UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017March 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission file number: 1-13445

 

Capital Senior Living Corporation

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

75-2678809

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

14160 Dallas Parkway, Suite 300, Dallas, Texas

 

75254

(Address of Principal Executive Offices)

 

(Zip Code)

(972) 770-5600

(Registrant’s Telephone Number, Including Area Code)

NONE

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

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of OctoberApril 27, 2017,2018, the Registrant had 30,474,46331,124,413 outstanding shares of its Common Stock, $0.01 par value, per share.

 

 

 


 

CAPITAL SENIOR LIVING CORPORATION

INDEX

 

 

 

Page
Number

 

Part I. Financial Information

 

 

3

 

Item 1. Financial Statements.

 

 

3

 

Consolidated Balance Sheets — September 30, 2017March 31, 2018 and December  31, 20162017

 

 

3

 

Consolidated Statements of Operations and Comprehensive Loss — Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 2016

 

 

4

 

Consolidated Statements of Cash Flows — NineThree Months Ended September 30,March 31, 2018 and 2017 and 2016

 

 

5

 

Notes to Unaudited Consolidated Financial Statements

 

 

6

 

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

14

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

 

2320

 

Item 4. Controls and Procedures

 

 

2320

 

Part II. Other Information

 

 

2320

 

Item 1. Legal Proceedings

 

 

2320

 

Item 1A. Risk Factors

 

 

2320

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

23

Item 3. Defaults Upon Senior Securities

 

 

2421

Item 3. Defaults Upon Senior Securities

21

 

Item 4. Mine Safety Disclosures

 

 

2421

 

Item 5. Other Information

 

 

2421

 

Item 6. Exhibits

 

 

2422

 

Signature

 

 

2623

 

Certifications

 

 

 

 

 


 

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except per share data)

 

 

September 30,

2017

 

 

December 31,

2016

 

 

March 31,

2018

 

 

December 31,

2017

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,186

 

 

$

34,026

 

 

$

9,938

 

 

$

17,646

 

Restricted cash

 

 

13,372

 

 

 

13,297

 

 

 

13,387

 

 

 

13,378

 

Accounts receivable, net

 

 

8,680

 

 

 

13,675

 

 

 

13,594

 

 

 

12,307

 

Property tax and insurance deposits

 

 

12,912

 

 

 

14,665

 

 

 

9,361

 

 

 

14,386

 

Prepaid expenses and other

 

 

3,978

 

 

 

6,365

 

 

 

6,124

 

 

 

6,332

 

Total current assets

 

 

48,128

 

 

 

82,028

 

 

 

52,404

 

 

 

64,049

 

Property and equipment, net

 

 

1,105,270

 

 

 

1,032,430

 

 

 

1,090,067

 

 

 

1,099,786

 

Other assets, net

 

 

18,233

 

 

 

31,323

 

 

 

18,079

 

 

 

18,836

 

Total assets

 

$

1,171,631

 

 

$

1,145,781

 

 

$

1,160,550

 

 

$

1,182,671

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,975

 

 

$

5,051

 

 

$

3,544

 

 

$

7,801

 

Accrued expenses

 

 

36,663

 

 

 

39,064

 

 

 

34,046

 

 

 

40,751

 

Current portion of notes payable, net of deferred loan costs

 

 

16,482

 

 

 

17,889

 

 

 

18,525

 

 

 

19,728

 

Current portion of deferred income

 

 

14,245

 

 

 

16,284

 

 

 

14,237

 

 

 

13,840

 

Current portion of capital lease and financing obligations

 

 

2,806

 

 

 

1,339

 

 

 

2,876

 

 

 

3,106

 

Federal and state income taxes payable

 

 

110

 

 

 

218

 

 

 

573

 

 

 

383

 

Customer deposits

 

 

1,428

 

 

 

1,545

 

 

 

1,332

 

 

 

1,394

 

Total current liabilities

 

 

75,709

 

 

 

81,390

 

 

 

75,133

 

 

 

87,003

 

Deferred income

 

 

10,504

 

 

 

12,205

 

 

 

9,563

 

 

 

10,033

 

Capital lease and financing obligations, net of current portion

 

 

49,857

 

 

 

37,439

 

 

 

48,272

 

 

 

48,805

 

Deferred taxes

 

 

1,941

 

 

 

1,941

 

Other long-term liabilities

 

 

15,273

 

 

 

15,325

 

 

 

16,343

 

 

 

16,250

 

Notes payable, net of deferred loan costs and current portion

 

 

935,345

 

 

 

882,504

 

 

 

934,072

 

 

 

938,206

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $.01 par value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Authorized shares – 15,000; no shares issued or outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $.01 par value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Authorized shares – 65,000; issued and outstanding

shares – 30,478 and 30,012 in 2017 and 2016, respectively

 

 

310

 

 

 

305

 

Authorized shares – 65,000; issued and outstanding

shares – 31,133 and 30,505 in 2018 and 2017, respectively

 

 

316

 

 

 

310

 

Additional paid-in capital

 

 

177,610

 

 

 

171,599

 

 

 

181,402

 

 

 

179,459

 

Retained deficit

 

 

(89,547

)

 

 

(51,556

)

 

 

(103,062

)

 

 

(95,906

)

Treasury stock, at cost – 494 shares in 2017 and 2016

 

 

(3,430

)

 

 

(3,430

)

Treasury stock, at cost – 494 shares in 2018 and 2017

 

 

(3,430

)

 

 

(3,430

)

Total shareholders’ equity

 

 

84,943

 

 

 

116,918

 

 

 

75,226

 

 

 

80,433

 

Total liabilities and shareholders’ equity

 

$

1,171,631

 

 

$

1,145,781

 

 

$

1,160,550

 

 

$

1,182,671

 

 

See accompanying notes to unaudited consolidated financial statements.


CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited, in thousands, except per share data)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

Three Months Ended

March 31,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resident revenue

 

$

117,318

 

 

$

111,436

 

 

$

350,026

 

 

$

331,643

 

 

$

114,643

 

 

$

115,990

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses (exclusive of facility lease expense and depreciation and amortization expense shown below)

 

 

74,636

 

 

 

69,622

 

 

 

220,703

 

 

 

203,307

 

 

 

71,700

 

 

 

72,778

 

General and administrative expenses

 

 

5,361

 

 

 

5,749

 

 

 

17,678

 

 

 

16,969

 

 

 

6,022

 

 

 

6,234

 

Facility lease expense

 

 

13,943

 

 

 

15,500

 

 

 

42,498

 

 

 

46,150

 

 

 

14,214

 

 

 

14,587

 

Loss on facility lease termination

 

 

 

 

 

 

 

 

12,858

 

 

 

 

 

 

 

 

 

12,858

 

Stock-based compensation expense

 

 

1,962

 

 

 

2,479

 

 

 

5,833

 

 

 

7,482

 

 

 

1,949

 

 

 

1,930

 

Depreciation and amortization expense

 

 

16,903

 

 

 

14,400

 

 

 

50,862

 

 

 

44,103

 

 

 

15,372

 

 

 

17,213

 

Total expenses

 

 

112,805

 

 

 

107,750

 

 

 

350,432

 

 

 

318,011

 

 

 

109,257

 

 

 

125,600

 

Income (Loss) from operations

 

 

4,513

 

 

 

3,686

 

 

 

(406

)

 

 

13,632

 

 

 

5,386

 

 

 

(9,610

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

19

 

 

 

15

 

 

 

51

 

 

 

50

 

 

 

37

 

 

 

18

 

Interest expense

 

 

(12,531

)

 

 

(10,636

)

 

 

(36,940

)

 

 

(30,966

)

 

 

(12,451

)

 

 

(12,005

)

Loss on disposition of assets, net

 

 

(1

)

 

 

(16

)

 

 

(126

)

 

 

(53

)

Gain (Loss) on disposition of assets, net

 

 

3

 

 

 

(125

)

Other income

 

 

1

 

 

 

 

 

 

6

 

 

 

233

 

 

 

1

 

 

 

3

 

Loss before provision for income taxes

 

 

(7,999

)

 

 

(6,951

)

 

 

(37,415

)

 

 

(17,104

)

 

 

(7,024

)

 

 

(21,719

)

Provision for income taxes

 

 

(133

)

 

 

(126

)

 

 

(394

)

 

 

(403

)

 

 

(132

)

 

 

(123

)

Net loss

 

$

(8,132

)

 

$

(7,077

)

 

$

(37,809

)

 

$

(17,507

)

 

$

(7,156

)

 

$

(21,842

)

Per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net loss per share

 

$

(0.28

)

 

$

(0.24

)

 

$

(1.28

)

 

$

(0.61

)

 

$

(0.24

)

 

$

(0.75

)

Diluted net loss per share

 

$

(0.28

)

 

$

(0.24

)

 

$

(1.28

)

 

$

(0.61

)

 

$

(0.24

)

 

$

(0.75

)

Weighted average shares outstanding — basic

 

 

29,512

 

 

 

28,959

 

 

 

29,427

 

 

 

28,879

 

 

 

29,627

 

 

 

29,288

 

Weighted average shares outstanding — diluted

 

 

29,512

 

 

 

28,959

 

 

 

29,427

 

 

 

28,879

 

 

 

29,627

 

 

 

29,288

 

Comprehensive loss

 

$

(8,132

)

 

$

(7,077

)

 

$

(37,809

)

 

$

(17,507

)

 

$

(7,156

)

 

$

(21,842

)

 

See accompanying notes to unaudited consolidated financial statements.


CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

Nine Months Ended

September 30,

 

 

Three Months Ended

March 31,

 

 

2017

 

 

2016

 

 

2018

 

 

2017

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(37,809

)

 

$

(17,507

)

 

$

(7,156

)

 

$

(21,842

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

50,862

 

 

 

44,103

 

 

 

15,372

 

 

 

17,213

 

Amortization of deferred financing charges

 

 

1,216

 

 

 

870

 

 

 

428

 

 

 

388

 

Amortization of deferred lease costs and lease intangibles

 

 

647

 

 

 

434

 

 

 

212

 

 

 

223

 

Amortization of lease incentives

 

 

(950

)

 

 

(563

)

 

 

(433

)

 

 

(295

)

Deferred income

 

 

(899

)

 

 

15

 

 

 

(61

)

 

 

(99

)

Lease incentives

 

 

5,159

 

 

 

5,858

 

 

 

 

 

 

2,258

 

Loss on facility lease termination

 

 

12,858

 

 

 

 

 

 

 

 

 

12,858

 

Loss on disposition of assets, net

 

 

126

 

 

 

53

 

(Gain) Loss on disposition of assets, net

 

 

(3

)

 

 

125

 

Provision for bad debts

 

 

1,355

 

 

 

1,214

 

 

 

459

 

 

 

443

 

Stock-based compensation expense

 

 

5,833

 

 

 

7,482

 

 

 

1,949

 

 

 

1,930

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,834

)

 

 

(8,883

)

 

 

(1,746

)

 

 

(799

)

Property tax and insurance deposits

 

 

1,753

 

 

 

1,189

 

 

 

5,025

 

 

 

4,425

 

Prepaid expenses and other

 

 

2,387

 

 

 

(2,112

)

 

 

208

 

 

 

1,097

 

Other assets

 

 

5,149

 

 

 

(462

)

 

 

508

 

 

 

4,730

 

Accounts payable

 

 

(1,076

)

 

 

(1,053

)

 

 

(4,257

)

 

 

2,114

 

Accrued expenses

 

 

(2,400

)

 

 

(1,586

)

 

 

(6,705

)

 

 

(7,829

)

Other liabilities

 

 

3,649

 

 

 

8,652

 

 

 

526

 

 

 

1,446

 

Federal and state income taxes receivable/payable

 

 

(108

)

 

 

(97

)

 

 

190

 

 

 

142

 

Deferred resident revenue

 

 

(1,520

)

 

 

(784

)

 

 

(12

)

 

 

(357

)

Customer deposits

 

 

(117

)

 

 

(249

)

 

 

(62

)

 

 

(38

)

Net cash provided by operating activities

 

 

42,281

 

 

 

36,574

 

 

 

4,442

 

 

 

18,133

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(30,165

)

 

 

(47,311

)

 

 

(5,616

)

 

 

(12,713

)

Cash paid for acquisitions

 

 

(85,000

)

 

 

(109,750

)

 

 

 

 

 

(85,000

)

Proceeds from disposition of assets

 

 

16

 

 

 

32

 

 

 

3

 

 

 

12

 

Net cash used in investing activities

 

 

(115,149

)

 

 

(157,029

)

 

 

(5,613

)

 

 

(97,701

)

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from notes payable

 

 

66,584

 

 

 

112,492

 

 

 

 

 

 

65,000

 

Repayments of notes payable

 

 

(15,414

)

 

 

(12,881

)

 

 

(5,723

)

 

 

(5,286

)

Increase in restricted cash

 

 

(75

)

 

 

(133

)

Cash payments for capital lease and financing obligations

 

 

(2,117

)

 

 

(989

)

 

 

(763

)

 

 

(667

)

Cash proceeds from the issuance of common stock

 

 

 

 

 

66

 

Excess tax benefits on stock options exercised

 

 

 

 

 

(27

)

Purchases of treasury stock

 

 

 

 

 

(2,496

)

Deferred financing charges paid

 

 

(950

)

 

 

(1,830

)

 

 

(42

)

 

 

(889

)

Net cash provided by financing activities

 

 

48,028

 

 

 

94,202

 

Net cash (used in) provided by financing activities

 

 

(6,528

)

 

 

58,158

 

Decrease in cash and cash equivalents

 

 

(24,840

)

 

 

(26,253

)

 

 

(7,699

)

 

 

(21,410

)

Cash and cash equivalents at beginning of period

 

 

34,026

 

 

 

56,087

 

Cash and cash equivalents at end of period

 

$

9,186

 

 

$

29,834

 

Cash and cash equivalents and restricted cash at beginning of period

 

 

31,024

 

 

 

47,323

 

Cash and cash equivalents and restricted cash at end of period

 

$

23,325

 

 

$

25,913

 

Supplemental Disclosures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

$

35,108

 

 

$

30,056

 

 

$

11,897

 

 

$

11,056

 

Income taxes

 

$

534

 

 

$

564

 

 

$

15

 

 

$

12

 

 

See accompanying notes to unaudited consolidated financial statements.


CAPITAL SENIOR LIVING CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017March 31, 2018

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 in geographically concentrated regions throughout the United States. As of September 30, 2017,March 31, 2018, the Company operated 129 senior housing communities in 23 states with an aggregate capacity of approximately 16,500 residents, including 83 senior housing communities that the Company owned and 46 senior housing communities that the Company leased. As of September 30, 2017, the Company also operated one home care agency. 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, 2016,2017, has been derived from audited consolidated financial statements of the Company for the year ended December 31, 2016,2017, and the accompanying unaudited consolidated financial statements, as of and for the three and nine month periods ended September 30,March 31, 2018 and 2017, and 2016, 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, 2016,2017, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2017.2, 2018.

In the opinion of the Company, the accompanying consolidated financial statements contain all adjustments (all of which were normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, 2017,March 31, 2018, results of operations for the three and nine month periods ended September 30,March 31, 2018 and 2017, and 2016, and cash flows for the ninethree month periods ended September 30, 2017March 31, 2018 and 2016.2017. The results of operations for the three and nine month periodsperiod ended September 30, 2017,March 31, 2018, are not necessarily indicative of the results for the year ending December 31, 2017.2018.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents and Restricted Cash

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

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

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

9,938

 

 

$

12,612

 

Restricted cash

 

 

13,387

 

 

 

13,301

 

 

 

$

23,325

 

 

$

25,913

 

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 and totaled approximately $112.7 million and $113.7 million for the three month periods ended March 31, 2018 and 2017, 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, 2017, 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 $3.9 million, which were recognized into revenue during the three month period ended March 31, 2018. The Company had contract liabilities for deferred resident fees totaling approximately $3.9 million which are included as a component of deferred income within current liabilities of the Company’s Consolidated Balance Sheets at March 31, 2018. 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 $1.2 million and 1.3 million for


the three month periods ended March 31, 2018 and 2017, 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 which 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, 2018 and December 31, 2017, the Company had contract liabilities for deferred community fees totaling approximately $1.4 million and $1.3 million, respectively, which are included as a component of deferred income within current liabilities of the Company’s Consolidated Balance Sheets. The Company recognized community fees of approximately $0.7 million and $1.0 million during the three month periods ended March 31, 2018 and 2017, respectively, as a component of resident revenue within the Company’s Consolidated Statements of Operations and Comprehensive Loss.

Lease Accounting

The Company determines whether to account for its leases as operating, capital or financing leases depending on the underlying terms of each lease agreement. This determination of classification is complex and requires significant judgment relating to certain information including the estimated fair value and remaining economic life of the community, the Company’s cost of funds, minimum lease payments and other lease terms. As of September 30, 2017,March 31, 2018, the Company leased 46 senior housing communities, 44 of which the Company classified as operating leases and two of which the Company classified as capital lease and financing obligations. The Company incurs lease acquisition costs and amortizes these costs over the term of the respective lease agreement. Certain leases entered into by the Company qualified as sale/leaseback transactions, and as such, any related gains have been deferred and are being amortized over the respective lease term. Facility lease expense in the Company’s Consolidated Statements of Operations and Comprehensive Loss includes rent expense plus amortization expense relating to leasehold acquisition costs slightly offset by the amortization of deferred gains and lease incentives.

There are various financial covenants and other restrictions in the Company’s lease agreements. Under the terms of lease agreements with a certain landlord, the Company is required to maintain a minimum lease coverage ratio for the seven communities within the lease portfolio. Cure provisions within the respective lease agreements allow the Company to deposit cash collateral with the landlord to serve as a short-term remedy for a lease coverage shortfall. The Company received a waiver from the landlord whereby the lease coverage ratio for the portfolio was waived for the period. With this waiver, the Company was not required to deposit cash collateral with the landlord for the lease coverage shortfall and was in compliance with all of its lease covenants at September 30, 2017. On JanuaryMarch 31, 2017,2018. The Company and landlord are currently negotiating terms to provide a long-term remedy for the lease coverage ratio requirement. Earnings related to these properties were not significant to the consolidated operating results of the Company acquiredfor the underlying real estate associated with four of its operating leases. For additional information refer to Note 3, “Acquisitions.”first quarter ended March 31, 2018.

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 $4.7$5.0 million and $4.3$4.9 million at September 30, 2017,March 31, 2018, and December 31, 2016,2017, 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.


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

The Company offers certain 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. Management believes that the liability for outstanding losses and expenses is adequate to cover the ultimate cost of losses and expenses incurred at September 30, 2017;March 31, 2018; however, actual claims and expenses may differ. Any subsequent changes in estimates are recorded in the period in which they are determined.


The Company uses a combination of insurance and self-insurance for workers’ compensation. Determining the reserve for workers’ compensation losses and costs that the Company has incurred as of the end of a reporting period involves significant judgments based on projected future events including potential settlements for 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 and nine month periods ended September 30,March 31, 2018 and 2017 and 2016 differ from the statutory tax rates due to state income taxes, permanent tax differences, and changes in the deferred tax asset valuation allowance. The Company is impacted by the Texas Margin Tax (“TMT”), which effectively imposes tax on modified gross revenues for communities within the State of Texas. During each of the three and nine month periods ended September 30,March 31, 2018 and 2017, and 2016, the Company consolidated 38 Texas communities, and the TMT increased the overall provision for income taxes.

Deferred income taxes are recorded based on the estimated future tax effects of loss carryforwards and temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years in which we expect those carryforwards and temporary differences to be recovered or settled. Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. As part of the evaluation, management has evaluated taxable income in carryback years, future reversals of taxable temporary differences, feasible tax planning strategies, and future expectations of income. Based upon this analysis, an adjustment to the valuation allowance of $3.1$1.4 million and $3.0$13.1 million was recorded during the thirdfirst quarters of fiscal 2018 and 2017, and 2016, respectively, to increase therespectively. The valuation allowance provided to $50.0 million and $28.7 million at September 30, 2017 and 2016, respectively, and reducereduces the Company’s net deferred tax assets to the amount that is more“more likely than notnot” (i.e., a greater than 50% likelihood) to be realized. Cumulative adjustmentsrealized and resulted in net reductions of $38.1 million and $36.7 million to the valuation allowance for the first nine months of fiscal 2017Company’s deferred tax assets at March 31, 2018 and 2016 were $19.1 million and $6.4 million, respectively. The adjustment to the valuation allowance during the first nine months of fiscal 2017 included an increase of $5.3 million for the adoption of ASU 2016-09, which was effective for the Company as of January 1, 2017, to recognize net operating loss carryforwards attributable to excess tax benefits on stock compensation that had not been previously recognized to additional paid in capital.December 31, 2017. 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 completed an analysis determining its best estimate for provisional tax adjustments based on the revised tax legislation associated with the Tax Cuts and Jobs Act (“TCJA”), which was enacted on December 22, 2017. Additionally, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”), to address the accounting and reporting of the TCJA. SAB 118 allows companies to take a reasonable period, which should not extend beyond one year from enactment of the TCJA, to measure and recognize the effects of the new tax law. The Company is continuing to analyze certain aspects of the TCJA and refine its tax calculations and estimates, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.

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” (i.e., a greater than 50% likelihood) 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 income tax audits for tax years prior to 2013.2014.


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):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

Three Months Ended

March 31,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2018

 

 

2017

 

Net loss

 

$

(8,132

)

 

$

(7,077

)

 

$

(37,809

)

 

$

(17,507

)

 

$

(7,156

)

 

$

(21,842

)

Net loss allocated to unvested restricted shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed net loss allocated to common shares

 

$

(8,132

)

 

$

(7,077

)

 

$

(37,809

)

 

$

(17,507

)

 

$

(7,156

)

 

$

(21,842

)

Weighted average shares outstanding – basic

 

 

29,512

 

 

 

28,959

 

 

 

29,427

 

 

 

28,879

 

 

 

29,627

 

 

 

29,288

 

Effects of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee equity compensation plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding – diluted

 

 

29,512

 

 

 

28,959

 

 

 

29,427

 

 

 

28,879

 

 

 

29,627

 

 

 

29,288

 

Basic net loss per share – common shareholders

 

$

(0.28

)

 

$

(0.24

)

 

$

(1.28

)

 

$

(0.61

)

 

$

(0.24

)

 

$

(0.75

)

Diluted net loss per share – common shareholders

 

$

(0.28

)

 

$

(0.24

)

 

$

(1.28

)

 

$

(0.61

)

 

$

(0.24

)

 

$

(0.75

)

 

Awards of unvested restricted stock representing approximately 957,0001,338,000 and 1,028,000849,000 shares were outstanding for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively, and awards of unvested restricted stock representing approximately 884,000 and 1,038,000 shares were outstanding for the nine months ended September 30, 2017 and 2016, respectively, and were antidilutive.

Treasury Stock

The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. 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 ninethree month period ended September 30, 2017.March 31, 2018.

Recently Issued Accounting Guidance

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

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). ASU 2016-18 requires an entity to include in its cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017. Management does not expect2017 and should be applied on a retrospective basis. The Company adopted the adoptionprovisions of ASU 2016-18 toon January 1, 2018 and the adoption resulted in the Company no longer reporting changes in restricted cash balances in the Consolidated Statements of Cash Flows within net cash flows (used in) provided by financing activities which did not have a material impact on the Company’s financial position, results of operations or cash flows.

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


In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in ASU 2016-09 are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted the provisions of ASU 2016-09 on January 1, 2017, and incorporated the provisions of this update into its consolidated financial statements upon adoption. Upon adoption, the Company elected to change its accounting policy to account for forfeitures as they occur. This change was applied on a modified retrospective basis with a cumulative effect adjustment to retained earnings of $0.2 million. Additionally, the adoption of ASU 2016-09 resulted in the Company recording an adjustment of $5.3 million, which resulted in an increase to the Company’s deferred tax asset valuation allowance, to recognize net operating loss carryforwards attributable to excess tax benefits on stock compensation that had not been previously recognized to additional paid in capital. Excess tax benefits for share-based payments are now included in net operating activities rather than net financing activities within the Company’s Consolidated Statements of Cash Flows. As a result of the adoption of ASU 2016-09, these reporting changes have been applied prospectively and prior periods have not been adjusted.

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in 2019. Early adoption of ASU 2016-02 as of its issuance is permitted. The new leaseslease standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting the new leaseslease standard on the Company’s consolidated financial statements.


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

Reclassifications

Certain reclassifications have a significant impact on the Company’s financial statements. The Company is currently planningbeen made to adopt the standard under the modified retrospective adoption.prior period amounts to conform to current period presentation.

3. ACQUISITIONS

Fiscal 2017

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

As a result of this acquisition, the Company recorded additions to property and equipment of approximately $88.1 million within the Company’s Consolidated Balance Sheets which will be depreciated or amortized over the estimated useful lives. The purchase accounting for the Springfield Transaction and Cincinnati Transaction, as defined below, which closed during fiscal 2016, was finalized during the first quarter of fiscal 2017 and valuation adjustments resulted in the Company reclassifying approximately $1.3 million from property and equipment to other assets to reflect the final purchase price allocation.


Fiscal 2016

Effective November 2, 2016, the Company closed the acquisition of one senior housing community located in Cincinnati, Ohio, for $29.0 million (the “Cincinnati Transaction”). The community consists of 45 independent living units and 77 assisted living units. The Company incurred approximately $0.2 million in transaction costs related to this acquisition which have been included in general and administrative expenses within the Company’s Consolidated Statements of Operations and Comprehensive Loss. The Company obtained financing from Fannie Mae for approximately $22.0 million of the acquisition price at a fixed interest rate of 4.24% with a 10-year term with the balance of the acquisition price paid from the Company’s existing cash resources.

Effective September 30, 2016, the Company closed the acquisition of one senior housing community located in Springfield, Massachusetts, for $27.0 million (the “Springfield Transaction”). The community consists of 97 independent living units and 90 assisted living units. The Company incurred approximately $0.3 million in transaction costs related to this acquisition which have been included in general and administrative expenses within the Company’s Consolidated Statements of Operations and Comprehensive Loss. The Company obtained financing from Fannie Mae for $20.3 million of the acquisition price at a fixed interest rate of 4.10% with a 10-year term with the balance of the acquisition price paid from the Company’s existing cash resources.

Effective September 27, 2016, the Company closed the acquisition of one senior housing community located in Kingwood, Texas for $18.0 million (the “Kingwood Transaction”). The community consists of 96 assisted living units. The Company incurred approximately $0.2 million in transaction costs related to this acquisition which have been included in general and administrative expenses within the Company’s Consolidated Statements of Operations and Comprehensive Loss. The Company obtained financing from Protective Life Insurance Company (“Protective Life”) for $13.0 million of the acquisition price at a fixed interest rate of 4.13% with a 15-year term with the balance of the acquisition price paid from the Company’s existing cash resources.

Effective February 16, 2016, the Company closed the acquisition of two senior housing communities located in Pensacola, Florida, for $48.0 million (the “Pensacola Transaction”). The two communities consist of 179 assisted living units. The Company incurred approximately $0.3 million in transaction costs related to this acquisition which have been included in general and administrative expenses within the Company’s Consolidated Statements of Operations and Comprehensive Loss. The Company obtained financing from Protective Life for $35.0 million of the acquisition price at a fixed interest rate of 4.38% with a 10-year term with the balance of the acquisition price paid from the Company’s existing cash resources.

Effective January 26, 2016, the Company closed the acquisition of three senior housing communities located in Colby, Park Falls, and Wisconsin Rapids, Wisconsin, for approximately $16.8 million (the “Pine Ridge Transaction”). The three communities consist of 138 assisted living units. The Company incurred approximately $0.1 million in transaction costs related to this acquisition which have been included in general and administrative expenses within the Company’s Consolidated Statements of Operations and Comprehensive Loss. The Company obtained financing from Protective Life for $11.3 million of the acquisition price at a fixed interest rate of 4.50% with a 10-year term with the balance of the acquisition price paid from the Company’s existing cash resources.

As a result of these acquisitions, the Company recorded additions to property and equipment of approximately $126.0 million and other assets of approximately $12.8 million, primarily consisting of in-place lease intangibles, within the Company’s Consolidated Balance Sheets which will be depreciated or amortized over the estimated useful lives.

4. DEBT TRANSACTIONS

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

On January 31, 2017, in conjunction with the Four Property Lease Transaction, the Company obtained $65.0 million of mortgage debt from Berkadia. The new mortgage loan is interest-only and has a 3-year term with an initial variable interest rate of LIBOR plus 4.00%. The Company incurred approximately $0.9 million in deferred financing costs related to this loan, which are being amortized over 3 years.

The Companypreviously issued standby letters of credit with Wells Fargo Bank (“Wells Fargo”), totaling approximately $3.9 million, for the benefit of Hartford Financial Services (“Hartford”) associatedin connection with the administration of workers compensation.

The Company previously issued standby letters of credit with JP Morgan Chase Bank (“Chase”), totaling approximately $6.7 million, for the benefit of Welltower, Inc. (“Welltower”), formerly Healthcare REIT, Inc. onin connection with certain leases between Welltower and the Company.

The Company previously issued standby letters of credit with Chase, totaling approximately $2.8$2.9 million, for the benefit of HCP, Inc. (“HCP”) onin connection with certain leases between HCP and the Company.



The senior housing communities owned by the Company and encumbered by mortgage debt are provided as collateral under their respective loan agreements. At September 30, 2017March 31, 2018 and December 31, 2016,2017, these communities carried a total net book value of approximately $994.0 million and $1.0 billion, and $935.6 million, respectively, with total mortgage loans outstanding, excluding deferred loan costs, of approximately $960.2$958.8 million and $907.2$963.1 million, respectively.


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 September 30, 2017March 31, 2018 and December 31, 2016,2017, the Company had gross deferred loan costs of approximately $13.8$14.1 million and $12.8$14.0 million, respectively. Accumulated amortization was approximately $4.2$5.0 million and $3.0$4.6 million at September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively. The Company was in compliance with all aspects of its outstanding indebtedness at September 30, 2017,March 31, 2018, and December 31, 2016.2017.

5. 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 September 30, 2017 andMarch 31, 2018 or December 31, 2016.2017.

Share Repurchases

On January 22, 2009, the Company’s board of directors approved a share repurchase program that authorized the Company to purchase up to $10.0 million of the Company’s common stock. Purchases may be made from time to time using a variety of methods, which may include open market purchases, privately 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 fiscal 2017.2018.

6. 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 8, 2007, the Company’s stockholders approved the 2007 Omnibus Stock and Incentive Plan for Capital Senior Living Corporation (as amended, the “2007 Plan”), which provides for, among other things, the grant of restricted stock awards, restricted stock units and stock options to purchase shares of the Company’s common stock. The 2007 Plan authorizes the Company to issue up to 4.6 million shares of common stock and the Company has reserved shares of common stock for future issuance pursuant to awards under the 2007 Plan. Effective May 8, 2007, the 1997 Omnibus Stock and Incentive Plan (as amended, the “1997 Plan”) was terminated and no additional shares will be granted under the 1997 Plan.

Stock Options

Although the Company has not granted stock options in recent years, the Company’s stock option program is a long-term retention program that is intended to attract, retain and provide incentives for employees, officers and directors and to more closely align stockholder 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. No stock options were outstanding at September 30, 2017.


March 31, 2018.


Restricted Stock

The Company may grant restricted stock awards and units to employees, officers, and directors in order to attract, retain, and provide incentives for such individuals and to more closely align stockholder and employee interests. For restricted stock awards and units without performance and market-based vesting conditions, the Company records compensation expense for the entire award on a straight-line basis over the requisite service period, which is generally a period of one to four years, unless the award is subject to certain accelerated vesting requirements. Restricted stock awards are considered outstanding at the time of grant since the holders thereof are entitled to dividends, upon vesting, and voting rights. For restricted stock awards with performance and market-based vesting conditions, total compensation expense is recognized over the requisite service period 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 nine-monththree-month period ended September 30, 2017March 31, 2018 is presented below:

 

 

 

Outstanding at

Beginning of Period

 

 

Granted

 

 

Vested

 

 

Cancelled

 

 

Outstanding at

End of Period

 

Shares

 

 

829,766

 

 

 

525,366

 

 

 

(335,690

)

 

 

(62,673

)

 

 

956,769

 

 

 

Outstanding at

Beginning of Period

 

 

Granted

 

 

Vested

 

 

Cancelled

 

 

Outstanding at

End of Period

 

Shares

 

 

964,484

 

 

 

643,866

 

 

 

(254,778

)

 

 

(15,984

)

 

 

1,337,588

 

 

The restricted stock outstanding at September 30, 2017March 31, 2018 had an intrinsic value of approximately $12.0$14.4 million.

During the ninethree month period ended September 30, 2017,March 31, 2018, the Company awarded 525,366643,866 shares of restricted common stock to certain employees and directors of the Company, of which 194,652237,840 shares were subject to performance and market-based vesting conditions. The average market value of the common stock on the date of grant was $13.57.$11.38. These awards of restricted stock vest over a one to four-year period and had an intrinsic value of approximately $7.1 million on the date of grant. Additionally, during the nine-month period ended September 30, 2017, the Company awarded 26,787 restricted stock units to certain directors of the Company with an average market value of $13.44 on the date of grant. These awards of restricted stock units vest over a one-year period and had an intrinsic value of approximately $0.4$7.3 million on the date of grant.

Unrecognized stock-based compensation expense is $10.6$14.3 million as of September 30, 2017.March 31, 2018. 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 and units.

7. CONTINGENCIES

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

The Company had two of its senior housing communities located in southeast Texas impacted by Hurricane Harvey during the third quarter of fiscal 2017. Both of these communities continue to remain fully vacated and are undergoing repairs. We maintain insurance coverage on these communities which includes damage caused by flooding. The insurance claim for this incident required a deductible of $100,000 that was expensed as a component of operating expenses in the Company’s Consolidated Statement of Operations and Comprehensive Loss in the third quarter of fiscal 2017. Through September 30, 2017,March 31, 2018, we have incurred approximately $0.4$4.2 million in clean-up and physical repair costs and we expect to incur additional repair costs which we believe are probable of being recovered through insurance proceeds. In addition to the repairs of physical damage to the buildings, the Company’s insurance coverage includes loss of business income (“Business Interruption”). Business Interruption includes reimbursement for lost revenue as well as incremental expenses incurred as a result of the hurricane. The Company has received an initial paymentpayments from our insurance underwriters totaling approximately $2.0 million during the first quarter of approximately $1.0fiscal 2018, and $2.7 million in Septemberfiscal 2017 of which approximately $0.7$1.6 million and $2.2 million, respectively, related to Business Interruption through September 30, 2017, whichand has been included as a reduction to operating expenses duringin the third quarterCompany’s Consolidated Statements of fiscal 2017.Operations and Comprehensive Loss. Based upon our initial assessmentassessments of the physical damages and insurance coverage, the Company currently estimates insurance proceeds will be sufficient to reimburse the Company for all damages and repair costs to fully restore the communities to their condition prior to the incident.  


8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and fair values of financial instruments at September 30, 2017,March 31, 2018, and December 31, 2016,2017, are as follows (in thousands):

 

 

2017

 

 

2016

 

 

March 31, 2018

 

 

December 31, 2017

 

 

Carrying

Amount

 

 

Fair Value

 

 

Carrying

Amount

 

 

Fair Value

 

 

Carrying

Amount

 

 

Fair Value

 

 

Carrying

Amount

 

 

Fair Value

 

Cash and cash equivalents

 

$

9,186

 

 

$

9,186

 

 

$

34,026

 

 

$

34,026

 

 

$

9,938

 

 

$

9,938

 

 

$

17,646

 

 

$

17,646

 

Restricted cash

 

 

13,372

 

 

 

13,372

 

 

 

13,297

 

 

 

13,297

 

 

 

13,387

 

 

 

13,387

 

 

 

13,378

 

 

 

13,378

 

Notes payable, excluding deferred loan costs

 

 

961,404

 

 

 

909,106

 

 

 

910,234

 

 

 

879,448

 

 

 

961,609

 

 

 

898,254

 

 

 

967,332

 

 

 

929,000

 

 

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

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

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


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. The Company cautions readers that forward-looking statements, including, without limitation, those relating to the Company’s future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to several important factors herein identified. These factors include the Company’s ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturn in economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rates, and changes in accounting principles and interpretations, among others, and other risks and factors identified from time to time in the Company’s reports filed with the Securities and Exchange Commission (“SEC”).

Overview

The following discussion and analysis addresses (i) the Company’s results of operations for the three and nine month periods ended September 30,March 31, 2018 and 2017, and 2016, 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, 2016.2017.

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

As of September 30, 2017,March 31, 2018, the Company operated 129 senior housing communities in 23 states with an aggregate capacity of approximately 16,500 residents, including 83 senior housing communities that the Company owned and 46 senior housing communities that the Company leased. As of September 30, 2017, the Company also operated one home care agency.

Significant Financial and Operational Highlights

The Company primarily derives its revenue by providing senior living and healthcare services to the elderly. When comparing the thirdfirst quarter of fiscal 2018 to the first quarter of fiscal 2017, to the third quarter of fiscal 2016, the Company generated total revenue of approximately $117.3$114.6 million compared to total revenue of approximately $111.4$116.0 million, respectively, representing an increasea decrease of approximately $5.9$1.3 million, or 5.3%1.2%. The increase inOur revenue primarily results from a full quarter of activity for the senior housing communities acquired by the Company during fiscal 2016 which resulted in an increase in revenue of approximately $4.5 million and we experienced an increase in revenue at our same-store communities of approximately $1.4 million. The increase at our same-store communities during the third quarter of fiscal 2017 wascontinues to be negatively impacted byfrom the aftermath of Hurricane Harvey which resulted in the full evacuation of all of our residents at two of our senior housing communities located in southeast Texas.Texas during the third quarter of fiscal 2017. Both of these communities are undergoing repairs and continue to remain fully vacated which resulted in a decrease of approximately $2.4 million in our same-store revenue during the thirdfirst quarter of fiscal 2017 of approximately $0.9 million.

The weighted average financial occupancy rate for our consolidated communities for2018 when compared to the third quartersfirst quarter of fiscal 2017 and 20162017. The decrease in revenue from the two senior housing communities negatively impacted by Hurricane Harvey was 86.6% and 87.8%, respectively. Although consolidated occupancies decreased, we experiencedpartially offset by an increase in revenue at our other remaining senior housing communities of $1.1 million due to a 1.7% increase in average monthly rental rates for our consolidatedrates.    

Excluding the two senior housing communities of 3.4% when comparing the third quarter of fiscal 2017 to the third quarter of fiscal 2016. On a same-store basis,negatively impacted by Hurricane Harvey, the weighted average financial occupancy rate for our consolidated communities for the thirdfirst quarters of fiscal 2018 and 2017 was 85.9% and 2016 was 86.6% and 87.8%87.2%, respectively. Although same-storeaverage financial occupancies decreased, we experienced an increase in average monthly rental rates of 2.7%1.7% when comparing the thirdfirst quarter of fiscal 20172018 to the thirdfirst quarter of fiscal 2016.2017.



TheAs mentioned above, the Company had two of its senior housing communities located in southeast Texas impacted by Hurricane Harvey during the third quarter of fiscal 2017. Both of these communities continue to remain fully vacated and are undergoing repairs. We maintain insurance coverage on these communities which includes damage caused by flooding. The insurance claim for this incident required a deductible of $100,000 that was expensed as a component of operating expenses in the Company’s Consolidated Statement of Operations and Comprehensive Loss in the third quarter of fiscal 2017. Through September 30, 2017,March 31, 2018, we have incurred approximately $0.4$4.2 million in clean-up and physical repair costs and we expect to incur additional repair costs which we believe are probable of being recovered through insurance proceeds. In addition to the repairs of physical damage to the buildings, the Company’s insurance coverage includes loss of business income (“Business Interruption”). Business Interruption includes reimbursement for lost revenue as well as incremental expenses incurred as a result of the hurricane. The Company has received an initial paymentpayments from our insurance underwriters totaling approximately $2.0 million during the first quarter of approximately $1.0fiscal 2018, and $2.7 million in Septemberfiscal 2017 of which approximately $0.7 $1.6


million and $2.2 million, respectively, related to Business Interruption through September 30, 2017, whichand has been included as a reduction to operating expenses duringin the third quarterCompany’s Consolidated Statements of fiscal 2017.Operations and Comprehensive Loss. Based upon our initial assessment of the physical damages and insurance coverage, the Company currently estimates insurance proceeds will be sufficient to reimburse the Company for all damages and repair costs to fully restore the communities to their condition prior to the incident.

Effective January 31, 2017, the Company acquired the underlying real estate associated with four of the senior housing communities previously leased from Ventas, Inc. (“Ventas”) for an acquisition price of $85.0 million (the “Four Property Lease Transaction”). The Company obtained interest only, bridge financing from Berkadia for $65.0 million of the acquisition price with an initial variable interest rate of LIBOR plus 4.0% and a 36-month term, with the balance of the acquisition price paid from the Company’s existing cash resources. For additional information refer to Note 3, “Acquisitions”, within the notes to unaudited consolidated financial statements.


Facility Lease Transactions

The Company currently leases 46 senior housing communities from certain real estate investment trusts (“REITs”), 44 of which are accounted for as operating leases and two of which are accounted for as capital lease and financing obligations. The lease terms are generally for 10-15 years with renewal options for an additional 5-20 years at the Company’s option. Under these lease agreements, the Company is responsible for all operating costs, maintenance and repairs, insurance and property taxes. The following table summarizes each of the Company’s facility lease agreements as of September 30, 2017March 31, 2018 (dollars in millions):

 

Landlord

 

Date of Lease

 

Number of

Communities

 

 

Value of

Transaction

 

 

Term

 

Initial

Lease Rate (1)

 

 

Lease

Acquisition and

Modification

Costs (2)

 

 

Deferred

Gains / Lease

Concessions (3)

 

 

Initial Date of Lease

 

Number of

Communities

 

 

Value of

Transaction

 

 

Current Expiration and

Renewal Term

 

Initial

Lease Rate (1)

 

 

Lease

Acquisition and

Modification

Costs (2)

 

 

Deferred

Gains / Lease

Concessions (3)

 

Ventas

 

September 30, 2005

 

 

4

 

 

$

61.4

 

 

(4)

(Two five-year renewals)

 

 

8

%

 

$

7.7

 

 

$

4.2

 

 

September 30, 2005

 

 

4

 

 

$

61.4

 

 

September 30, 2025 (4)

(Two five-year renewals)

 

 

8

%

 

$

7.7

 

 

$

4.2

 

Ventas

 

January 31, 2008

 

 

1

 

 

 

5.0

 

 

(4)

(Two five-year renewals)

 

 

7.75

%

 

 

0.2

 

 

 

 

 

January 31, 2008

 

 

1

 

 

 

5.0

 

 

September 30, 2025 (4)

(Two five-year renewals)

 

 

7.75

%

 

 

0.2

 

 

 

 

Ventas

 

June 27, 2012

 

 

2

 

 

 

43.3

 

 

(4)

(Two five-year renewals)

 

 

6.75

%

 

 

0.8

 

 

 

 

 

June 27, 2012

 

 

2

 

 

 

43.3

 

 

September 30, 2025 (4)

(Two five-year renewals)

 

 

6.75

%

 

 

0.8

 

 

 

 

HCP

 

May 1, 2006

 

 

3

 

 

 

54.0

 

 

(5)

(Two ten-year renewals)

 

 

8

%

 

 

0.3

 

 

 

12.8

 

 

May 1, 2006

 

 

3

 

 

 

54.0

 

 

October 31, 2020 (5)

(Two ten-year renewals)

 

 

8

%

 

 

0.3

 

 

 

12.8

 

HCP

 

May 31, 2006

 

 

6

 

 

 

43.0

 

 

(6)

(One ten-year renewal)

 

 

8

%

 

 

0.2

 

 

 

0.6

 

 

May 31, 2006

 

 

6

 

 

 

43.0

 

 

April 30, 2026 (6)

(One ten-year renewal)

 

 

8

%

 

 

0.2

 

 

 

0.6

 

HCP

 

December 1, 2006

 

 

4

 

 

 

51.0

 

 

(5)

(Two ten-year renewals)

 

 

8

%

 

 

0.7

 

 

 

 

 

December 1, 2006

 

 

4

 

 

 

51.0

 

 

October 31, 2020 (5)

(Two ten-year renewals)

 

 

8

%

 

 

0.7

 

 

 

 

HCP

 

December 14, 2006

 

 

1

 

 

 

18.0

 

 

(5)

(Two ten-year renewals)

 

 

7.75

%

 

 

0.3

 

 

 

 

 

December 14, 2006

 

 

1

 

 

 

18.0

 

 

October 31, 2020 (5)

(Two ten-year renewals)

 

 

7.75

%

 

 

0.3

 

 

 

 

HCP

 

April 11, 2007

 

 

1

 

 

 

8.0

 

 

(5)

(Two ten-year renewals)

 

 

7.25

%

 

 

0.1

 

 

 

 

 

April 11, 2007

 

 

1

 

 

 

8.0

 

 

October 31, 2020 (5)

(Two ten-year renewals)

 

 

7.25

%

 

 

0.1

 

 

 

 

Welltower

 

April 16, 2010

 

 

5

 

 

 

48.5

 

 

15 years

(One 15-year renewal)

 

 

8.25

%

 

 

0.6

 

 

 

0.8

 

 

April 16, 2010

 

 

5

 

 

 

48.5

 

 

April 30, 2025 (15 years)

(One 15-year renewal)

 

 

8.25

%

 

 

0.6

 

 

 

0.8

 

Welltower

 

May 1, 2010

 

 

3

 

 

 

36.0

 

 

15 years

(One 15-year renewal)

 

 

8.25

%

 

 

0.2

 

 

 

0.4

 

 

May 1, 2010

 

 

3

 

 

 

36.0

 

 

April 30, 2025 (15 years)

(One 15-year renewal)

 

 

8.25

%

 

 

0.2

 

 

 

0.4

 

Welltower

 

September 10, 2010

 

 

12

 

 

 

104.6

 

 

15 years

(One 15-year renewal)

 

 

8.50

%

 

 

0.4

 

 

 

2.0

 

 

September 10, 2010

 

 

12

 

 

 

104.6

 

 

September 30, 2025 (15 years)

(One 15-year renewal)

 

 

8.50

%

 

 

0.4

 

 

 

2.0

 

Welltower

 

April 8, 2011

 

 

4

 

 

 

141.0

 

 

15 years

(One 15-year renewal)

 

 

7.25

%

 

 

0.9

 

 

 

16.3

 

 

April 8, 2011

 

 

4

 

 

 

141.0

 

 

April 30, 2026 (15 years)

(One 15-year renewal)

 

 

7.25

%

 

 

0.9

 

 

 

16.3

 

Subtotal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12.4

 

 

 

37.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12.4

 

 

 

37.1

 

Accumulated amortization through September 30, 2017

 

 

 

(7.0

)

 

 

 

Accumulated deferred gains / lease concessions recognized through September 30, 2017

 

 

 

 

 

 

(23.6

)

Net lease acquisition costs / deferred gains / lease concessions as of September 30, 2017

 

 

$

5.4

 

 

$

13.5

 

Accumulated amortization through March 31, 2018

Accumulated amortization through March 31, 2018

 

 

 

(7.4

)

 

 

 

Accumulated deferred gains / lease concessions recognized through March 31, 2018

Accumulated deferred gains / lease concessions recognized through March 31, 2018

 

 

 

 

 

 

(24.7

)

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

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

 

 

$

5.0

 

 

$

12.4

 

 

(1)

Initial lease rates are measured against agreed upon fair market values and are subject to conditional lease escalation provisions as set forth in each respective lease agreement.

(2)

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

(3)

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

(4)

Effective June 17, 2015, the Company executed amendments to the master lease agreements with Ventas to facilitate up to $24.5 million ofcertain leasehold improvements for 10 of the leased communities, of which the underlying real estate associated with four of its operating leases was acquired by the Company upon closing the Four Property Lease Transaction on January 31, 2017, and extend the lease terms through September 30, 2025, with two 5-year renewal extensions available at the Company’s option. Effective June 30, 2016, the Company executed amendments to the master lease agreements with Ventas to increase the Special Projects Funds for leasehold improvements from $24.5 million to $28.5 million and extend the date for completion of the leasehold improvements to June 30, 2017. Effective June 30, 2017, the Company executed amendments to the master lease agreements with Ventas to extend the date for completion of the leasehold improvements to June 30, 2018. On January 31, 2017, the Company acquired from Ventas the underlying real estate associated with four of its operating leases. For additional information refer to Note 3, “Acquisitions”, within the notes to unaudited consolidated financial statements.

(5)

On November 11, 2013, the Company executed an amendment to the master lease agreement associated with nine of its leased communities with HCP to facilitate up to $3.3 million of leasehold improvements for one of the leased communities and extend the respective lease terms through October 31, 2020, with two 10-year renewal extensions available at the Company’s option.

(6)

On April 24, 2015, the Company exercised its right to extend the lease terms on six of its lease communities with HCP through April 30, 2026, with one 10-year renewal extension remaining available at the Company’s option.


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

There are various financial covenants and other restrictions in the Company’s lease agreements. Under the terms of lease agreements with a certain landlord, the Company is required to maintain a minimum lease coverage ratio for the seven communities within the lease portfolio. Cure provisions within the respective lease agreements allow the Company to deposit cash collateral with the landlord to serve as a short-term remedy for a lease coverage shortfall. The Company received a waiver from the landlord whereby the lease coverage ratio for the portfolio was waived for the period. With this waiver, the Company was not required to deposit cash collateral with the landlord for the lease coverage shortfall and was in compliance with all of its lease covenants at September 30, 2017March 31, 2018. The Company and Decemberlandlord are currently negotiating terms to provide a long-term remedy for the lease coverage ratio requirement. Earnings related to these properties were not significant to the consolidated operating results of the Company for the first quarter ended March 31, 2016.2018.

Recent Accounting Developments

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

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).. ASU 2016-18 requires an entity to include in its cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017. Management does not expect2017 and should be applied on a retrospective basis. The Company adopted the adoptionprovisions of ASU 2016-18 toon January 1, 2018 and the adoption resulted in the Company no longer reporting changes in restricted cash balances in the Consolidated Statements of Cash Flows within net cash flows (used in) provided by financing activities which did not have a material impact on the Company’s financial position, results of operations or cash flows.

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

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in ASU 2016-09 are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted the provisions of ASU 2016-09 on January 1, 2017, and incorporated the provisions of this update into its consolidated financial statements upon adoption. Upon adoption, the Company elected to change its accounting policy to account for forfeitures as they occur. This change was applied on a modified retrospective basis with a cumulative effect adjustment to retained earnings of $0.2 million. Additionally, the adoption of ASU 2016-09 resulted in the Company recording an adjustment of $5.3 million, which resulted in an increase to the Company’s deferred tax asset valuation allowance, to recognize net operating loss carryforwards attributable to excess tax benefits on stock compensation that had not been previously recognized to additional paid in capital. Excess tax benefits for share-based payments are now included in net operating activities rather than net financing activities within the Company’s Consolidated Statements of Cash Flows. As a result of the adoption of ASU 2016-09, these reporting changes have been applied prospectively and prior periods have not been adjusted.

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in 2019. Early adoption of ASU 2016-02 as of its issuance is permitted. The new leaseslease standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting the new leaseslease standard on the Company’s consolidated financial statements.

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


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.

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 September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2018

 

 

2017

 

 

$

 

 

%

 

 

$

 

 

%

 

 

$

 

 

%

 

 

$

 

 

%

 

 

$

 

 

%

 

 

$

 

 

%

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resident revenue

 

$

117,318

 

 

 

100.0

 

 

$

111,436

 

 

 

100.0

 

 

$

350,026

 

 

 

100.0

 

 

$

331,643

 

 

 

100.0

 

 

$

114,643

 

 

 

100.0

 

 

$

115,990

 

 

 

100.0

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses (exclusive of facility lease expense and depreciation and amortization expense shown below)

 

 

74,636

 

 

 

63.6

 

 

 

69,622

 

 

 

62.5

 

 

 

220,703

 

 

 

63.1

 

 

 

203,307

 

 

 

61.3

 

 

 

71,700

 

 

 

62.5

 

 

 

72,778

 

 

 

62.8

 

General and administrative expenses

 

 

5,361

 

 

 

4.6

 

 

 

5,749

 

 

 

5.2

 

 

 

17,678

 

 

 

5.0

 

 

 

16,969

 

 

 

5.2

 

 

 

6,022

 

 

 

5.3

 

 

 

6,234

 

 

 

5.4

 

Facility lease expense

 

 

13,943

 

 

 

11.9

 

 

 

15,500

 

 

 

13.9

 

 

 

42,498

 

 

 

12.1

 

 

 

46,150

 

 

 

13.9

 

 

 

14,214

 

 

 

12.4

 

 

 

14,587

 

 

 

12.6

 

Loss on facility lease termination

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,858

 

 

 

3.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,858

 

 

 

11.1

 

Stock-based compensation expense

 

 

1,962

 

 

 

1.7

 

 

 

2,479

 

 

 

2.2

 

 

 

5,833

 

 

 

1.7

 

 

 

7,482

 

 

 

2.3

 

 

 

1,949

 

 

 

1.7

 

 

 

1,930

 

 

 

1.6

 

Depreciation and amortization expense

 

 

16,903

 

 

 

14.4

 

 

 

14,400

 

 

 

12.9

 

 

 

50,862

 

 

 

14.5

 

 

 

44,103

 

 

 

13.3

 

 

 

15,372

 

 

 

13.4

 

 

 

17,213

 

 

 

14.8

 

Total expenses

 

 

112,805

 

 

 

96.2

 

 

 

107,750

 

 

 

96.7

 

 

 

350,432

 

 

 

100.1

 

 

 

318,011

 

 

 

96.0

 

 

 

109,257

 

 

 

95.3

 

 

 

125,600

 

 

 

108.3

 

Income (Loss) from operations

 

 

4,513

 

 

 

3.8

 

 

 

3,686

 

 

 

3.3

 

 

 

(406

)

 

 

(0.1

)

 

 

13,632

 

 

 

4.0

 

 

 

5,386

 

 

 

4.7

 

 

 

(9,610

)

 

 

(8.3

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

19

 

 

 

0.0

 

 

 

15

 

 

 

0.0

 

 

 

51

 

 

 

0.0

 

 

 

50

 

 

 

0.0

 

 

 

37

 

 

 

0.0

 

 

 

18

 

 

 

0.0

 

Interest expense

 

 

(12,531

)

 

 

(10.6

)

 

 

(10,636

)

 

 

(9.5

)

 

 

(36,940

)

 

 

(10.6

)

 

 

(30,966

)

 

 

(9.4

)

 

 

(12,451

)

 

 

(10.8

)

 

 

(12,005

)

 

 

(10.3

)

Loss on disposition of assets, net

 

 

(1

)

 

 

 

 

 

(16

)

 

 

(0.0

)

 

 

(126

)

 

 

(0.0

)

 

 

(53

)

 

 

(0.0

)

Gain (Loss) on disposition of assets, net

 

 

3

 

 

 

 

 

 

(125

)

 

 

(0.1

)

Other income

 

 

1

 

 

 

0.0

 

 

 

 

 

 

 

 

 

6

 

 

 

0.0

 

 

 

233

 

 

 

0.1

 

 

 

1

 

 

 

0.0

 

 

 

3

 

 

 

 

Loss before provision for income taxes

 

 

(7,999

)

 

 

(6.8

)

 

 

(6,951

)

 

 

(6.2

)

 

 

(37,415

)

 

 

(10.7

)

 

 

(17,104

)

 

 

(5.3

)

 

 

(7,024

)

 

 

(6.1

)

 

 

(21,719

)

 

 

(18.7

)

Provision for income taxes

 

 

(133

)

 

 

(0.1

)

 

 

(126

)

 

 

(0.1

)

 

 

(394

)

 

 

(0.1

)

 

 

(403

)

 

 

(0.1

)

 

 

(132

)

 

 

(0.1

)

 

 

(123

)

 

 

(0.1

)

Net loss

 

$

(8,132

)

 

 

(6.9

)

 

$

(7,077

)

 

 

(6.3

)

 

$

(37,809

)

 

 

(10.8

)

 

$

(17,507

)

 

 

(5.4

)

 

$

(7,156

)

 

 

(6.2

)

 

$

(21,842

)

 

 

(18.8

)

 

Three Months Ended September 30, 2017March 31, 2018 Compared to the Three Months Ended September 30, 2016March 31, 2017

Revenues.

Resident revenue was $117.3$114.6 million for the three months ended September 30, 2017,March 31, 2018, compared to $111.4$116.0 million for the three months ended September 30, 2016,March 31, 2017, representing an increasea decrease of $5.9$1.3 million, or 5.3%1.2%. The increasedecrease in resident revenue primarily results from an increasethe negative impacts of $4.5 million from the senior housing communities acquired by the Company during or subsequent to the third quarter of fiscal 2016 and an increase of $1.4 million due to a 2.7% increase in average monthly rental rates at the Company’s other consolidated same-store communities. The increase in resident revenue at our same-store communities was negatively impacted by Hurricane Harvey which resulted in the full evacuation of all of our residents at two of our senior housing communities located in southeast Texas.Texas during the third quarter of fiscal 2017. Both of these communities are undergoing repairs and continue to remain fully vacated which resulted in a reduction of approximately $2.4 million in our resident revenue during the first quarter of fiscal 2018 when compared to the first quarter of fiscal 2017. The decrease in revenue from the two senior housing communities negatively impacted by Hurricane Harvey was partially offset by an increase in revenue at our same-store resident revenueother remaining senior housing communities of approximately $0.9 million.$1.1 million due to a 1.7% increase in average monthly rental rates.

Expenses.

Total expenses were $112.8$109.3 million in the thirdfirst quarter of fiscal 2018 compared to $125.6 million in the first quarter of fiscal 2017, compared to $107.8 million in the third quarterrepresenting a decrease of fiscal 2016, representing an increase of $5.1$16.3 million, or 4.7%13.0%. This increasedecrease is primarily the result of a $5.0$12.9 million increaseloss on facility lease termination incurred by the Company in operating expenses andthe first quarter of fiscal 2017, a $2.5$1.8 million increasedecrease in depreciation and amortization expense, partially offset by a $1.6$1.1 million decrease in operating expenses, a $0.4 million decrease in facility lease expense, a $0.5 million decrease in stock-based compensation expense, and a $0.4$0.2 million decrease in general and administrative expenses.


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


 

The increasedecrease in operating expensesdepreciation and amortization expense primarily results from a decrease in in-place lease amortization of $3.2 million from senior housing communities acquired by the Company prior to fiscal 2017, partially offset by an increase of $3.1$1.4 million from thea full quarter of activity for senior housing communities acquired by the Company during or subsequentfiscal 2017 and due to the third quarter of fiscal 2016 and an increase of $2.6 millionin depreciable assets at the Company’s other consolidated same-store communities primarily due to increased wagesresulting from ongoing capital improvements and benefits to employees for annual merit increases and incremental costs, including increased contract labor costs for additional staffing required for newly licensed memory care and assisted living units, to support changes in occupancy with more of our residents at higher levels of care, slightly offset by a decrease of $0.7 million for insurance proceeds the Company received in September to cover Business Interruption through September 30, 2017, for the period the two communities located in southeast Texas were unoccupied in August and September due to Hurricane Harvey.refurbishments.

The increase in depreciation and amortization expense primarily results from an increase of $2.7 million from senior housing communities acquired by the Company during or subsequent to the third quarter of fiscal 2016 and an increase of $2.4 million due to an increase in depreciable assets at the Company’s other consolidated same-store communities, partially offset by a decrease in in-place lease amortization of $2.5 million from senior housing communities acquired by the Company prior to the third quarter of fiscal 2016.

The decrease in general and administrativeoperating expenses primarily results from a decreasereduction of $0.9$1.6 million in employeefor insurance benefits and claims paid which resulted in lower health insurance costs toproceeds the Company slightlyreceived to cover Business Interruption during the first quarter of fiscal 2018, for the period the two communities located in southeast Texas were unoccupied due to Hurricane Harvey, partially offset by an increase of $0.5 million in general operating costsat the Company’s other communities primarily attributabledue to increases in employeeincreased wages and benefits to employees for annual merit increases and incentive compensationincremental costs, including increased labor costs for additional staffing required for newly licensed memory care and additional employees hired during or subsequentassisted living units, to the third quartersupport changes in occupancy with more of fiscal 2016.our residents at higher levels of care.

The decrease in facility lease expense primarily results from a full quarter of reduced rents from the Four Property Lease Transaction that closed on January 31, 2017, whereby the Company acquired the underlying real estate associated with four of the senior housing communities previously leased from Ventas.

The decrease in stock-based compensation expensegeneral and administrative expenses primarily results from a reduction of $0.3 million in transaction and conversion costs due to the Company granting fewer sharescurtailing its acquisition activities and a $0.1 million reduction in employee insurance benefits and claims paid which resulted in lower health insurance costs to the Company, slightly offset by an increase of restricted stock at lower grant date fair market values$0.2 million in general operating costs primarily attributable to certainincreases in employee wages and benefits for annual merit increases and incentive compensation and additional employees of the Companyhired during or subsequent to the thirdfirst quarter of fiscal 2016.2017.

Other income and expense.

Interest income generally reflects interest earned on the investment of cash balances and escrowed funds or interest associated with certain income tax refunds or property tax settlements.

Interest expense increased $1.9$0.4 million in the thirdfirst quarter of fiscal 2018 when compared to the first quarter of fiscal 2017 when compared to the third quarter of fiscal 2016 primarily due to an increasea full quarter of $0.6 millioninterest from the additional mortgage debt associated with the Four Property Lease Transaction that closed on January 31, 2017, whereby the Company acquired the underlying real estate associated with four of the senior housing communities acquired by the Company during or subsequent to the third quarter of fiscal 2016 and an increase of $1.3 million at the Company’s other consolidated same-store communities due to additional mortgage debt added by the Company associated with certain refinancings and supplemental loans that occurred during or subsequent to the third quarter of fiscal 2016.previously leased from Ventas.

Provision for income taxes.

Provision for income taxes for the thirdfirst quarter of fiscal 20172018 was $0.1 million, or 1.7%1.9% of loss before income taxes, compared to a provision for income taxes of $0.1 million, or 1.8%0.6% of loss before income taxes, for the thirdfirst quarter of fiscal 2016.2017. The effective tax rates for the thirdfirst quarters of fiscal 20172018 and 20162017 differ from the statutory tax rates due to state income taxes, permanent tax differences, and changes in the deferred tax asset valuation allowance. The Company is impacted by the Texas Margin Tax (“TMT”), which effectively imposes tax on modified gross revenues for communities within the State of Texas. During each of the thirdfirst quarters of fiscal 20172018 and 2016,2017, the Company consolidated 38 Texas communities and the TMT increased 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. Based upon this evaluation, adjustments to the deferred tax asset valuation allowance of $3.1$1.4 million and $3.0$13.1 million were recorded during the thirdfirst quarters of fiscal 20172018 and 2016,2017, respectively, to reduce the Company’s net deferred tax assets to the amount that is more likely than not to be realized.The adjustment to the valuation allowance during the first quarter of fiscal 2017 included an increase of $5.3 million for the adoption of ASU 2016-09 which was effective for the Company January 1, 2017.

Net loss and comprehensive loss.

As a result of the foregoing factors, the Company reported net loss and comprehensive loss of $(8.17.2 million) for the three months ended September 30, 2017,March 31, 2018, compared to net loss and comprehensive loss of $(7.121.8 million) for the three months ended September 30, 2016.


Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016

Revenues.

Resident revenue was $350.0 million for the nine months ended September 30, 2017, compared to $331.6 million for the nine months ended September 30, 2016, representing an increase of $18.4 million, or 5.5%. The increase in resident revenue primarily results from an increase of $14.7 million from the senior housing communities acquired by the Company during or subsequent to the third quarter of fiscal 2016 and an increase of $3.7 million due to a 2.5% increase in average monthly rental rates at the Company’s other consolidated same-store communities. The increase in resident revenue at our same-store communities was negatively impacted by Hurricane Harvey which resulted in the evacuation of all of our residents at two of our communities located in southeast Texas. Both of these communities are undergoing repairs and continue to remain fully vacated which resulted in a decrease in our same-store resident revenue of approximately $0.9 million.

Expenses.

Total expenses were $350.4 million for the nine months ended September 30, 2017, compared to $318.0 million for the nine months ended September 30, 2016, representing an increase of $32.4 million, or 10.2%. This increase is primarily the result of a $17.4 million increase in operating expenses, a $12.9 million loss on facility lease termination, a $6.8 million increase in depreciation and amortization expense, and a $0.7 million increase in general and administrative expenses, slightly offset by a $3.7 million decrease in facility lease expense and a $1.6 million decrease in stock-based compensation expense.

The increase in operating expenses primarily results from an increase of $10.8 million from the senior housing communities acquired by the Company during or subsequent to the first nine months of fiscal 2016 and an increase of $7.3 million at the Company’s other consolidated same-store communities primarily due to increased wages and benefits to employees for annual merit increases and incremental costs, including increased contract labor costs for additional staffing required for newly licensed memory care and assisted living units, to support changes in occupancy with more of our residents at higher levels of care, slightly offset by a decrease of $0.7 million for insurance proceeds the Company received in September to cover Business Interruption through September 30, 2017, for the period the two communities located in southeast Texas were unoccupied in August and September due to Hurricane Harvey.

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

The increase in depreciation and amortization expense primarily results from an increase of $6.2 million from senior housing communities acquired by the Company during or subsequent to the first nine months of fiscal 2016 and an increase of $6.7 million due to an increase in depreciable assets at the Company’s other consolidated same-store communities, partially offset by a decrease in in-place lease amortization of $6.2 million from senior housing communities acquired by the Company prior to fiscal 2016.

The increase in general and administrative expenses primarily results from an increase of $0.7 million in employee insurance benefits and claims paid which resulted in higher health insurance costs to the Company.

The decrease in facility lease expense primarily results from the Four Property Lease Transaction that closed on January 31, 2017, whereby the Company acquired the underlying real estate associated with four of the senior housing communities previously leased from Ventas.

The decrease in stock-based compensation expense results from the Company granting fewer shares of restricted stock at lower grant date fair market values to certain employees of the Company subsequent to the first nine months of fiscal 2016.

Other income and expense.

Interest income generally reflects interest earned on the investment of cash balances and escrowed funds or interest associated with certain income tax refunds or property tax settlements.

Interest expense increased $6.0 million in the first nine months of fiscal 2017 when compared to the first nine months of fiscal 2016 primarily due to an increase of $2.0 million from the additional mortgage debt associated with the senior housing communities acquired by the Company during or subsequent to the first nine months of fiscal 2016 and an increase of $4.0 million at the Company’s other consolidated same-store communities due to additional mortgage debt added by the Company associated with certain refinancings and supplemental loans that occurred during or subsequent to the first nine months of fiscal 2016.

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


Provision for income taxes.

Provision for income taxes for the first nine months of fiscal 2017 was $0.4 million, or 1.1% of loss before income taxes, compared to a provision for income taxes of $0.4 million, or 2.4% of loss before income taxes, for the first nine months of fiscal 2016. The effective tax rates for the first nine months of fiscal 2017 and 2016 differ from the statutory tax rates due to state income taxes, permanent tax differences, and changes in the deferred tax asset valuation allowance. The Company is impacted by the TMT, which effectively imposes tax on modified gross revenues for communities within the State of Texas. During each of the first nine months of fiscal 2017 and 2016, the Company consolidated 38 Texas communities and the TMT increased 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. Based upon this evaluation, adjustments to the deferred tax asset valuation allowance of $19.1 million and $6.4 million were recorded during the first nine months of fiscal 2017 and 2016, respectively, to reduce the Company’s net deferred tax assets to the amount that is more likely than not to be realized. The adjustment to the valuation allowance during the first nine months of fiscal 2017 included an increase of $5.3 million for the adoption of ASU 2016-09, which was effective for the Company as of January 1, 2017, to recognize net operating loss carryforwards attributable to excess tax benefits on stock compensation that had not been previously recognized to additional paid in capital.

Net loss and comprehensive loss.

As a result of the foregoing factors, the Company reported net loss and comprehensive loss of $(37.8 million) for the nine months ended September 30, 2017 and net loss and comprehensive loss of $(17.5 million) for the nine months ended September 30, 2016.2017.

Liquidity and Capital Resources

In addition to approximately $9.2$9.9 million of unrestricted cash balances on hand as of September 30, 2017,March 31, 2018, the Company’s principal sources of liquidity are expected to be cash flows from operations, supplemental debt financings, additional proceeds from debt refinancings, equity issuances, and/or proceeds from the sale of assets. The Company expects its available cash and cash flows from operations, supplemental debt financings, 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, primarily for acquisitions and other corporate initiatives, could be dependent on its ability to access additional funds through joint ventures and the debt and/or equity markets. The Company, from time to time, considers and evaluates transactions related to its portfolio including supplemental debt financings, debt


refinancings, equity issuances, purchases and sales of assets, reorganizations and other transactions. There can be no assurance that the Company will continue to 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.

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



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

 

 

Nine Months Ended

September 30,

 

 

Three Months Ended

March 31,

 

 

2017

 

 

2016

 

 

2018

 

 

2017

 

Net cash provided by operating activities

 

$

42,281

 

 

$

36,574

 

 

$

4,442

 

 

$

18,133

 

Net cash used in investing activities

 

 

(115,149

)

 

 

(157,029

)

 

 

(5,613

)

 

 

(97,701

)

Net cash provided by financing activities

 

 

48,028

 

 

 

94,202

 

Net cash (used in) provided by financing activities

 

 

(6,528

)

 

 

58,158

 

Net decrease in cash and cash equivalents

 

$

(24,840

)

 

$

(26,253

)

 

$

(7,699

)

 

$

(21,410

)

 

Operating activities.

The net cash provided by operating activities for the nine month period ended September 30, 2017,first quarter of fiscal 2018 primarily results from net non-cash charges of $76.2$17.9 million, a decrease in tax and insurance deposits of $5.0 million, a decrease in prepaid expenses and other assets of $5.1$0.7 million, and an increase in other liabilities of $3.6 million, a decrease in prepaid expenses of $2.4 million, and a decrease in property tax and insurance deposits of $1.8$0.5 million, partially offset by net loss of $(37.87.2 million), a decrease in accrued expenses of $6.7 million, a decrease in accounts payable of $4.3 million, and an increase in accounts receivable of $3.8 million, a decrease in accrued expenses of $2.4 million, a decrease in deferred resident revenue of $1.5 million, and a decrease in accounts payable of $1.1$1.7 million. The net cash provided by operating activities for the nine months ended September 30, 2016,first quarter of fiscal 2017 primarily results from net non-cash charges of $59.5$35.0 million, an increasea decrease in other liabilitiesassets of $8.7$4.7 million, and a decrease in property tax and insurance deposits of $1.2$4.4 million, an increase in accounts payable of $2.1 million, an increase in other liabilities of $1.4 million, and a decrease in prepaid expenses of $1.1 million, partially offset by net loss of $(17.521.8 million), a decrease in accrued expenses of $7.8 million, an increase in accounts receivable of $8.9$0.8 million, an increase in prepaid expenses of $2.1 million, a decrease in accrued expenses of $1.6 million, a decrease in accounts payable of $1.1 million,and a decrease in deferred resident revenue of $0.8 million, and an increase in other assets of $0.5$0.4 million.

Investing activities.

The net cash used in investing activities for the nine month period ended September 30,first quarter of fiscal 2018 primarily results from capital expenditures of $5.6 million associated with ongoing capital improvements and refurbishments. The net cash used in investing activities for the first quarter of fiscal 2017 primarily results from capital expenditures of $30.2$12.7 million associated with ongoing capital renovationsimprovements and refurbishments and the acquisition of senior housing communities by the Company of $85.0 million.

Financing activities.

The net cash used in investingfinancing activities for the nine months ended September 30, 2016,first quarter of fiscal 2018 primarily results from capital expendituresrepayments of $47.3notes payable of $5.7 million and acquisitionspayments on capital lease and financing obligations of senior housing communities by the Company of $109.8$0.8 million.

Financing activities.

The net cash provided by financing activities for the nine month period ended September 30,first quarter of fiscal 2017 primarily results from notes payable proceeds of $66.6 million, of which $65.0 million is related to new mortgage debt associated with the acquisition of senior housing communities by the Company, and approximately $1.6 million related to insurance premium financing, partially offset by repayments of notes payable of $15.4$5.3 million, payments on capital lease and financing obligations of $2.1$0.7 million, and deferred financing charges paid of $1.0 million. The net cash provided by financing activities for the nine months ended September 30, 2016, primarily results from notes payable proceeds of $112.5 million, of which approximately $79.6 million is related to new mortgage debt associated with the acquisition of senior housing communities by the Company, approximately $28.8 million related to supplemental mortgage debt obtained on existing senior housing communities, and approximately $4.1 million related to insurance premium financing, partially offset by repayments of notes payable of $12.9 million, purchases of treasury stock of $2.5 million, deferred financing charges paid of $1.8 million, and payments on capital lease and financing obligations of $1.0$0.9 million.

Debt transactions.

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

On January 31, 2017, in conjunction with the Four Property Lease Transaction, the Company obtained $65.0 million of mortgage debt from Berkadia Commercial Mortgage LLC (“Berkadia”). The new mortgage loan is interest-only and has a 3-year term with an initial variable interest rate of LIBOR plus 4.00%. The Company incurred approximately $0.9 million in deferred financing costs related to this loan, which are being amortized over 3 years.

The Companypreviously issued standby letters of credit with Wells Fargo Bank (“Wells Fargo”), totaling approximately $3.9 million, for the benefit of Hartford Financial Services (“Hartford”) associatedin connection with the administration of workers compensation.

The Company previously issued standby letters of credit with JP Morgan Chase Bank (“Chase”), totaling approximately $6.7 million, for the benefit of Welltower, Inc. (“Welltower”), formerly Healthcare REIT, Inc. onin connection with certain leases between Welltower and the Company.

The Company previously issued standby letters of credit with Chase, totaling approximately $2.8$2.9 million, for the benefit of HCP, Inc. (“HCP”) onin connection with certain leases between HCP and the Company.


Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company’s primary market risk is exposure to changes in interest rates on debt and lease instruments. As of September 30, 2017,March 31, 2018, the Company had $961.4$961.6 million in outstanding debt comprised of various fixed and variable interest rate debt instruments of $884.8$885.2 million and $76.6$76.4 million, respectively. In addition, as of September 30, 2017,March 31, 2018, the Company had $448.5$417.6 million in future facility lease obligations with contingent rent increases on certain leases based on changes in the consumer price index or certain operational performance measures.

Changes in interest rates would affect the fair market values of the Company’s fixed interest rate debt instruments, but would not have an impact on the Company’s earnings or cash flows. Fluctuations in interest rates on the Company’s variable interest rate debt instruments, which are tied to LIBOR, would affect the Company’s earnings and cash flows but would not affect the fair market values of the variable interest rate debt. Each percentage point increase in interest rates would impact the Company’s annual interest expense by approximately $0.8 million based on the Company’s outstanding variable interest rate debt as of September 30, 2017.March 31, 2018. Increases in the consumer price index could have an effect on future facility lease expense if the leased community exceeds the contingent rent escalation thresholds set forth in each of the Company’s lease agreements.

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 September 30, 2017March 31, 2018 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.

Our business involves various risks. When evaluating our business, the following information should be carefully considered in conjunction with the other information contained in our periodic filings with the SEC. Additional risks and uncertainties not known to us currently or that currently we deem to be immaterial also may impair our business operations. If we are unable to prevent events that have a negative effect from occurring, then our business may suffer. Negative events are likely to decrease our revenue, increase our costs, weaken our financial results and/or decrease our financial strength, and may cause our stock price to decline. There have been no material changes in our risk factors from those disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.2017.



Item 2. UNREGISTERED SALES OF EQUITYEQUITY 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 of September 30, 2017.March 31, 2018.

 

Period

 

Total Number

of Shares

Purchased

 

 

Average

Price Paid

per Share

 

 

Total Shares Purchased

as Part of Publicly

Announced Program

 

 

Approximate Dollar Value of

Shares that May Yet Be

Purchased Under the Program

 

Total at June 30, 2017

 

 

494,115

 

 

$

6.94

 

 

 

494,115

 

 

$

6,570,222

 

July 1 – July 31, 2017

 

 

 

 

 

 

 

 

 

 

 

6,570,222

 

August 1 – August 31, 2017

 

 

 

 

 

 

 

 

 

 

 

6,570,222

 

September 1 – September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

6,570,222

 

Total at September 30, 2017

 

 

494,115

 

 

$

6.94

 

 

 

494,115

 

 

$

6,570,222

 

Period

 

Total Number

of Shares

Purchased

 

 

Average

Price Paid

per Share

 

 

Total Shares Purchased

as Part of Publicly

Announced Program

 

 

Approximate Dollar Value of

Shares that May Yet Be

Purchased Under the Program

 

Total at December 31, 2017

 

 

494,115

 

 

$

6.94

 

 

 

494,115

 

 

$

6,570,222

 

January 1 – January 31, 2018

 

 

 

 

 

 

 

 

 

 

 

6,570,222

 

February 1 – February 28, 2018

 

 

 

 

 

 

 

 

 

 

 

6,570,222

 

March 1 – March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

6,570,222

 

Total at March 31, 2018

 

 

494,115

 

 

$

6.94

 

 

 

494,115

 

 

$

6,570,222

 

 

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.

Not applicable.



Item 6. EXHIBITS.EXHIBITS.

The following documents are filed as a part of this report. Those exhibits previously filed and incorporated herein by reference are identified below. Exhibits not required for this report have been omitted.

 

Exhibit

Number

 

 

 

Description

 

 

 

  3.1

 

 

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

 

 

 

3.1.1

 

 

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

 

 

 

  3.2

 

 

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

 

 

 

  4.1

 

 

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

 

 

 

  4.2

 

 

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

 

 

 

  4.3

 

 

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

 

 

 


10.1*

Form of Performance Award Agreement Under the 2007 Omnibus Stock and Incentive Plan.10.1

10.2*

 

 

Employment Agreement,agreement, dated July 5, 2017,February 19, 2018, by and between Capital Senior Living, Inc. and Brett D. Lee. (Incorporated by reference to exhibit 10.1 to the Company’s Current Report on Form 8-K filed by the Company with the Securities and exchange Commission on July 10, 2017.)Jeremy Falke.

 

 

 

31.1*

 

 

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

 

 

 

31.2*

 

 

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

 

 

 

32.1*

 

 

Certification of Lawrence A. Cohen pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2*

 

 

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

 

 

 

101.INS*

 

 

XBRL Instance Document

 

 

 

101.SCH*

 

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL*

 

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.LAB*

 

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE*

 

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF*

 

 

XBRL Taxonomy Extension Definition Linkbase Document

 

*

Filed herewith.

 


 

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.

 

 

 

 

Capital Senior Living Corporation

(Registrant)

 

 

By:

 

/s/ Carey P. Hendrickson

 

 

Carey P. Hendrickson

 

 

Senior Vice President and Chief Financial Officer

 

 

(Principal Financial Officer and Duly Authorized Officer)

 

 

Date: NovemberMay 2, 20172018

 

 

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