UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended March 31, 2020 

OR

For the transition period from                      to                     

Commission file number: 1-13445

Capital Senior Living Corporation

(Exact Name of Registrant as Specified in its Charter)

(972) 770-5600

(Registrant’s Telephone Number, Including Area Code)

NONE

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

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   ☒     No   ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes   ☒     No   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

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  ☐    No  ☒

As of June 11, 2020, the Registrant had 30,697,633 outstanding shares of its Common Stock, $0.01 par value, per share.

EXPLANATORY NOTE

As previously disclosed in the Current Report on Form 8-K filed by Capital Senior Living Corporation (the “Company”) with the Securities and Exchange Commission (the “SEC”) on May 8, 2020, the filing of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (this “Quarterly Report”) was delayed due to circumstances related to the novel coronavirus (COVID-19). The COVID-19 pandemic has caused disruptions in the Company’s business and operations, including due to recent quarantines, shelter-in-place orders, travel bans, illnesses and other limitations, which have required the Company’s employees to work remotely and disrupted normal interactions with accounting personnel, legal advisors and other parties involved in the preparation of this Quarterly Report, including a third party accounting firm who assisted the Company with accounting considerations related to the recently announced restructuring of the Company’s lease agreements with its three largest landlords. This prevented the Company from completing the tasks necessary to file this Quarterly Report by its May 11, 2020 due date. The Company relied on the SEC’s Orders under Section 36 of the Securities and Exchange Act of 1934, as amended, dated March 4, 2020 and March 25, 2020 (Release Nos. 34-88318 and 34-88465), to delay the filing of this Quarterly Report.

CAPITAL SENIOR LIVING CORPORATION

INDEX

2

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands)

See accompanying notes to unaudited consolidated financial statements.

3

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited, in thousands, except per share data)

See accompanying notes to unaudited consolidated financial statements.

4

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(unaudited, in thousands)

See accompanying notes to unaudited consolidated financial statements.

5

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

See accompanying notes to unaudited consolidated financial statements.

6

CAPITAL SENIOR LIVING CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

1. BASIS OF PRESENTATION

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, and manages senior housing communities throughout the United States. As of March 31, 2020, the Company operated 124 senior housing communities in 23 states with an aggregate capacity of approximately 15,600 residents, including 79 senior housing communities that the Company owned, 39 senior housing communities that the Company leased, and six communities that the Company managed on behalf of a third party. The accompanying consolidated financial statements 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.

The accompanying Consolidated Balance Sheet, as of December 31, 2019, has been derived from audited consolidated financial statements of the Company for the year ended December 31, 2019, and the accompanying unaudited consolidated financial statements, as of and for the three month periods ended March 31, 2020 and 2019, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States have not been included pursuant to those rules and regulations. For further information, refer to the financial statements and notes thereto for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2020.  The Company meets the SEC’s definition of a “Smaller Reporting Company,” and therefore qualifies for the SEC’s reduced disclosure requirements for smaller reporting companies.

In the opinion of the Company, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position as of March 31, 2020, results of operations and cash flows for the three month periods ended March 31, 2020 and 2019. The results of operations for the three month periods ended March 31, 2020 are not necessarily indicative of the results for the year ending December 31, 2020.

2. GOING CONCERN UNCERTAINTY

A new strain of coronavirus, which causes the viral disease known as COVID-19, has spread from China to many other countries, including the United States. COVID-19 has caused, and will continue to cause, a decline in the occupancy levels at the Company’s communities, which will negatively impact its revenues and operating results, which depend significantly on such occupancy levels.

In an effort to protect its residents and employees and slow the spread of COVID-19 and in response to recent quarantines, shelter-in-place orders and other limitations imposed by federal, state and local governments, the Company has restricted or limited access to its communities, including limitations on in-person prospective resident tours and, in certain cases, new resident admissions. As a result, COVID-19 has caused, and management expects will continue to cause, a decline in the occupancy levels at the Company’s communities, which will negatively impact revenues and operating results, which depend significantly on such occupancy levels.  Reduced controllable move-out activity during the pandemic may partially offset future adverse revenue impacts.

In addition, the recent outbreak of COVID-19 has required the Company to incur, and management expects will require the Company to continue to incur, significant additional operating costs and expenses in order to implement enhanced infection control protocols and otherwise care for its residents, including increased costs and expenses relating to supplies and personal protective equipment, labor and specialized disinfecting and cleaning services. Further, residents at certain of its senior housing communities have tested positive for COVID-19, which has increased the costs of caring for the residents and resulted in reduced occupancies at such communities.

ASC 205-40, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” requires an evaluation of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued. Initially, this evaluation does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management evaluates the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

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In complying with the requirements under ASC 205-40 to complete an evaluation without considering mitigating factors, the Company considered several conditions or events including 1) uncertainty around the impact of COVID-19 on the Company’s operations and financial results, and 2) operating losses and negative cash flows from operations for projected fiscal year 2020. The above conditions raise substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

The Company is implementing plans as discussed below, which includes strategic and cash-preservation initiatives, which are designed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date its financial statements are issued. The Company’s primary sources of near- and medium-term liquidity are expected to be (1) improved operating cash flows due to strategic and cash preservation initiatives discussed below, (2) debt forbearance, to the extent available on acceptable terms, and (3) forbearance on rent payments to landlords, to the extent available on acceptable terms.

Strategic and Cash Preservation Initiatives

The Company has taken or intends to take the following actions, among others, to improve its liquidity position and to address uncertainty about its ability to operate as a going concern:

The Company’s plans are designed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date its financial statements are issued; however, the remediation plan is dependent on conditions and matters that may be outside of the Company’s control or may not be available on terms acceptable to the Company, or at all, many of which have been made worse or more unpredictable by COVID-19.  Accordingly, management determined it was not probable the plans will be effectively implemented within one year after the date the financial statements are issued. If the Company is unable to successfully execute all of these initiatives or if the plan does not fully mitigate the Company’s liquidity challenges, the Company’s operating plans and resulting cash flows along with its cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the twelve-month period following the date the financial statements are issued.  

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The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date the financial statements are issued. As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.

3. 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 deposits must remain so long as the letters of credit are outstanding which are subject to renewal annually.

The following table sets forth the Company’s cash and cash equivalents and restricted cash (in thousands):

Long-Lived Assets and Impairment

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 to determine whether impairment indicators exist.

If an indicator of impairment is identified, the carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is separately identifiable and is less than its carrying value. Recoverability of an asset group is assessed by comparing its carrying amount to the estimated future undiscounted net cash flows expected to be generated by the asset group through operation or disposition, calculated utilizing the lowest level of identifiable cash flows. If this comparison indicates that the carrying amount of an asset group is not recoverable, the Company recognizes an impairment loss. Asset groups were established at the individual property level and consist of property and equipment, net for owned properties and property and equipment, net and right-of-use assets, net for leased properties.  The Company determines the fair value of operating lease right-of-use (“ROU”) assets by comparing the contractual rent payments to estimated market rental rates. Long-lived ROU and fixed assets are valued at fair value using inputs classified as Level 3 in the fair value hierarchy, which are unobservable inputs based on the Company’s assumptions. Impairment, if any, is recorded in the period in which the impairment occurred.

Assets Held for Sale

Assets are classified as held for sale when the Company has determined all of the held-for-sale criteria have been met. The Company determines the fair value, net of costs of disposal, of an asset on the date the asset is categorized as held for sale, and the asset is recorded at the lower of its fair value, net of cost of disposal, or carrying value on that date. The Company periodically reevaluates assets held for sale to determine if the assets are still recorded at the lower of fair value, net of cost of disposal, or carrying value. The fair values are generally determined based on market rates, industry trends, and recent comparable sales transactions. The actual sales price of these assets could differ significantly from the Company’s estimates. During the three months ended March 31, 2019, the Company classified one senior housing community located in Kokomo, Indiana, as held for sale, resulting in $4.9 million being reclassified as assets held for sale and $3.5 million of corresponding mortgage debt being reclassified to the current portion of notes payable within the Consolidated Balance Sheet. The Company determined, using level 2 inputs as defined in the accounting standards codification, that the assets had an aggregate fair value, net of costs of disposal of $4.9 million. As the fair value was less than the carrying value of $7.2 million, a remeasurement write-down of approximately $2.3 million was recorded to adjust the carrying values of the assets held for sale at March 31, 2019. There were no senior housing communities classified as held for sale by the Company at March 31, 2020 or December 31, 2019.

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Off-Balance Sheet Arrangements

The Company had no material off-balance sheet arrangements at March 31, 2020 or December 31, 2019.

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 $103.6 million and $112.6 million for the three months ended March 31, 2020 and 2019, respectively. 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. At December 31, 2019, the Company had contract liabilities for deferred resident fees paid by our residents prior to the month housing and support services were to be provided totaling approximately $4.3 million, which were recognized into revenue during the three months ended March 31, 2020. At December 31, 2018, the Company had contract liabilities for deferred resident fees paid by our residents prior to the month housing and support services were to be provided totaling approximately $4.5 million, which were recognized into revenue during the three months ended March 31, 2019. The Company had contract liabilities for deferred resident fees totaling approximately $4.6 million and $4.3 million which are included as a component of deferred income within current liabilities of the Company’s Consolidated Balance Sheets at March 31, 2020 and December 31, 2019, 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 and totaled approximately $0.9 million and $1.0 million for the three months ended March 31, 2020 and 2019, respectively, 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 that generally require the resident to pay a community fee prior to moving into the community and are recorded initially by the Company as deferred revenue. At March 31, 2020 and December 31, 2019, the Company had contract liabilities for deferred community fees totaling approximately $2.2 million and $2.2 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 $1.1 million and $0.6 million during the three months ended March 31, 2020 and 2019, respectively.

During the three months ended March 31, 2020, the Company entered into a management agreement whereby it manages certain communities under a contract which provides periodic management fee payments to the Company and reimbursement for costs and expense related to such communities. Management fees are generally determined by an agreed upon percentage of gross revenues (as defined in the management agreement). The Company has determined that all community management activities are a single performance obligation, which is satisfied over time as the services are rendered. The Company's estimate of the transaction price for management services also includes the amount of reimbursement due from the owners of the communities for services provided and related costs incurred. Such revenue is included in "reimbursed costs incurred on behalf of managed communities" on the Company’s Consolidated Statements of Operations and Comprehensive Loss. The related costs are included in "costs incurred on behalf of managed communities" on the Company’s Consolidated Statements of Operations and Comprehensive Loss.  The Company recognized revenue from management fees and reimbursed costs incurred on behalf of managed communities of $0.1 million and $0.4 million, respectively, during the three months ended March 31, 2020.

Lease Accounting

Management determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of the identified asset means the lessee has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset.

Operating lease right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term on the lease commencement date. When the implicit lease rate is not determinable, management uses the Company’s incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future minimum lease payments. The expected lease terms include options to extend or terminate the lease when it is reasonably certain the Company will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease terms.

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Financing lease right-of-use assets are recognized within property, plant and equipment and leasehold improvements, net on the Company's consolidated balance sheets. The Company recognizes interest expense on the financing lease liabilities utilizing the effective interest method. The right-of-use asset is generally amortized to depreciation and amortization expense on a straight-line basis over the lease term.

Modifications to existing lease agreements, including changes to the lease term or payment amounts, are reviewed to determine whether they result in a separate contract. For modifications that do not result in a separate contract, management reviews the lease classification and re-measures the related right-of-use assets and liabilities at the effective date of the modification.

Certain of the Company’s lease arrangements have lease and non-lease components. The Company accounts for the lease components and non-lease components as a single lease component for all classes of underlying assets. Leases with an expected lease term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the expected lease term.

Credit Risk and Allowance for Doubtful Accounts

The Company’s resident receivables are generally due within 30 days from the date billed. Accounts receivable are reported net of an allowance for doubtful accounts of $8.8 million and $8.6 million at March 31, 2020, and December 31, 2019, respectively, and represent the Company’s estimate of the amount that ultimately will be collected. 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.

Self-Insurance Liability Accruals

The Company offers full-time employees an option to participate in its health and dental plans. The Company 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. Additionally, the Company may be liable for an Employee Shared Responsibility Payment (“ESRP”) pursuant to the Affordable Care Act (“ACA”). 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 that 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. Management believes that the liabilities recorded and reserves established for outstanding losses and expenses are adequate to cover the ultimate cost of losses and expenses incurred at March 31, 2020; 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 pending 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.

Income Taxes

Income taxes are computed using the asset and liability method and current income taxes are recorded based on amounts refundable or payable in the current year. The effective tax rates for the three months ended March 31, 2020 and 2019 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. The Company consolidates 38 Texas communities for purposes of the TMT, which contributes to the overall provision for income taxes.

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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. At year end, the Company had a three-year cumulative operating loss for its U.S. operations and accordingly, has provided a full valuation allowance on its U.S. and state net deferred tax assets.  The valuation allowance reduces the Company’s net deferred tax assets to the amount that is “more likely than not” (i.e., a greater than 50% likelihood) 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 such determination was made. The benefits of the net deferred tax assets might not be realized if actual results differ from expectations.

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, disclosure, 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 such position is “more likely than not” to be upheld on audit based only on the technical merits of the tax position. The Company’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 tax audits for years prior to 2016.

More recently, on March 18, 2020, the Families First Coronavirus Response Act (FFCR Act), and on March 27, 2020, the CARES Act were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning after December 31, 2017. Future regulatory guidance under the FFCR Act and the CARES Act remains forthcoming, and such guidance could ultimately increase or lessen their impact on our business and financial condition.

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.

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

Awards of unvested restricted stock and restricted stock units representing approximately 933,000 shares, as well as 147,000 outstanding stock options, were antidilutive as a result of the net loss reported by the Company for the three months ended March 31, 2020. Awards of unvested restricted stock and restricted stock units representing approximately 984,000 shares and approximately 147,000 stock options, respectively, were antidilutive as a result of the net loss reported by the Company for the three months ended March 31, 2019. Accordingly, such shares and options were not included in the calculation of diluted weighted average shares outstanding for the three months ended March 31, 2020 and 2019.

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Treasury Stock

The Company accounts for treasury stock under the cost method and includes treasury stock as a component of shareholders’ equity (deficit). All shares acquired by the Company have been purchased in open-market transactions. There were no repurchases of the Company’s common stock during the three months ended March 31, 2020 or fiscal 2019.

Recently Issued Accounting Guidance

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies certain disclosure requirements in Topic 820, such as the removal of the need to disclose the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, and several changes related to Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. The Company adopted ASU 2018-13 on January 1, 2020, the adoption of which did not have a material impact on its consolidated financial statements and disclosures.

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 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. For smaller reporting companies, ASU 2016-13 is effective for fiscal years and for interim periods within those fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements and disclosures.

4. IMPAIRMENT OF LONG-LIVED ASSETS

During the three months ended March 31, 2020, the Company determined that the modifications of certain of its Master Lease Agreements (see “Note 5- Dispositions and Other Significant Transactions”) and adverse impacts on the Company’s operating results resulting from the COVID-19 pandemic were indicators of potential impairment of its long-lived assets.  As such, the Company evaluated its long-lived asset groups for impairment and identified communities with a carrying amount of the assets in excess of the estimated future undiscounted net cash flows expected to be generated by the assets.    

In March 2020, the Company entered into forbearance agreements with Ventas and Welltower, which, among other things, provide that the lease agreements covering the communities will be converted into property management agreements with the Company as manager on December 31, 2020 if the properties have not transitioned to a successor operator on or prior to such date (see “Note 5- Dispositions and Other Significant Transactions”). The Company’s leases with Ventas and Welltower were originally scheduled to mature during 2025 and 2026.  Due to the modification of the lease term and the expected impacts of the COVID-19 pandemic, the Company evaluated certain owned communities and all leased communities for impairment and tested the recoverability of these assets by comparing projected undiscounted cash flows associated with these assets to their respective historical carrying values.  For communities in which the historical carrying value was not recoverable, the Company compared the estimated fair value of the assets to their carrying amount and recorded an impairment charge for the excess of carrying amount over fair value.  For the operating lease right-of-use assets fair value was estimated utilizing a discounted cash flow approach based on historical and projected cash flows and market data, including management fees and a market support lease coverage ratio.  The fair values of the property and equipment, net of these communities were primarily determined utilizing the cost approach, which determines the current replacement cost of the property being appraised and then deducts for the loss in value caused by physical deterioration, functional obsolescence, and economic obsolescence the amount required to replace the asset as if new and adjusts to reflect usage.  These fair value measurements are considered Level 3 measurements within the valuation hierarchy.  For the three months ended March 31, 2020, the Company recorded non-cash impairment charges of $6.2 million and $29.8 million to operating lease right-of-use assets, net and property and equipment, net, respectively.  No impairment charges were recorded for the three months ended March 31, 2019.

5. DISPOSITIONS AND OTHER SIGNIFICANT TRANSACTIONS

Disposition of Boca Raton, Florida Community

Effective January 15, 2020, the Company’s leased senior living community located in Boca Raton, Florida transitioned to a new operator.  In conjunction with the transition, the Company paid the lessor, Healthpeak, a one-time $0.3 million termination payment as a prepayment against the remaining lease payments and was relieved of any additional obligation to Healthpeak with regard to that property.  The Company recorded a $1.8 million gain on the transaction, which is included in gain on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Loss.

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Disposition of Merrillville, Indiana Community

Effective March 31, 2020, the Company sold one community located in Merrillville, Indiana for a total purchase price of $7.0 million and received approximately $6.9 million in cash proceeds after paying customary closing costs.  The community was unencumbered by any mortgage debt.  The Company recognized a loss of $7.4 million on the disposition, which is included in loss on disposition of assets, net on the Company’s Consolidated Statements of Operations and Comprehensive Loss.  The community was comprised of 171 assisted living units and 42 memory care units.

Early Termination of Master Lease Agreements

As of December 31, 2019, the Company leased 46 senior housing communities from certain real estate investment trusts (“REITs”) and transitioned one community to a different operator effective January 15, 2020. During the three months ended March 31, 2020, the Company entered into agreements, which restructured or terminated certain of its Master Lease Agreements with each of its landlords as further described below, and after giving effect to such transactions, and the disposition of the Company’s Boca Raton community in January 2020, as of March 31, 2020, the Company leased 39 senior living communities and managed six senior living communities for the account of Healthpeak.

Ventas

As of December 31, 2019, the Company leased seven senior housing communities from Ventas.  The term of the Ventas lease agreement was scheduled to expire on September 30, 2025.  On March 10, 2020, the Company entered into an agreement with Ventas (as amended, the “Ventas Agreement”), providing for the early termination of its Master Lease Agreement with Ventas covering all seven communities.  Pursuant to such agreement, among other things, from February 1, 2020 through December 31, 2020, the Company agreed to pay Ventas rent of approximately $1.0 million per month for such communities as compared to approximately $1.3 million per month that would otherwise have been due and payable under the Master Lease Agreement.  In addition, the Ventas Agreement provides that the Company will not be required to comply with certain financial covenants of the Master Lease Agreement during the forbearance period, which terminates on December 31, 2020 absent any defaults by the Company.  In conjunction with the Ventas Agreement, the Company released $4.1 million in security deposits and $2.5 million in escrow deposits held by Ventas, and Ventas reduced the amounts and term of Company’s lease payments, including as it relates to the Company’s financing obligation, which was $11.4 million at December 31, 2019.  The Ventas Agreement provides that Ventas can terminate the Master Lease Agreement, with respect to any or all communities upon 30 days’ notice. The effective date of termination may not be later than December 31, 2020. Upon termination, Ventas may elect to enter into a property management agreement with the Company as manager or transition the properties to a new operator. If, as of December 1, 2020, Ventas has not delivered a termination notice for any communities subject to the Master Lease Agreement, then, with respect to any such communities, Ventas will be deemed to have delivered a termination notice electing to enter into a property management agreement with the Company as manager for such communities with an effective date of December 31, 2020. Any such management agreement will provide for a management fee equal to 5% of gross revenues of the applicable community payable to the Company and other customary terms and conditions. The Ventas Agreement also provides that the Company will not be obligated to fund certain capital expenditures under the Master Lease Agreement during the applicable forbearance period and Ventas will reimburse the Company for certain specified capital expenditures.

In accordance with Accounting Standards Codification (“ASC”) Topic 842, the reduction in the monthly minimum rent payable to Ventas and modification of the lease term pursuant to the Ventas Agreement was determined to be a modification of the Master Lease Agreement.  As such, the Company reassessed the classification of the Master Lease Agreement with Ventas based on the modified terms and determined that the lease continued to be classified as an operating lease until the communities transitioned to a different operator or management agreement, at which time the lease would terminate.  The modification resulted in a reduction to the lease termination obligation, lease liability and operating lease right-of-use asset recorded in the Company's consolidated balance sheets by $11.1 million, $51.6 million, and $47.8 million, respectively.  The Company recognized a net gain of $8.4 million on the transaction, which is included in gain on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020 and was primarily due to the impact of the change in lease term on certain of the right-of-use asset balances.  As a result of the lease modification, the Company assessed the operating lease right-of-use assets for impairment.  See “Note 4- Impairment of Long Lived Assets.”

Welltower

As of December 31, 2019, the Company leased 24 senior housing communities from Welltower. The initial terms of the Welltower lease agreements were scheduled to expire on various dates from April 2025 through April 2026. On March 15, 2020, the Company entered into an agreement with Welltower (the “Welltower Agreement”), providing for the early termination of three Master Lease Agreements between it and Welltower covering all 24 communities.  Pursuant to such agreement, among other things, from February 1, 2020 through December 31, 2020, the Company agreed to pay Welltower rent of approximately $2.2 million per month for such communities as compared to approximately $2.8 million per month that would otherwise have been due and payable under the Master Lease Agreements.  In addition, the Welltower Agreement provides that the Company will not be required to comply with certain financial covenants of the Master Lease Agreements during the forbearance period, which terminates on December 31, 2020, absent any defaults

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by the Company.  In conjunction with the Welltower Agreement, the Company agreed to release $6.5 million in letters of credit to Welltower, which were released subsequent to March 31, 2020 and were included in the current portion of lease liabilities on the Company’s consolidated balance sheets at March 31, 2020.  The Welltower Agreement provides that Welltower can terminate the agreement, with respect to any or all communities upon 30 days’ notice. The effective date of termination may not be later than December 31, 2020. Upon termination, Welltower may elect to enter into a property management agreement with the Company as manager or to transition the properties to a new operator. If, as of December 1, 2020, Welltower has not delivered a termination notice for any communities subject to the Master Lease Agreements, then, with respect to any such communities, Welltower will be deemed to have delivered a termination notice electing to enter into a property management agreement with the Company as manager for such communities with an effective date of December 31, 2020. Any such management agreement will provide for a management fee equal to 5% of gross revenues of the applicable community payable to the Company and other customary terms and conditions. The Welltower Agreement also provides that the Company will not be obligated to fund certain capital expenditures under the Master Lease Agreements during the applicable forbearance period and Welltower will reimburse the Company for certain specified capital expenditures.

In accordance with ASC Topic 842, the reduction in the monthly minimum rent payable to Welltower under the then- existing Master Lease Agreements with Welltower and modification to the lease term pursuant to the Welltower Agreement was determined to be a modification of the Master Lease Agreements.  As such, the Company reassessed the classification of the Master Lease Agreements based on the modified terms and determined that the each of the leases continued to be classified as an operating lease until the applicable communities transitioned to a different operator or management agreement, at which time such lease would terminate.  The modification resulted in a reduction to the lease liability and operating lease right-of-use asset recorded in the Company's consolidated balance sheets by $129.9 million, and $121.9 million, respectively, and recognized a gain of $8.0 million on the transaction, which is included in gain on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020.  As a result of the lease modification, the Company assessed the operating lease right-of-use assets for impairment.  See “Note 4- Impairment of Long Lived Assets.”

Healthpeak

On March 1, 2020, the Company entered into an agreement with Healthpeak (“the Healthpeak Agreement”), effective February 1, 2020, providing for the early termination of one of its Master Lease Agreements with Healthpeak, which was previously scheduled to mature in April 2026.  Such Master Lease Agreement terminated and was converted into a Management Agreement under a RIDEA structure pursuant to which the Company agreed to manage the six communities that were subject to the Master Lease Agreement until such communities are sold by Healthpeak.  Pursuant to the Management Agreement, the Company will receive a management fee equal to 5% of gross revenues realized at the applicable senior living communities plus reimbursement for its direct costs and expenses related to such communities.  In conjunction with the Healthpeak Agreement, the Company released approximately $2.6 million of security deposits held by Healthpeak.  The Company remeasured the lease liability and operating lease right-of-use asset recorded in the Company's consolidated balance sheets at December 31, 2019 to zero, which resulted in the recognized a $7.0 million loss on the transaction, which is included in gain on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020.

6. DEBT TRANSACTIONS

The Company previously issued standby letters of credit with Wells Fargo Bank (“Wells Fargo”), totaling approximately $3.4 million, for the benefit of Hartford Financial Services (“Hartford”) in connection with the administration of workers’ compensation which remain outstanding as of March 31, 2020.

The Company previously issued standby letters of credit with JP Morgan Chase Bank (“Chase”), totaling approximately $6.5 million, for the benefit of Welltower, in connection with certain leases between Welltower and the Company.  The letters of credit remained outstanding as of March 31, 2020, but were subsequently surrendered to Welltower in conjunction with the Welltower Agreement.

The Company previously issued standby letters of credit with Chase, totaling approximately $2.9 million, for the benefit of Healthpeak in connection with certain leases between Healthpeak and the Company.  The letters of credit were released to the Company during the quarter ended March 31, 2020 and were included in cash and cash equivalents on the Company’s consolidated balance sheets.

The senior housing communities owned by the Company and encumbered by mortgage debt are provided as collateral under their respective loan agreements. At March 31, 2020 and December 31, 2019, these communities carried a total net book value of approximately $888.2 million and $898.0 million, respectively, with total mortgage loans outstanding, excluding deferred loan costs, of approximately $923.0 million and $926.5 million, respectively.

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In connection with the Company’s loan commitments described above, the Company incurred financing charges that were deferred and amortized over the terms of the respective notes. At March 31, 2020 and December 31, 2019, the Company had gross deferred loan costs of approximately $14.3 million and $14.3 million, respectively. Accumulated amortization was approximately $6.1 million and $5.7 million at March 31, 2020 and December 31, 2019, respectively. The Company was in compliance with all aspects of its outstanding indebtedness at March 31, 2020 and December 31, 2019.

7. 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 Company’s board of directors 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 March 31, 2020 or December 31, 2019.

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 negotiated 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 particular 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 Company 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 the first quarter of 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. The Company has not purchased any additional shares of its common stock pursuant to the Company’s share repurchase program during the three months ended March 31, 2020 or fiscal 2019.

8. STOCK-BASED COMPENSATION

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

On May 14, 2019, the Company’s stockholders approved the 2019 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation (the “2019 Plan”), which replaced the 2007 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation (as amended, the “2007 Plan”). The 2019 Plan provides for, among other things, the grant of restricted stock awards, restricted stock units and stock options to purchase shares of the Company’s common stock. The 2019 Plan authorizes the Company to issue up to 2,250,000 shares of common stock plus reserved shares not issued or subject to outstanding awards under the 2007 Plan, and the Company has reserved shares of common stock for future issuance pursuant to awards under the 2019 Plan. Effective March 26, 2019, the 2007 Plan was terminated and no additional awards will be granted under the 2007 Plan.

Stock Options

The Company may periodically grant stock options as a long-term retention tool that is intended to attract, retain and provide incentives for employees, officers and directors and to more closely align stockholder interests with those of our employees and directors. The Company’s stock options generally vest over a period of 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 three months ended March 31, 2020 and 2019 is presented below:

At March 31, 2020, the options outstanding had no intrinsic value, a weighted-average remaining contractual life of 8.75 years, and a weighted average exercise price of $7.46.  At March 31, 2020, there was approximately $0.3 million of total unrecognized compensation expense, which is expected to be recognized over a weighted average period of 1.75 years.  At March 31, 2020, 48,588

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options were exercisable, and the remaining options were unvested.  There were no stock options granted during the three months ended March 31, 2020.

Restricted Stock

The Company periodically grants 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 for each separately vesting tranche of the award as if the award is, in substance, multiple awards 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 for performance-based awards.

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 stock awards activity and related information for the three months ended March 31, 2020 is presented below:

The restricted stock outstanding at March 31, 2020 had an intrinsic value of approximately $0.5 million.  There were no grants of restricted stock awards or restricted stock units during the three months ended March 31, 2020.

The Company recognized $0.6 million and $(1.0 million) in stock-based compensation expense during the three months ended March 31, 2020 and 2019, respectively, which is primarily associated with employees whose corresponding salaries and wages are included within general and administrative expenses within the Company’s Consolidated Statements of Operations and Comprehensive Loss. The credit balance in stock-based compensation expense for the three months ended March 31, 2019, primarily resulted from the full reversal of stock compensation expense previously recognized by the Company due to stock award cancellations for the retirement and separation of certain members of executive management and the Company concluding certain performance metrics associated with performance-based restricted stock awards was no longer probable of achievement. Unrecognized stock-based compensation expense was $2.4 million as of March 31, 2020. If all awards granted are earned, the Company expects this expense to be recognized over a one to three-year period for performance and market-based stock awards and a one to four-year period for nonperformance-based stock awards, options and units.

9. 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.

10. FAIR VALUE MEASUREMENTS

Financial Instruments

The carrying amounts and fair values of financial instruments at March 31, 2020 and December 31, 2019, are as follows (in thousands):

The following methods and assumptions were used in estimating the Company’s fair value disclosures for financial instruments:

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Cash and cash equivalents and Restricted cash: The carrying amounts reported in the Company’s Consolidated Balance Sheets for cash and cash equivalents and restricted cash approximate fair value, which represent level 1 inputs as defined in the accounting standards codification.

Notes payable, excluding deferred loan costs: The fair value of notes payable, excluding deferred loan costs, 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.

Assets Held for Sale

During the three months ended March 31, 2020, no senior living communities were classified as assets held for sale.  During the three months ended March 31, 2019, the Company recognized a remeasurement write-down of approximately $2.3 million to adjust the carrying values of the assets held for sale at March 31, 2019.  

The Company determines, using level 2 inputs as defined in the accounting standards codification, the fair value, net of costs of disposal, of an asset on the date the asset is categorized as held for sale, and the asset is recorded at the lower of its fair value, net of cost of disposal, or carrying value on that date. The Company periodically reevaluates assets held for sale to determine if the assets are still recorded at the lower of fair value, net of cost of disposal, or carrying value. The fair values are generally determined based on market rates, industry trends and recent comparable sales transactions.

Operating Lease Right-Of-Use Assets

The Company recognized an impairment charge of approximately $6.2 million to operating lease right-of-use assets, net during the three months ended March 31, 2020. The fair value of the impaired assets was $14.6 million at March 31, 2020.  The fair value of the right-of-use assets was estimated, using level 3 inputs as defined in the accounting standards codification, utilizing a discounted cash flow approach based upon historical and projected cash flows and market data, including management fees and a market supported lease coverage ratio of 1.1. The range of discount rates utilized was 7.7% to 10.3%, depending upon the property type and geographical location of the respective community.  See “Note 4- Impairment of Long-Lived Assets.”

Property and Equipment, Net

For the three months ended March 31, 2020, the Company recorded a non-cash impairment charge of $29.8 million to property and equipment, net.  The fair value of the impaired assets was $10.5 million at March 31, 2020.  The fair values of the property and equipment, net of these communities were primarily determined utilizing the cost approach, which determines the current replacement cost of the property being appraised and then deducts for the loss in value caused by physical deterioration, functional obsolescence, and economic obsolescence the amount required to replace the asset as if new and adjusts to reflect usage.  This fair value measurement is considered a Level 3 measurement within the valuation hierarchy.  See “Note 4- Impairment of Long-Lived Assets.”

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

As of March 31, 2020, there was a wide range of possible outcomes as a result of the COVID-19 pandemic, as there was a high degree of uncertainty about its ultimate impacts. Management’s estimates of the impacts of the pandemic are highly dependent on variables that are difficult to predict, including the duration, severity, and geographic concentrations of the pandemic and any resurgence of the disease, the duration and degree to which visitors are restricted from the Company's communities, the effect of the pandemic on the demand for senior living communities, the degree to which the Company may receive government financial relief and the timing thereof, and the duration and costs of the Company’s response efforts. Future events may indicate differences from management's current judgments and estimates which could, in turn, result in future impairments.

11. LEASES

Management determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of the identified asset means the lessee has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset.

Operating lease right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term on the lease commencement date. When the implicit lease rate is not determinable, management uses the Company’s incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future minimum lease payments. As of March 31, 2020, the weighted average discount rate and average remaining lease terms of the Company's operating leases was 4.4% and 0.8 years, respectively. The expected lease terms include options to extend or terminate the

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lease when it is reasonably certain the Company will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease terms.

Financing lease right-of-use assets are recognized within property, plant and equipment and leasehold improvements, net on the Company's consolidated balance sheets. The Company recognizes interest expense on the financing lease liabilities utilizing the effective interest method.  As of March 31, 2020, the weighted average discount rate and average remaining lease term of the Company's financing leases was 7.0% and 3.7 years, respectively. The right-of-use asset is generally amortized to depreciation and amortization expense on a straight-line basis over the lease term.

Certain of the Company’s lease arrangements have lease and non-lease components. The Company accounts for the lease components and non-lease components as a single lease component for all classes of underlying assets. Leases with an expected lease term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the expected lease term.

The Company has operating leases for various real estate (primarily senior housing communities) and equipment as well as financing leases for certain vehicles. As of March 31, 2020, the Company leased 39 senior housing communities from certain real estate investment trusts (“REITs”). Under these facility lease agreements, the Company is responsible for all operating costs, maintenance and repairs, insurance and property taxes. Additionally, facility leases may include contingent rent increases when certain operational performance thresholds are surpassed, at which time the right-of-use assets and lease liability will be remeasured.

The recoverability of assets and depreciable life of leasehold improvements are limited by expected lease terms. There are various financial covenants and other restrictions in the Company’s lease agreements. The Company’s lease agreements do not contain any material residual value guarantees. The Company was in compliance with all of its lease covenants at March 31, 2020.  As of December 31, 2019, the Company was not in compliance with certain financial covenants with regard to its Master Lease Agreements with Ventas and Welltower.  The Company subsequently entered into the Ventas Agreement and the Welltower Agreement with respect to such defaults. Under the agreements, the Company does not have to comply with certain financial covenants of the respective Master Lease Agreements during the forbearance period, which terminates on December 31, 2020, absent any defaults by the Company under such agreements.  The Company was in compliance with all other lease covenants at December 31, 2019.

A summary of operating and financing lease expense (including the respective presentation on the consolidated statement of operations) and cash flows from leasing transactions is as follows:

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Future minimum lease payments associated with operating lease liabilities recognized on the Company’s Consolidated Balance Sheets as of March 31, 2020, are as follows (in thousands):

12. SUBSEQUENT EVENTS

Debt Forbearance Agreements on Fannie Mae Loans

The CARES Act, among other things, permits borrowers with mortgages from Government Sponsored Enterprises who are experiencing a financial hardship related to COVID-19 to obtain forbearance of their loans for up to 90 days. On May 7, 2020, the Company entered into forbearance agreements with Berkadia, as servicer of 23 of its Fannie Mae loans covering 20 properties, and on May 9, 2020, the Company entered into a forbearance agreement with Wells Fargo, as servicer of one Fannie Mae loan covering one property, and on May 20, 2020, the Company entered into forbearance agreements with KeyBank, as servicer of three Fannie Mae loans covering two properties.   The forbearance agreements allow the Company to withhold the loan payments due under the loan agreements for the months of April, May and June 2020 ("Deferred Payments") and Fannie Mae will forbear in exercising its rights and remedies during such period.  During this three-month loan payment forbearance, the Company agrees to pay to Fannie Mae monthly all net operating income, if any, as defined in the agreement, for the properties receiving forbearance.  After June 30, 2020, the Company will be required to repay to Fannie Mae the Deferred Payments, less payments made during the forbearance period, over the 12 months subsequent to the end of the reporting period, which is in addition to regular monthly loan payments during this 12 month period. 

Debt Forbearance Agreement on BBVA Loan

The Company also entered into an agreement with another lender, BBVA, USA, related to a loan covering three properties pursuant to which the Company will defer monthly debt service payments for April, May and June 2020, which deferred payments are added to principal due at maturity in December 2021.

Protective Life Amendments to Loan Agreements and Loan Modification and Temporary Deferral Agreements

On May 21, 2020, the Company entered into amendments to its loan agreements with one of its lenders, Protective Life Insurance Company, related to loans covering 10 properties.  These amendments allow the Company to defer principal and interest payments for April, May and June 2020 and to defer principal payments for July 2020 through March 2021, with such deferral amounts being added to principal due at maturity in either 2025 or 2026, depending upon the loan.

Healthpeak Rent Payments

On May 20, 2020 the Company entered into an agreement with Healthpeak under which effective April 1, 2020, through the lease term ending October 31, 2020, the Company began paying Healthpeak rent of approximately $0.7 million per month for eight senior housing communities subject to a Master Lease Agreement with Healthpeak in lieu of approximately $0.9 million of monthly rent due and payable under the Master Lease Agreement covering such communities.  The rents paid to Healthpeak represent approximately 75% of their scheduled rates, with the remaining rent being subject to payment by the Company pursuant to a three-year note payable with final payment to be on or before November 1, 2023.

With these agreements, the Company is in compliance under its loans with all lenders and its lease agreements.

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Item 2. 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 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 contingent 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, continued spread of COVID-19, including the speed, depth, geographic reach and duration of such spread, new information that may emerge concerning the severity of COVID-19, the actions taken to prevent or contain the spread of COVID or treat its impact, the legal, regulatory and administrative developments that occur at the federal, state and local levels in response to the COVID-19 pandemic, and the frequency and magnitude of legal actions and liability claims that may arise due to COVID-19 or the Company’s response efforts; the impact of COVID-19 on Company’s ability to continue as a going concern; the Company’s ability to generate sufficient cash flows from operations, additional proceeds from debt refinancing, and proceeds from the sale of assets to satisfy its short and long-term 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 compliance 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 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 Securities and Exchange Commission (“SEC”), including those set forth under “Item 1A. Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2019.

Overview

The following discussion and analysis addresses (i) the Company’s results of operations for the three months ended March 31, 2020 and 2019, and (ii) liquidity and capital resources of the Company, and should be read in conjunction with the Company’s consolidated financial statements contained elsewhere in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The Company is one of the largest operators of senior housing communities in the United States. Our 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. We provide senior living services to the 75+ population, including independent living, assisted living, and memory care services at reasonable prices. Many of our 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 residents’ autonomy and independence based on their physical and mental abilities.

As of March 31, 2020, the Company operated 124 senior housing communities in 23 states with an aggregate capacity of approximately 15,600 residents, including 79 senior housing communities that the Company owned, 39 senior housing communities that the Company leased, and six senior housing communities that the Company managed on behalf of third parties.

COVID-19 Pandemic

A new strain of coronavirus, which causes the viral disease known as COVID-19, has spread from China to many other countries, including the United States. The outbreak has been declared to be a pandemic by the World Health Organization, and the Health and Human Services Secretary has declared a public health emergency in the United States in response to the outbreak. Additionally, the Centers for Disease Control and Prevention has stated that older adults are at a higher risk for serious illness from COVID-19.

In an effort to protect its residents and employees and slow the spread of COVID-19 and in response to recent quarantines, shelter-in-place orders and other limitations imposed by federal, state and local governments, the Company has restricted or limited access to its communities, including limitations on in-person prospective resident tours and, in certain cases, new resident admissions. As a result, COVID-19 has caused, and management expects will continue to cause, a decline in the occupancy levels at the Company’s communities, which has, and will continue to negatively impact revenues and operating results, which depend significantly

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on such occupancy levels.  During the second half of March, new resident leads, visits, and move-in activity began to decline compared to typical levels. This trend intensified in April 2020, and began to adversely impact occupancy, resulting in consolidated senior housing occupancy excluding the community sold effective March 31, 2020, decreasing from 79.9% as of March 31, 2020 to 78.7% as of April 30, 2020. We expect further deterioration of resident fee revenue resulting from fewer move-ins and typical resident attrition inherent in our business, which may increase due to the impacts of COVID-19.  Lower than normal controllable move-out activity during the COVID-19 pandemic may partially offset future adverse revenue impacts.

In addition, the recent outbreak of COVID-19 has required the Company to incur, and management expects will require the Company to continue to incur, significant additional operating costs and expenses in order to implement enhanced infection control protocols and otherwise care for its residents. Further, residents at certain of its senior housing communities have tested positive for COVID-19, which has increased the costs of caring for the residents at such communities and has resulted in reduced occupancies at such communities. During the second half March, the Company began to incur incremental direct costs to prepare for and respond to the COVID-19 pandemic.  Beginning in April, the Company incurred substantial costs as a result of the COVID-19 pandemic, including costs for acquisition of additional personal protective equipment (“PPE”), cleaning and disposable food service supplies, enhanced cleaning and environmental sanitation costs, and increased labor expense. The Company expects such costs to continue.  We also expect to incur costs for COVID-19 testing of residents and employees. We are not able to reasonably predict the total amount of costs we will incur related to the pandemic, and such costs are likely to be substantial.

We cannot predict with reasonable certainty the impacts that COVID-19 ultimately will have on our business, results of operations, cash flow, and liquidity, and our preparation and response efforts may delay or negatively impact our strategic initiatives, including plans for future growth. The ultimate impact of COVID-19 will depend on many factors, some of which cannot be foreseen, including the duration, severity, and geographic concentrations of the pandemic and any resurgence of the disease; the impact of COVID-19 on the nation’s economy and debt and equity markets and the local economies in our markets; the development and availability of COVID-19 infection and antibody testing, therapeutic agents, and vaccines and the prioritization of such resources among businesses and demographic groups; government financial and regulatory relief efforts that may become available to business and individuals; perceptions regarding the safety of senior living communities during and after the pandemic; changes in demand for senior living communities and our ability to adapt our sales and marketing efforts to meet that demand; the impact of COVID-19 on our residents’ and their families’ ability to afford our resident fees, including due to changes in unemployment rates, consumer confidence, and equity markets caused by COVID-19; changes in the acuity levels of our new residents; the disproportionate impact of COVID-19 on seniors generally and those residing in our communities; the duration and costs of our preparation and response efforts, including increased supplies, labor, litigation, and other expenses; the impact of COVID-19 on our ability to complete financings, refinancings, or other transactions (including dispositions) or to generate sufficient cash flow to cover required interest and lease payments and to satisfy financial and other covenants in our debt and lease documents; increased regulatory requirements and enforcement actions resulting from COVID-19, including those that may limit our collection efforts for delinquent accounts; and the frequency and magnitude of legal actions and liability claims that may arise due to COVID-19 or our response efforts.

Going Concern and Management’s Plan

Accounting Standards Codification (“ASC”) 205-40, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” requires an evaluation of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern for the 12-month period following the date the financial statements are issued. Initially, this evaluation does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management evaluates the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

In complying with the requirements under ASC 205-40 to complete an evaluation without considering mitigating factors, the Company considered several conditions or events including 1) uncertainty around the impact of COVID-19 on the Company’s operations and financial results (see “COVID-19 Pandemic” above), and 2) operating losses and negative cash flows from operations for projected fiscal year 2020. The above conditions raise substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

The Company is implementing plans as discussed below, which includes strategic and cash-preservation initiatives, which are designed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date its financial statements are issued. The Company’s primary sources of near- and medium-term liquidity are expected to be (1) improved operating cash flows due to strategic and cash preservation initiatives discussed below, (2) debt forbearance, to the extent available on acceptable terms, and (3) forbearance on rent payments to landlords, to the extent available on acceptable terms.

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Strategic and Cash Preservation Initiatives

The Company has taken or intends to take the following actions, among others, to improve its liquidity position and to address uncertainty about its ability to operate as a going concern:

The Company’s plans are designed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date its financial statements are issued; however, the remediation plan is dependent on conditions and matters that may be outside of the Company’s control or may not be available on terms acceptable to the Company, or at all, many of which have been made worse or more unpredictable by COVID-19.  If the Company is unable to successfully execute all of these initiatives or if the plan does not fully mitigate the Company’s liquidity challenges, the Company’s operating plans and resulting cash flows along with its cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the twelve-month period following the date the financial statements are issued.  

As a result of COVID-19’s short- and long-term impact to the Company’s financial position, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern.  The Company’s continuation as a going concern depends upon many factors, including the ability to increase its revenues, reduce costs and/or pursue other transactions to raise capital, including, without limitation, by selling assets, and no assurances can be given that the Company will be able to successfully do so.

Significant Financial and Operational Highlights

The Company primarily derives its revenue by providing senior living and healthcare services to seniors. When comparing the first quarter of fiscal 2020 to the first quarter of fiscal 2019, the Company generated resident revenue of approximately $105.7 million compared to revenue of approximately $114.2 million, respectively, representing a decrease of approximately $8.5 million, or 7.4%.  The decrease in revenue is due to the disposition of four communities since the first quarter of 2019 and transitioning one of its senior housing communities to a different operator and six communities to a management agreement during the first quarter of 2020 of approximately $4.8 million and a decrease in resident revenue at the Company’s remaining senior housing communities of approximately $3.7 million, which was primarily due to a decrease of 310 basis points in total occupancies.  In addition, during the three months ended March 31, 2020, the Company began managing six properties on behalf of a third party, which generated management fee income and reimbursed costs incurred on behalf of managed communities of $0.1 million and $0.4 million, respectively.

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The Company continues to evaluate its portfolio of senior housing communities and explore opportunities to monetize certain of its assets, including through the sale of various owned communities that it believes are operating in challenging markets or that no longer fit its portfolio criteria. During the first quarter of 2020, the Company transitioned one community to a different operator, transitioned six properties to a management agreement, and sold one property.

Consolidated financial occupancy for the first quarters of fiscal 2020 and 2019 was 80.0% and 83.1%, respectively. Although average financial occupancies decreased for such periods, the Company experienced an increase in average monthly rental rates of 160 basis points when comparing the first three months of fiscal 2020 to the first three months of fiscal 2019.

Facility Lease Transactions

As of December 31, 2019, the Company leased 46 senior housing communities from certain real estate investment trusts (“REITs”) and transitioned one community to a different operator effective January 15, 2020. During the three months ended March 31, 2020, the Company restructured certain of its Master Lease Agreements with each of its landlords as further described below, and after giving effect to such transactions and as of March 31, 2020, the Company leased 39 senior living communities and managed six senior living communities for the account of Healthpeak.

Ventas

As of December 31, 2019, the Company leased seven senior housing communities from Ventas.  The term of the Ventas lease agreement was scheduled to expire on September 30, 2025.  On March 10, 2020, the Company entered into the Ventas Agreement providing for the early termination of its Master Lease Agreement with Ventas covering all seven communities.  Pursuant to such agreement, among other things, from February 1, 2020 through December 31, 2020, the Company agreed to pay Ventas rent of approximately $1.0 million per month for such communities as compared to approximately $1.3 million per month that would otherwise have been due and payable under the Master Lease Agreement.  In addition, the Ventas Agreement provides that the Company will not be required to comply with certain financial covenants of the Master Lease Agreement during the forbearance period, which terminates on December 31, 2020 absent any defaults by the Company.  In conjunction with the Ventas Agreement, the Company released $4.1 million in security deposits and $2.5 million in escrow deposits held by Ventas, and Ventas forgave the Company’s lease termination obligation, which was $11.4 million at December 31, 2019.  The Ventas Agreement provides that Ventas can terminate the Master Lease Agreement with respect to any or all communities upon 30 days’ notice. The effective date of termination may not be later than December 31, 2020. Upon termination, Ventas may elect to enter into a property management agreement with the Company as manager or to transition the properties to a new operator. If, as of December 1, 2020, Ventas has not delivered a termination notice for any communities subject to the Master Lease Agreement, then, with respect to any such communities, Ventas will be deemed to have delivered a termination notice electing to enter into a property management agreement with the Company as manager for such communities with an effective date of December 31, 2020. Any such management agreement will provide for a management fee equal to 5% of the gross revenues of the applicable community payable to the Company and other customary terms and conditions. The Ventas Agreement also provides that the Company will not be obligated to fund certain capital expenditures under the Master Lease Agreement during the applicable forbearance period and Ventas will reimburse the Company for certain specified capital expenditures.

In accordance with ASC Topic 842, the reduction in the monthly minimum rent payable to Ventas and modification of the lease term pursuant to the Ventas Agreement was determined to be a modification of the Master Lease Agreement.  As such, the Company reassessed the classification of the Master Lease Agreement with Ventas based on the modified terms and determined that the lease continued to be classified as an operating lease until the communities transitioned to a different operator or management agreement, at which time the lease would terminate.  The Company reduced the lease termination obligation, lease liability and operating lease right-of-use asset recorded in the Company's consolidated balance sheets by $11.1 million, $51.6 million, and $47.8 million, respectively, and recognized a gain of $8.4 million on the transaction, which is included in gain on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020.  

Welltower

As of December 31, 2019, the Company leased 24 senior housing communities from Welltower. The initial terms of the Welltower lease agreements were scheduled to expire on various dates from April 2025 through April 2026. On March 15, 2020, the Company entered into an agreement with Welltower (the “Welltower Agreement”), providing for the early termination of three Master Lease Agreements between it and Welltower covering all 24 communities.  Pursuant to such agreement, among other things, from February 1, 2020 through December 31, 2020, the Company agreed to pay Welltower rent of approximately $2.2 million per month for such communities as compared to approximately $2.8 million per month that would otherwise have been due and payable under the Master Lease Agreements.  In addition, the Welltower Agreement provides that the Company will not be required to comply with certain financial covenants of the Master Lease Agreements during the forbearance period, which terminates on December 31, 2020, absent any defaults by the Company.  In conjunction with the Welltower Agreement, the Company agreed to release $6.5 million in letters of credit to Welltower, which were released subsequent to March 31, 2020 and were included in the current portion of lease liabilities on the

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Company’s consolidated balance sheets at March 31, 2020.  The Welltower Agreement provides that Welltower can terminate the agreement, with respect to any or all communities upon 30 days’ notice. The effective date of termination may not be later than December 31, 2020. Upon termination, Welltower may elect to enter into a property management agreement with the Company as manager or to transition the properties to a new operator. If, as of December 1, 2020, Welltower has not delivered a termination notice for any communities subject to the Master Lease Agreements, then, with respect to any such communities, Welltower will be deemed to have delivered a termination notice electing to enter into a property management agreement with the Company as manager for such communities with an effective date of December 31, 2020. Any such management agreement will provide for a management fee equal to 5% of the gross revenues of the applicable community payable to the Company and other customary terms and conditions. The Welltower Agreement also provides that the Company will not be obligated to fund certain capital expenditures under the Master Lease Agreements during the applicable forbearance period and Welltower will reimburse the Company for certain specified capital expenditures.

In accordance with ASC Topic 842, the reduction in the monthly minimum rent payable to Welltower under the then- existing Master Lease Agreements with Welltower and modification to the lease term pursuant to the Welltower Agreement was determined to be a modification of the Master Lease Agreements.  As such, the Company reassessed the classification of the Master Lease Agreements based on the modified terms and determined that the lease continued to be classified as operating leases until the community transitioned to a different operator or management agreement, at which time the lease would terminate.  The modification resulted in a reduction to the lease liability and operating lease right-of-use asset recorded in the Company's consolidated balance sheets by $129.9 million, and $121.9 million, respectively, and recognized a gain of $8.0 million on the transaction, which is included in gain on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020.

Healthpeak

On March 1, 2020, the Company entered into an agreement with Healthpeak (“the Healthpeak Agreement”), effective February 1, 2020, providing for the early termination of one of its Master Lease Agreements with Healthpeak, which was previously scheduled to mature in April 2026.  Such Master Lease Agreement terminated and was converted into a Management Agreement under a RIDEA structure pursuant to which the Company agreed to manage the six communities that were subject to the Master Lease Agreement until such communities are sold by Healthpeak.  Pursuant to the Management Agreement, the Company will receive a management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement for its direct costs and expenses related to such communities.  In conjunction with the Healthpeak Agreement, the Company released approximately $2.6 million of security deposits held by Healthpeak. The Company remeasured the lease liability and operating lease right-of-use asset recorded in the Company's consolidated balance sheets at December 31, 2019 to zero, which resulted in the Company recognizing a $7.0 million loss on the transaction, which is included in gain on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020.

Recent Accounting Developments

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies certain disclosure requirements in Topic 820, such as the removal of the need to disclose the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, and several changes related to Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. The Company adopted ASU 2018-13 on January 1, 2020, the adoption of which did not have a material impact on its consolidated financial statements and disclosures.

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 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. For smaller reporting companies, ASU 2016-13 is effective for fiscal years and for interim periods within those fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements and disclosures.

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, and Section 16 filings and any amendments to those reports and filings. These reports and filings are available free of charge through the Company’s Internet website as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.

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Results of Operations

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

Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

Revenues.

Revenue was $106.1 million for the three month period ended March 31, 2020, compared to $114.2 million for the three month period ended March 31, 2019, representing a decrease of $8.1 million, or approximately 7.1%. The decrease in resident revenue is due to the disposition of four communities since the first quarter of 2019 and transition of six communities to a management agreement during the first quarter of 2020, which together accounted for a decrease to resident revenues of approximately $4.8 million, and a decrease in resident revenue at the Company’s remaining senior housing communities of approximately $3.3 million, which was primarily due to a decrease of 310 basis points in total occupancy.

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Expenses.

Total expenses were $145.3 million in the first quarter of fiscal 2020 compared to $112.2 million in the first quarter of fiscal 2019, representing an increase of $33.1 million, or 29.5%. This increase is primarily the result of a $1.1 million decrease in general and administrative expenses, a $36.0 million increase in impairment expenses, a $3.4 million decrease in facility lease expense, and a $0.3 million decrease in depreciation and amortization expense, partially offset by a $1.6 million increase in stock-based compensation expense.  Operating expenses increased by 510 basis points as a percentage of revenue which is primarily due to wages and benefits to employees for annual merit increases and incremental costs decrease of 1.1%, which was not in line with the decrease in revenue.

Other income and expense.

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Provision for income taxes.

Provision for income taxes for the first quarter of fiscal 2020 was $0.2 million, or 0.5% of loss before income taxes, compared to a provision for income taxes of $0.1 million, or 1.0% of loss before income taxes, for the first quarter of fiscal 2019. The effective tax rates for the first quarters of fiscal 2020 and 2019 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. The Company consolidates 38 Texas communities, which contributes to the overall provision for income taxes. 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. At year end, the Company had a three-year cumulative operating loss for its U.S. operations and accordingly, has provided a full valuation allowance on its net deferred tax assets. The valuation allowance reduces the Company’s net deferred tax assets to the amount that is “more likely than not” (i.e., a greater than 50% likelihood) to be realized.

Net loss and comprehensive loss.

As a result of the foregoing factors, the Company reported net loss and comprehensive loss of $47.2 million for the three months ended March 31, 2020, compared to net loss and comprehensive loss of $13.0 million for the three months ended March 31, 2019.

Liquidity and Capital Resources

In addition to approximately $17.7 million of unrestricted cash balances on hand as of March 31, 2020, the Company’s principal sources of liquidity are expected to be cash flows from operations, additional proceeds from debt refinancings, equity issuances, and/or proceeds from the sale of owned assets. The Company expects its available cash and cash flows from operations, additional 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 are and will be dependent on its ability to access additional funds through the debt and/or equity markets or additional sales of assets. The Company, from time to time, considers and evaluates financial and capital raising transactions related to its portfolio including debt refinancings, equity issuances, purchases and sales of assets, reorganizations and other transactions. If capital were obtained through the issuance of Company equity, the issuance of Company securities would dilute the ownership of our existing stockholders and any newly issued securities may have rights, preferences, and/or privileges senior to those of our common stock. There can be no assurance that the Company will continue to generate 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.

Recent changes in the current economic environment, and other future changes, 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 or refinancings for the Company or buyers of the Company’s properties more difficult or on terms not acceptable to the Company.

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

Operating activities.

The net cash used in operating activities for the three months ended March 31, 2020, primarily results from net loss of $47.2 million, a decrease in accrued expenses of $7.7 million, an operating lease expense adjustment of $3.3 million, a decrease in accounts payable of $1.0 million, an increase in other assets of $0.2 million, and a decrease in deferred resident revenue of $0.4 million, partially offset by net non-cash charges of $46.4 million, a decrease in tax and insurance deposits of $4.1 million, and a decrease in prepaid expenses of $0.9 million. The net cash used in operating activities for the three months ended March 31, 2019, primarily results from net loss of $13.0 million, a decrease in accounts payable of $6.9 million, a decrease in accrued expenses of $3.7 million, an operating lease expense adjustment of $0.7 million, an increase in accounts receivable of $0.7 million, and a decrease in deferred resident revenue of $0.5 million, partially offset by net non-cash charges of $18.5 million, a decrease in tax and insurance deposits of $4.6 million, a decrease in prepaid expenses of $0.5 million, and a decrease in other assets of $0.5 million.

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Investing activities.

The net cash provided by investing activities for the three months ended March 31, 2020 primarily results from the Company’s receipt of $6.4 million in proceeds from the disposition of assets, partially offset by capital expenditures associated with ongoing capital improvements and refurbishments at the Company’s senior housing communities of $5.4 million.  The net cash used in investing activities for the three months ended March 31, 2019 primarily results from capital expenditures of $3.4 million.  

Financing activities.

The net cash used in financing activities for the three months ended March 31, 2020 primarily results from repayments of notes payable of $4.9 million, and payments on financing obligations of $0.3 million. The net cash used in financing activities for the three months ended March 31, 2019 primarily results from repayments of notes payable of $4.3 million, payments on capital lease and financing obligations of $0.1 million, and deferred financing charges paid of $0.1 million.

Debt transactions.

The Company previously issued standby letters of credit with Wells Fargo Bank (“Wells Fargo”), totaling approximately $3.4 million, for the benefit of Hartford Financial Services (“Hartford”) in connection with the administration of workers’ compensation which remain outstanding as of March 31, 2020.

The Company previously issued standby letters of credit with JP Morgan Chase Bank (“Chase”), totaling approximately $6.5 million, for the benefit of Welltower, in connection with certain leases between Welltower and the Company.  The letters of credit remained outstanding as of March 31, 2020, but were subsequently surrendered to Welltower in conjunction with the Welltower Agreement.

The Company previously issued standby letters of credit with Chase, totaling approximately $2.9 million, for the benefit of Healthpeak in connection with certain leases between Healthpeak and the Company.  The letters of credit were released to the Company during the quarter ended March 31, 2020 and were included in cash and cash equivalents on the Company’s consolidated balance sheets.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

Item 4. 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. The Company’s 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 and procedures 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 March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. 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 1A. RISK FACTORS.

The effects of the events and circumstances described in the following risk factors may, directly or indirectly, heighten, exacerbate or otherwise bring to fruition many of the risks and uncertainties contained in our annual, quarterly and periodic reports filed with the SEC.

The sudden onset of COVID-19 has had a significant adverse impact on occupancy levels, revenues, expenses and operating results at our communities. Although we are unable to predict the full nature and extent of the impact of COVID-19 at this time, we expect COVID-19 will continue to have a significant adverse effect on our business, financial condition, liquidity and results of operations.

We face risks related to an epidemic, pandemic or other health crisis. A new strain of coronavirus, which causes the viral disease known as COVID-19, has spread from China to many other countries, including the United States. The outbreak has been declared to be a pandemic by the World Health Organization, and the Health and Human Services Secretary has declared a public health emergency in the United States in response to the outbreak. Additionally, the Centers for Disease Control and Prevention has stated that older adults are at a higher risk for serious illness from COVID-19.

In an effort to protect its residents and employees and slow the spread of COVID-19 and in response to recent quarantines, shelter-in-place orders and other limitations imposed by federal, state and local governments, the Company has restricted or limited access to its communities, including limitations on in-person prospective resident tours and, in certain cases, new resident admissions. As a result, COVID-19 has caused, and management expects will continue to cause, a decline in the occupancy levels at the Company’s communities, which has, and will continue to negatively impact revenues and operating results, which depend significantly on such occupancy levels.  During the second half of March, new resident leads, visits, and move-in activity began to decline compared to typical levels. This trend intensified in April and May of 2020, and began to adversely impact occupancy, resulting in consolidated senior housing occupancy excluding the community sold effective March 31, 2020, decreasing from 79.9% as of March 31, 2020 to 78.7% as of April 30, 2020. We expect further deterioration of resident fee revenue resulting from fewer move-ins and typical resident attrition inherent in our business, which may increase due to the impacts of COVID-19.  

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In addition, the recent outbreak of COVID-19 has required the Company to incur, and management expects will require the Company to continue to incur, significant additional operating costs and expenses in order to care for its residents. Further, residents at certain of its senior housing communities have tested positive for COVID-19, which has increased the costs of caring for the residents at such communities and has resulted in reduced occupancies at such communities. During the second half March, the Company began to incur incremental direct costs to prepare for and respond to the COVID-19 pandemic.  Beginning in April, the Company incurred substantial costs as a result of the COVID-19 pandemic, including costs for acquisition of additional personal protective equipment (“PPE”), cleaning and disposable food service supplies, enhanced cleaning and environmental sanitation costs, and increased labor expense. The Company expects such costs to continue.  We also expect to incur costs for COVID-19 testing of residents and employees. We are not able to reasonably predict the total amount of costs we will incur related to the pandemic, and such costs are likely to be substantial.

As a result, we expect COVID-19 will have a significant adverse effect on our business, financial condition, liquidity, and results of operations. It has resulted in the Company’s management concluding that there is substantial doubt about the Company’s ability to continue as a going concern within twelve months after the date on which the Company’s financial statements are issued.

The COVID-19 pandemic has also caused substantial volatility in the market prices and trading volumes in the equity markets, including our stock. Our stock price and trading volume may continue to be subject to wide fluctuations as a result of the pandemic, and may decline in the future.

The ultimate impacts of COVID-19 on our business, results of operations, cash flow, liquidity, and stock price will depend on many factors, some of which cannot be foreseen, including the duration, severity, and geographic concentrations of the pandemic and any resurgence of the disease; the impact of COVID-19 on the nation’s economy and debt and equity markets and the local economies in our markets; the development and availability of COVID-19 infection and antibody testing, therapeutic agents, and vaccines and the prioritization of such resources among businesses and demographic groups; government financial and regulatory relief efforts that may become available to business and individuals; perceptions regarding the safety of senior living communities during and after the pandemic; changes in demand for senior living communities and our ability to adapt our sales and marketing efforts to meet that demand; the impact of COVID-19 on our residents’ and their families’ ability to afford our resident fees, including due to changes in unemployment rates, consumer confidence, and equity markets caused by COVID-19; changes in the acuity levels of our new residents; the disproportionate impact of COVID-19 on seniors generally and those residing in our communities; the duration and costs of our preparation and response efforts, including increased supplies, labor, litigation, and other expenses; the impact of COVID-19 on our ability to complete financings, refinancings, or other transactions (including dispositions) or to generate sufficient cash flow to cover required interest and lease payments and to satisfy financial and other covenants in our debt and lease documents; increased regulatory requirements and enforcement actions resulting from COVID-19, including those that may limit our collection efforts for delinquent accounts; and the frequency and magnitude of legal actions and liability claims that may arise due to COVID-19 or our response efforts.

If the Company is not able to successfully implement its business plans and strategies, the Company’s consolidated results of operations, financial position, liquidity and ability to continue as a going concern could be negatively affected.

As noted elsewhere in this Quarterly Report on Form 10-Q, due to the impact of COVID-19 on the Company’s financial position, the Company’s management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern. The Company has taken and intends to take actions to improve its liquidity position and to address the uncertainty about its ability to operate as a going concern, but these actions are subject to a number of assumptions, projections, and analyses. If these assumptions prove to be incorrect, the Company may be unsuccessful in executing its business plans or achieving the projected results, which could adversely impact its financial results and liquidity. Those plans include various cost-cutting, efficiency and profitability initiatives. There are no assurances such initiatives will prove to be successful or the cost savings, profitability or other results the Company achieves through those plans will be consistent with its expectations. As a result, the Company’s results of operations, financial position and liquidity could be negatively impacted. If we become insolvent or fail to continue as a going concern, our common stock may become worthless.

If we cannot regain compliance with the continued listing requirements of the New York Stock Exchange (“NYSE”), the NYSE will delist our common stock.

Our common stock is currently listed on the NYSE. On April 10, 2020, we received notice (the “Notice”) from the NYSE that the Company is no longer in compliance with NYSE continued listing standards set forth in Section 802.01B (the “Minimum Market Capitalization Standard”) and Section 802.01C (the “Minimum Stock Price Standard”) of the NYSE’s Listed Company Manual due to the fact that (i) the Company’s average global market capitalization over a consecutive 30 trading-day period was less than $50 million and, at the same time, its stockholders’ equity was less than $50 million, and (ii) the average closing price of the Company’s common stock was less than $1.00 over a consecutive 30 trading-day period. If we are unable to regain compliance with such continued listing requirements within the time periods prescribed by the NYSE’s rules, our common stock will be delisted.  Due to current market conditions, the NYSE has temporarily tolled the applicable cure periods for complying with the Minimum Market Capitalization Standard and the Minimum Stock Price Standard, which are currently scheduled to recommence on July 1, 2020, and as such, the NYSE has informed the Company that it has until December 19, 2021 to regain compliance with the Minimum Market Capitalization Statement and until December 19, 2020, to regain compliance with the Minimum Stock Price Standard.

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In accordance with the NYSE’s listing requirements, within 10 business days after the Company’s receipt of the Notice, the Company notified the NYSE that it would submit a plan to the NYSE within 45 days after the Company’s receipt of the Notice advising the NYSE of definitive action the Company has taken, or is taking, to bring it into conformity with the Minimum Market Capitalization Standard within 18 months after the Company’s receipt of the Notice. On May 26, 2020, the Company submitted its plan to the NYSE.  The NYSE is reviewing the Company’s plan and, within 45 days after the NYSE’s receipt of the Company’s plan, make a determination as to whether the Company has made a reasonable demonstration of its ability to come into conformity with the Minimum Market Capitalization Standard within 18 months. If the NYSE does not accept the Company’s plan, then the NYSE will initiate delisting proceedings. If the NYSE accepts the Company’s plan, the Company’s common stock will continue to be listed and traded on the NYSE during the cure period, subject to the Company’s compliance with the plan and other continued listing standards. The NYSE will review the Company on a quarterly basis to confirm compliance with the plan. If the Company fails to comply with the plan or does not meet continued listing standards at the end of the 18-month cure period, it will be subject to the prompt initiation of NYSE suspension and delisting procedures.

The Company also responded to the NYSE within 10 business days after the Company’s receipt of the Notice stating its intent to cure the Minimum Stock Price Standard, including through a reverse stock split of the Company’s common stock, subject to stockholder approval, if such action is necessary to cure the non-compliance.

A delisting of our common stock could negatively impact us by, among other things:

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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

(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 shares purchased by the Company pursuant to its share repurchase program (as described below) as March 31, 2020.

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.

Item 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

Item 4. MINE SAFETY DISCLOSURES.

Not applicable.

Item 5. OTHER INFORMATION.

Subsequent to the issuance of its earnings release for the period ended March 31, 2020, the Company updated several entries in its financial statements for such period related to the Welltower Agreement and the Ventas Agreement that closed during such period.  These updates resulted in adjustments to certain items, the net impact of which resulted in comprehensive loss for the three months ended March 31, 2020, decreasing from $(48,372) to $(47,181), and basic and diluted net loss per share decreasing from $(1.59) to $(1.55) and $(1.59) to $(1.55), respectively.  The Company has updated its earnings release on its website accordingly.

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Item 6. 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.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT 10.1

AMENDED and restated FORBEARANCE AGREEMENT

THIS AMENDED AND RESTATED FORBEARANCE AGREEMENT (this agreement, as it may be amended, restated, extended or replaced, the “Agreement”) is dated April 3, 2020, and made effective as of February 1, 2020 (the “Effective Date”), and is by and among (1) Ventas Realty, Limited Partnership, a Delaware limited partnership, as Landlord with respect to the Whitley Place Premises (“VRLP”); (2) Ventas Amberleigh, LLC, a Delaware limited liability company, as Landlord with respect to the Amberleigh Premises (“Ventas Amberleigh”); (3) Ventas Crown Pointe, LLC, a Delaware limited liability company, as Landlord with respect to the Crown Pointe Premises (“Ventas Crown Pointe”); (4) Ventas Santa Barbara, LLC, a Delaware limited liability company, as Landlord with respect to the Santa Barbara Premises (“Ventas Santa Barbara”); (5) Ventas West Shores, LLC, a Delaware limited liability company, as Landlord with respect to the West Shores Premises (“Ventas West Shores”), (6) Ventas East Lansing, LLC, a Delaware limited liability company, as Landlord with respect to the East Lansing Premises (“Ventas East Lansing”), (7) Ventas Raleigh, LLC, a Delaware limited liability company, as Landlord with respect to the Raleigh Premises (“Ventas Raleigh” and, together with VRLP, Ventas Amberleigh, Ventas Crown Pointe, Ventas Santa Barbara, Ventas West Shores, Ventas East Lansing and its and their respective successors and assigns, individually and collectively, “Landlord”); (8) Capital Senior Management 2, Inc., a Texas corporation (together with its permitted successors and assigns and any other person or entity that becomes a Tenant under the Master Lease, individually and collectively, “Tenant”); and (9) Capital Senior Living Properties, Inc., a Texas corporation (“Guarantor”).

RECITALS

Landlord and Tenant are parties to that certain Third Amended and Restated Master Lease Agreement, dated June 27, 2012 (the “2012 Master Lease”), as amended by that certain First Amendment to Third Amended and Restated Master Lease Agreement, dated October 22, 2013, that certain Second Amendment to Third Amended and Restated Master Lease Agreement, dated January 21, 2014, that certain Third Amendment to Third Amended and Restated Master Lease Agreement, dated January 21, 2014, that certain Fourth Amendment to Third Amended and Restated Master Lease Agreement, dated June 17, 2015 (the “Fourth Amendment”), and that certain Fifth Amendment to Third Amended and Restated Master Lease Agreement dated June 30, 2016 (the “Fifth Amendment, and together with the 2012 Master Lease and such other amendments thereto, collectively, the “Original Master Lease”), which Original Master Lease was combined with the East Lansing Lease and the Raleigh Lease (each as defined in the Lease Combination Agreement and Amendment) pursuant to the terms of that certain Partial Lease Termination, Lease Combination Agreement and Amendment to Lease dated as of January 31, 2017 (the “Lease Combination Agreement and Amendment”, and the Original Master Lease, as so combined and amended by the Lease Combination Agreement and Amendment, and as further amended pursuant to letter agreement dated June 30, 2017, collectively, the “Original Combined Master Lease”). Under the Original Combined Master Lease, Tenant leases from Landlord certain independent, assisted living and memory care communities located in various states; and

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The Original Combined Master Lease has in turn been amended by that certain First Amendment to Combined Master Lease Agreement dated April 13, 2018, by and among Landlord, Tenant and Guarantor (the “First Combined Amendment”), that certain Second Amendment to Combined Master Lease Agreement dated June 30, 2018, by and among Landlord, Tenant and Guarantor (the “Second Combined Amendment”), and that certain Third Amendment to Combined Master Lease Agreement dated June 30, 2019 (the “Third Combined Amendment” and the Original Combined Master Lease as so amended, the “Master Lease”); and

Tenant’s obligations under the Master Lease are guaranteed by Guarantor pursuant to the terms of those three certain documents titled “Guaranty of Lease”, each dated June 27, 2012 (as the same may have been modified or amended, collectively, the “Lease Guaranty”); and

Tenant has informed Landlord that it is unable to pay, in full and in a timely manner, its Rent payments under the Master Lease and has requested payment relief from Landlord.  Landlord has informed Tenant that, on account of the non-payment of Rent and resulting Events of Default under the Master Lease, Landlord expects to incur significant damages; and

Landlord is willing to forbear from the exercise of certain remedies under the Master Lease pursuant to the terms of this Agreement; and

Tenant, Landlord and Guarantor entered into to that certain Forbearance Agreement dated March 10, 2020 and made effective as of February 1, 2020 (the “Original Forbearance Agreement”); and

Tenant, Landlord and Guarantor wish to amend and restate the Original Forbearance Agreement.

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the parties hereby agree that the Original Forbearance Agreement is hereby superseded, amended and restated as follows:

Recitals; Capitalized Terms; Conflict.  Tenant hereby acknowledges and agrees that the recitals to this Agreement are true and correct, and the same are hereby incorporated into this Agreement.  All capitalized terms used herein and not defined herein shall have the respective meanings ascribed thereto in the Master Lease.  In the event of any conflict between the terms of this Agreement and the terms of the Master Lease, the terms of this Agreement shall govern and control.

Forbearance Through the Final Release Date. Landlord agrees that, effective from the Effective Date through the earlier to occur of (i) the Final Release Date (as defined below) and (ii) the occurrence of a Forbearance Default (as defined below) (the “Forbearance Period”), Landlord will forbear from exercising any remedies that would otherwise be available to Landlord under Section 17 of the Master Lease.

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The occurrence of one or more of the following shall constitute a “Forbearance Default”:

Tenant shall fail to abide by or observe any term, condition, covenant or other provision contained in this Agreement;

An “Event of Default” or an uncured default shall occur under the Master Lease, the Lease Guaranty or any document related to or executed in connection with this Agreement or the Master Lease (other than the failure to pay full Fixed Rent or to comply with the financial covenants in Sections 8.2.6 and 8.2.7 of the Master Lease, provided that Tenant is in compliance with Section 5 below and continues to operate the Facilities consistent with past practice and provide a high quality of care for residents);

Tenant or Guarantor shall cease to exist or revoke or purport to terminate its liability under any of the Master Lease or this Agreement, or challenge the validity or enforceability of any of such agreements or deny any further liability or obligation thereunder;

Tenant or any of its Affiliates shall become subject to a voluntary or involuntary bankruptcy, receivership, foreclosure or other creditors rights proceedings or Tenant or Guarantor shall fail to pay its debts as they become due, or admits in writing (other than a writing solely to Landlord or any of its Affiliates) its inability to pay its debts generally, or makes an assignment of all or substantially all of its property for the benefit of creditors;

Tenant or Guarantor or any of their respective creditors shall commence a case, proceeding or other action against Landlord relating to any of the Master Lease, this Agreement or the Lease Guaranty or any action or omission by Landlord or its agents in connection with any of the foregoing;

Tenant shall take an action that Landlord reasonably believes in good faith is inconsistent in any material respect with any provision of this Agreement, or impairs, or is likely to impair, the prospect of payment or performance by Tenant of its obligations;

Any default by Tenant or any Affiliate of Tenant shall occur under the terms of (i) any Material Lease or (ii) any Material Financing that (A) continues beyond any applicable grace or cure periods and (B) with respect to which the counterparty exercises remedies other than applying security deposits and/or escrows. “Material Lease” shall mean any lease to which Tenant or a Tenant Affiliate is a party where Welltower or Healthpeak is the landlord. “Material Financing” shall mean any obligation of Tenant or any Affiliate of Tenant (including Guarantor) for borrowed money having a principal balance of $1,000,000 or more in the aggregate including any instrument under which any such obligation is created or secured; or

Failure of the Other Landlords Rent Condition (defined below) for any calendar month.

Surrender of Security Deposit and Escrow Deposits. Effective as of the date hereof and notwithstanding anything in the Master Lease to the contrary, the Security Deposit and all escrow deposits held by Landlord pursuant to Section 3.3 of the Master Lease have been applied to Tenant’s obligations under the Master Lease and shall be deemed fully earned by Landlord and

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non-refundable. The application of the Security Deposit and such escrow deposits contemplated by this Section 3 shall not reduce or modify Tenant’s obligations under the Master Lease in any respect, including, but not limited to, Tenant’s obligations to pay Impositions and insurance premiums and to make the escrow deposits required by Section 3.3.1 of the Master Lease from and after April 1, 2020.

Landlord’s Termination Right. At any time and from time to time from and after the Effective Date, Landlord may elect to terminate the Master Lease as to any one or more, or all, of the Facilities by written notice to Tenant delivered no later than the date that is 30 days prior to the effective date of termination, which effective date of termination may not be later than December 31, 2020 (a “Termination Notice”). Any such Termination Notice shall indicate whether Landlord elects (i) for Tenant or an Affiliate of Tenant reasonably acceptable to Landlord (“CSL Manager”) to manage the applicable Facility(ies) after the effective date of termination (a “Management Election”) or (ii) to transition the applicable Facility(ies) (a “Transition Election”) to a new operator (a “Successor Operator”). Upon any such termination, whether pursuant to a Management Election or a Transition Election, the applicable Facility shall constitute a Deleted Property and the provisions of Section 17.9 shall pertain. If, as of December 1, 2020, Landlord has not delivered a Termination Notice for any given Facility(ies), then, with respect to such Facility(ies), Landlord will be deemed to have delivered a Termination Notice making a Management Election for such Facility(ies) with an effective date of termination of December 31, 2020. Landlord and Tenant acknowledge and agree that the Fixed Rent allocable to each Facility as of the date hereof is as listed on Schedule 0 attached hereto.

If Landlord makes a Management Election, Tenant would effect an Operational Transfer to Landlord or Landlord’s affiliate pursuant to the terms of Section 37 of the Master Lease, provided, however that Tenant shall, or shall cause the CSL Manager to, upon the effective date of termination of the applicable Facility(ies), enter into a property management agreement with Landlord with respect to the applicable Facility(ies) on market terms and in form prepared by Landlord in its reasonable judgment, which management agreement shall, in any event:

Have an initial term expiring on the date that the Master Lease would have expired for the applicable Facility(ies) or such shorter term as Landlord may specific;

Provide for a management fee equal to 5% of the gross revenues of the applicable Facility(ies);

Be terminable at any time by Landlord for any or no reason on at least 30 days’ prior written notice; and

Include transition obligations substantially equivalent to the transition obligations of Tenant under the Master Lease, as supplemented by this Agreement.

If Landlord makes a Transition Election, Tenant shall effect an Operational Transfer of the applicable Facility(ies) to the Successor Operator(s) designated by Landlord pursuant to the terms of the Master Lease and, without limitation of any provision of the Master

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Lease (including without limitation Section 37 of the Master Lease [Operational Transfer]), supplemented as follows:

If licenses, permits or certificates held in Tenant’s name cannot be transferred, or cannot be transferred immediately, to Successor Operator, then Tenant shall, at Landlord’s request, enter into an interim management arrangement or another so called “bridging” arrangement in form and substance reasonably acceptable to Landlord and Successor Operator, which will lawfully permit Successor Operator to continue to operate the Facility, and engage in the normal activities of the Facility, under Tenant’s license, permit or certificate, as applicable, until the earliest of completion of such license, permit and certificate transfers, issuance of replacement licenses, permits and certificates.  Under the interim management agreement or bridging arrangements, Successor Operator will be entitled to all revenues but also bear all obligations and expenses, both operating and capital, and including all rent obligations, during the effectiveness of any such agreement.

Tenant shall, for each Facility, enter into (and perform its obligations under) an operations transfer agreement in customary form with Successor Operator providing for an orderly transfer and transition of the business operations, operational assets and employees to Successor Operator, in each case, for nominal or no consideration.  Such operations transfer agreement shall provide for customary indemnities and prorations and other payments of operating revenues and expenses between Tenant and Successor Operator, all of which Tenant agrees to pay or satisfy if and when required under the terms of such agreement provided that a reconciliation process and timeframes for such payment are included in such agreement.  Provisions regarding prorations under such operations transfer agreement shall generally provide that revenues and expenses of the Facility attributable to the period prior to the transition date or “closing” date under such operations transfer agreement (the “OTA Closing Date”) shall be for the account of Tenant and that revenues and expenses of the Facility attributable to the period from and after the OTA Closing Date shall be for the account of Successor Operator.

Tenant and its Affiliates shall agree to customary provisions regarding the non-solicitation/non-hire of employees and customers of the Facilities for a period of two years following the final transition to Successor Operator.

At the option of Landlord, Tenant shall, at its sole cost and expense, procure a two year “tail” policy providing for commercial general and professional liability insurance (if such coverage prior to closing was obtained under a claims made insurance policy) meeting the requirements of the Master Lease for such insurance, naming Landlord, Successor Operator, and/or Landlord’s other designees as additional insureds.

Tenant shall not initiate, prompt or solicit the removal or transfer to another facility of the executive director or the sales director of any Facility, save and except for any removals or transfers arising in connection with any wrongful or egregious acts or omissions, performance that is below acceptable standards, or violations of Tenant’s policies and procedures. With respect to any persons who are or who become owners, officers, directors, or employees of any Successor Operator or who are involved with any Successor Operator in any manner (or who otherwise work at any Facilities transitioned as contemplated hereunder), Tenant and its Affiliates hereby for the benefit of Landlord waive and will not enforce or seek enforcement of any non-competition

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provision in any non-competition or similar agreement in effect between Tenant and or its Affiliates and such persons. If such person is involved with any Successor Operator as provided in the preceding sentence Tenant and its Affiliates will no longer have any obligation to make payments to such persons under any employment, separation, or similar agreement with such person.

Within 45 days after the Effective Date, Tenant shall agree to a general form of operations transfer agreement on the Landlord’s approved form (and such form shall then be used for all transitions contemplated hereunder, subject to usual and customary changes requested by operators, and subject to deal specific changes applicable to the facility in question).

Tenant and its Affiliates may sell or transfer, directly or indirectly, those properties owned by an Affiliate of Tenant whose direct or indirect parent is Capital Senior Living Properties, Inc. (“CSLP”) (collectively, “Sales”), subject to the provisions of this Section 0. No Sales shall be permitted to Affiliates of Tenant other than those whose direct or indirect parent is CSLP. If the net proceeds (after transaction costs and repayment of secured debt) in the aggregate for all Sales exceed $30,000,000.00 of net proceeds, then such excess over $30,000,000.00 shall be paid by Tenant as prepaid rent on a pro rata basis to Ventas and Welltower within three days after such sale, such pro rata basis to be determined in accordance with the modified net base or fixed rent of Facilities still owned by Ventas or Welltower and not yet transitioned. Regardless of the amount of net proceeds of Sales, no net proceeds of Sales shall be distributed to any shareholders of the public company.  Net proceeds of Sales are available for operations in the normal course of business, including the scheduled payments of principal and interest on debt of Tenant and any affiliates, regardless of whether CSLP is the direct or indirect parent; however, the net proceeds of Sales may not be used for unscheduled prepayments of debt.  No FF&E or vehicles or other equipment or materials used in connection with any Facility (i.e., covered by the Master Lease) shall be moved (other than replacements of obsolete items in the ordinary course), sold or encumbered.  

Holdover and Forbearance Period Covenants.  During the Forbearance Period, other than as expressly set forth herein, Tenant shall continue to have, and be required to observe, all of the provisions of the Master Lease.  Notwithstanding the foregoing, (a) during the Forbearance Period, Tenant shall not be required to comply with the financial covenants in Sections 8.2.6 and 8.2.7 of the Master Lease; and (b) (i) with respect to Facilities which have not yet been transitioned in accordance with the terms of this Agreement, Tenant’s obligation in respect of Fixed Rent during the Forbearance Period (A) shall, for the period from the Effective Date through December 31, 2020, be equal to 75% of the Fixed Rent that would otherwise be due pursuant to the terms of the Master Lease, as set forth on Schedule 0 under the heading “Forbearance Period Rent” (“Forbearance Period Fixed Rent”) and (B) shall be paid no later than the third calendar day of each calendar month and (ii) with respect to Facilities which have been transitioned in accordance with the terms of this Agreement, Tenant’s obligation in respect of Fixed Rent during the Forbearance Period shall nonetheless continue through December 31, 2020 in the following amount for each Facility: (x) 75% of the Fixed Rent that would otherwise be due for such Facility pursuant to the terms of the Master Lease, as set forth on Schedule 4, less (y) the lower of the 4Q19 Amount for such Facility and the T3 Amount for such Facility. “4Q19 Amount” means the amount set forth on Schedule 4A for each Facility (representing 1/3 of the EBITDAR for each Facility for the period October 1, 2019-December 31, 2019). “T3 Amount” means the average

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monthly EBITDAR for the Facility in question for the last full three months immediately preceding the transition. “EBITDAR” means, for a given period, revenues for such period less total operating expenses for such period including without limitation property taxes, insurance, professional fees and settlement costs, but excluding management fees and bad debt expense. The aggregate difference between the Forbearance Period Fixed Rent for all Facilities during the Forbearance Period and prior to the transition of such Facilities and the actual contractual Fixed Rent due during such period pursuant to the terms of the Master Lease (such difference being referred to as “Rent Difference”) shall not be released until 91 days after the Final Release Date (in which event such Rent Difference shall no longer be applicable) or the occurrence of a Forbearance Default (in which event such Rent Difference shall become immediately due). Tenant has paid to Landlord an amount equal to $666,875, being the amount due pursuant to the terms of this Section 5 for March 2020, by automatic debit and transfer to Landlord from Tenant’s bank account.

Capital Expenditures. During the Forbearance Period, (i) Tenant shall have no obligation to fund any amounts into the Capital Expenditures Account, whether or not the Capital Expenditures made and reported by Tenant for a given Capital Expenditures Year are less than the Required Capital Expenditures Amount, (ii) Landlord shall reimburse Tenant for the amounts spent on the Special Projects listed on Schedule 6 attached hereto up to the amounts for such Special Projects as set forth on such Schedule 6 pursuant to the terms of the Master Lease applicable to reimbursement for Special Projects, including the conditions to disbursement set forth therein; provided that the failure to pay full Fixed Rent or to comply with the financial covenants in Section 8.2.6 and 8.2.7 of the Master Lease (provided no Forbearance Default has occurred) shall not constitute a failure of the condition to disbursement set forth in Section 11.5.3(b) of the Master Lease (relating to the existence of an Event of Default or default), and (iii) Landlord shall reimburse Tenant for Capital Expenditures made by Tenant up to an aggregate amount of $1,000 per Unit per Capital Expenditures Year upon written request by Tenant therefor, accompanied by a report summarizing and describing in reasonable detail all of the Capital Expenditures for which such reimbursement is sought, on both an aggregate basis and broken down by Facility, and such receipts and other information as Landlord may reasonably require, provided, however, that Landlord and Tenant may in their respective sole discretions agree on the execution, completion, and reimbursement for other Capital Expenditure projects that will exceed the $1,000 per Unit amount. The aggregate maximum amount of the foregoing reimbursement requirement shall be equitably prorated for any Facility(ies) that are subject to the Master Lease for less than the full Capital Expenditures Year (e.g., due to the effect of a Management Election or Transition Election). In the event of a Forbearance Default, all amounts reimbursed by Landlord to Tenant pursuant to this Section 6 up to the total Required Capital Expenditures Amount that would otherwise have accrued for the applicable period shall become immediately due and payable by Tenant as Additional Rent. Tenant agrees that (i) except as provided in this Section 6, Landlord has, and shall have, no reimbursement obligations to Tenant with respect to any Capital Expenditures undertaken by Tenant and (ii) Tenant shall diligently and continuously prosecute the Special Projects listed on Schedule 6 to completion.

Reporting.

On each Wednesday for so long as Tenant continues to operate any Facility, Tenant shall deliver to Landlord, or its designees, (a) weekly occupancy data; (b) weekly move-out data;

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(c) weekly sales funnel data; and within five (5) days after the end of a month (d) monthly rent rolls for each Facility, in each case in forms reasonably acceptable to Landlord.

No later than the 5th day of each month, Tenant shall deliver an officer’s certificate to Landlord signed by the CEO or CFO of Capital Senior Living, Inc. confirming that, for the immediately preceding month, (i) all consideration of any kind paid or granted by or on behalf of Tenant and/or any of Tenant’s Affiliates (each, a “Tenant Party” and, collectively, the “Tenant Parties”) to Welltower Inc. and its Affiliates (collectively, “Welltower”) during such month (including, but not limited to, base or minimum rent, capital expenditures on the leased properties, real estate tax payments and/or escrows, and insurance payments and/or escrows, but excluding any security deposits surrendered to such landlord parties on account of a default under the applicable leases) did not exceed the amounts described on Schedule 7.2 under the heading “Welltower” for such month and (ii) all consideration of any kind paid or granted by or on behalf of any Tenant Parties to Healthpeak Properties and its Affiliates (collectively, “Healthpeak”) during such month (including, but not limited to, base or minimum rent, capital expenditures on the leased properties, real estate tax payments and/or escrows, and insurance payments and/or escrows, but excluding any security deposits surrendered to such landlord parties on account of a default under the applicable leases) did not exceed the amounts described on Schedule 7.2 under the heading “Healthpeak” for such month (the “Other Landlords Rent Condition”). In the event that properties leased to Tenant Parties by Welltower or Healthpeak cease to be leased to Tenant Parties, Schedule 7.2 shall be equitably adjusted to account for the resulting reduction in the Tenant Parties’ contractual obligations. Tenant hereby represents and warrants to Landlord that the Other Landlords Rent Condition was satisfied for February, 2020, and the officer’s certificate required by April 5, 2020 shall confirm satisfaction of the Other Landlords Rent Condition for both February 2020 and March 2020.  

Final Release at Completion of Transition.  Provided that the Final Release Conditions have been satisfied in full (the date such conditions are satisfied, the “Final Release Date”), then, ninety-one (91) days following the Final Release Date (provided the Final Release Conditions remained satisfied for the entirety of such period), Landlord shall:

On behalf of itself, and its current and former subsidiaries, successors, assigns, Affiliates, agents, attorneys, employees, members, partners, officers and directors (all of the foregoing persons, collectively, the “Landlord Release Parties”), release Tenant and its current and former subsidiaries, successors, assigns, Affiliates, agents, attorneys, employees, members, partners, officers and directors (all of the foregoing persons, collectively, the “Tenant Release Parties”) from any and all liabilities, claims, actions, causes of action, suits, debts, accounts, damages, injuries or demands of whatever kind or nature (including, without limitation, any claims for attorneys’ fees) related to its obligations under the Master Lease, the Facilities or the operations thereof that any of them had, now have or may have, whether fixed, liquidated or contingent, whether known or unknown and whether asserted by way of claim, counterclaim, cross-claim, action for indemnity, contribution or otherwise, but expressly excluding (i) fraud and (ii) obligations under the Master Lease that expressly survive termination pursuant to the terms of the Master Lease (and the Guaranty shall continue to pertain with respect to such obligations); and

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The “Final Release Conditions” shall mean

No Forbearance Default has occurred;

All of the Facilities have been fully and finally transitioned to Landlord’s Successor Operator (for purposes of this Section 8, such term shall include, in the event of any Management Election, Landlord or its designee) in accordance with the terms of this Agreement and the Master Lease, including, but not limited to, all necessary licenses and permits to operate the Facilities having been issued to such Successor Operator and any so-called “bridging arrangements” with respect to such Facilities having been terminated;

All prorations and other payments between Tenant, Landlord and/or Successor Operator of operating revenues and expenses have been fully and finally settled and paid;

None of Tenant nor any of its Affiliates are subject to a voluntary or involuntary petition under the Bankruptcy Code (11 U.S.C. §§ 101 et. seq.), receivership, foreclosure, assignment for benefit of creditors, or any similar proceeding for the restructuring of its respective financial affairs or liquidation of its respective assets under state or federal law;

No claim has been asserted against Tenant, Landlord, or in each case, any of their Affiliates, seeking to challenge or unwind any of the transactions contemplated herein; and

Tenant provides an updated release in the form contemplated by Section 11.2.

Bankruptcy.  Tenant hereby represents and warrants to Landlord that Tenant (a) intends to consensually restructure its financial affairs without filing a bankruptcy petition under Chapter 11 of the Bankruptcy Code and in the event any petition is filed under Chapter 11, Tenant will make every reasonable effort to propose a consensual plan of reorganization should such a filing become necessary, (b) is instead attempting to effect a consensual out of court restructuring with its creditors and other parties in interest including pursuant to the accommodations provided by Landlord under this Agreement, and (c) the relief allowed by this Agreement and the concessions made by Landlord to date are critical to the Tenant’s efforts to consensually restructure its financial affairs outside of Chapter 11 to the extent reasonably possible.  Landlord is entering into this Agreement in reliance on, among other things, Tenant’s representations, warranties, covenants and agreements set forth in this Section 9, and Tenant is making and entering into those representations, warranties, covenants and agreements in order to induce Landlord to enter into this Agreement.  Accordingly, in the event that Tenant files or becomes the subject of a petition under the Bankruptcy Code:

(i) Tenant consents to relief from any automatic stay imposed by Section 362 of the Bankruptcy Code in connection with the exercise of the rights and remedies otherwise available to Landlord, and Tenant irrevocably waives its rights to object to such relief; and (ii) Tenant agrees that no injunctive relief against Landlord shall be sought under Section 105 or other provision of the Bankruptcy Code, and irrevocably waives its right to file an adversary action to obtain injunctive relief against Landlord.

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Tenant agrees that (i) Landlord is relying upon the timely performance by Tenant of all obligations hereunder, including, without limitation, in respect of its holdover tenancy and obligation to transition the Facilities to a Successor Operator notwithstanding the entry of an order for relief under the Bankruptcy Code; and (ii) the failure by Tenant to comply with its obligations hereunder and the provisions of the Master Lease that survive termination of the Master Lease for any reason whatsoever will result in immediate prejudice that constitutes cause for immediate relief from the automatic stay provisions of the Bankruptcy Code to Landlord; and (iii) upon the entry of an order by the Bankruptcy Court granting relief from the automatic stay pursuant to a request by Landlord, possession will be delivered to Landlord or its Successor Operator by Tenant immediately or as otherwise directed by Landlord, in its sole discretion, without the necessity of any further action by Landlord.

No provision of this Agreement shall be deemed a waiver of Landlord’s rights or remedies under the Bankruptcy Code or applicable law to oppose any relief sought against Landlord, including, without limitation, in respect of the Master Lease or this Agreement, to require timely performance of Tenant’s obligations hereunder, including, without limitation, its obligations to comply with the provisions of the Master Lease that survive termination of the Master Lease, or to gain possession of any Facility(ies) as to which Landlord seeks possession immediately or to assert any claim against Tenant.

The release contemplated in Section 8.1 herein shall be automatically null and void immediately upon the: (i)  filing of a voluntary or involuntary bankruptcy by or against Tenant or any of its Affiliates within 90 days of the Final Release Date; or (i) the entry of any order avoiding or otherwise disallowing the this Forbearance Agreement. Further, the calculation of Rent and damages of Landlord under the Master Lease shall include any payments made by Tenant to Landlord that are subject to any action under Chapter 5 of the Bankruptcy Code, including pursuant to any state law under Section 544 of the Bankruptcy Code.

For purposes of this Section, in the event that a bankruptcy action is commenced, the term “Tenant” shall include Tenant’s successor in bankruptcy, whether a trustee under Chapter 7 or Chapter 11 of the Bankruptcy Code, Tenant as debtor in possession, a custodian whose compliance with Section 543 of the Bankruptcy Code has been excused, or other responsible person.

Most Favored Nations. Tenant shall promptly, and in any event within two (2) business days of execution, provide to Landlord a true and complete copy of any agreement or instrument that has the effect of modifying or amending any Tenant Party’s obligations under its leases with Welltower or Healthpeak (an “Other Landlords Agreement”), together with any documents or information that may reasonably be required to determine the nature and extent of such modifications or amendments, unless complete versions of such documents are already public (including, but not limited to, exhibits). If, in Landlord’s reasonable judgement, any such Other Landlords Agreement has the effect of causing the overall rights, benefits and/or concessions granted to Welltower or Healthpeak relative to its contractual rights under its leases with the Tenant Parties as of February 1, 2020 to be, in the aggregate, more favorable to Welltower or Healthpeak, as applicable, than the rights, benefits and/or concessions granted to Landlord under this Agreement, then Landlord may require such amendments to this Agreement as may be necessary to render such rights, benefits and concessions to be reasonably equivalent to those

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granted to Welltower or Healthpeak, as applicable, and Tenant shall promptly execute and deliver any such amendment, and no Other Landlords Agreement shall cause a default under Section 7.2 provided that Tenant fully complies with the requirements of this Section 10.

Miscellaneous.

Representations and Warranties.  To induce Landlord to enter into this Agreement, Tenant hereby represents and warrants to Landlord as follows:

Tenant is a corporation, duly organized, validly existing and in good standing under its jurisdiction of organization; Tenant is qualified to do business in and is in good standing under the laws of the State in which the Facility operated by Tenant is located;

Tenant has the power and authority to execute, deliver and perform this Agreement and has taken all requisite action necessary to authorize the execution, delivery and performance of its obligations under this Agreement;

This Agreement constitutes the legal, valid and binding obligation of Tenant enforceable in accordance with its terms;

The execution, delivery and performance of this Agreement will not require any consent, approval, authorization, order or declaration of, or any filing or registration with, any court, any Governmental Authority or any other person other than those that have already been obtained or those that are provided for in this Agreement; and

The execution, delivery and performance of this Agreement do not violate any order, writ, injunction, decree, statute, rule or regulation applicable to Tenant or any of the Facilities.

Tenant has read and understands this Agreement, has consulted with and been represented by legal counsel in connection herewith, and has been advised by its counsel of its rights and obligations hereunder.

The parties hereto acknowledge and agree that this Agreement shall not be construed more favorably in favor of one than the other based upon which party drafted the same, it being acknowledged that all parties hereto contributed substantially to the negotiation and preparation of this Agreement.

Landlord Not Liable; Expenses.

Tenant hereby acknowledges and affirms that, as of the Effective Date, it has no claim, counterclaim, defense, concession, offset, abatement or deduction against its or his obligations under the Master Lease, as affected hereby.

Effective upon the execution of this Agreement, the Tenant Release Parties forever release, acquit and discharge the Landlord Release Parties from any and all liabilities, claims, actions, causes of action, suits, debts, accounts, damages, injuries or demands of whatever kind or nature (including, without limitation, any claims for attorneys’ fees) related to the Tenant

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Release Parties, the Master Lease, the Facilities or the operations thereof that any of them had, now have or may have, whether fixed, liquidated or contingent, accruing on or prior to the Effective Date, whether known or unknown and whether asserted by way of claim, counterclaim, cross-claim, action for indemnity, contribution or otherwise (collectively, the “Claims”).

In furtherance of the foregoing, the Tenant Release Parties hereby covenant and agree, for and on behalf of themselves and the other Tenant Release Parties, that they shall not, directly or indirectly, commence, maintain, prosecute or sue or cooperate in any suit against any of the Landlord Release Parties, either affirmatively or by way of cross-complaint, indemnity claim or counterclaim or in any other manner or at all on any Claim.

The Tenant Release Parties acknowledge that the release contained in this Section 11.2 (the “Release”) is intended to be effective as a bar to each and every one of the Claims.  The Tenant Release Parties expressly consent to this Release being given full force and effect according to each and all of its express terms and provisions, including, without limitation, those relating to any unknown and unsuspected Claims (notwithstanding any State, Federal or other statute, rule or law that expressly limits the effectiveness of a general release of unknown, unsuspected and unanticipated claims), if any, as well as those relating to any other Claims.  The Tenant Release Parties acknowledge and agree that: (1) execution of this Release is an essential and material inducement to Landlord agreeing to execute this Agreement; (2) this Agreement is to the benefit of, among others, the Tenant Release Parties; and (3) without this Release, Landlord would not have executed and delivered this Agreement or entered into the transactions contemplated hereby.  The Tenant Release Parties further agree that, in the event any Tenant Release Party asserts a Claim against any Landlord Release Party, this Release shall serve as a complete defense to such Claim, and any Landlord Release Party may present this Release as such a defense.

All costs, expenses and fees (including, without limitation, reasonable attorneys’ fees and other professional fees) incurred by Landlord or its Affiliates in the preparation, execution, delivery, negotiation and implementation of this Agreement, or related documents, shall be paid and reimbursed by Tenant (i) on the date of execution of this Agreement and (ii) promptly upon written demand by Landlord from time to time.

Reaffirmation of Obligations, etc.  Tenant acknowledges and agrees that the obligations hereunder, including, without limitation, the provisions of the Master Lease that survive termination of the Master Lease, and all liabilities due and owing Landlord under this Agreement and such Master Lease provisions constitute the valid and binding obligations of Tenant enforceable against Tenant in accordance with their respective terms, and Tenant reaffirms its obligations and liabilities hereunder and in respect of amounts owed under the Master Lease.  Landlord’s entry into this Agreement or any of the documents referenced herein, its negotiations with any party, its conduct of any analysis or investigation of the operations of Tenant, any collateral or any document, its acceptance of any payment from Tenant or any other party of any payments made prior to or after the date hereof and its making of any credit support prior to or after the date hereof and/or any other action or failure to act on the part of Landlord shall not, except as expressly provided herein, (a) constitute a modification of any applicable document, (b) constitute a waiver of any condition, default or Event of Default under the Master Lease, (c) excuse Tenant from any of its obligations hereunder, including, without limitation, in respect of provisions

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that survive the termination of the Master Lease, or (d) toll the running of any time periods applicable to any rights and remedies of Landlord.  Tenant agrees that it will not assert laches, waiver or any other defense to the enforcement of any of the applicable documents based upon any agreement or action by Landlord set forth in or contemplated by this Agreement.

Guarantor Reaffirmation. Guarantor joins this Agreement and hereby (a) consents to this Agreement and agrees to be bound by its terms and (b) reaffirms that its obligations under the Lease Guaranty to guarantee Tenant’s obligations under the Master Lease, as affected by this Amendment, remain in full force and effect.

Acknowledgement of Liens and Security Interests.  Tenant acknowledges, confirms and agrees that Landlord has and shall continue to have valid, enforceable and perfected first-priority liens upon and security interests in the Lease Collateral and all products and proceeds thereof as specified in the Master Lease.

No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of Landlord, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.  The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.

Further Assurances.  Landlord and Tenant agree that they shall take such actions and execute, deliver and, if necessary, file such agreements, instruments and other documents as shall be reasonably requested by the other party hereto to preserve or further the parties’ rights pursuant hereto and in order to effectuate the intent and purposes of this Agreement.

Severability.  Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained in this Agreement.

Governing Law.  This Agreement is made pursuant to, and shall be construed and enforced in accordance with, the laws of the State of Illinois, irrespective of the principal place of business, residence or domicile of the parties hereto, and without giving effect to otherwise applicable principles of conflicts of law.

Successors And Assigns.  This Agreement and the covenants and agreements herein contained shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, devisees, successors and assigns.

Integrated Agreement; Modifications.  This Agreement, and the terms of the Master Lease that survive termination of the Master Lease, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede any and all prior representations, understandings and agreements, whether written or oral, with respect to such

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subject matter.  Each of the parties hereto acknowledges that it has not relied upon, in entering into this Agreement, any representation, warranty, promise or condition not specifically set forth in this Agreement.  No supplement, modification or waiver of any provision of this Agreement shall be binding unless executed in writing by the party to be bound thereby.

No Waiver. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.  Landlord hereby expressly reserves all rights and remedies that it may have at law, in equity or under the Master Lease and the Guaranty.  Landlord has not waived, does not waive, and shall not be deemed to have waived, any such right or remedy or to have made or given any election with respect to such matters or otherwise.  Nothing contained in this letter is intended to limit, nor shall it be deemed to limit or in any way affect, any of Landlord’s rights or remedies at law, in equity or under the Master Lease with respect to any current or future failure to timely pay amounts owing under the Master Lease or any other matter.  Nothing contained herein, nor any failure by Landlord to exercise, or delay by Landlord in exercising, any of its rights or remedies at law, in equity or under the Master Lease with respect to any existing or future failure to timely pay amounts owing under the Master Lease or any other matter, shall be deemed to constitute, nor is it intended to constitute, a waiver, estoppel, release, modification, limitation, forbearance or agreement by Landlord to delay the exercise of any of Landlord’s rights or remedies at law, in equity or under the Master Lease or a waiver of any obligations of Tenant under the Master Lease.  The following shall not be construed as a waiver or release of any rights or remedies by Landlord or an indication of a course of dealing, and shall not operate as a course of dealing or to toll any cure period, notice period or other applicable period or in any manner modify or give rise to an obligation of Landlord to modify the legal relationship evidenced by the Master Lease: (a) the attendance and/or participation by Landlord or its attorneys or other representatives at any telephone communications, meetings or other discussions with respect to the Master Lease; or (b) any correspondence, statements, discussions, negotiations, meetings, drafts of documents (including, without limitation, unexecuted drafts of proposed modifications) or telephone communications among Landlord and/or its attorneys or other representatives and Tenant and/or its attorneys or other representatives with respect to any proposed transactions involving the Master Lease. The reservations and disclaimers set forth in this term sheet shall continue to apply and remain in full force and effect notwithstanding any action or inaction that Landlord may or may not take with respect to any matter described herein.

Headings and Captions.  The headings and captions of the paragraphs of this Agreement are for convenience of reference only and shall not affect the meaning or interpretation of this Agreement or any provision hereof.

Gender and Number.  As used in this Agreement, the neuter shall include the feminine and masculine, the singular shall include the plural, and the plural shall include the singular, except where expressly provided to the contrary.

Counterparts; Facsimile.  This Agreement may be signed in any number of counterparts, and signature pages may be delivered by facsimile or electronic mail, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

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[Signature pages follow]

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IN WITNESS WHEREOF, the parties hereto have executed these presents the day and year first above written.

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EXHIBIT 10.2

FORBEARANCE AGREEMENT

THIS FORBEARANCE AGREEMENT (this agreement, as it may be amended, restated, extended or replaced, the “Agreement”) is dated as of March 15, 2020, and made effective as of February 1, 2020 (the “Effective Date”), and is by and among (1) Midwest Miracle Hills, LLC, (2) Midwest Woodbridge, LLC, (3) Midwest Ames, LLC, (4) Midwest Prestwick, LLC, (5) Midwest Village of Columbus, LLC, (6) Midwest Windermere, LLC, (7) Midwest 108th & Q, LLC, (8) Midwest Van Dorn, LLC, ((1) through (8) collectively "Landlord #1"); (9) HCRI Texas Properties, Ltd., (10) 402 South Colonial Drive, LLC, (11) 311 E. Hawkins Parkway, LLC, (12) 2281 Country Club Drive, LLC, (13) 5902 North Street, LLC, (14) 750 North Collegiate Drive, LLC, (15) 1011 E. Pecan Grove Road, LLC, (16) 5550 Old Jacksonville Highway, LLC, (17) 1329 Brown Street, LLC, (18) 1818 Martin Drive, LLC, ((9) through (18) collectively "Landlord #2"); and (19) 901 Florsheim Drive, LLC, (20) 504 North River Road, LLC, (21) 6949 Main Street, LLC and (22) 41 Springfield Avenue, LLC ((19) through (22) collectively "Landlord #3"), each of (1) through (22) a Delaware limited liability company except in the case of HCRI Texas Properties, Ltd., a Texas limited partnership (Landlord #1, Landlord #2 and Landlord #3 together with its and their respective successors and assigns, individually and collectively, “Landlord”); (23) Capital Midwest, LLC ("Tenant #1"), (24) Capital Texas S, LLC ("Tenant #2") and (25) Capital Spring Meadows, LLC ("Tenant #3"), each of Tenant #1, Tenant #2 and Tenant #3 a Delaware limited liability company (Tenant #1, Tenant #2 and Tenant #3 together with its and their permitted successors and assigns and any other person or entity that becomes a Tenant under the Master Lease, individually and collectively, “Tenant”); and (26) Capital Senior Living Properties, Inc., a Texas corporation (“Guarantor”).