Company’s facility lease agreements as of December 31, 2018

(dollars in millions):

Landlord

Initial Date of Lease

Number of
Communities

Value of
Transaction

Current Expiration and
Renewal Term

Ventas . . . . . . . . . September 30, 2005

Ventas . . . . . . . . .

January 31, 2008

Ventas . . . . . . . . .

June 27, 2012

HCP . . . . . . . . . . .

May 1, 2006

HCP . . . . . . . . . . .

May 31, 2006

HCP . . . . . . . . . . . December 1, 2006

HCP . . . . . . . . . . . December 14, 2006

HCP . . . . . . . . . . .

April 11, 2007

Welltower

. . . . . .

April 16, 2010

Welltower

. . . . . .

May 1, 2010

4

1

2

3

6

4

1

1

5

3

$ 61.4

5.0

43.3

54.0

43.0

51.0

18.0

8.0

48.5

36.0

Welltower

. . . . . . September 10, 2010

12

104.6

Welltower

. . . . . .

April 8, 2011

4

141.0

September 30, 2025
(4)
(Two five-year renewals)
September 30, 2025
(4)
(Two five-year renewals)
September 30, 2025
(4)
(Two five-year renewals)
October 31, 2020
(5)
(Two 10-year renewals)
April 30, 2026
(6)
(One 10-year renewal)
October 31, 2020
(5)
(Two 10-year renewals)
October 31, 2020
(5)
(Two 10-year renewals)
October 31, 2020
(5)
(Two 10-year renewals)
April 30, 2025
(15 years)
(One 15-year renewal)
April 30, 2025
(15 years)
(One 15-year renewal)
September 30, 2025
(15 years)
(One 15-year renewal)
April 30, 2026
(15 years)
(One 15-year renewal)

Lease
Acquisition
and
Modification
Costs (2)

Initial
Lease
Rate (1)

Deferred
Gains / Lease
Concessions (3)

8% $ 7.7

$ 4.2

7.75%

0.2

6.75%

0.8

—

—

8%

0.3

12.8

8%

0.2

0.6

8%

0.7

7.75%

0.3

7.25%

0.1

8.25%

0.6

8.25%

0.2

8.50%

0.4

—

—

—

0.8

0.4

2.0

7.25%

0.9

16.3

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated amortization through December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deferred gains / lease concessions recognized through December 31, 2018 . . . . . . . .

12.4
(7.9)
—

37.1
—
(26.2)

Net lease acquisition costs / deferred gains / lease concessions as of December 31, 2018 . . . . . . . .

$ 4.5

$ 10.9

(1) Initial lease rates are measured against agreed upon fair market values and are subject to conditional lease

escalation provisions as set forth in each respective lease agreement.

34

(2) Lease acquisition and modification costs are being amortized over the respective lease terms.

(3) Deferred gains of $34.5 million and lease concessions of $2.6 million are being recognized in the Company’s
Consolidated Statements of Operations and Comprehensive Loss as a reduction in facility lease expense over
the respective initial lease term. Lease concessions of $0.6 million relate to the transaction with HCP on
May 31, 2006, and $2.0 million relate to the transaction with Welltower on September 10, 2010.

(4) Effective June 17, 2015, the Company executed amendments to the master lease agreements with Ventas to
facilitate leasehold improvements for 10 of the leased communities, of which the underlying real estate asso-
ciated with four of its operating leases was acquired by the Company upon closing the Four Property Lease
Transaction on January 31, 2017, and extend the lease terms through September 30, 2025, with two five-year
renewal extensions available at the Company’s option.

(5) On November 11, 2013, the Company executed an amendment to the master lease agreement associated with
nine of its leased communities with HCP to facilitate leasehold improvements for one of the leased commun-
ities and extend the respective lease terms through October 31, 2020, with two 10-year renewal extensions
available at the Company’s option.

(6) On April 24, 2015, the Company exercised its right to extend the lease terms with HCP through April 30,

2026, with one 10-year renewal extension remaining available at the Company’s option.

Facility lease expense in the Company’s Consolidated Statements of Operations and Comprehensive Loss
includes rent expense plus amortization expense relating to leasehold acquisition costs offset by the amortization
of deferred gains and lease incentives. There are various financial covenants and other restrictions in the Compa-
ny’s lease agreements. The Company was in compliance with all of its lease covenants at December 31, 2018 and
2017.

Debt Transactions

On December 18, 2018, the Company repaid certain mortgage loans associated with 21 of its senior living
communities totaling approximately $170.6 million from Fannie Mae which were scheduled to mature on various
dates beginning August 2021 through April 2026. The repayment of these mortgage loans facilitated the
establishment of a MCF with Berkadia whereby the Company obtained approximately $201.0 million of new
mortgage financing. The MCF will allow the Company to make future advances, should the Company decide to
do so, assuming certain borrowing conditions are satisfied. The MCF consists of two separate loans which are
cross-defaulted and cross-collateralized. Approximately $150.8 million of the new financing is long-term fixed
interest rate debt at a fixed interest rate of 5.13% with a 10-year term and interest only for the first 36 months and
the principal amortized over a 30-year term thereafter. Approximately $50.3 million of the new financing is long-
term variable interest rate debt at a variable interest rate of LIBOR plus 2.14% with a 10-year term and interest
only for the first 36 months and a fixed monthly principal component of $67,000 thereafter. The Company
incurred approximately $3.0 million in deferred financing costs related to the MCF, which are being amortized
over 10 years. As a result of the early repayment of the Fannie Mae mortgage debt, the Company accelerated the
amortization of approximately $1.5 million in unamortized deferred financing costs and incurred prepayment
premiums of approximately $11.1 million.

On December 18, 2018, the Company completed mortgage financing of $3.5 million from Berkadia at a
variable interest rate of LIBOR plus 3.75% on one community located in Kokomo, Indiana. The mortgage loan is
interest-only and has an 18-month term maturing in July 2020.

On December 1, 2018, the Company renewed certain insurance policies and entered into a finance agree-
ment totaling approximately $0.8 million. The finance agreement has a fixed interest rate of 4.40% with the prin-
cipal being repaid over an 11-month term.

On November 30, 2018, the Company completed supplemental mortgage financing of approximately
$1.8 million from Fannie Mae at a fixed interest rate of 6.30% on one community located in Mesquite, Texas.
The supplemental mortgage loan is coterminous, cross-collateralized and cross-defaulted with the original exist-
ing mortgage debt maturing in July 2024.

35

Effective June 29, 2018, the Company extended its mortgage loan with Berkadia on one of its senior living
communities located in Canton, Ohio. The maturity date was extended to October 10, 2021 with an initial varia-
ble interest rate of LIBOR plus 5.0% with principal amortized over 25 years.

Effective May 31, 2018, the Company renewed certain insurance policies and entered into a finance agree-
ment totaling approximately $1.7 million. The finance agreement has a fixed interest rate of 3.64% with the prin-
cipal being repaid over an 11-month term.

The Company issued standby letters of credit with Wells Fargo Bank (“Wells Fargo”), totaling approx-
imately $3.4 million, for the benefit of Hartford Financial Services (“Hartford”) associated with the admin-
istration of workers compensation which remain outstanding as of December 31, 2018.

The Company issued standby letters of credit with JPMorgan Chase Bank (“Chase”), totaling approximately
$6.7 million, for the benefit of Welltower, on certain leases between Welltower and the Company which remain
outstanding as of December 31, 2018.

The Company issued standby letters of credit with Chase, totaling approximately $2.9 million, for the bene-
fit of HCP on certain leases between HCP and the Company which remain outstanding as of December 31, 2018.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the amounts reported in the
accompanying financial statements and related notes. Management bases its estimates and assumptions on histor-
ical experience, observance of industry trends and various other sources of information and factors, the results of
which form the basis for making judgments about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from these estimates. Critical accounting policies are
defined as those that are reflective of significant judgments and uncertainties, and potentially could result in
materially different results under different assumptions and conditions. The Company believes the following are
our most critical accounting policies and/or typically require management’s most difficult, subjective and com-
plex judgments.

Revenue Recognition

Resident revenue consists of fees for basic housing and certain support services and fees associated with
additional housing and expanded support requirements such as assisted living care, memory care, and ancillary
services. Basic housing and certain support services revenue is recorded when services are rendered and amounts
billed are due from residents in the period in which the rental and other services are provided. Residency agree-
ments are generally short term in nature with durations of one year or less and are typically terminable by either
party, under certain circumstances, upon providing 30 days’ notice, unless state law provides otherwise, with
resident fees billed monthly in advance. Revenue for certain ancillary services is recognized as services are pro-
vided, and includes fees for services such as medication management, daily living activities, beautician/barber,
laundry, television, guest meals, pets, and parking which are generally billed monthly in arrears.

The Company’s senior housing communities have residency agreements which generally require the resi-
dent to pay a community fee prior to moving into the community and are recorded initially by the Company as
deferred revenue. The deferred amounts are amortized over the respective residents’ initial lease term which is
consistent with the contractual obligation associated with the estimated stay of the resident.

Revenues from the Medicaid program accounted for approximately 5.4% of the Company’s revenue in fis-
cal 2018, 5.6% of the Company’s revenue in fiscal 2017, and 5.5% of the Company’s revenue in fiscal 2016.
During fiscal 2018, 2017, and 2016, 40, 41, and 40, respectively, of the Company’s communities were providers
of services under Medicaid programs. Accordingly, these communities were entitled to reimbursement under the
foregoing program at established rates that were lower than private pay rates. Patient service revenue for Medic-
aid patients was recorded at the reimbursement rates as the rates were set prospectively by the applicable state
upon the filing of an annual cost report. None of the Company’s communities were providers of services under
the Medicare program during fiscal 2018, 2017, or 2016.

36

Laws and regulations governing the Medicaid program are complex and subject to interpretation. The
Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pend-
ing or threatened investigations involving allegations of potential wrongdoing. While no such regulatory
inquiries have been made, compliance with such laws and regulations can be subject to future government review
and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the
Medicaid program.

Purchase Accounting

In determining the allocation of the purchase price of senior housing communities acquired to net tangible
and identified intangible assets acquired and liabilities assumed, if any, the Company makes estimates of fair
value using information obtained as a result of pre-acquisition due diligence,
leasing activities and/or
independent appraisals. The Company assigns the purchase price for senior living communities to assets acquired
and liabilities assumed based on their estimated fair values. The determination of fair value involves the use of
significant judgments and estimates which is generally assessed as follows:

The Company allocates the fair values of buildings acquired on an as-if-vacant basis and depreciates the
building values over the estimated remaining lives of the buildings, not to exceed 40 years. The Company
determines the allocated values of other fixed assets, such as site improvements and furniture, fixtures and
equipment, based upon the replacement cost and depreciates such values over the assets’ estimated remaining
useful lives as determined at the acquisition date. The Company determines the value of land by considering the
sales prices of similar properties in recent transactions.

The fair value of acquired lease-related intangibles reflects the estimated fair value of existing resident
in-place leases as represented by the cost to obtain residents and an estimated absorption period to reflect the
value of the rent and recovery costs foregone during a reasonable lease-up period as if the property acquired was
vacant. The Company amortizes any acquired resident in-place lease intangibles to depreciation and amortization
expense over the estimated remaining useful life of the respective resident operating leases.

Credit Risk and Allowance for Doubtful Accounts

The Company’s resident receivables are generally due within 30 days from the date billed. Accounts receiv-
able are reported net of an allowance for doubtful accounts of $6.8 million and $4.9 million at December 31,
2018 and 2017, respectively, and represent the Company’s estimate of the amount that ultimately will be col-
lected. The adequacy of the Company’s allowance for doubtful accounts is reviewed on an ongoing basis, using
historical payment trends, write-off experience, analyses of receivable portfolios by payor source and aging of
receivables, as well as a review of specific accounts, and adjustments are made to the allowance as necessary.
Credit losses on resident receivables have historically been within management’s estimates, and management
believes that the allowance for doubtful accounts adequately provides for expected losses.

Off-Balance Sheet Arrangements

The Company had no material off-balance sheet arrangements at December 31, 2018.

Lease Accounting

The Company determines whether to account for its leases as operating, capital or financing leases depend-
ing on the underlying terms of each lease agreement. This determination of classification requires significant
judgment relating to certain information, including the estimated fair value and remaining economic life of the
community, the Company’s cost of funds, minimum lease payments and other lease terms. The lease rates under
the Company’s lease agreements are subject to certain conditional escalation clauses which are recognized when
probable or incurred and are based on changes in the consumer price index or certain operational performance
measures. As of December 31, 2018 and 2017, the Company leased 46 communities, two of which the Company
classified as capital lease and financing obligations with the remaining classified as operating leases. The Com-
pany incurs lease acquisition costs and amortizes these costs over the term of the respective lease agreement.
Certain leases entered into by the Company qualified as sale/leaseback transactions, and as such, any related

37

gains have been deferred and are being amortized over the respective lease term. No new communities were
leased by the Company during fiscal 2018 or 2017. Effective January 31, 2017, the Company acquired from
Ventas the underlying real estate associated with four of its operating leases. For additional information refer to
Note 3, “Acquisitions”, within the notes to consolidated financial statements.

Facility lease expense in the Company’s Consolidated Statements of Operations and Comprehensive loss
includes rent expense plus amortization expense relating to leasehold acquisition costs offset by the amortization
of deferred gains and lease incentives.

Employee Health and Dental Benefits, Workers’ Compensation, and Insurance Reserves

The Company offers full-time employees an option to participate in its health and dental plans. The Com-
pany is self-insured up to certain limits and is insured if claims in excess of these limits are incurred. The cost of
employee health and dental benefits, net of employee contributions, is shared between the corporate office and
the senior housing communities based on the respective number of plan participants. Funds collected are used to
pay the actual program costs including estimated annual claims, third-party administrative fees, network provider
fees, communication costs, and other related administrative costs incurred by the plans. Claims are paid as they
are submitted to the Company’s third-party administrator. The Company records a liability for outstanding
claims and claims that have been incurred but not yet reported. This liability is based on the historical claim
reporting lag and payment trends of health insurance claims. Management believes that the liability for out-
standing losses and expenses is adequate to cover the ultimate cost of losses and expenses incurred at
December 31, 2018; however, actual claims and expenses may differ. Any subsequent changes in estimates are
recorded in the period in which they are determined.

The Company uses a combination of insurance and self-insurance for workers’ compensation. Determining
the reserve for workers’ compensation losses and costs that the Company has incurred as of the end of a reporting
period involves significant judgments based on projected future events, including potential settlements for pend-
ing claims, known incidents which may result in claims, estimates of incurred but not yet reported claims,
changes in insurance premiums, estimated litigation costs and other factors. The Company regularly adjusts these
estimates to reflect changes in the foregoing factors. However, since this reserve is based on estimates, the actual
expenses incurred may differ from the amounts reserved. Any subsequent changes in estimates are recorded in
the period in which they are determined.

Long-Lived Assets

Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful
lives of the assets. At each balance sheet date, the Company reviews the carrying value of its property and
equipment to determine if facts and circumstances suggest that they may be impaired or that the depreciation
period may need to be changed. The Company considers internal factors such as net operating losses along with
external factors relating to each asset, including contract changes, local market developments, and other publicly
available information. If an indicator of impairment is identified, the carrying value of a long-lived asset is con-
sidered impaired when the anticipated undiscounted cash flows from such asset is separately identifiable and is
less than its carrying value. In that event, a loss is recognized based on the amount the carrying value exceeds the
fair market value, generally based on discounted cash flows, of the long-lived asset. For property and equipment
where indicators of impairment were identified, tests of recoverability were performed and the Company has
concluded its property and equipment is recoverable and does not warrant adjustment to the carrying value or
remaining useful lives as of December 31, 2018. The Company does not believe there were any indicators of
impairment that would require an adjustment to the carrying value of the property and equipment or their remain-
ing useful lives as of December 31, 2017.

Income Taxes

Income taxes are computed using the asset and liability method and current income taxes are recorded based
on amounts refundable or payable. Deferred income taxes are recorded based on the estimated future tax effects
of loss carryforwards and temporary differences between financial statement carrying amounts of existing assets

38

and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax
rates that are expected to apply to taxable income in the years in which we expect those carryforwards and
temporary differences to be recovered or settled. Management regularly evaluates the future realization of
deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. As part
of the evaluation, management has evaluated taxable income in carryback years, future reversals of taxable
temporary differences, feasible tax planning strategies, and future expectations of income. Based upon this
evaluation, a valuation allowance has been recorded to reduce the Company’s net deferred tax assets to the
amount that is more likely than not to be realized. However, in the event that we were to determine that it would
be more likely than not that the Company would realize the benefit of deferred tax assets in the future in excess
of their net recorded amounts, adjustments to deferred tax assets would increase net income in the period we
made such a determination. The benefits of the net deferred tax assets might not be realized if actual results differ
from expectations. The effective tax rates for fiscal 2018 and 2017 differ from the statutory tax rates due to state
income taxes, permanent tax differences, and changes in the deferred tax asset valuation allowance. The Com-
pany is impacted by the Texas Margin Tax (“TMT”), which effectively imposes tax on modified gross revenues
for communities within the State of Texas. During each of fiscal 2018 and 2017, the Company consolidated 38
Texas communities and the TMT increased the overall provision for income taxes.

The Company evaluates uncertain tax positions through consideration of accounting and reporting guidance
on criteria, measurement, derecognition, classification, interest and penalties, accounting in interim periods, dis-
closure, and transition that is intended to provide better financial-statement comparability among different
companies. The Company is required to recognize a tax benefit in its financial statements for an uncertain tax
position only if management’s assessment is that its position is “more likely than not” (i.e., a greater than
50 percent likelihood) to be upheld on audit based only on the technical merits of the tax position. The Compa-
ny’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as
income tax expense. The Company is generally no longer subject to federal and state income tax audits for years
prior to 2015.

Recently Issued Accounting Guidance

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2017-01, Business Combinations – Clarifying the Definition of a Business. ASU 2017-01 provides
guidance in accounting for business combinations when determining if the transaction represents acquisitions or
disposals of assets or of a business. Under ASU 2017-01, when determining whether an integrated set of assets
and activities constitutes a business, entities must compare the fair value of gross assets acquired to the fair value
of a single identifiable asset or group of similar identifiable assets. If substantially all of the fair value of the
gross assets acquired (or disposed of) is concentrated in the single identifiable assets or group of similar identifi-
able assets, the integrated set of assets and activities is not characterized as a business. ASU 2017-01 is applied
prospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within
those fiscal years. The Company adopted the provisions of ASU 2017-01 on January 1, 2018 and beginning from
the date of adoption will apply the accounting guidance provided to the Company’s acquisition activities. Man-
agement expects the adoption to require the accounting for acquisitions of senior housing communities to be
reflected as acquisitions of assets rather than as a business combination; however, management does not expect
the adoption of ASU 2017-01 to have a material impact on the Company’s financial position, results of oper-
ations or cash flows.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
(a consensus of the FASB Emerging Issues Task Force). ASU 2016-18 requires an entity to include in its cash
and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash
and restricted cash equivalents. ASU 2016-18 is effective for interim and annual reporting periods beginning
after December 15, 2017 and should be applied on a retrospective basis. The Company adopted the provisions of
ASU 2016-18 on January 1, 2018 and the adoption resulted in the Company no longer reporting changes in
restricted cash balances in the Consolidated Statements of Cash Flows within net cash flows (used in) provided
by financing activities which did not have a material impact on the Company’s cash flows.

39

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash
Payments. ASU 2016-15 amends the guidance in Accounting Standards Codification (“ASC”) 230, which often
requires judgment to determine the appropriate classification of cash flows as operating, investing or financing
activities and has resulted in diversity in practice in how certain cash receipts and cash payments are classified.
ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017 and
should be applied on a retrospective basis. The Company adopted the provisions of ASU 2016-15 on January 1,
2018 and the adoption did not have a material impact on the Company’s cash flows.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses: Measurement of
Credit Losses on Financial Instruments. Current U.S. generally accepted accounting principles (GAAP) require
an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has
been incurred. ASU 2016-13 replaces the current incurred loss methodology for credit losses and removes the
thresholds that companies apply to measure credit losses on financial statements measured at amortized cost,
such as loans, receivables, and held-to-maturity debt securities with a methodology that reflects expected credit
losses and requires consideration of a broader range of reasonable and supportable information to form credit loss
estimates. ASU 2016-13 is effective for fiscal years and for interim periods within those fiscal years beginning
after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The
Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial
statements and disclosures.

in July 2018,

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 amends the existing accounting
standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and
making targeted changes to lessor accounting. The new lease standard requires lessees to recognize on the bal-
ance sheet a liability to make lease payments and a right-of-use asset representing the right to use the underlying
the FASB issued ASU 2018-11, Leases, Targeted
asset for the lease term. Additionally,
Improvements, which provided entities with a transition method option to not restate comparative periods pre-
sented, but to recognize a cumulative effect adjustment to beginning retained earnings in the period of adoption.
The FASB retained a dual model for lease classification, requiring leases to be classified as finance or operating
leases to determine recognition in the statements of operations and cash flows; however, substantially all leases
will be required to be recognized on the balance sheet. The standards update will also require quantitative and
qualitative disclosures regarding key information about leasing arrangements and provides a modified retro-
spective transition approach for all leases existing at, or entered into after, the date of initial application, with an
option to use certain transition relief. The Company expects to utilize certain practical expedients that, upon
adoption, allows entities to (1) not reassess whether any expired or existing contracts are or contain leases,
(2) retain the classification of leases (e.g., operating or finance lease) existing as of the date of adoption, (3) not
reassess initial direct costs for any existing leases, and (4) not record a right-of-use asset and related lease
liability for leases with an initial lease term of 12 months or less. The Company is in the final stages of evaluat-
ing its existing lease portfolio, including accumulating all of the necessary information required to properly
account for leases under the new accounting guidance, and believes the most significant impact relates to its
accounting for real estate leases. The Company plans to elect a transition option which allows for the recognition
of a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption without
recasting the financial statements in periods prior to adoption. At adoption, the Company expects to recognize a
material increase in assets and liabilities on its Consolidated Balance Sheet resulting from the recognition of
lease liabilities initially measured at the present value of its future operating lease payments and the related right
of use assets. The Company has concluded that the previously unrecognized right of use assets will be reviewed
for impairment which could result in a reduction to the initially recognized right of use assets and a cumulative
effect adjustment to beginning retained earnings as of January 1, 2019. The Company continues to evaluate the
impacts of adopting ASU 2016-02 on its financial position, results of operations, and cash flows, and is updating
its systems, processes, and internal controls to meet the new reporting and disclosure requirements. The adoption
of this standard will have no impact on the Company’s covenant compliance under its current debt and lease
agreements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU
2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters

40

into contracts for the transfer of nonfinancial assets. Under ASU 2014-09, an entity will recognize revenue when
it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the
goods or services. ASU 2014-09 is effective for annual periods beginning after December 15, 2017. The Com-
pany adopted the provisions of ASU 2014-09 on January 1, 2018 under the modified retrospective approach.
Under the modified retrospective approach, the guidance is applied to the most current period presented,
recognizing the cumulative effect of the adoption to beginning retained earnings. The Company has determined
that the adoption of ASU 2014-09 did not result in an adjustment to beginning retained earnings and did not
result in significant changes to the amount and/or timing of revenue reported within the Company’s consolidated
financial statements; however, ASU 2014-09 requires enhanced disclosures related to the nature, amount, timing
and uncertainty of revenue arrangements. Additionally, our contracts with residents are generally short term in
nature and revenue is recognized when services are provided; as such, ASU 2014-09 provides an entity need not
disclose information related to performance obligations when the performance obligation is part of a contract that
has an original expected duration of one year or less.

Results of Operations

The following tables set forth, for the periods indicated, selected historical Consolidated Statements of
Operations and Comprehensive Loss data in thousands of dollars and expressed as a percentage of total revenues.

Revenues:

Resident revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$460,018

100.0% $466,997

100.0% $447,448

100.0%

Year Ended December 31,

2018

2017

2016

$

%

$

%

$

%

Expenses:

Operating expenses (exclusive of facility lease expense
and depreciation and amortization expense shown
below) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . .
Facility lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on facility lease termination . . . . . . . . . . . . . . . . . .
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . . . . . . . . .

294,661
26,961
56,551
—
2,990
8,428
62,824

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

452,415

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):

7,603

64.1
5.9
12.3
—
0.7
1.6
13.7

98.3

1.7

290,662
23,574
56,432
12,858
1,748
7,682
66,199

459,155

7,842

62.2
5.0
12.1
2.8
0.4
1.6
14.2

98.3

1.7

273,899
23,671
61,718
—
1,727
11,645
60,398

433,058

14,390

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of deferred loan costs and prepayment
. . . . . .
premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (Loss) on disposition of assets, net . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

165
(50,543)

0.0
(11.0)

73
(49,471)

0.0
(10.6)

67
(42,207)

(12,623)
28
3

(2.7)
0.0
0.0

—
(123)
7

—
(0.0)
0.0

(8.9)
(0.5)

—
(65)
233

(27,582)
(435)

Loss before benefit (provision) for income taxes . . . . . . . .
Benefit (Provision) for income taxes . . . . . . . . . . . . . . . . . .

(55,367)
1,771

(12.0)
0.4

(41,672)
(2,496)

Net loss and comprehensive loss . . . . . . . . . . . . . . . . . . . . .

$ (53,596)

(11.6)%$ (44,168)

(9.4)%$ (28,017)

(6.3)%

41

61.2
5.3
13.8
—
0.4
2.6
13.5

96.8

3.2

0.0
(9.4)

—
(0.0)
0.0

(6.2)
(0.1)

Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017

Revenues

Resident revenue was $460.0 million for the year ended December 31, 2018, compared to $467.0 million for
the year ended December 31, 2017, representing a decrease of $7.0 million, or 1.5%. The decrease in resident
revenue primarily results from the negative impacts of Hurricane Harvey, which resulted in the full evacuation of
our residents at two of our senior housing communities located in southeast Texas during the third quarter of
fiscal 2017. Although these communities reopened and began accepting residents in July 2018, unoccupied units
at these communities resulted in a decrease of approximately $4.6 million in our resident revenue during fiscal
2018 when compared to fiscal 2017. Additionally, we experienced a decrease in resident revenue at our other
remaining senior housing communities of $2.4 million primarily due to a 1.6% decrease in average financial
occupancies.

Expenses

Total expenses were $452.4 million during fiscal 2018 compared to $459.2 million during fiscal 2017, repre-
senting a decrease of $6.7 million, or 1.5%. This decrease is primarily the result of a $12.9 million loss on
facility lease termination incurred by the Company in the first quarter of fiscal 2017 and a $3.4 million decrease
in depreciation and amortization expense, partially offset by a $4.0 million increase in operating expenses, a
$3.4 million increase in general and administrative expenses, a $1.2 million increase in provision for bad debts, a
$0.7 million increase in stock-based compensation expense, and a $0.1 million increase in facility lease costs.

• The $12.9 million loss on facility lease termination is due to the Four Property Lease Transaction that
closed on January 31, 2017, whereby the Company acquired the underlying real estate associated with
four of the senior housing communities previously leased from Ventas. For additional information refer to
Note 3, “Acquisitions”, within the notes to unaudited consolidated financial statements.

• The decrease in depreciation and amortization expense primarily results from a decrease in in-place lease
amortization of $7.6 million from senior housing communities acquired by the Company prior to fiscal
2017, partially offset by an increase of $4.3 million from a full year of activity for senior housing com-
munities acquired by the Company during the first quarter of fiscal 2017 and due to an increase in
depreciable assets from ongoing capital improvements and refurbishments at the Company’s commun-
ities.

• The increase in operating expenses primarily results from an increase of $4.3 million due to increased
wages and benefits to employees for annual merit increases and incremental costs, including increased
labor costs for additional staffing required for newly licensed memory care and assisted living units, to
support changes in occupancy with more of our residents at higher levels of care, an increase of
$1.0 million in property taxes and insurance, an increase of $0.9 million in promotion and marketing
costs, an increase of $0.8 million in utilities costs, an increase of $0.7 million for information systems
maintenance and support costs, and an overall increase of $0.8 million in general operating expenses
primarily for repairs and maintenance, medical supplies and resident services, partially offset by an
increase of $2.9 million for insurance proceeds the Company received to cover Business Interruption
during fiscal 2018, for units unoccupied during the period at the two communities located in southeast
Texas which were impacted by Hurricane Harvey and a $1.6 million reduction in food costs primarily due
to the Company’s recent procurement initiatives to streamline and automate purchasing and spend opti-
mization.

• The increase in general and administrative expenses primarily results from an increase of $4.2 million due
to separation and placement costs primarily associated with the retirement and replacement of the
Company’s CEO during the fourth quarter, an increase of $2.1 million in general operating costs primar-
ily attributable to increases in employee wages and benefits for annual merit increases and additional
employees hired during or subsequent to fiscal 2017, and an increase of $0.5 million for employee benefit
reserve adjustments, and an increase of $0.3 million related to ongoing renovation and conversion activ-
ities at our communities, partially offset by a net reduction of $2.1 million in employee insurance benefits

42

and claims paid, which resulted in lower health insurance costs to the Company, and a decrease of
$1.6 million due to lower amounts accrued for employee incentive compensation.

• The increase in stock-based compensation expense results from the Company granting a larger number of
shares of restricted stock to certain employees and directors of the Company during fiscal 2018, some of
which required accelerated expense recognition, when compared to fiscal 2017.

Other income and expense.

• Interest income generally reflects interest earned on the investment of cash balances and escrowed funds

or interest associated with certain income tax refunds or property tax settlements.

• Interest expense increased $1.1 million in fiscal 2018 when compared to fiscal 2017 primarily due to a
full year of interest from the additional mortgage debt associated with the Four Property Lease Trans-
action that closed on January 31, 2017, whereby the Company acquired the underlying real estate asso-
ciated with four of the senior housing communities previously leased from Ventas, and due to additional
mortgage debt associated with certain supplemental loans obtained by the Company during fiscal 2018
and 2017.

• Write-off of deferred loan costs and prepayment premiums is attributable to the early repayment of certain
mortgage debt on the Company’s owned properties due to the opportunity to establish a MCF with
Berkadia and extend scheduled maturities.

Benefit (Provision) for income taxes

Benefit for income taxes for fiscal 2018 was $1.8 million, or 3.2% of loss before income taxes, compared to
a provision for income taxes of $2.5 million, or 6.0% of loss before income taxes, for fiscal 2017. The effective
tax rates for fiscal 2018 and 2017 differ from the statutory tax rates due to state income taxes, permanent tax
differences, and changes in the deferred tax asset valuation allowance. The Company is impacted by the TMT,
which effectively imposes tax on modified gross revenues for communities within the State of Texas. During
each of fiscal 2018 and 2017, the Company consolidated 38 Texas communities and the TMT increased the
overall provision for income taxes. The variation in benefit (provision) for income taxes was attributable to
slightly lower state income taxes and final remeasurement adjustments from recent tax legislation changes asso-
ciated with the Tax Cuts and Jobs Act (“TCJA”), which was enacted on December 22, 2017.

Management regularly evaluates the future realization of deferred tax assets and provides a valuation allow-
ance, if considered necessary, based on such evaluation. As part of the evaluation, management has evaluated
taxable income in carryback years, future reversals of taxable temporary differences, feasible tax planning strat-
egies, and future expectations of income. Based upon this evaluation, adjustments to the deferred tax asset valu-
ation allowance of $9.5 million and $5.9 million were recorded during fiscal 2018 and 2017, respectively, to
reduce the Company’s net deferred tax assets to the amount that is more likely than not to be realized.

Net loss and comprehensive loss

As a result of the foregoing factors, the Company reported net loss and comprehensive loss of $(53.6 mil-
lion) for the fiscal year ended December 31, 2018 and net loss and comprehensive loss of $(44.2 million) for the
fiscal year ended December 31, 2017.

Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016

Revenues

Resident revenue was $467.0 million for the year ended December 31, 2017, compared to $447.4 million for
the year ended December 31, 2016, representing an increase of $19.5 million, or 4.4%. The increase in resident
revenue primarily results from an increase of $15.3 million from a full year of activity for the senior housing
communities acquired by the Company during fiscal 2016 and an increase of $4.3 million due to a 2.8% increase

43

in average monthly rental rates at the Company’s same-store communities which was primarily the result of
annual rent increases for our existing residents and recent capital improvements we have invested in our
communities for unit conversions which enable us to provide a broader range of senior living services at higher
levels of care. The increase in resident revenue at our same-store communities was negatively impacted by
Hurricane Harvey which resulted in the full evacuation of our residents at two of our communities located in
southeast Texas. Both of these communities were undergoing repairs and remained fully vacated at December 31,
2017, which resulted in a decrease in our same-store resident revenue of approximately $3.5 million.

Expenses

Total expenses were $459.2 million during fiscal 2017 compared to $433.1 million during fiscal 2016, repre-
senting an increase of $26.1 million, or 6.0%. This increase is primarily the result of a $16.8 million increase in
operating expenses, a $12.9 million loss on facility lease termination, and a $5.8 million increase in depreciation
and amortization expense, slightly offset by a $5.3 million decrease in facility lease expense and a $4.0 million
decrease in stock-based compensation expense.

• The increase in operating expenses primarily results from an increase of $11.6 million from a full year of
activity for the senior housing communities acquired by the Company during fiscal 2016 and an increase
of $5.2 million at the Company’s same-store communities primarily due to increased wages and benefits
to employees for annual merit increases and incremental costs, including increased labor costs for addi-
tional staffing required for newly licensed memory care and assisted living units, to support changes in
occupancy with more of our residents at higher levels of care. The increase in operating expenses at our
same-store communities included a reduction of $2.2 million for insurance proceeds the Company
received to cover Business Interruption through December 31, 2017, for the period the two communities
located in southeast Texas were unoccupied due to Hurricane Harvey.

• The $12.9 million loss on facility lease termination is due to the Four Property Lease Transaction that
closed on January 31, 2017, whereby the Company acquired the underlying real estate associated with
four of the senior housing communities previously leased from Ventas. For additional information, refer
to Note 3, “Acquisitions”, within the notes to consolidated financial statements.

• The increase in depreciation and amortization expense primarily results from an increase of $3.4 million
from a full year of activity for the senior housing communities acquired by the Company during fiscal
2016 and an increase of $8.7 million due to an increase in depreciable assets at the Company’s same-store
communities, partially offset by a decrease in in-place lease amortization of $6.3 million from senior
housing communities acquired by the Company prior to fiscal 2016.

• The decrease in facility lease expense primarily results from the Four Property Lease Transaction that

closed on January 31, 2017.

• The decrease in stock-based compensation expense results from the accelerated vesting of restricted stock
awards for severance benefits associated with the passing of the Company’s Chief Operating Officer in
the fourth quarter of fiscal 2016, the Company granting fewer shares of restricted stock to certain
employees of the Company during fiscal 2017.

Other income and expense

• Interest income generally reflects interest earned on the investment of cash balances and escrowed funds

or interest associated with certain income tax refunds or property tax settlements.

• Interest expense increased $7.3 million in fiscal 2017 when compared to fiscal 2016 primarily due to an
increase of $2.0 million from a full year of activity for the additional mortgage debt associated with the
senior housing communities acquired by the Company during fiscal 2016 and an increase of $5.2 million
at the Company’s same-store communities due to the Four Property Lease Transaction that closed on
January 31, 2017, additional mortgage debt for supplemental loans obtained by the Company during fiscal
2017, and a full year of activity for certain refinancings and supplemental loans obtained by the Company
during fiscal 2016.

44

• Other income in fiscal 2016 represents payments received by the Company associated with certain legal

settlements.

Provision for income taxes

Provision for income taxes for fiscal 2017 was $2.5 million, or 6.0% of loss before income taxes, compared
to a provision for income taxes of $0.4 million, or 1.6% of loss before income taxes, for fiscal 2016. The effec-
tive tax rates for fiscal 2017 and 2016 differ from the statutory tax rates due to state income taxes, permanent tax
differences, and changes in the deferred tax asset valuation allowance. The Company is impacted by the Texas
Margin Tax (“TMT”), which effectively imposes tax on modified gross revenues for communities within the
State of Texas. During each of fiscal 2017 and 2016, the Company consolidated 38 Texas communities and the
TMT increased the overall provision for income taxes. The increase in provision for income taxes for fiscal 2017
was attributable to an increase of $0.2 million for higher state income taxes with the remaining $1.9 million due
to recent tax legislation changes associated with the TCJA.

Management regularly evaluates the future realization of deferred tax assets and provides a valuation allow-
ance, if considered necessary, based on such evaluation. As part of the evaluation, management has evaluated
taxable income in carryback years, future reversals of taxable temporary differences, feasible tax planning strat-
egies, and future expectations of income. Based upon this evaluation, adjustments to the deferred tax asset valu-
ation allowance of $5.9 million and $8.6 million were recorded during fiscal 2017 and 2016, respectively, to
reduce the Company’s net deferred tax assets to the amount that is more likely than not to be realized.

Net loss and comprehensive loss

As a result of the foregoing factors, the Company reported net loss and comprehensive loss of $(44.2 mil-
lion) for the fiscal year ended December 31, 2017, compared to net loss and comprehensive loss of $(28.0 mil-
lion) for the fiscal year ended December 31, 2016.

Quarterly Results

The following table presents certain unaudited quarterly financial information for each of the four quarters
ended December 31, 2018 and 2017. This information has been prepared on the same basis as the audited con-
solidated financial statements of the Company appearing elsewhere in this report and include, in the opinion of
the Company’s management, all adjustments (consisting of normal recurring adjustments) necessary to present
fairly the quarterly results when read in conjunction with the audited consolidated financial statements of the
Company and the related notes thereto.

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (Loss) from operations . . . . . . . . . . . . . . . .
Net loss and comprehensive loss . . . . . . . . . . . . . . .
Net loss per share, basic . . . . . . . . . . . . . . . . . . . . .
Net loss per share, diluted . . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding, basic . . . . . .
Weighted average shares outstanding, fully

2018 Calendar Quarters

First

Second

Third

Fourth (1)

(In thousands, except per share amounts)

$114,643
5,386
(7,156)
(0.24)
(0.24)
29,627

$
$

$114,627
3,643
(9,060)
(0.30)
(0.30)
29,831

$
$

$115,650
1,696
(11,089)
(0.37)
(0.37)
29,877

$
$

$115,098
(3,122)
(26,291)
(0.88)
(0.88)
29,908

$
$

diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29,627

29,831

29,877

29,908

(1) The fourth quarter of calendar 2018 was impacted by $4.2 million of additional general and administrative
expenses for separation and placement costs primarily associated with the retirement and replacement of the
Company’s CEO and $12.6 million for write-off of deferred loan costs and prepayment premiums from the
early repayment of certain mortgage debt on the Company’s owned properties due to the opportunity to
establish a MCF with Berkadia and extend scheduled maturities.

45

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) Income from operations . . . . . . . . . . . . . . . .
Net loss and comprehensive loss . . . . . . . . . . . . . . .
Net loss per share, basic . . . . . . . . . . . . . . . . . . . . .
Net loss per share, diluted . . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding, basic . . . . . .
Weighted average shares outstanding, fully

2017 Calendar Quarters

First

Second

Third

Fourth

(In thousands, except per share amounts)

$115,990
(9,610)
(21,842)
(0.75)
(0.75)
29,288

$
$

$116,718
4,691
(7,835)
(0.27)
(0.27)
29,478

$
$

$117,318
4,513
(8,132)
(0.28)
(0.28)
29,512

$
$

$116,971
8,248
(6,359)
(0.22)
(0.22)
29,531

$
$

diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29,288

29,478

29,512

29,531

Liquidity and Capital Resources

In addition to approximately $31.3 million of unrestricted cash balances on hand as of December 31, 2018,
the Company’s principal sources of liquidity are expected to be cash flows from operations, supplemental debt
financings, additional proceeds from debt refinancings, equity issuances, and/or proceeds from the sale of assets.
The Company expects its available cash and cash flows from operations, supplemental debt financings, addi-
tional proceeds from debt refinancings, and proceeds from the sale of assets to be sufficient to fund its short-term
working capital requirements. The Company’s long-term capital requirements, primarily for acquisitions and
other corporate initiatives, could be dependent on its ability to access additional funds through joint ventures and
the debt and/or equity markets. The Company from time to time considers and evaluates transactions related to
its portfolio including supplemental debt financings, debt refinancings, equity issuances, purchases and sales of
assets, reorganizations and other transactions. There can be no assurance that the Company will continue to gen-
erate cash flows at or above current levels or that the Company will be able to obtain the capital necessary to
meet the Company’s short and long-term capital requirements.

Changes in the current economic environment could result in decreases in the fair value of assets, slowing of
transactions, and tightening liquidity and credit markets. These impacts could make securing debt for acquisitions
or refinancings for the Company, its joint ventures, or buyers of the Company’s properties more difficult or on
terms not acceptable to the Company. Additionally, the Company may be more susceptible to being negatively
impacted by operating or performance deficits based on the exposure associated with certain lease coverage
requirements.

In summary, the Company’s cash flows were as follows (in thousands):

Year Ended
December 31,

2018

2017

2016

Net cash provided by operating activities . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . .

$ 36,870
(21,908)
(1,666)

$ 55,594
(124,940)
53,047

$ 52,279
(201,049)
126,847

Increase (Decrease) in cash and cash equivalents . . . . . . . . . . .

$ 13,296

$ (16,299)

$ (21,923)

Operating Activities

The Company had net cash provided by operating activities of $36.9 million, $55.6 million, and
$52.3 million in fiscal 2018, 2017, and 2016, respectively. The net cash provided by operating activities for fiscal
2018 primarily results from net non-cash charges of $87.1 million, a decrease in other assets of $1.4 million, an
increase in accounts payable of $1.3 million, a decrease in tax and insurance deposits of $1.2 million, a decrease
in prepaid expenses of $1.1 million, an increase in accrued expenses of $1.1 million, and an increase in deferred
resident revenue of $0.6 million, partially offset by net loss of $(53.6 million) and an increase in accounts receiv-

46

able of $3.2 million. The net cash provided by operating activities for fiscal 2017 primarily results from net
non-cash charges of $96.0 million, a decrease in other assets of $4.1 million, an increase in other liabilities of
$5.0 million, and an increase in accounts payable of $2.8 million, and in increase in accrued expenses of
$1.7 million, partially offset by net loss of $(44.2 million), an increase in accounts receivable of $8.2 million, and
a decrease in deferred resident revenue of $1.9 million. The net cash provided by operating activities for fiscal
2016 primarily results from net non-cash charges of $82.1 million, an increase in accrued expenses of
$4.8 million and an increase in accounts payable of $1.7 million, partially offset by net loss of $(28.0 million), an
increase in accounts receivable of $2.5 million, an increase in other assets of $2.2 million, an increase in prepaid
expenses of $2.0 million, and a decrease in deferred resident revenue of $1.1 million.

Investing Activities

The Company had net cash used in investing activities of $21.9 million, $124.9 million, and $201.0 million
in fiscal 2018, 2017, and 2016, respectively. The net cash used in investing activities for fiscal 2018 primarily
results from capital expenditures associated with ongoing capital renovations and refurbishments at the Compa-
ny’s senior housing communities. The net cash used in investing activities for fiscal 2017 primarily results from
capital expenditures of $40.0 million associated with ongoing capital renovations and refurbishments at the
Company’s senior housing communities and the acquisition of senior housing communities by the Company of
$85.0 million. The net cash used in investing activities for fiscal 2016 primarily results from capital expenditures
of $62.4 million associated with ongoing capital renovations and refurbishments at the Company’s senior hous-
ing communities and acquisitions of senior housing communities by the Company of $138.8 million.

Financing Activities

The Company had net cash (used in) provided by financing activities of ($1.7 million), $53.0 million, and
$126.8 million in fiscal 2018, 2017, and 2016, respectively. The net cash used in financing activities for fiscal
2018 primarily results from notes payable proceeds of $208.8 million, of which approximately $206.3 million
resulted from mortgage debt refinancings and supplemental mortgage debt financings and the remaining
$2.5 million related to insurance premium financing, partially offset by repayments of notes payable of
$204.1 million, deferred financing charges paid of $3.3 million, and payments on capital lease and financing
obligations of $3.2 million. The net cash provided by financing activities for fiscal 2017 primarily results from
notes payable proceeds of $77.2 million, of which $65.0 million is related to new mortgage debt associated with
the acquisition of senior housing communities by the Company, approximately $7.1 million related to supple-
mental mortgage debt obtained on the Company’s existing owned senior housing communities, and approx-
imately $5.1 million related to insurance premium financing, partially offset by repayments of notes payable of
$20.1 million, payments on capital lease and financing obligations of $2.9 million, and deferred financing
charges paid of $1.2 million associated with the acquisition of senior housing communities by the Company. The
net cash provided by financing activities for fiscal 2016 primarily results from notes payable proceeds of
$150.8 million, of which approximately $101.5 million is related to new mortgage debt associated with the
acquisition of senior housing communities by the Company, approximately $44.4 million related to supplemental
mortgage debt obtained on existing senior housing communities, and approximately $4.9 million related to
insurance premium financing, partially offset by repayments of notes payable of $17.7 million, purchases of
treasury stock of $2.5 million, deferred financing charges paid of $2.5 million, and payments on capital lease and
financing obligations of $1.3 million.

47

Disclosures About Contractual Obligations

The following table provides the amounts due under specified contractual obligations for the periods

indicated as of December 31, 2018 (in thousands):

Less Than
One
Year

One to
Three Years

Three to
Five Years

More Than
Five Years

Total

Long-term debt, including interest expense(1) . . . .
Operating and capital leases(2) . . . . . . . . . . . . . . . .

$ 62,886
66,455

$194,507
116,022

$203,827
104,088

$809,015
97,165

$1,270,235
383,730

Total contractual cash obligations . . . . . . . . . . . . .

$129,341

$310,529

$307,915

$906,180

$1,653,965

(1) Amounts due associated with our variable rate mortgage debt is projected by applying the variable interest

rates effective at December 31, 2018.

(2) Reflects future minimum lease commitments under the Company’s various property and equipment lease

agreements at current rental rates.

Long-term debt relates to the aggregate maturities of the Company’s notes payable. As of December 31,
2018, the Company leases its corporate headquarters in Dallas, 46 senior housing communities and certain
equipment used at the Company’s corporate headquarters and communities.

Impact of Inflation

To date, inflation has not had a significant impact on the Company. However, inflation could affect the
Company’s future revenues and results of operations because of, among other things, the Company’s dependence
on senior residents, many of whom rely primarily on fixed incomes to pay for the Company’s services. As a
result, during inflationary periods, the Company may not be able to increase resident service fees to account fully
for increased operating expenses. In structuring its fees, the Company attempts to anticipate inflation levels, but
there can be no assurance that the Company will be able to anticipate fully or otherwise respond to any future
inflationary pressures.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company’s primary market risk is exposure to changes in interest rates on debt and lease instruments.
As of December 31, 2018, the Company had $983.2 million in outstanding debt comprised of various fixed and
variable interest rate debt instruments of $853.2 million and $130.0 million, respectively. In addition, as of
December 31, 2018, the Company had $382.1 million in future facility lease obligations with contingent rent
increases on certain leases based on changes in the consumer price index or certain operational performance
measures.

Changes in interest rates would affect the fair market value of the Company’s fixed interest rate debt instru-
ments, but would not have an impact on the Company’s earnings or cash flows. Fluctuations in interest rates on
the Company’s variable interest rate debt instruments, which are tied to LIBOR, would affect the Company’s
earnings and cash flows but would not affect the fair market values of the variable interest rate debt. Each
percentage point increase in interest rates would impact the Company’s annual interest expense by approximately
$1.3 million based on the Company’s outstanding variable interest rate debt as of December 31, 2018. Increases
in the consumer price index could have an effect on future facility lease expense if the leased community exceeds
the contingent rent escalation thresholds set forth in each of the Company’s lease agreements.

The following table summarizes information on the Company’s debt

instruments outstanding as of
December 31, 2018. The table presents the principal due and weighted average interest rates by expected
maturity date for the Company’s debt instruments by fiscal year.

48

Principal Amount, which excludes deferred loan costs, and Average Interest Rate by Expected Maturity

Date at December 31, 2018 ($ in thousands):

2019

2020

2021

2022

2023

Thereafter

Total

Fair
Value

Long-term debt:
Fixed rate
debt

. . . . . . . .

Average interest

rate . . . . . . . . . . . . .
Variable rate

debt

. . . . . . . . . .

Average interest

rate . . . . . . . . . . . . .
Total debt . . . .

$15,777

$14,803

$15,564

$53,648

$73,930

$679,470

$853,192

$815,303

4.64%

4.64%

4.65%

4.65%

4.61%

4.61%

273

68,793

10,689

733

800

48,728

130,016

130,016

6.06%

5.15%

4.57%

4.57%

4.57%

4.57%

$983,208

$945,319

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The consolidated financial statements of the Company are included under Item 15 of this Annual Report on

Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE.

The Company had no disagreements on accounting or financial disclosure matters with its independent

accountants to report under this Item 9.

ITEM 9A. CONTROLS AND PROCEDURES.

Effectiveness of Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”)) as of the end of the period covered by this report. The Company’s disclosure
controls and procedures are designed to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to
ensure that such information is accumulated and communicated to the Company’s management, including the
CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Based upon the controls evaluation, the Company’s CEO and CFO have concluded that, as of the end of the

period covered by this report, the Company’s disclosure controls and procedures are effective.

There have not been any changes in the Company’s internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s fiscal quarter ended
December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.

Internal Controls Over Financial Reporting

Management’s Report On Internal Control Over Financial Reporting

Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, is
responsible for establishing and maintaining adequate internal control over financial reporting, as defined in

49

Rules 13a-15(f) under the Exchange Act. The Company’s internal controls were designed to provide reasonable
assurance to the Company’s management and board of directors regarding the preparation and fair presentation
of published financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect mis-
statements. Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework
(2013 framework). Based on our assessment, we believe that, as of December 31, 2018, the Company’s internal
control over financial reporting is effective based on those criteria.

The effectiveness of our internal control over financial reporting as of December 31, 2018, has been audited
by Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial
statements included in this Annual Report on Form 10-K, as stated in their report which is included as part of this
Annual Report on Form 10-K. The Ernst & Young LLP report is on page F-34 of this report.

ITEM 9B. OTHER INFORMATION.

None.

50

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE.*

ITEM 11. EXECUTIVE COMPENSATION.*

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS.*

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE.*

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.*

* Information required by Items 10, 11, 12, 13 and 14 will be set forth in the definitive proxy statement relating
to the 2019 Annual Meeting of Stockholders of Capital Senior Living Corporation, which will be filed with SEC
pursuant to Regulation 14A under the Exchange Act. This definitive proxy statement relates to a meeting of
stockholders involving the election of directors and the portions therefrom required to be set forth in this Form
10-K by Items 10, 11, 12, 13 and 14 are incorporated herein by reference pursuant to General Instruction G(3) to
Form 10-K.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

The following documents are filed as part of this Report:

(1) Financial Statements:

The response to this portion of Item 15 is submitted as a separate section of this Report. See

“Index to Financial Statements” at page F-1.

(2) Financial Statement Schedules:

All schedules have been omitted as the required information is inapplicable or the information is

presented in the financial statements or related notes.

(3) Exhibits:

The following documents are filed as a part of this report. Those exhibits previously filed and incorporated

herein by reference are identified below. Exhibits not required for this report have been omitted.

Exhibit
Number

3.1

3.1.1

3.2

Description

Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference
to Exhibit 3.1 to the Registration Statement No. 333-33379 on Form S-1/A filed by the Company
with the Securities and Exchange Commission on September 8, 1997.)

to Amended and Restated Certificate of

the Registrant
Amendment
(Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999, filed by the Company with the Securities and
Exchange Commission.)

Incorporation of

Second Amended and Restated Bylaws of the Registrant (Incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed by the Company with the
Securities and Exchange Commission on March 8, 2013.)

51

Exhibit
Number

Description

4.1

4.2

4.3

10.1

10.2

10.3

10.4

10.5

10.6

10.6.1

10.7

10.8

2007 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation (Incorporated by
reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-8 filed by the
Company with the Securities and Exchange Commission on May 31, 2007.)

First Amendment
to 2007 Omnibus Stock and Incentive Plan for Capital Senior Living
Corporation (Incorporated by reference to Exhibit 4.7 to the Company’s Registration Statement
on Form S-8 filed by the Company with the Securities and Exchange Commission on May 31,
2007.)

Amended and Restated Second Amendment to the 2007 Omnibus Stock and Incentive Plan for
Capital Senior Living Corporation, as amended (Incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed by the Company with the Securities and Exchange
Commission on May 22, 2015.)

Employment Agreement, dated as of November 26, 1996, by and between Capital Senior Living,
Inc. and David R. Brickman (Incorporated by reference to Exhibit 10.12 to the Registration
Statement No. 333-33379 on Form S-1 filed by the Company with the Securities and Exchange
Commission.)

Agreement of Limited Partnership of Triad Senior Living II, L.P., dated September 23, 1998
(Incorporated by reference to Exhibit 10.57 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1998, filed by the Company with the Securities and Exchange
Commission.)

Agreement of Limited Partnership of Triad Senior Living III, L.P., dated November 10, 1998
(Incorporated by reference to Exhibit 10.58 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1998, filed by the Company with the Securities and Exchange
Commission.)

Agreement of Limited Partnership of Triad Senior Living IV, L.P., dated December 22, 1998
(Incorporated by reference to Exhibit 10.59 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1998, filed by the Company with the Securities and Exchange
Commission.)

Employment Agreement, dated May 26, 1999, by and between Lawrence A. Cohen and Capital
Senior Living Corporation (Incorporated by reference to the Exhibit 10.4 to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999, filed by the
Company with the Securities and Exchange Commission.)

Second Amended and Restated Agreement of Limited Partnership of Triad Senior Living I, L.P.
(Incorporated by reference to Exhibit 10.78 to the Company’s Annual Report on Form 10-K,
dated March 30, 2000, filed by the Company with the Securities and Exchange Commission.)

Amendment No. 1 to Second Amended and Restated Agreement of Limited Partnership of Triad
Senior Living I, LP. (Incorporated by reference to Exhibit 10.105 to the Company’s Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2002, filed by the Company
with the Securities and Exchange Commission.)

First Amendment to Triad II Partnership Agreement (Incorporated by reference to Exhibit 10.4
to the Company’s Current Report on Form 8-K, dated August 15, 2000, filed by the Company
with the Securities and Exchange Commission.)

Second Amendment to the Employment Agreement of Lawrence A. Cohen, dated January 27,
2003, by and between Lawrence A. Cohen and Capital Senior Living Corporation (Incorporated
by reference to Exhibit 10.106 to the Company’s Annual Report on Form 10-K, dated March 26,
2003, filed by the Company with the Securities and Exchange Commission.)

52

Exhibit
Number

10.9

10.10

10.11

10.12

10.13

10.14

10.15

10.16

10.17

10.18

10.19

10.20

10.21

Description

Second Amendment to the Employment Agreement of David R. Brickman, dated January 27,
2003, by and between David R. Brickman and Capital Senior Living Corporation (Incorporated
by reference to Exhibit 10.109 to the Company’s Annual Report on Form 10-K, dated March 26,
2003, filed by the Company with the Securities and Exchange Commission.)

Master Lease Agreement, dated June 30, 2005, between Ventas Amberleigh, LLC and Capital
Senior Management 2, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K/A, dated June 30, 2005, filed by the Company with the Securities and
Exchange Commission on July 11, 2005.)

Schedule identifying substantially identical agreements to Exhibit 10.10 (Incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A, dated June 30, 2005,
filed by the Company with the Securities and Exchange Commission on July 11, 2005.)

Master Lease Agreement, dated October 18, 2005, between Ventas Georgetowne, LLC and
Capital Senior Management 2, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K, dated October 18, 2005, filed by the Company with the Securities
and Exchange Commission.)

Master Lease Agreement, dated May 31, 2006, between subsidiaries of the Company and HCP
(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated
May 31, 2006, filed by the Company with the Securities and Exchange Commission.)

Lease, dated May 31, 2006, between subsidiaries of the Company and HCP regarding the
Crosswood Oaks Facility in Citrus Heights, California (Incorporated by reference to Exhibit 10.2
to the Company’s Current Report on Form 8-K, dated May 31, 2006, filed by the Company with
the Securities and Exchange Commission.)

Schedule identifying substantially identical agreements to Exhibit 10.14 (Incorporated by
reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, dated May 31, 2006,
filed by the Company with the Securities and Exchange Commission.)

Fourth Amendment to the Employment Agreement of Lawrence A. Cohen (Incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on April 20, 2010.)

Master Lease Agreement, dated as of September 10, 2010, between Capital Texas S, LLC and
the Landlord parties thereto (Incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on September 16,
2010.)

Employment Agreement dated July 22, 2010, by and between Capital Senior Living, Inc. and
Joseph G. Solari (Incorporated by reference to Exhibit 10.50 to the Company’s Annual Report on
Form 10-K, dated March 12, 2012, filed by the Company with the Securities and Exchange
Commission.)

Employment Agreement dated April 25, 2014, by and between Capital Senior Living, Inc. and
Carey P. Hendrickson (Incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K, dated April 28, 2014, filed by the Company with the Securities and
Exchange Commission.)

Form of Outside Director’s Restricted Share Unit Award Under the 2007 Omnibus Stock and
Incentive Plan for Capital Senior Living Corporation (Incorporated by reference to Exhibit 10.1
to the Company’s Quarterly Report on Form 10-Q filed by the Company with the Securities and
Exchange Commission on August 5, 2015.)

Second Amendment to Employment Agreement of Joseph G. Solari, dated August 31, 2013, by
and between Capital Senior Living Corporation and Joseph G. Solari (Incorporated by reference
to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed by the Company with the
Securities and Exchange Commission on May 6, 2015.)

53

Exhibit
Number

10.22

10.23

10.24

10.25

10.26

10.27

*21.1

*23.1

*31.1

*31.2

*32.1

*32.2

Description

Retirement and Separation Agreement dated August 21, 2018, by and between Capital Senior
Living Corporation and Lawrence A. Cohen (Incorporated by reference to exhibit 10.1 to the
Company’s Current Report on Form 8-K filed by the Company with the Securities and Exchange
Commission on August 22, 2018.)

Amended and Restated Employment Agreement dated September 11, 2018, by and between
Capital Senior Living, Inc. and Brett D. Lee (Incorporated by reference to exhibit 10.1 to the
Company’s Current Report on Form 8-K filed by the Company with the Securities and Exchange
Commission on September 12, 2018.)

Employment Agreement dated January 7, 2019, by and between Capital Senior Living
Corporation and Kimberly S. Lody (Incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed by the Company with the Securities and Exchange
Commission on January 8, 2019.)

Nonqualified Stock Option Agreement dated January 7, 2019, by and between Capital Senior
Living Corporation and Kimberly S. Lody (Incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed by the Company with the Securities and Exchange
Commission on January 8, 2019.)

Performance Award Agreement dated January 7, 2019, by and between Capital Senior Living
Corporation and Kimberly S. Lody (Incorporated by reference to Exhibit 10.3 to the Company’s
Current Report on Form 8-K filed by the Company with the Securities and Exchange
Commission on January 8, 2019.)

Restricted Stock Award Agreement dated January 7, 2019, by and between Capital Senior Living
Corporation and Kimberly S. Lody (Incorporated by reference to Exhibit 10.4 to the Company’s
Current Report on Form 8-K filed by the Company with the Securities and Exchange
Commission on January 8, 2019.)

Subsidiaries of the Company

Consent of Ernst & Young LLP

Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)

Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)

Certification of Kimberly S. Lody pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Certification of Carey P. Hendrickson pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

*101.INS

XBRL Instance Document

*101.SCH XBRL Taxonomy Extension Schema Document

*101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

*101.LAB XBRL Taxonomy Extension Label Linkbase Document

*101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

*101.DEF XBRL Taxonomy Extension Definition Linkbase Document

* Filed herewith.

54

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant

has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

CAPITAL SENIOR LIVING CORPORATION

By: /s/ KIMBERLY S. LODY

Kimberly S. Lody
President, Chief Executive Officer and Director

Date: March 1, 2019

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the fol-
lowing persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose
signature to this report appears below hereby appoints Kimberly S. Lody and Carey P. Hendrickson and each of
them, any one of whom may act without the joinder of the other, as his or her attorney-in-fact to sign on his
behalf, individually and in each capacity stated below, and to file all amendments to this report, which amend-
ment or amendments may make such changes in and additions to the report as any such attorney-in-fact may
deem necessary or appropriate.

Signature

Title

Date

/s/ KIMBERLY S. LODY

Kimberly S. Lody

/s/ CAREY P. HENDRICKSON

Carey P. Hendrickson

/s/ MICHAEL W. REID

Michael W. Reid

/s/ PHILIP A. BROOKS

Philip A. Brooks

/s/ ED A. GRIER

Ed A. Grier

/s/ E. RODNEY HORNBAKE

E. Rodney Hornbake

/s/ PAUL J. ISAAC

Paul J. Isaac

/s/

JILL M. KRUEGER

Jill M. Krueger

/s/ ROSS B. LEVIN

Ross B. Levin

/s/ RONALD A. MALONE

Ronald A. Malone

President,
Chief Executive Officer (Principal
Executive Officer) and Director

Executive Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)

March 1, 2019

March 1, 2019

Chairman of the Board

March 1, 2019

Director

Director

Director

Director

Director

Director

Director

55

March 1, 2019

March 1, 2019

March 1, 2019

March 1, 2019

March 1, 2019

March 1, 2019

March 1, 2019

INDEX TO FINANCIAL STATEMENTS

Consolidated Financial Statements of Capital Senior Living Corporation

Report of Independent Registered Public Accounting Firm, Ernst & Young LLP . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets — December 31, 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations and Comprehensive Loss — For the years ended

Page

F-2
F-3

December 31, 2018, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-4

Consolidated Statements of Shareholders’ Equity — For the years ended December 31, 2018, 2017

and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-5

Consolidated Statements of Cash Flows — For the years ended December 31, 2018, 2017 and

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial

F-6
F-7

Reporting, Ernst & Young LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-34

F-1

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of
Capital Senior Living Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Capital Senior Living Corporation (the
Company) as of December 31, 2018 and 2017, the related consolidated statements of operations and compre-
hensive loss, shareholders’ equity and cash flows for each of the three years in the period ended December 31,
2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company
at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework), and our report dated March 1, 2019 expressed an
unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commis-
sion and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the
risks of material misstatement of the financial statements, whether due to error or fraud, and performing proce-
dures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the finan-
cial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditors since 2006.
Dallas, Texas
March 1, 2019

/s/

Ernst & Young LLP

F-2

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31,

2018

2017

(In thousands)

ASSETS

Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal and state income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property tax and insurance deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

31,309
13,011
10,581
152
13,173
5,232

17,646
13,378
12,307
—
14,386
6,332

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73,458
1,059,049
152
16,485

64,049
1,099,786

—
18,836

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,149,144

$1,182,671

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of notes payable, net of deferred loan costs . . . . . . . . . . . . . . . . . . .
Current portion of deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of capital lease and financing obligations . . . . . . . . . . . . . . . . . . . . .
Federal and state income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease and financing obligations, net of current portion . . . . . . . . . . . . . . . . . . .
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable, net of deferred loan costs and current portion . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies
Shareholders’ equity:

9,095
41,880
14,342
14,892
3,113
406
1,302

85,030
8,151
45,647
—
15,643
959,408

$

7,801
40,751
19,728
13,840
3,106
383
1,394

87,003
10,033
48,805
1,941
16,250
938,206

Preferred stock, $.01 par value:

—

—

Authorized shares — 15,000; no shares issued or outstanding . . . . . . . . . . . . . . . .

Common stock, $.01 par value:

Authorized shares — 65,000; issued and outstanding shares 31,273 and 30,505

in 2018 and 2017, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost — 494 shares in 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . .

318
187,879
(149,502)
(3,430)

310
179,459
(95,906)
(3,430)

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35,265

80,433

Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,149,144

$1,182,671

See accompanying notes to consolidated financial statements.

F-3

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

Year Ended December 31,

2018

2017

2016

(In thousands, except per share data)

Revenues:

Resident revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$460,018

$466,997

$447,448

Expenses:

Operating expenses (exclusive of facility lease expense and . . . . . . . . . . . . .
depreciation and amortization expense shown below) . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on facility lease termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

294,661
26,961
56,551
—
2,990
8,428
62,824

290,662
23,574
56,432
12,858
1,748
7,682
66,199

273,899
23,671
61,718
—
1,727
11,645
60,398

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

452,415

459,155

433,058

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of deferred loan costs and prepayment premiums . . . . . . . . . . . . .
Gain (Loss) on disposition of assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss before benefit (provision) for income taxes . . . . . . . . . . . . . . . . . . . . . . .
Benefit (Provision) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,603

7,842

14,390

165
(50,543)
(12,623)
28
3

(55,367)
1,771

73
(49,471)
—
(123)
7

(41,672)
(2,496)

67
(42,207)
—
(65)
233

(27,582)
(435)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (53,596) $ (44,168) $ (28,017)

Per share data:

Basic net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

(1.80) $

(1.50) $

(0.97)

(1.80) $

(1.50) $

(0.97)

Weighted average shares outstanding — basic . . . . . . . . . . . . . . . . . . . . . . .

29,812

29,453

28,909

Weighted average shares outstanding — diluted . . . . . . . . . . . . . . . . . . . . . .

29,812

29,453

28,909

Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (53,596) $ (44,168) $ (28,017)

See accompanying notes to consolidated financial statements.

F-4

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Common Stock

Shares

Amount

Additional
Paid-In
Capital

Retained
Deficit

Treasury
Stock

Total

(In thousands)

Balance at January 1, 2016 . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . .
Restricted stock awards . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . .
Excess tax benefits on stock options

29,539

299

6 —

611
—

6

—

159,920
60
1
11,645

exercised . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—
(144) —
—
—

(27)
—
—

30,012

305

3 —

171,599
—

Balance at December 31, 2016 . . . . . . . . . . . . .
Restricted stock unit conversions . . . . . . . . . .
Restricted stock awards . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

490
—
—

Balance at December 31, 2017 . . . . . . . . . . . . .
Restricted stock awards . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30,505
768
—
—

5

—
—

$310
8

—
—

(4)
7,864
—

$179,459
(8)
8,428
—

(23,539)
—
—
—

—
—
(28,017)

(51,556)
—
—
(182)
(44,168)

(934)
—
—
—

135,746
60
7
11,645

—
(2,496)
—

(3,430)
—
—
—
—

(27)
(2,496)
(28,017)

116,918
—

1
7,682
(44,168)

$ (95,906) $(3,430) $ 80,433
—
—
—

—
—
(53,596)

—
8,428
(53,596)

Balance at December 31, 2018 . . . . . . . . . . . . .

31,273

$318

$187,879

$(149,502) $(3,430) $ 35,265

See accompanying notes to consolidated financial statements.

F-5

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Operating Activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred financing charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred lease costs and lease intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of lease incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on facility lease termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of deferred loan costs and prepayment premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) Loss on disposition of assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property tax and insurance deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal and state income taxes receivable/payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred resident revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2018

2017

2016

(in thousands)

$ (53,596) $ (44,168) $ (28,017)

62,824
1,709
849
(2,074)
(1,391)
(2,245)
3,376
—
12,623
(28)
2,990
8,428

(3,173)
1,213
1,100
1,350
1,294
1,129
—

23
561
(92)

66,199
1,626
859
(1,336)
(1,397)
1,941
5,673
12,858
—
123
1,748
7,682

(8,159)
279
33
4,061
2,750
1,689
5,017
165
(1,898)
(151)

60,398
1,193
679
(710)
(414)
—
7,530
—
—

65
1,727
11,645

(14,519)
(267)
(1,995)
(2,228)
1,695
4,798
12,014
107
(1,148)
(274)

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing Activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from disposition of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities
Proceeds from notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments for capital lease and financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash proceeds from the issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits on stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing charges paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36,870

55,594

52,279

(21,965)
—

57

(39,959)
(85,000)
19

(62,371)
(138,750)
72

(21,908)

(124,940)

(201,049)

208,841
(204,093)
(3,151)
—
—
—
(3,263)

77,197
(20,099)
(2,869)
—
—
—
(1,182)

150,798
(17,680)
(1,314)
67
(27)
(2,496)
(2,501)

Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,666)

53,047

126,847

Increase (Decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents and restricted cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,296
31,024

(16,299)
47,323

(21,923)
69,246

Cash and cash equivalents and restricted cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 44,320

$ 31,024

$ 47,323

Supplemental Disclosures
Cash paid during the year for:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 49,225

$ 47,022

$ 40,585

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

555

$

543

$

582

See accompanying notes to consolidated financial statements.

F-6

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

1. Organization

Capital Senior Living Corporation, a Delaware corporation (together with its subsidiaries, the “Company”),
is one of the largest operators of senior housing communities in the United States in terms of resident capacity.
The Company owns, operates, develops and manages senior housing communities throughout the United States.
As of December 31, 2018, the Company operated 129 senior housing communities in 23 states with an aggregate
capacity of approximately 16,500 residents, including 83 senior housing communities which the Company owned
and 46 senior housing communities that the Company leased. The accompanying consolidated financial state-
ments include the financial statements of Capital Senior Living Corporation and its wholly owned subsidiaries.
All material intercompany balances and transactions have been eliminated in consolidation.

2. Summary of Significant Accounting Policies

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less at the
date of acquisition to be cash equivalents. The Company has deposits in banks that exceed Federal Deposit
Insurance Corporation insurance limits. Management believes that credit risk related to these deposits is minimal.
Restricted cash consists of deposits required by certain lenders as collateral pursuant to letters of credit. The
deposit must remain so long as the letter of credit is outstanding which is subject to renewal annually.

The following table sets forth our cash and cash equivalents and restricted cash (in thousands):

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$31,309
13,011

$17,646
13,378

$44,320

$31,024

Year Ended December 31,

2018

2017

Long-Lived Assets

Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful
lives of the assets. At each balance sheet date, the Company reviews the carrying value of its property and
equipment to determine if facts and circumstances suggest that they may be impaired or that the depreciation
period may need to be changed. The Company considers internal factors such as net operating losses along with
external factors relating to each asset, including contract changes, local market developments, and other publicly
available information. If an indicator of impairment is identified, the carrying value of a long-lived asset is con-
sidered impaired when the anticipated undiscounted cash flows from such asset is separately identifiable and is
less than its carrying value. In that event, a loss is recognized based on the amount the carrying value exceeds the
fair market value, generally based on discounted cash flows, of the long-lived asset. For property and equipment
where indicators of impairment were identified, tests of recoverability were performed and the Company has
concluded its property and equipment is recoverable and does not warrant adjustment to the carrying value or
remaining useful lives as of December 31, 2018. The Company does not believe there were any indicators of
impairment that would require an adjustment to the carrying value of the property and equipment or their remain-
ing useful lives as of December 31, 2017.

Off-Balance Sheet Arrangements

The Company had no material off-balance sheet arrangements at December 31, 2018.

F-7

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

Income Taxes

Income taxes are computed using the asset and liability method and current income taxes are recorded based
on amounts refundable or payable. Deferred income taxes are recorded based on the estimated future tax effects
of loss carryforwards and temporary differences between financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax
rates that are expected to apply to taxable income in the years in which we expect those carryforwards and
temporary differences to be recovered or settled. Management regularly evaluates the future realization of
deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. As part
of the evaluation, management has evaluated taxable income in carryback years, future reversals of taxable
temporary differences, feasible tax planning strategies, and future expectations of income.

The Company evaluates uncertain tax positions through consideration of accounting and reporting guidance
on criteria, measurement, derecognition, classification, interest and penalties, accounting in interim periods, dis-
closure, and transition that is intended to provide better financial-statement comparability among different
companies. The Company is required to recognize a tax benefit in its financial statements for an uncertain tax
position only if management’s assessment is that its position is “more likely than not” (i.e., a greater than
50 percent likelihood) to be upheld on audit based only on the technical merits of the tax position. The Compa-
ny’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as
income tax expense.

Revenue Recognition

Resident revenue consists of fees for basic housing and certain support services and fees associated with
additional housing and expanded support requirements such as assisted living care, memory care, and ancillary
services. Basic housing and certain support services revenue is recorded when services are rendered and amounts
billed are due from residents in the period in which the rental and other services are provided which totaled
approximately $452.5 million and $458.3 million, respectively, for the fiscal years ended December 31, 2018 and
2017. Residency agreements are generally short term in nature with durations of one year or less and are typically
terminable by either party, under certain circumstances, upon providing 30 days’ notice, unless state law provides
otherwise, with resident fees billed monthly in advance. The Company had contract liabilities for deferred fees
paid by our residents prior to the month housing and support services were to be provided totaling approximately
$4.5 million and $3.9 million, respectively, which are included as a component of deferred income within current
liabilities of the Company’s Consolidated Balance Sheets at December 31, 2018 and 2017. Deferred fees paid by
our residents recognized into revenue during fiscal 2018 and 2017 totaled approximately $3.9 million and
$5.8 million, respectively. Revenue for certain ancillary services is recognized as services are provided, and
includes fees for services such as medication management, daily living activities, beautician/barber, laundry,
television, guest meals, pets, and parking which are generally billed monthly in arrears. Deferred fees totaled
approximately $4.7 million and $5.1 million, respectively, for the fiscal years ended December 31, 2018 and
2017, and were recognized as a component of resident revenue within the Company’s Consolidated Statements
of Operations and Comprehensive Loss.

The Company’s senior housing communities have residency agreements which generally require the resi-
dent to pay a community fee prior to moving into the community and are recorded initially by the Company as
deferred revenue. At each of December 31, 2018 and 2017, the Company had contract liabilities for deferred
community fees totaling approximately $1.1 million and $1.3 million, respectively, which are included as a
component of deferred income within current liabilities of the Company’s Consolidated Balance Sheets. The
Company recognized community fees as a component of resident revenue within the Company’s Consolidated
Statements of Operations and Comprehensive Loss of approximately $2.8 million and $3.6 million, respectively,
during the fiscal years ended December 31, 2018 and 2017.

F-8

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

Revenues from the Medicaid program accounted for approximately 5.4% of the Company’s revenue in fis-
cal 2018, 5.6% of the Company’s revenue in fiscal 2017, and 5.5% of the Company’s revenue in fiscal 2016.
During fiscal 2018, 2017, and 2016, 40, 41, and 40, respectively, of the Company’s communities were providers
of services under the Medicaid program. Accordingly, these communities were entitled to reimbursement under
the foregoing program at established rates that were lower than private pay rates. Patient service revenue for
Medicaid patients was recorded at the reimbursement rates as the rates were set prospectively by the applicable
state upon the filing of an annual cost report. None of the Company’s communities were providers of services
under the Medicare program during fiscal 2018, 2017, or 2016.

Laws and regulations governing the Medicaid program are complex and subject to interpretation. The
Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pend-
ing or threatened investigations involving allegations of potential wrongdoing. While no such regulatory
inquiries have been made, compliance with such laws and regulations can be subject to future government review
and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the
Medicaid program.

Purchase Accounting

In determining the allocation of the purchase price of senior housing communities acquired to net tangible
and identified intangible assets acquired and liabilities assumed, if any, the Company makes estimates of fair
value using information obtained as a result of pre-acquisition due diligence,
leasing activities and/or
independent appraisals. The Company assigns the purchase price for senior living communities to assets acquired
and liabilities assumed based on their estimated fair values. The determination of fair value involves the use of
significant judgments and estimates which is generally assessed as follows:

The Company allocates the fair values of buildings acquired on an as-if-vacant basis and depreciates the
building values over the estimated remaining lives of the buildings, not to exceed 40 years. The Company
determines the allocated values of other fixed assets, such as site improvements and furniture, fixtures and
equipment, based upon the replacement cost and depreciates such values over the assets’ estimated remaining
useful lives as determined at the acquisition date. The Company determines the value of land by considering the
sales prices of similar properties in recent transactions.

The fair value of acquired lease-related intangibles reflects the estimated fair value of existing resident
in-place leases as represented by the cost to obtain residents and an estimated absorption period to reflect the
value of the rent and recovery costs foregone during a reasonable lease-up period as if the property acquired was
vacant. The Company amortizes any acquired resident in-place lease intangibles to depreciation and amortization
expense over the estimated remaining useful life of the respective resident operating leases.

Credit Risk and Allowance for Doubtful Accounts

The Company’s resident receivables are generally due within 30 days from the date billed. Accounts receiv-
able are reported net of an allowance for doubtful accounts of $6.8 million and $4.9 million at December 31,
2018 and 2017, respectively, and represent the Company’s estimate of the amount that ultimately will be col-
lected. The adequacy of the Company’s allowance for doubtful accounts is reviewed on an ongoing basis, using
historical payment trends, write-off experience, analyses of receivable portfolios by payor source and aging of
receivables, as well as a review of specific accounts, and adjustments are made to the allowance as necessary.
Credit losses on resident receivables have historically been within management’s estimates, and management
believes that the allowance for doubtful accounts adequately provides for expected losses.

Lease Accounting

The Company determines whether to account for its leases as operating, capital or financing leases depend-
ing on the underlying terms of the lease agreement. This determination of classification requires significant

F-9

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

judgment relating to certain information, including the estimated fair value and remaining economic life of the
community, the Company’s cost of funds, minimum lease payments and other lease terms. The lease rates under
the Company’s lease agreements are subject to certain conditional escalation clauses which are recognized when
probable or incurred and are based on changes in the consumer price index or certain operational performance
measures. As of December 31, 2018 and 2017, the Company leased 46 communities, two of which the Company
classified as capital lease and financing obligations with the remaining classified as operating leases. The Com-
pany incurs lease acquisition costs and amortizes these costs over the term of the lease agreement. Certain leases
entered into by the Company qualified as sale/leaseback transactions, and as such, any related gains have been
deferred and are being amortized over the respective lease term. No new communities were leased by the Com-
pany during fiscal 2018 or 2017. Effective January 31, 2017, the Company acquired from Ventas the underlying
real estate associated with four of its operating leases. For additional information refer to Note 3, “Acquisitions”.

Facility lease expense in the Company’s Consolidated Statements of Operations and Comprehensive loss
includes rent expense plus amortization expense relating to leasehold acquisition costs offset by the amortization
of deferred gains and lease incentives.

Employee Health and Dental Benefits, Workers’ Compensation, and Insurance Reserves

The Company offers full-time employees an option to participate in its health and dental plans. The Com-
pany is self-insured up to certain limits and is insured if claims in excess of these limits are incurred. The cost of
employee health and dental benefits, net of employee contributions, is shared between the corporate office and
the senior housing communities based on the respective number of plan participants. Funds collected are used to
pay the actual program costs, including estimated annual claims, third-party administrative fees, network pro-
vider fees, communication costs, and other related administrative costs incurred by the plans. Claims are paid as
they are submitted to the Company’s third-party administrator. The Company records a liability for outstanding
claims and claims that have been incurred but not yet reported. This liability is based on the historical claim
reporting lag and payment trends of health insurance claims. Management believes that the liability for out-
standing losses and expenses is adequate to cover the ultimate cost of losses and expenses incurred at
December 31, 2018; however, actual claims and expenses may differ. Any subsequent changes in estimates are
recorded in the period in which they are determined.

The Company uses a combination of insurance and self-insurance for workers’ compensation. Determining
the reserve for workers’ compensation losses and costs that the Company has incurred as of the end of a reporting
period involves significant judgments based on projected future events, including potential settlements for pend-
ing claims, known incidents which may result in claims, estimates of incurred but not yet reported claims,
changes in insurance premiums, estimated litigation costs and other factors. The Company regularly adjusts these
estimates to reflect changes in the foregoing factors. However, since this reserve is based on estimates, the actual
expenses incurred may differ from the amounts reserved. Any subsequent changes in estimates are recorded in
the period in which they are determined.

Net Loss Per Share

Basic net loss per common share is computed by dividing net loss by the weighted average number of
common shares outstanding for the period. Potentially dilutive securities consist of unvested restricted shares and
shares that could be issued under outstanding stock options. Potentially dilutive securities are excluded from the
computation of net loss per common share if their effect is antidilutive.

F-10

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except

for per share amounts):

Year Ended December 31,

2018

2017

2016

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss allocated to unvested restricted shares . . . . . . . . . . . . . . .

$(53,596)

$(44,168)

$(28,017)

—

—

—

Undistributed net loss allocated to common shares . . . . . . . . . . . .
Weighted average shares outstanding — basic . . . . . . . . . . . . . . .
Effects of dilutive securities:

$(53,596)
29,812

$(44,168)
29,453

$(28,017)
28,909

Employee equity compensation plans . . . . . . . . . . . . . . . . . . . .

—

—

—

Weighted average shares outstanding — diluted . . . . . . . . . . . . . .

29,812

29,453

28,909

Basic net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

(1.80)

(1.80)

$

$

(1.50)

(1.50)

$

$

(0.97)

(0.97)

Awards of unvested restricted stock representing approximately 1.3 million, 0.9 million, and 0.8 million
shares were outstanding for the fiscal years ended December 31, 2018, 2017, and 2016, respectively, and are
antidilutive.

Treasury Stock

The Company accounts for treasury stock under the cost method and includes treasury stock as a component
of shareholders’ equity until it is canceled. There were no repurchases of the Company’s common stock during
fiscal 2018 or 2017.

Stock-Based Compensation

The Company recognizes compensation expense for share-based payment awards to certain employees and
directors, including grants of stock options and awards of restricted stock, in the Consolidated Statements of
Operations and Comprehensive Loss based on their fair values.

On May 8, 2007, the Company’s stockholders approved the 2007 Omnibus Stock and Incentive Plan for
Capital Senior Living Corporation (as amended, the “2007 Plan”) which provides for, among other things, the
grant of restricted stock awards and stock options to purchase shares of the Company’s common stock. The 2007
Plan authorizes the Company to issue up to 4.6 million shares of common stock and the Company currently has
286,000 shares of common stock reserved for future issuance pursuant to awards under the 2007 Plan.

Segment Information

The Company evaluates the performance and allocates resources of its senior living facilities based on cur-
rent operations and market assessments on a property-by-property basis. The Company does not have a concen-
tration of operations geographically or by product or service as its management functions are integrated at the
property level. The Company has determined that all of its operating units meet the criteria in Accounting Stan-
dards Codification (“ASC”) Topic 280, Segment Reporting, to be aggregated into one reporting segment. As
such, the Company operates in one segment.

F-11

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

Recently Issued Accounting Guidance

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2017-01, Business Combinations – Clarifying the Definition of a Business. ASU 2017-01 provides
guidance in accounting for business combinations when determining if the transaction represents acquisitions or
disposals of assets or of a business. Under ASU 2017-01, when determining whether an integrated set of assets
and activities constitutes a business, entities must compare the fair value of gross assets acquired to the fair value
of a single identifiable asset or group of similar identifiable assets. If substantially all of the fair value of the
gross assets acquired (or disposed of) is concentrated in the single identifiable assets or group of similar identifi-
able assets, the integrated set of assets and activities is not characterized as a business. ASU 2017-01 is applied
prospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within
those fiscal years. The Company adopted the provisions of ASU 2017-01 on January 1, 2018 and beginning from
the date of adoption will apply the accounting guidance provided to the Company’s acquisition activities. Man-
agement expects the adoption to require the accounting for acquisitions of senior housing communities to be
reflected as acquisitions of assets rather than as a business combination; however, management does not expect
the adoption of ASU 2017-01 to have a material impact on the Company’s financial position, results of oper-
ations or cash flows.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
(a consensus of the FASB Emerging Issues Task Force). ASU 2016-18 requires an entity to include in its cash
and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash
and restricted cash equivalents. ASU 2016-18 is effective for interim and annual reporting periods beginning
after December 15, 2017 and should be applied on a retrospective basis. The Company adopted the provisions of
ASU 2016-18 on January 1, 2018 and the adoption resulted in the Company no longer reporting changes in
restricted cash balances in the Consolidated Statements of Cash Flows within net cash flows (used in) provided
by financing activities which did not have a material impact on the Company’s cash flows.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash
Payments. ASU 2016-15 amends the guidance in Accounting Standards Codification (“ASC”) 230, which often
requires judgment to determine the appropriate classification of cash flows as operating, investing or financing
activities and has resulted in diversity in practice in how certain cash receipts and cash payments are classified.
ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017 and
should be applied on a retrospective basis. The Company adopted the provisions of ASU 2016-15 on January 1,
2018 and the adoption did not have a material impact on the Company’s cash flows.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of
Credit Losses on Financial Instruments. Current U.S. generally accepted accounting principles (GAAP) require
an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has
been incurred. ASU 2016-13 replaces the current incurred loss methodology for credit losses and removes the
thresholds that companies apply to measure credit losses on financial statements measured at amortized cost,
such as loans, receivables, and held-to-maturity debt securities with a methodology that reflects expected credit
losses and requires consideration of a broader range of reasonable and supportable information to form credit loss
estimates. ASU 2016-13 is effective for fiscal years and for interim periods within those fiscal years beginning
after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The
Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial
statements and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 amends the existing accounting
standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and
making targeted changes to lessor accounting. The new lease standard requires lessees to recognize on the bal-
ance sheet a liability to make lease payments and a right-of-use asset representing the right to use the underlying

F-12

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

in July 2018,

the FASB issued ASU 2018-11, Leases, Targeted
asset for the lease term. Additionally,
Improvements, which provided entities with a transition method option to not restate comparative periods pre-
sented, but to recognize a cumulative effect adjustment to beginning retained earnings in the period of adoption.
The FASB retained a dual model for lease classification, requiring leases to be classified as finance or operating
leases to determine recognition in the statements of operations and cash flows; however, substantially all leases
will be required to be recognized on the balance sheet. The standards update will also require quantitative and
qualitative disclosures regarding key information about leasing arrangements and provides a modified retro-
spective transition approach for all leases existing at, or entered into after, the date of initial application, with an
option to use certain transition relief. The Company expects to utilize certain practical expedients that, upon
adoption, allows entities to (1) not reassess whether any expired or existing contracts are or contain leases,
(2) retain the classification of leases (e.g., operating or finance lease) existing as of the date of adoption, (3) not
reassess initial direct costs for any existing leases, and (4) not record a right-of-use asset and related lease
liability for leases with an initial lease term of 12 months or less. The Company is in the final stages of evaluat-
ing its existing lease portfolio, including accumulating all of the necessary information required to properly
account for leases under the new accounting guidance, and believes the most significant impact relates to its
accounting for real estate leases. The Company plans to elect a transition option which allows for the recognition
of a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption without
recasting the financial statements in periods prior to adoption. At adoption, the Company expects to recognize a
material increase in assets and liabilities on its Consolidated Balance Sheet resulting from the recognition of
lease liabilities initially measured at the present value of its future operating lease payments and the related right
of use assets. The Company has concluded that the previously unrecognized right of use assets will be reviewed
for impairment which could result in a reduction to the initially recognized right of use assets and a cumulative
effect adjustment to beginning retained earnings as of January 1, 2019. The Company continues to evaluate the
impacts of adopting ASU 2016-02 on its financial position, results of operations, and cash flows, and is updating
its systems, processes, and internal controls to meet the new reporting and disclosure requirements. The adoption
of this standard will have no impact on the Company’s covenant compliance under its current debt and lease
agreements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU
2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters
into contracts for the transfer of nonfinancial assets. Under ASU 2014-09, an entity will recognize revenue when
it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the
goods or services. ASU 2014-09 is effective for annual periods beginning after December 15, 2017. The Com-
pany adopted the provisions of ASU 2014-09 on January 1, 2018 under the modified retrospective approach.
Under the modified retrospective approach, the guidance is applied to the most current period presented,
recognizing the cumulative effect of the adoption to beginning retained earnings. The Company has determined
that the adoption of ASU 2014-09 did not result in an adjustment to beginning retained earnings and did not
result in significant changes to the amount and/or timing of revenue reported within the Company’s consolidated
financial statements; however, ASU 2014-09 requires enhanced disclosures related to the nature, amount, timing
and uncertainty of revenue arrangements. Additionally, our contracts with residents are generally short term in
nature and revenue is recognized when services are provided; as such, ASU 2014-09 provides an entity need not
disclose information related to performance obligations when the performance obligation is part of a contract that
has an original expected duration of one year or less.

Use of Estimates and Critical Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in the accompanying
financial statements and related footnotes. Management bases its estimates and assumptions on historical experi-

F-13

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

ence, observance of industry trends and various other sources of information and factors, the results of which
form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results could differ from these estimates. Critical accounting policies are defined as
those that are reflective of significant judgments and uncertainties, and potentially could result in materially dif-
ferent results under different assumptions and conditions. The Company believes revenue recognition, purchase
accounting, credit risk and allowance for doubtful accounts, lease accounting, employee health and dental bene-
fits, workers’ compensation and insurance reserves, long-lived assets, and income taxes are its most critical
accounting policies and/or require management’s most subjective judgments.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to current period presentation.

3. Acquisitions

Fiscal 2017

Effective January 31, 2017 (the “Closing Date”), the Company acquired the underlying real estate through
an asset acquisition associated with four of the senior housing communities previously leased from Ventas, Inc.
(“Ventas”) for an acquisition price of $85.0 million (the “Four Property Lease Transaction”). The Company
obtained interest only, bridge financing from Berkadia Commercial Mortgage LLC (“Berkadia”)
for
$65.0 million of the acquisition price with an initial variable interest rate of LIBOR plus 4.0% and a 36-month
term, with an option to extend 6 months, and the balance of the acquisition price paid from the Company’s exist-
ing cash resources. Additionally, the Company agreed to continue paying $2.3 million of the annual rents asso-
ciated with the four communities acquired over the remaining lease term of the seven communities remaining in
the Ventas Lease Portfolio. As such, the total additional lease payments to be paid over the remaining lease term
were discounted back to the Closing Date utilizing a credit-adjusted risk-free rate to determine the fair value of
the lease termination financing obligation of $16.0 million. The fair value of the four communities acquired was
determined to approximate $88.1 million. The fair values of the property, plant, and equipment of the acquired
communities were determined utilizing a direct capitalization method considering facility net operating income
and market capitalization rates. These fair value measurements were based on current market conditions as of the
acquisition date and are considered Level 3 measurements (fair value measurements using significant
unobservable inputs) within the fair value hierarchy of ASC 820-10, Fair Value Measurement. The range of capi-
talization rates utilized was 7.25% to 8.50%, depending upon the property type, geographical location, and over-
all quality of each respective community. The acquisition price of $85.0 million and lease termination obligation
of $16.0 million resulted in total aggregate consideration by the Company for the acquisition of the four
communities of $101.0 million. The Company recorded the difference between the total aggregate consideration
($101.0 million) and the estimated fair value of the four communities acquired ($88.1 million) of $12.9 million
as a loss on facility lease termination during the first quarter of fiscal 2017. Additionally, the Company incurred
approximately $0.4 million in transaction costs related to this acquisition which have been capitalized as a
component of the cost of the assets acquired.

As a result of this asset acquisition, the Company recorded additions to property and equipment of approx-
imately $88.1 million within the Company’s Consolidated Balance Sheets which is being depreciated or amor-
tized over the estimated useful lives.

F-14

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

4. Property and Equipment

Property and equipment consists of the following (in thousands):

Asset Lives

2018

2017

December 31,

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and building improvements . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . .

5 to 20 years
10 to 40 years
5 to 10 years
5 to 7 years
(1)
NA

Less accumulated depreciation and amortization . . . . . .

Property and equipment, net . . . . . . . . . . . . . . . . . . . .

$

69,842
25,373
1,158,577
66,202
6,344
98,396
421

$

69,842
24,665
1,148,816
62,614
6,236
85,384
5,711

1,425,155
(366,106)

1,403,268
(303,482)

$1,059,049

$1,099,786

(1) Leasehold improvements are amortized over the shorter of the useful life of the asset or the remaining lease term.

At December 31, 2018 and 2017, furniture and equipment included $3.8 million and $3.2 million of cap-
italized computer software development costs of which $3.1 million and $3.0 million, respectively, has been
amortized and is included as a component of accumulated depreciation and amortization.

Property and equipment includes $31.8 million of assets under capital lease in connection with the Ventas
Lease Transaction, as discussed at Note 15, “Leases,” of which $16.3 million and $15.4 million has been amor-
tized and is included as a component of accumulated depreciation and amortization at December 31, 2018 and
2017, respectively.

5. Other Assets

Other assets consist of the following (in thousands):

Deferred lease costs, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security and other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,715
9,889
1,881

$ 5,555
10,234
3,047

$16,485

$18,836

December 31,

2018

2017

In connection with the Company’s acquisitions and certain of its lease transactions, subject to final valuation
adjustments, the Company records additions to in-place lease intangibles in order to reflect the value associated
with the resident operating leases acquired. In-place lease intangibles are being amortized over the estimated
remaining useful life of the respective resident operating leases. The value of in-place leases includes lost rev-
enue that would be realized if the resident operating leases were to be replaced by the Company.

F-15

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

6. Accrued Expenses

Accrued expenses consist of the following (in thousands):

Accrued salaries, bonuses and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued health claims and workers comp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2018

2017

$11,996
14,079
3,066
4,845
1,012
6,882

$13,015
14,208
3,757
4,547
763
4,461

$41,880

$40,751

F-16

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

7. Notes Payable

Notes payable consists of the following (in thousands):

Lender

Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .

Average
Monthly
Payment

Net Book Value
Of Collateral(1)

Interest
Rate

Maturity
Date

$—
—
—
—
—
—
—
—
135
11
60
20
—
—
—
84
49
39
17
—
—
45
67
67
282
632
120
81
91
11
134
22
54
53
95
70
109
102

$ —
—
—
—
—
—
—
—
25,781
4,140
14,707
14,707
—
—
—
16,577
16,577
7,943
7,943
—
—
8,166
12,893
12,202
50,722
109,519
25,091
19,891
65,624
9,290
26,589
13,433
10,256
11,808
6,351
15,106
8,496
23,648

F-17

5.69
4.97
4.92
5.19
4.92
4.38
4.76
4.85
4.69
4.97
4.48
4.85
4.34
4.50
5.49
4.32
5.39
4.58
5.49
4.66
5.46
5.93
5.50
5.38
5.56
4.24
4.48
4.30
4.98
6.30
4.59
5.72
4.70
4.50
4.46
4.35
3.85
3.84

August 2021
October 2021
October 2021
October 2021
November 2021
March 2022
April 2022
April 2022
April 2022
April 2022
May 2022
May 2022
November 2022
November 2022
November 2022
January 2023
January 2023
January 2023
January 2023
April 2023
April 2023
October 2023
November 2023
November 2023
January 2024
July 2024
July 2024
July 2024
July 2024
July 2024
September 2024
September 2024
September 2024
January 2025
January 2025
February 2025
March 2025
April 2025

Notes Payable
December 31,

2018

2017

$ — $ 12,283
4,331
17,097
4,839
19,886
4,831
10,403
3,470
23,637
2,022
10,699
3,697
26,382
5,881
7,403
15,532
8,453
6,953
3,029
15,131
3,068
7,205
11,180
11,236
46,662
121,141
22,394
15,462
16,579
—
24,805
3,682
9,864
9,915
18,023
13,434
22,086
20,749

—
—
—
—
—
—
—
23,127
1,991
10,462
3,640
—
—
—
15,194
8,327
6,808
2,990
—
—
7,092
10,992
11,042
45,892
118,715
21,963
15,156
16,322
1,796
24,342
3,634
9,683
9,731
17,686
13,179
21,633
20,324

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Lender

Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Fannie Mae . . . . . . . . . . . . . . . . . . .
Protective Life . . . . . . . . . . . . . . . .
Protective Life . . . . . . . . . . . . . . . .
Protective Life . . . . . . . . . . . . . . . .
Protective Life . . . . . . . . . . . . . . . .
Protective Life . . . . . . . . . . . . . . . .
Protective Life . . . . . . . . . . . . . . . .
Protective Life . . . . . . . . . . . . . . . .
Berkadia . . . . . . . . . . . . . . . . . . . . .
Berkadia . . . . . . . . . . . . . . . . . . . . .
Berkadia . . . . . . . . . . . . . . . . . . . . .
HUD . . . . . . . . . . . . . . . . . . . . . . . .
Insurance Financing . . . . . . . . . . . .
Insurance Financing . . . . . . . . . . . .
Insurance Financing . . . . . . . . . . . .
Insurance Financing . . . . . . . . . . . .

Less deferred loan costs, net . . . . . .

Less current portion . . . . . . . . . . . .

December 31, 2018

Average
Monthly
Payment

Net Book Value
Of Collateral(1)

Interest
Rate

Maturity
Date

Notes Payable
December 31,

2018

2017

31
—
—
81
—
58
44
273
9

—
—
98
108
652
194
96
49
78
138
57
187
70
378
18
97
16

—
—
160
70

23,648
—
—
15,219
—
12,481
9,256
38,141
7,577
—
—
21,982
24,350
160,096
160,096
24,088
10,994
17,506
32,096
13,460
41,379
15,019
93,631
7,292
18,785
5,356
—
—
—
—

5.53
4.55
4.79
5.30
5.71
4.69
4.70
4.68
5.81
5.43
5.84
4.10
4.24
5.13
(3)
3.55
4.25
4.25
4.25
4.50
4.38
4.13
(4)
(5)
(6)
4.48
2.76
3.04
3.64
4.40

April 2025
June 2025
June 2025
June 2025
June 2025
October 2025
October 2025
December 2025
December 2025
April 2026
April 2026
October 2026
December 2026
January 2029
January 2029
April 2025
August 2025
September 2025
November 2025
February 2026
March 2026
October 2031
February 2020
July 2020

October 2021(5)

September 2045
May 2018
November 2018
May 2019
November 2019

5,300
—
—
13,335
—
10,595
8,008
50,295
1,426
—
—
19,498
21,243
150,782
50,261
19,787
9,350
14,871
26,478
10,761
32,920
12,326
65,000
3,500
11,255
2,933
—
—
799
763

5,372
8,794
10,753
13,580
4,079
10,780
8,147
51,163
1,445
10,443
4,903
19,854
21,617
—
—
20,234
9,535
15,163
26,993
10,959
33,705
12,645
65,000
—
11,505
2,989
725
3,505
—
—

$5,412

4.64%(2)

$983,207

$967,332

9,457

9,398

$973,750
14,342

$957,934
19,728

$959,408

$938,206

(1) 80 of the facilities owned by the Company are encumbered by mortgage debt and are provided as collateral

under their respective loan agreements.

(2) Weighted average interest rate on current fixed interest rate debt outstanding.

F-18

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

(3) Variable interest rate of LIBOR plus 2.14%, which was 4.57% at December 31, 2018.

(4) Variable interest rate of LIBOR plus 4.00%, which was 6.89% at December 31, 2018.

(5) Variable interest rate of LIBOR plus 3.75%, which was 6.21% at December 31, 2018.

(6) Variable interest rate of LIBOR plus 5.00%, which was 7.89% at December 31, 2018. Effective June 29,

2018, the Company extended the maturity date with Berkadia to October 10, 2021.

The aggregate scheduled maturities of notes payable at December 31, 2018 are as follows (in thousands):

2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 16,050
83,595
26,254
54,381
74,729
728,198

$983,207

On December 18, 2018, the Company repaid certain mortgage loans associated with 21 of its senior living
communities totaling approximately $170.6 million from Fannie Mae which were scheduled to mature on various
dates beginning August 2021 through April 2026. The repayment of these mortgage loans facilitated the
establishment of a Master Credit Facility (“MCF”) with Berkadia whereby the Company obtained approximately
$201.0 million of new mortgage financing. The MCF will allow the Company to make future advances, should
the Company decide to do so, assuming certain borrowing conditions are satisfied. The MCF consists of two
separate loans which are cross-defaulted and cross-collateralized. Approximately $150.8 million of the new
financing is long-term fixed interest rate debt at a fixed interest rate of 5.13% with a 10-year term and interest
only for the first 36 months and the principal amortized over a 30-year term thereafter. Approximately
$50.3 million of the new financing is long-term variable interest rate debt at a variable interest rate of LIBOR
plus 2.14% with a 10-year term and interest only for the first 36 months and a fixed monthly principal component
of $67,000 thereafter. The Company incurred approximately $3.0 million in deferred financing costs related to
the MCF, which are being amortized over 10 years. As a result of the early repayment of the Fannie Mae mort-
gage debt, the Company accelerated the amortization of approximately $1.5 million in unamortized deferred
financing costs and incurred prepayment premiums of approximately $11.1 million. The MCF was subsequently
assigned to Fannie Mae on December 28, 2018, and is reported as such in preceding notes payable summary
table.

On December 18, 2018, the Company completed mortgage financing of $3.5 million from Berkadia at a
variable interest rate of LIBOR plus 3.75% on one community located in Kokomo, Indiana. The mortgage loan is
interest-only and has an 18-month term maturing in July 2020. The Company incurred approximately $91,000 in
deferred financing costs related to this loan, which are being amortized over 18 months.

On December 1, 2018, the Company renewed certain insurance policies and entered into a finance agree-
ment totaling approximately $0.8 million. The finance agreement has a fixed interest rate of 4.40% with the prin-
cipal being repaid over an 11-month term.

On November 30, 2018, the Company completed supplemental mortgage financing of approximately
$1.8 million from Fannie Mae at a fixed interest rate of 6.30% on one community located in Mesquite, Texas.
The supplemental mortgage loan is coterminous, cross-collateralized and cross-defaulted with the original exist-
ing mortgage debt maturing in July 2024. The Company incurred approximately $0.1 million in deferred financ-
ing costs related to this loan, which are being amortized over the remaining initial loan term.

F-19

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

Effective June 29, 2018, the Company extended its mortgage loan with Berkadia on one of its senior living
communities located in Canton, Ohio. The maturity date was extended to October 10, 2021 with an initial varia-
ble interest rate of LIBOR plus 5.0% with principal amortized over 25 years.

Effective May 31, 2018, the Company renewed certain insurance policies and entered into a finance agree-
ment totaling approximately $1.7 million. The finance agreement has a fixed interest rate of 3.64% with the prin-
cipal being repaid over an 11-month term.

The Company issued standby letters of credit with Wells Fargo Bank (“Wells Fargo”), totaling approx-
imately $3.4 million, for the benefit of Hartford Financial Services (“Hartford”) associated with the admin-
istration of workers compensation which remain outstanding as of December 31, 2018.

The Company issued standby letters of credit with JPMorgan Chase Bank (“Chase”), totaling approximately
$6.7 million, for the benefit of Welltower, Inc. (“Welltower”), formerly Healthcare REIT, Inc. on certain leases
between Welltower and the Company which remain outstanding as of December 31, 2018.

The Company issued standby letters of credit with Chase, totaling approximately $2.9 million, for the bene-
fit of HCP, Inc. (“HCP”) on certain leases between HCP and the Company which remain outstanding as of
December 31, 2018.

On December 15, 2017, the Company completed supplemental mortgage financing of approximately
$4.1 million from Fannie Mae at a fixed interest rate of 5.71% on one community located in Oneonta, New York.
The supplemental mortgage loan is coterminous, cross-collateralized and cross-defaulted with the original exist-
ing mortgage debt maturing in June 2025. The Company incurred approximately $0.2 million in deferred financ-
ing costs related to this loan, which are being amortized over the remaining initial loan term.

On December 1, 2017, the Company renewed certain insurance policies and entered into a finance agree-
ment totaling approximately $3.5 million. The finance agreement has a fixed interest rate of 3.04% with the prin-
cipal being repaid over an 11-month term.

On November 30, 2017, the Company completed supplemental mortgage financing of approximately
$3.0 million from Fannie Mae at a fixed interest rate of 5.49% on one community located in Rocky River, Ohio.
The supplemental mortgage loan is coterminous, cross-collateralized and cross-defaulted with the original exist-
ing mortgage debt maturing in January 2023. The Company incurred approximately $0.1 million in deferred
financing costs related to this loan, which are being amortized over the remaining initial loan term.

On May 31, 2017, the Company renewed certain insurance policies and entered into a finance agreement
totaling approximately $1.6 million. The finance agreement has a fixed interest rate of 2.76% with the principal
being repaid over an 11-month term.

On January 31, 2017, in conjunction with the Four Property Lease Transaction, the Company obtained
$65.0 million of mortgage debt from Berkadia. The new mortgage loan is interest-only and has a three-year term,
with an option to extend 6 months, and an initial variable interest rate of LIBOR plus 4.00%. The Company
incurred approximately $0.9 million in deferred financing costs related to this loan, which are being amortized
over three years.

In connection with the Company’s loan commitments described above, the Company incurred financing
charges that were deferred and amortized over the life of the notes. At December 31, 2018 and 2017, the Com-
pany had gross deferred loan costs of $14.1 million and $14.0 million, respectively. Accumulated amortization
was $4.7 million and $4.6 million at December 31, 2018 and 2017, respectively. Amortization expense is
expected to be approximately $1.7 million in each of the next five fiscal years. The Company was in compliance
with all aspects of its outstanding indebtedness at December 31, 2018 and 2017.

F-20

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

8. Equity

Preferred Stock

The Company is authorized to issue preferred stock in series and to fix and state the voting powers and such
designations, preferences and relative participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof. Such action may be taken by the Board without
stockholder approval. The rights, preferences and privileges of holders of common stock are subject to the rights
of the holders of preferred stock. No preferred stock was outstanding as of December 31, 2018 and 2017.

Share Repurchases

On January 22, 2009, the Company’s board of directors approved a share repurchase program that
authorized the Company to purchase up to $10.0 million of the Company’s common stock. Purchases may be
made from time to time using a variety of methods, which may include open market purchases, privately nego-
tiated transactions or block trades, or by any combination of such methods, in accordance with applicable insider
trading and other securities laws and regulations. The size, scope and timing of any purchases will be based on
business, market and other conditions and factors, including price, regulatory and contractual requirements or
consents, and capital availability. The repurchase program does not obligate the Company to acquire any partic-
ular amount of common stock and the share repurchase authorization has no stated expiration date. Shares of
stock repurchased under the program will be held as treasury shares. Pursuant to this authorization, during fiscal
2009, the Company purchased 349,800 shares at an average cost of $2.67 per share for a total cost to the Com-
pany of approximately $0.9 million. On January 14, 2016, the Company announced that its board of directors
approved a continuation of the share repurchase program. Pursuant to this authorization, during fiscal 2016, the
Company purchased 144,315 shares of its common stock at an average cost of $17.29 per share for a total cost to
the Company of approximately $2.5 million. All such purchases were made in open market transactions. There
were no repurchases of the Company’s common stock during fiscal 2018 or 2017.

9. Stock-Based Compensation

Stock Options

The Company’s stock option program is a long-term retention program that is intended to attract, retain and
provide incentives for employees, officers and directors and to more closely align stockholder and employee
interests. The Company’s stock options generally vest over one to five years and the related expense is amortized
on a straight-line basis over the vesting period.

A summary of the Company’s stock option activity and related information for the years ended

December 31, 2018, 2017, and 2016 is presented below:

Outstanding
Beginning of
Year

Granted Exercised

Forfeited

Outstanding
End of Year

Options
Exercisable

December 31, 2018
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average price . . . . . . . . . . . . . . . .
December 31, 2017
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average price . . . . . . . . . . . . . . . .
December 31, 2016
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average price . . . . . . . . . . . . . . . .

—
—

—
—

—
—

—
$ —

—
$ —

3,000
$10.97

F-21

—
$ —

—
$ —

3,000
$10.97

—
—

—
—

—
—

—
$—

—
$—

—
$—

—
$—

—
$—

—
$—

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

No stock options were outstanding at December 31, 2018 and 2017, as all outstanding options have fully

vested and have been exercised or forfeited.

Restricted Stock

The Company may grant restricted stock awards and units to employees, officers, and directors in order to
attract, retain, and provide incentives for such individuals and to more closely align stockholder and employee
interests. For restricted stock awards and units without performance and market-based vesting conditions, the
Company records compensation expense for the entire award on a straight-line basis over the requisite service
period, which is generally a period of one to four years, unless the award is subject to certain accelerated vesting
requirements. Restricted stock awards are considered outstanding at the time of grant since the holders thereof
are entitled to dividends, upon vesting, and voting rights. For restricted stock awards with performance and
market-based vesting conditions, total compensation expense is recognized over the requisite service period once
the performance target is deemed probable of achievement. Performance goals are evaluated periodically and if
such goals are not ultimately met or it is not probable the goals will be achieved, no compensation expense is
recognized and any previously recognized compensation expense is reversed. If the achievement of a market
condition varies from initial estimates on the date of grant, compensation expense will not be adjusted to reflect
the difference since the grant date fair value of the performance award gave consideration to the probability of
market condition achievement.

The Company recognizes compensation expense of a restricted stock award over its respective vesting or
performance period based on the fair value of the award on the grant date, net of actual forfeitures. A summary of
the Company’s restricted common stock awards activity and related information for
the years ended
December 31, 2018, 2017, and 2016 is presented below:

Outstanding
Beginning of
Year

Issued

Vested

Forfeited

Outstanding
End of Year

December 31, 2018
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2017
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

964,484

830,794

(386,900)

(63,219) 1,345,159

829,766

565,745

(355,400)

(75,627)

964,484

783,310

666,883

(565,224)

(55,203)

829,766

The restricted stock outstanding at December 31, 2018, 2017, and 2016, had an aggregate intrinsic value of

$9.1 million, $13.0 million, and $13.3 million, respectively.

During fiscal 2018, the Company awarded 830,794 shares of restricted common stock to certain employees
and directors of the Company, of which 237,840 shares were subject to performance and market-based vesting
conditions. The average market value of the common stock on the date of grant was $11.08. These awards of
restricted shares vest over a one to four-year period, unless the award is subject to certain accelerated vesting
requirements, and had an intrinsic value of $9.2 million on the date of grant. Additionally, during fiscal 2018, the
Company awarded 67,356 restricted stock units to certain directors of the Company with average market value of
$10.69 on the date of grant. These awards of restricted units vest over a one-year period and had an intrinsic
value of approximately $0.7 million on the date of grant.

Stock Based Compensation

The Company uses the Black-Scholes option pricing model to estimate the grant date fair value of its stock
options. The Black-Scholes model requires the input of certain assumptions including expected volatility,

F-22

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

expected dividend yield, expected life of the option and the risk-free interest rate. The expected volatility used by
the Company is based primarily on an analysis of historical prices of the Company’s common stock. The
expected term of options granted is based primarily on historical exercise patterns on the Company’s outstanding
stock options. The risk-free rate is based on zero-coupon U.S. Treasury yields in effect at the date of grant with
the same period as the expected option life. The Company does not expect to pay dividends on its common stock
and therefore has used a dividend yield of zero in determining the fair value of its awards. The option forfeiture
rate assumption used by the Company is based primarily on the Company’s historical option forfeiture patterns.
At December 31, 2018, the Company had no stock options outstanding.

The Company uses the Monte-Carlo simulation model to determine the fair value of performance awards
which include market-based vesting conditions. The Monte-Carlo simulation model uses the same input assump-
tions as the Black-Scholes model, however, it also further incorporates into the fair-value determination the
possibility that the market condition may not be satisfied. Compensation costs related to awards with a market-
based condition are recognized regardless of whether the market condition is satisfied, provided that the requisite
service has been provided. During fiscal 2018, in accordance with the Company’s long-term incentive compensa-
tion plan, the Company granted 237,840 shares of restricted common stock with performance and market-based
vesting conditions to certain employees of the Company. These performance awards are subject to a market-
based condition that may increase or decrease the number of shares vested if the Company’s 2020 Total Stock-
holder Return (“TSR”) exceeds or falls below certain achievement level parameters when ranked against the
Company’s designated Peer Group. These restricted performance shares vest over a three-year period based on
the Company’s Earnings before Interest, Taxes, Depreciation, Amortization, and Rent (“EBITDAR”) financial
performance target set by the Company’s compensation committee for the fiscal year ending December 31, 2020.
The number of shares of restricted common stock ultimately issued will be prorated between performance level
targets achieved.

The Company recognized $8.4 million, $7.7 million, and $11.6 million in stock-based compensation
expense during fiscal 2018, 2017, and 2016, respectively, which primarily is associated with employees whose
corresponding salaries and wages are included in general and administrative expenses within the Company’s
Consolidated Statements of Operations and Comprehensive Loss. Unrecognized stock-based compensation
expense is $9.5 million at December 31, 2018. The Company expects stock-based compensation expense to be
recognized over a one to three-year period for performance restricted stock awards and a one to four-year period
for nonperformance-based restricted stock awards and units.

10. Income Taxes

The (benefit) provision for income taxes consists of the following (in thousands):

Year Ended December 31,

2018

2017

2016

Current:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (152)
474

$

6
550

$—
435

Deferred:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2,093)
—

1,940
—

—
—

(Benefit) Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(1,771)

$2,496

$435

F-23

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

The (benefit) provision for income taxes differed from the amounts of income tax (benefit) provision
determined by applying the U.S. federal statutory income tax rate to income before (benefit) provision for
income taxes as a result of the following (in thousands):

Tax benefit at federal statutory rates . . . . . . . . . . . . . . . . . . . . . . . .
State income tax benefit, net of federal effects . . . . . . . . . . . . . . . .
Change in deferred tax asset valuation allowance . . . . . . . . . . . . . .
Tax reform impact on deferred income taxes . . . . . . . . . . . . . . . . .
Share based compensation ASU 2016-09 adoption . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(Benefit) Provision for income taxes

Year Ended December 31,

2018

2017

2016

$(11,627)
(665)
9,543
—
—
978

$(14,168)
(648)
7,857
13,959
(5,326)
822

$(9,335)
(550)
8,569
—
—
1,751

$ (1,771)

$ 2,496

$

435

The Company is impacted by the Texas Margin Tax (“TMT”), which effectively imposes tax on modified
gross revenues for communities within the State of Texas and accounts for the majority of the Company’s current
state tax expense. During each of fiscal 2018, 2017, and 2016 the Company consolidated 38 Texas communities
and the TMT increased the overall provision for income taxes. The effective tax rate for fiscal 2018 differs from
the statutory tax rate primarily due to state income taxes, changes in the deferred tax asset valuation allowance,
and other permanent tax differences. The effective tax rate for fiscal 2017 differs from the statutory tax rate
primarily due to state income taxes, changes in the deferred tax asset valuation allowance, tax reform impact on
deferred income taxes, adoption of ASU 2016-09, and other permanent tax differences. The effective tax rate for
fiscal 2016 differs from the statutory tax rate primarily due to state income taxes, changes in the deferred tax
asset valuation allowance, and other permanent tax differences. The Company is generally no longer subject to
federal and state tax audits for years before 2015.

A summary of the Company’s deferred tax assets and liabilities, are as follows (in thousands):

December 31,

2018

2017

Deferred tax assets:

Deferred gains on sale/leaseback transactions . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,440
33,252
3,087
5,323
2,330

$ 2,890
25,441
2,245
4,367
2,099

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

46,432
(46,280)

37,042
(36,737)

Total deferred tax assets, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

152

305

Deferred tax liabilities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

(2,246)

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ —

$ (2,246)

Deferred taxes, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

152

$ (1,941)

F-24

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

Income taxes are computed using the asset and liability method and current income taxes are recorded based
on amounts refundable or payable. Deferred income taxes are recorded based on the estimated future tax effects
of loss carryforwards and temporary differences between financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax
rates that are expected to apply to taxable income in the years in which we expect those carryforwards and
temporary differences to be recovered or settled. Management regularly evaluates the future realization of
deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. As part
of the evaluation, management has evaluated taxable income in carryback years, future reversals of taxable
temporary differences, feasible tax planning strategies, and future expectations of income. Based upon this
evaluation, a valuation allowance has been recorded to reduce the Company’s net deferred tax assets to the
amount that is more likely than not to be realized. A significant component of objective evidence evaluated was
the cumulative losses before income taxes incurred by the Company over the past several fiscal years. Such
objective evidence severely limits the ability to consider other subjective evidence such as the Company’s ability
to generate sufficient taxable income in future periods to fully recover the deferred tax assets. However, in the
event that we were to determine that it would be more likely than not that the Company would realize the benefit
of deferred tax assets in the future in excess of their net recorded amounts, adjustments to deferred tax assets
would increase net income in the period we made such a determination. The benefits of the net deferred tax
assets might not be realized if actual results differ from expectations.

At December 31, 2017, the Company completed an analysis determining its best estimate for provisional tax
adjustments based on the revised tax legislation associated with the Tax Cuts and Jobs Act (“TCJA”), which was
enacted on December 22, 2017. Additionally, the Securities and Exchange Commission issued Staff Accounting
Bulletin 118 (“SAB 118”), to address the accounting and reporting of the Act. SAB 118 allowed companies to
take a reasonable period, which should not extent beyond one year from enactment of the TCJA, to measure and
recognize the effects of the new tax law. Based upon the Company’s analysis of the TCJA and consideration of
SAB 118, the Company remeasured its deferred income taxes on a provisional basis as of December 31, 2017,
which resulted in a net $14.0 million reduction in the Company’s deferred tax assets and liabilities. The
remeasurement consisted of a $15.9 million reduction to the Company’s deferred tax assets for the change in the
corporate statutory tax rate from 34% to 21% and a $0.3 million reduction to the Company’s deferred tax asset
valuation allowance for the repeal of the corporate Alternative Minimum Tax (“AMT”), partially offset by a
$2.2 million increase to the Company’s deferred tax asset valuation allowance for maximum deduction limits for
future net operating loss (“NOL”) carryforwards to 80% of taxable income for losses arising in tax years begin-
ning after December 31, 2017.

The Company completed its assessment of the TCJA under SAB 118 as of December 31, 2018, resulting in
a net $2.2 million reduction to the Company’s deferred tax asset valuation allowance. The $2.2million reduction
was primarily related to guidance released in December 2018 for companies electing real property trade or busi-
ness under Section 163(j)(7)(B) of the Internal Revenue Code to opt out of the interest expense limitation. This
guidance requires residential rental property to be depreciated under the Alternative Depreciation System
(“ADS”), including assets placed in service prior to 2018.

As of December 31, 2018, the Company has federal and state NOL carryforwards of $147.2 million and
$121.2 million and related deferred tax assets of $30.9 million and $6.7 million, respectively, and a federal AMT
credit carryforward of $0.2 million. The federal and state NOL carryforwards in the income tax returns filed
included unrecognized tax benefits. The deferred tax assets recognized for those NOLs are presented net of the
unrecognized benefits. If not used, the federal NOL generated prior to fiscal 2018 will expire during fiscal 2033
to 2037 and state NOL’s will expire during fiscal 2019 to 2038. Federal NOL’s generated in fiscal 2018 and
beyond currently have no expiration due to changes to tax laws enacted with the TCJA.

The Company evaluates uncertain tax positions through consideration of accounting and reporting guidance
on criteria, measurement, derecognition, classification, interest and penalties, accounting in interim periods, dis-

F-25

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

closure, and transition that is intended to provide better financial-statement comparability among different
companies. The Company is required to recognize a tax benefit in its financial statements for an uncertain tax
position only if management’s assessment is that its position is “more likely than not” (i.e., a greater than
50 percent likelihood) to be upheld on audit based only on the technical merits of the tax position. The Compa-
ny’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as
income tax expense. As of December 31, 2018, the Company has unrecognized tax benefits of $4.6 million for an
uncertain tax position associated with a change in accounting method. The unrecognized tax benefits as of
December 31, 2018 are timing-related uncertainties that if recognized would not impact the effective tax rate of
the Company.

A summary of the Company’s unrecognized tax benefits activity and related information for the years ended

December 31, 2018, 2017, and 2016 is presented below (in thousands):

2018

2017

2016

Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross increases – tax positions in prior period . . . . . . . . . . . . . . . . . . . .
Gross decreases – tax positions in prior period . . . . . . . . . . . . . . . . . . . .
Gross increases – tax positions in current period . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,416
1,228
—
—
—
—

$3,786
—
(370)
—
—
—

$ —
2,451
—
1,335
—
—

Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,644

$3,416

$3,786

11. Employee Benefit Plans

The Company has a 401(k) salary deferral plan (the “Plan”) in which certain employees of the Company
meeting minimum service and age requirements are eligible to participate. Contributions to the Plan are in the
form of employee salary deferrals, which are subject to employer matching contributions of 50% of up to 4% of
the employee’s annual salary. The Company’s contributions are funded semi-monthly to the Plan administrator.
Matching contributions of $0.5 million were contributed to the Plan in each of fiscal 2018, 2017 and 2016. The
Company incurred administrative expenses related to the Plan of $25,000, $21,300, and $24,600 in fiscal 2018,
2017, and 2016, respectively.

12. Contingencies

The Company has claims incurred in the normal course of its business. Most of these claims are believed by
management to be covered by insurance, subject to normal reservations of rights by the insurance companies and
possibly subject to certain exclusions in the applicable insurance policies. Whether or not covered by insurance,
these claims, in the opinion of management, based on advice of legal counsel, should not have a material effect
on the consolidated financial statements of the Company if determined adversely to the Company.

The Company had two of its senior housing communities located in southeast Texas impacted by Hurricane
Harvey during the third quarter of fiscal 2017. We maintain insurance coverage on these communities which
includes damage caused by flooding. The insurance claim for this incident required a deductible of $100,000 that
was expensed as a component of operating expenses in the Company’s Consolidated Statement of Operations and
Comprehensive Loss in the third quarter of fiscal 2017. Physical repairs have been substantially completed to
restore the communities to their condition prior to the incident and these communities reopened and began
accepting residents in July 2018. Through December 31, 2018, we have incurred approximately $6.9 million in
clean-up and physical repair costs which we believe are probable of being recovered through insurance proceeds.

F-26

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

In addition to the repairs of physical damage to the buildings, the Company’s insurance coverage includes loss of
business income (“Business Interruption”). Business Interruption includes reimbursement for lost revenue as well
as incremental expenses incurred as a result of the hurricane. The Company received payments from our
insurance underwriters during fiscal 2018 totaling approximately $9.2 million and during fiscal 2017 totaling
approximately $2.7 million, of which approximately $5.1 million and $2.2 million, respectively, related to Busi-
ness Interruption which has been included as a reduction to operating expenses in the Company’s Consolidated
Statements of Operations and Comprehensive Loss.

In July 2018, the Company received notifications from the Internal Revenue Service (“IRS”) pursuant to the
Affordable Care Act (“ACA”) that the Company may be liable for an Employer Shared Responsibility Payment
(“ESRP”) in the amount of approximately $2.1 million for the year ended December 31, 2015. The ESRP is
applicable to employers that had 50 or more full-time equivalent employees, did not offer minimum essential
coverage (“MEC”) to at least 70% of full-time employees and their dependents, or did offer MEC to at least 70%
of full-time employees and their dependents which did not meet the affordable or minimum value criteria and
had one or more full-time employees certified as being allowed the premium tax credit (“PTC”). The IRS
determines the amount of the proposed ESRP from information returns completed by employers and from
income tax returns completed by employees. Based upon the Company’s review of the notifications provided by
the IRS, the Company initially concluded it would be liable for approximately $0.2 million of the ESRP assess-
ments which was accrued within certain employee benefit reserves. The Company formally responded to the
notifications from the IRS and received favorable decisions revising the ESRP to $83,200 during the fourth quar-
ter of fiscal 2018.

13. Fair Value of Financial Instruments

The carrying amounts and fair values of financial instruments at December 31, 2018 and 2017 are as follows

(in thousands):

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable, excluding deferred loan costs . . . . .

2018

2017

Carrying
Amount

$ 31,309
13,011
983,207

Fair Value

$ 31,309
13,011
945,318

Carrying
Amount

$ 17,646
13,378
967,332

Fair Value

$ 17,646
13,378
929,000

The following methods and assumptions were used in estimating its fair value disclosures for financial

instruments:

Cash and cash equivalents and Restricted cash: The carrying amounts reported in the balance sheet for cash
and cash equivalents and restricted cash equal fair value, which represent level 1 inputs as defined in the account-
ing standards codification.

Notes payable: The fair value of notes payable is estimated using discounted cash flow analysis, based on
current incremental borrowing rates for similar types of borrowing arrangements, which represent level 2 inputs
as defined in the accounting standards codification.

The estimated fair value of these assets and liabilities could be affected by market changes and this effect

could be material.

F-27

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

14. Allowance for Doubtful Accounts

The components of the allowance for doubtful accounts are as follows (in thousands):

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts, net of recoveries . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs and other

$ 4,881
2,990
(1,078)

$ 4,253
1,748
(1,120)

$3,188
1,727
(662)

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6,793

$ 4,881

$4,253

December 31,

2018

2017

2016

15. Leases

As of December 31, 2018, the Company leased 46 senior housing communities from certain real estate
investment trusts (“REITs”). The lease terms are generally for 10-15 years with renewal options for 5-20 years at
the Company’s option. Under these lease agreements, the Company is responsible for all operating costs, main-
tenance and repairs, insurance and property taxes. No new facility leases were entered into by the Company dur-
ing fiscal 2018.

F-28

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

The following table summarizes each of the Company’s facility lease agreements as of December 31, 2018

(dollars in millions):

Number of
Communities

Value of
Transaction

Current Expiration and
Renewal Term

Initial
Lease
Rate
(1)

Lease
Acquisition and
Modification
Costs (2)

Deferred
Gains /Lease
Concessions (3)

8% $ 7.7

$ 4.2

Landlord

Initial Date of Lease

Ventas . . . . . . . . . September 30, 2005

Ventas . . . . . . . . .

January 31, 2008

Ventas . . . . . . . . .

June 27, 2012

HCP . . . . . . . . . . .

May 1, 2006

HCP . . . . . . . . . . . May 31, 2006

HCP . . . . . . . . . . . December 1, 2006

HCP . . . . . . . . . . . December 14, 2006

HCP . . . . . . . . . . .

April 11, 2007

Welltower

. . . . . .

April 16, 2010

Welltower

. . . . . .

May 1, 2010

4

1

2

3

6

4

1

1

5

3

$ 61.4

5.0

43.3

54.0

43.0

September 30, 2025 (4)
(Two five-year renewals)
September 30, 2025 (4)
(Two five-year renewals)
September 30, 2025 (4)
(Two five-year renewals)
October 31, 2020 (5)
(Two 10-year renewals)
April 30, 2026 (6)
(One 10-year renewal)
October 31, 2020 (5)
(Two 10-year renewals)
October 31, 2020 (5)
(Two 10-year renewals)
October 31, 2020 (5)
(Two 10-year renewals)
48.5 April 30, 2025 (15 years)

51.0

18.0

8.0

7.75%

6.75%

8%

8%

8%

7.75%

7.25%

8.25%

(One 15-year renewal)

36.0 April 30, 2025 (15 years)

8.25%

0.2

0.8

0.3

0.2

0.7

0.3

0.1

0.6

0.2

0.4

—

—

12.8

0.6

—

—

—

0.8

0.4

2.0

Welltower

. . . . . . September 10, 2010

12

104.6

(One 15-year renewal)
September 30, 2025 (15
years)
(One 15-year renewal)

8.50%

Welltower

. . . . . .

April 8, 2011

4

141.0 April 30, 2026 (15 years)

7.25%

0.9

16.3

(One 15-year renewal)

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated amortization through December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deferred gains / lease concessions recognized through December 31, 2018 . . . . . . .

12.4
(7.9)
—

37.1
—
(26.2)

Net lease acquisition costs / deferred gains / lease concessions as of December 31, 2018 . . . . . . .

$ 4.5

$ 10.9

(1) Initial lease rates are measured against agreed upon fair market values and are subject to conditional lease

escalation provisions as set forth in each respective lease agreement.

(2) Lease acquisition and modification costs are being amortized over the respective lease terms.

(3) Deferred gains of $34.5 million and lease concessions of $2.6 million are being recognized in the Company’s
Consolidated Statements of Operations and Comprehensive Loss as a reduction in facility lease expense over
the respective initial lease terms. Lease concessions of $0.6 million relate to the transaction with HCP on
May 31, 2006, and $2.0 million relate to the transaction with Welltower on September 10, 2010.

(4) Effective June 17, 2015, the Company executed amendments to the master lease agreements with Ventas to
facilitate leasehold improvements for 10 of the leased communities, of which the underlying real estate asso-
ciated with four of its operating leases was acquired by the Company upon closing the Four Property Lease
Transaction on January 31, 2017, and extend the lease terms through September 30, 2025, with two five-year
renewal extensions available at the Company’s option.

(5) On November 11, 2013, the Company executed a third amendment to the master lease agreement associated
with nine of its leased communities with HCP to facilitate leasehold improvements for one of the leased

F-29

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

communities and extend the respective lease terms through October 31, 2020, with two 10-year renewal
extensions available at the Company’s option.

(6) On April 24, 2015, the Company exercised its right to extend the lease term with HCP through April 30,

2026, with one 10-year renewal extension remaining available at the Company’s option.

Ventas

As of December 31, 2018, the Company leased seven senior housing communities from Ventas. Effective
January 31, 2017, the Company closed the Four Property Lease Transaction and acquired four of the senior hous-
ing communities leased from Ventas for a total acquisition price of $85.0 million. The Company obtained
interim, interest only, bridge financing from Berkadia for $65.0 million of the acquisition price with an initial
variable interest rate of LIBOR plus 4.0% and a 36-month term, with an option to extend the term 6 months, and
the balance of the acquisition price paid from the Company’s existing cash resources. For additional information
refer to Note 3, “Acquisitions.” Prior to the Four Property Lease Transaction, the Company previously leased 11
senior housing communities from Ventas. During the second quarter of fiscal 2015, the Company executed
amendments to the master lease agreements with Ventas to facilitate up to $24.5 million of leasehold improve-
ments for 10 communities within the Ventas lease portfolio and extend the lease terms until September 30, 2025,
with two five-year renewal extension available at the Company’s option. Additionally, during the second quarter
of fiscal 2016, the Company executed amendments to the master lease agreements with Ventas to increase the
Special Project Funds for leasehold improvements from $24.5 million to $28.5 million and extend the date for
completion of the leasehold improvements to June 30, 2017. During the second quarter of fiscal 2017, the Com-
pany executed amendments to the master lease agreements with Ventas to decrease the Special Project Funds for
leasehold improvements from $28.5 million to approximately $17.0 million due to the Four Property Lease
Transaction and extend the date for completion of the leasehold improvements to June 30, 2018. During the
second quarter of fiscal 2018, the Company executed amendments to the master lease agreements with Ventas to
increase the Special Project Funds for leasehold improvements from approximately $17.0 million to approx-
imately $20.0 million and extend the date for completion of the leasehold improvements to June 30, 2019. The
initial lease rates under each of the Ventas Lease Agreements range from 6.75% to 8% and are subject to certain
conditional escalation clauses that will be recognized when probable or incurred. The Company initially incurred
$11.4 million in lease acquisition and modification costs related to the Ventas Lease Agreements, of which a
portion of these costs were written-off upon closing the Four Property Lease Transaction leaving $8.7 million in
lease acquisition and modification costs associated with the remaining properties. These deferred lease acquis-
ition and modification costs are being amortized over the lease terms and are included in facility lease expense in
the Company’s Consolidated Statement of Operations and Comprehensive loss. The Company accounts for five
of the Ventas Lease Agreements as an operating lease and two as a Capital lease and financing obligation.

Effective June 27, 2012, the Company closed a lease modification transaction with Ventas which resulted in
the Company exchanging two of its owned communities for one of the communities in the existing Ventas lease
portfolio and simultaneously leasing back the two communities exchanged (the “Ventas Lease Transaction”).
This transaction was the result of negotiations for a solution to the anticipation of the Company not meeting cer-
tain lease coverage ratio requirements for its lease portfolio of ten properties with Ventas. The two communities
previously owned by the Company are located in East Lansing, Michigan (the “East Lansing Community”) and
Raleigh, North Carolina (the “Raleigh Community”) and were exchanged for a community located in Merrill-
ville, Indiana (the “Towne Centre Community”). All three communities continue to be operated by the Company.
In conjunction with this transaction, Ventas assumed approximately $18.3 million of existing mortgage debt from
Berkadia and the Company received the Towne Centre Community unencumbered. All of the leased commun-
ities in the Ventas lease portfolio were modified to be coterminous with the East Lansing and Raleigh Commun-
ity leases expiring on September 30, 2020, which were extended to September 30, 2025 during fiscal 2015, with
two 5-year renewal extensions available at the Company’s option, eliminate property-level lease covenants, and

F-30

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

contain substantially similar terms and conditions. These leases were re-evaluated by the Company at the mod-
ification date and continue to be treated as operating leases. Under the terms of the original lease agreements
with Ventas, the Company had previously deposited additional cash collateral of approximately $3.4 million,
which was returnable to the Company once certain performance targets were reached. However, due to the
rebalanced lease portfolio meeting the lease coverage ratio requirements, the Company negotiated the return of
these deposits as a condition to the lease modification. Additionally, due to the extension of the lease terms for
the Ventas lease portfolio to fiscal 2020, the rights of Ventas to reset the underlying values of the leased
communities were deferred for five years.

Pursuant to ASC 840, Leases, the Company performed a sale/leaseback analysis to determine whether the
East Lansing Community and Raleigh Community could be removed from its Consolidated Balance Sheets.
Based upon the analysis performed, the Company concluded certain aspects of the lease modification would be
considered forms of “continuing involvement” which precludes the Company from derecognizing these assets
from its Consolidated Balance Sheets under sale/leaseback accounting criteria. Therefore, the Company recorded
financing obligations equal to the fair market value of the communities exchanged and the mortgage debt
assumed by Ventas. At the end of the lease term, including exercise of any renewal options, the net remaining
financing obligation less the net carrying value of the leased assets will be recognized as a non-cash gain on sale
of the East Lansing Community and Raleigh Community. Rental payments under these leases will not be
reflected as a component of facility lease expense but will be recognized as a reduction of the financing obliga-
tion and interest expense based upon the Company’s incremental borrowing rate at the time the transaction was
closed. As a result of this transaction, the Company recorded additions to property and equipment of approx-
imately $13.2 million and other assets, primarily consisting of lease intangibles, of approximately $11.8 million
within the Company’s Consolidated Balance Sheets, which will be depreciated or amortized over the estimated
useful lives. The additions to property and equipment were reduced by approximately $4.9 million, which repre-
sented the unamortized portion of the deferred gain previously recognized by the Company when the Towne
Centre Community had been sold in fiscal 2006. Lease intangibles consist of the fair value of in-place leases
associated with the Towne Centre Community and the fair value attributable to Ventas deferring its right to reset
the underlying values of the lease portfolio five years until fiscal 2020.

HCP

As of December 31, 2018, the Company leased 15 senior housing communities from HCP. During the
fourth quarter of fiscal 2013, the Company executed an amendment to the master lease agreement with HCP to
facilitate up to $3.3 million of leasehold improvements for one community within the HCP lease portfolio and
extend the initial lease terms for nine communities until October 31, 2020, with two 10-year renewal extensions
available at the Company’s option. During the second quarter of fiscal 2015, the Company exercised its right to
extend the lease term with HCP for the remaining six communities in the HCP lease portfolio until April 30,
2026, with one 10-year renewal extension available at the Company’s option. The initial lease rates under the
HCP Lease Agreements range from 7.25% to 8% and are subject to certain conditional escalation clauses, which
will be recognized when probable or incurred. The Company incurred $1.6 million in lease acquisition and mod-
ification costs related to the HCP Lease Agreements. These deferred lease acquisition and modification costs are
being amortized over the lease terms and are included in facility lease expense in the Company’s Consolidated
Statements of Operations and Comprehensive Loss. The Company accounts for each of the HCP Lease Agree-
ments as an operating lease.

Welltower

As of December 31, 2018, the Company leased 24 senior housing communities from Welltower. The Well-
tower Lease Agreements each have an initial term of 15 years, with one 15-year renewal extension available at
the Company’s option. The initial lease rates under the Welltower Lease Agreements range from 7.25% to 8.5%

F-31

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

and are subject to certain conditional escalation clauses, which will be recognized when probable or incurred.
The initial terms on the Welltower Lease Agreements expire on various dates from April 2025 through April
2026. The Company incurred $2.1 million in lease acquisition costs related to the Welltower Lease Agreements.
These deferred lease acquisition costs are being amortized over the lease terms and are included in facility lease
expense in the Company’s Consolidated Statements of Operations and Comprehensive Loss. The Company
accounts for each of the Welltower Lease Agreements as an operating lease.

Facility lease expense in the Company’s Consolidated Statements of Operations and Comprehensive Loss
includes rent expense plus amortization expense relating to leasehold acquisition costs offset by the amortization
of deferred gains and lease incentives. The Company leases its corporate headquarters in Dallas, Texas, and has
various lease contracts for a duration of 5 years or less on automobiles, buses and office equipment. The lease on
the corporate headquarters currently expires on September 30, 2020.

The Company incurred $60.6 million, $59.7 million, and $64.5 million in lease expense during fiscal 2018, 2017,

and 2016, respectively. Future minimum lease commitments as of December 31, 2018, are as follows (in thousands):

2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 66,455
63,929
52,093
52,062
52,026
97,165

$383,730

At each of December 31, 2018 and 2017, the Company had gross deferred lease costs of $12.4 million.
Accumulated amortization at December 31, 2018 and 2017 was $8.0 million and $7.2 million, respectively, and
amortization expense is expected to be approximately $0.8 million in each of the next five fiscal years. There are
various financial covenants and other restrictions in the Company’s lease agreements. The Company was in
compliance with all of its lease covenants at December 31, 2018 and 2017.

16. Quarterly Financial Information (Unaudited)

The following table presents certain unaudited quarterly financial information for each of the four quarters
ended December 31, 2018 and 2017. This information has been prepared on the same basis as the audited con-
solidated financial statements of the Company and include, in the opinion of the Company’s management, all
adjustments (consisting of normal recurring adjustments) necessary to present fairly the quarterly results when
read in conjunction with the audited consolidated financial statements of the Company.

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (Loss) from operations . . . . . . . . . . . . . . . .
Net loss and comprehensive loss . . . . . . . . . . . . . . .
Net loss per share, basic . . . . . . . . . . . . . . . . . . . . .
Net loss per share, diluted . . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding, basic . . . . . .
Weighted average shares outstanding, fully

diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-32

2018 Calendar Quarters

First

Second

Third

Fourth (1)

(In thousands, except per share amounts)

$114,643
5,386
(7,156)
(0.24)
(0.24)
29,627

$
$

$114,627
3,643
(9,060)
(0.30)
(0.30)
29,831

$
$

$115,650
1,696
(11,089)
(0.37)
(0.37)
29,877

$
$

$115,098
(3,122)
(26,291)
(0.88)
(0.88)
29,908

$
$

29,627

29,831

29,877

29,908

CAPITAL SENIOR LIVING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

(1) The fourth quarter of calendar 2018 was impacted by $4.2 million of additional general and administrative
expenses for separation and placement costs primarily associated with the retirement and replacement of the
Company’s CEO and $12.6 million for write-off of deferred loan costs and prepayment premiums from the
early repayment of certain mortgage debt on the Company’s owned properties due to the opportunity to
establish a MCF with Berkadia and extend scheduled maturities.

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) Income from operations . . . . . . . . . . . . . . . .
Net loss and comprehensive loss . . . . . . . . . . . . . . .
Net loss per share, basic . . . . . . . . . . . . . . . . . . . . .
Net loss per share, diluted . . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding, basic . . . . . .
Weighted average shares outstanding, fully

2017 Calendar Quarters

First

Second

Third

Fourth

(In thousands, except per share amounts)

$115,990
(9,610)
(21,842)
(0.75)
(0.75)
29,288

$
$

$116,718
4,691
(7,835)
(0.27)
(0.27)
29,478

$
$

$117,318
4,513
(8,132)
(0.28)
(0.28)
29,512

$
$

$116,971
8,248
(6,359)
(0.22)
(0.22)
29,531

$
$

diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29,288

29,478

29,512

29,531

F-33

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of
Capital Senior Living Corporation

Opinion on Internal Control over Financial Reporting

We have audited Capital Senior Living Corporation’s internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Com-
mittee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our
opinion, Capital Senior Living Corporation (the Company) maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017,
the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows
for each of the three years in the period ended December 31, 2018, and the related notes and our report dated
March 1, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial report-
ing and for its assessment of the effectiveness of internal control over financial reporting included in the accom-
panying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public account-
ing firm registered with the PCAOB and are required to be independent with respect to the Company in accord-
ance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the circum-
stances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the compa-
ny’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect mis-
statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that con-
trols may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.

Dallas, Texas
March 1, 2019

/s/

Ernst & Young LLP

F-34

NON-GAAP RECONCILIATIONS
(In thousands)

ATTACHMENT A

The Company utilizes certain financial valuation and performance measures that are not calculated in
accordance with U.S. generally accepted accounting principles (“GAAP”). Non-GAAP financial valuation and
performance measures may have material limitations in that they do not reflect all of the costs associated with
our results of operations as determined in accordance with GAAP. As a result, these non-GAAP financial
measures should not be considered a substitute for, nor superior to, financial results and measures determined or
calculated in accordance with GAAP. Adjusted EBITDAR is a financial valuation measure commonly used by
our management, research analysts and investors to value companies in the senior living industry. Because
Adjusted EBITDAR excludes interest expense and rent expense, it allows our management, research analysts and
investors to compare the enterprise values of different companies without regard to differences in capital
structures and leasing arrangements. The Company believes that adjusted CFFO is useful as a financial
performance measure in identifying trends in day-to-day operations because it excludes the costs associated with
acquisitions and conversions and other items that do not ordinarily reflect the ongoing operating results of our
primary business. Adjusted CFFO provides indicators to management of progress in achieving both consolidated
and individual business unit operating performance and is used by research analysts and investors to evaluate the
performance of companies in the senior living industry. The Company strongly urges you to review the following
reconciliation of net loss to adjusted EBITDAR and the reconciliation of net loss to adjusted CFFO, along with
the Company’s consolidated balance sheets, statements of operations and comprehensive loss, and statements of
cash flows included within the Company’s Annual Reports on Form 10-K.

Year Ended December 31,

2018

2017

2016

Adjusted EBITDAR

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on facility lease termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of deferred loan costs and prepayment premiums . . . . . . . . . . .
(Gain) Loss on disposition of assets, net . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Benefit) Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Casualty losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction and conversion costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee placement and separation costs . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefit reserve adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communities excluded due to repositioning . . . . . . . . . . . . . . . . . . . . . . .

$ (53,596) $ (44,168) $ (28,017)
60,398
66,199
11,645
7,682
61,718
56,432
—
12,858
1,727
1,748
(73)
(67)
42,207
49,471
—
—
65
123
(233)
(7)
435
2,496
1,271
1,996
4,922
2,323
—
—
—
—
(3,167)
(3,716)

62,824
8,428
56,551
—
2,990
(165)
50,543
12,623
(28)
(3)
(1,771)
1,951
2,443
4,168
548
168

Adjusted EBITDAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$147,674

$153,364

$152,904

Adjusted CFFO

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash charges, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recurring capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Casualty losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction and conversion costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee placement and separation costs . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefit reserve adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax impact of Spring Meadows Transaction . . . . . . . . . . . . . . . . . . . . . . .
Communities excluded due to repositioning . . . . . . . . . . . . . . . . . . . . . . .

$ (53,596) $ (44,168) $ (28,017)
82,113
95,976
(7,530)
(5,673)
(4,634)
(4,746)
1,271
2,028
5,568
2,681
—
—
—
—
(424)
—
(43)
(226)

87,061
(3,376)
(4,746)
1,951
2,535
4,168
548
—
1,570

Adjusted CFFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 36,115

$ 45,872

$ 48,304

Company Management

Board of Directors

Shareholder Information

KIMBERLY S. LODY
President, Chief Executive Officer and
Director

CAREY P. HENDRICKSON
Executive Vice President
and Chief Financial Officer

MICHAEL C. FRYAR
Senior Vice President
and Chief Revenue Officer

DAVID R. BRICKMAN
Senior Vice President, General
Counsel and Secretary

JEREMY D. FALKE
Senior Vice President,
Human Resources

DAVID W. BEATHARD
Senior Vice President, Operations

CAROLE J. BURNELL
Vice President, Operations

JEFFREY P. CELLUCCI
Vice President, Operations

GLORIA M. HOLLAND
Vice President, Finance

ROBERT F. HOLLISTER
Property Controller

JOHN J. KLITSCH
Vice President,
Sales/Business Development

CHRISTOPHER H. LANE
Vice President, Financial Reporting

JOSEPH G. SOLARI
Vice President, Corporate
Development

MICHAEL W. REID 1
Chairman of the Board
Capital Senior Living Corporation
Managing Partner
HSP Real Estate Group
New York, New York

KIMBERLY S. LODY
President, Chief Executive Officer
and Director
Capital Senior Living Corporation
Dallas, Texas

PHILIP A. BROOKS 2, 3
Managing Partner
Select Living, LLC
Richmond, Virginia

ED A. GRIER 1, 2
Dean, School of Business
Virginia Commonwealth University
Richmond, Virginia

E. RODNEY HORNBAKE, M.D. 3
Independent Medical Consultant
East Haddam, Connecticut

JILL M. KRUEGER 1, 2
President and CEO
Symbria, Inc.
Warrenville, Illinois

RONALD A. MALONE 1, 3
Former Director and CEO
Gentiva Health Services, Inc.
Atlanta, Georgia

PAUL J. ISAAC 1
Founder and CEO
Arbiter Partners Capital
Management, LLC
New York, New York

ROSS B. LEVIN 2
Director of Research
Arbiter Partners Capital
Management, LLC
New York, New York

1 Member of the Board’s Compensation Committee
2 Member of the Board’s Audit Committee
3 Member of the Board’s Nominating and Corporate

Governance Committee

STOCK EXCHANGE LISTING
Capital Senior Living Corporation
Common Stock is listed on the New
York Stock Exchange and trades
under the symbol CSU.

TRANSFER AGENT AND
REGISTRAR
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, KY 40233-5000
or
462 South 4th Street, Ste 1600
Louisville, KY 40202
(866) 267-2831
TDD for hearing impaired: (800) 231-5469
Foreign shareowners: (201) 680-6578
TDD foreign shareowners: (201) 680-6610
www.computershare.com/investor

AUDITORS
Ernst & Young LLP
2323 Victory Avenue, Suite 2000
Dallas, Texas 75219
(214) 969-8000

Corporate Information

CORPORATE HEADQUARTERS
14160 Dallas Parkway, Suite 300
Dallas, Texas 75254
(972) 770-5600
(972) 770-5666 fax
main@capitalsenior.com

CORPORATE WEB SITE
www.capitalsenior.com

Form 10-K

A copy of Capital Senior Living
Corporation’s 2018 annual report to
the SEC on Form 10-K is included herein
and is available without charge upon written
request to the Investor Relations Department
at corporate headquarters. It can also be
found on the Company’s web site,
www.capitalsenior.com.

Annual Shareholders Meeting

May 14, 2019 at 10:00 am, Central Time
The Westin Galleria Dallas
13340 Dallas Parkway
Dallas, Texas 75240
(972) 934-9494

14160 Dallas Parkway, Suite 300
Dallas, Texas 75254
972.770.5600

Fax: 972.770.5666

www.capitalsenior.com