Lucus Advisors LLC Releases Public Letter to Board of Directors of Capital Senior Living Corporation

Major Shareholder Calls Upon Company to Retain Investment Bank to
Explore Strategic Alternatives in Order to Unlock Potential and Maximize
Shareholder Value

Believes that CSU Could be Worth Between $32 and $35 Per Share to a
Third Party Acquirer, Implying Premium of Approximately 57%

NEW YORK–(BUSINESS WIRE)–Lucus Advisors LLC (“Lucus”), an investment management firm overseeing
funds including Red Alder Master Fund, LP (“Red Alder”), and an
approximately 5.6% shareholder of Capital Senior Living Corporation
(“CSU” or the “Company”) (NYSE:CSU) through its affiliated funds and
managed accounts, today publicly released the following letter sent to
the Company’s Board of Directors:

December 10, 2015

Capital Senior Living Corporation
14160 Dallas Parkway Suite, 300
Texas 75254
Attention: Board of Directors

Ladies and Gentlemen:

Lucus Advisors LLC (“Lucus”), through its affiliated funds and managed
accounts, currently owns approximately 5.6% of Capital Senior Living
Corporation (“CSU” or the “Company”). Lucus believes that CSU is deeply
undervalued, and that there are opportunities readily within the control
of the Board of Directors (the “Board”) to create significant value for

By way of background, Lucus was founded in 2012 and its most well-known
offering, Red Alder Master Fund, LP (“Red Alder”), invests in
undervalued and underperforming public companies with high potential.
Our approach to such investments is to actively engage with management
teams and boards of directors in a constructive manner to identify and
execute on opportunities to unlock value for the benefit of all
shareholders. Our principals and investment team have experience
enhancing value at portfolio companies through a combination of
strategic refocusing, improved operational execution, more efficient
capital allocation, and stronger management focus. Most recently, Red
Alder was involved with Ann Inc. (“ANN”), a company more than triple the
size of CSU, which was sold to a logical buyer for a hefty premium. We
believe all shareholders benefitted from our involvement with ANN.

As you know, we have had discussions with Company management for longer
than a year; we started these conversations in an attempt to understand
(and to help rectify) why the stock traded at a deep discount to its
intrinsic value. We toured the Company’s facilities across the country,
met with the team in Dallas, and visited several facilities owned by the
Company’s competitors. Throughout this period, we have been circumspect
of publicly pushing for a sale of the Company, as we believed that we
could work constructively with management and the Board to entertain
organic solutions to correct this discount. We have concluded, however,
that the time has come for the Company to explore strategic initiatives
and that ongoing private discussions will not bring about the necessary

We filed a Schedule 13D with the SEC on October 9, 2015, revealing
publicly a 5.6% ownership stake in the Company at that time. We believe
our sponsorship of the Company has galvanized market participants to
become more eager about the possibility of value creation.
Unfortunately, the Company’s inability to invigorate its stock price has
increased our conviction in the idea that alternatives to the status quo
ought to be examined. For example, the Company has delivered an
approximately 5.0% annualized return to shareholders since January 1,
2013. During the same period, the S&P 500 index has handily outperformed
CSU by almost twofold with an approximately 9.1% annualized return.
During a bull market for US stocks, and with particularly favorable
interest rate conditions for real estate-oriented companies, we do not
believe CSU has lived up to its potential and has instead delivered
subpar returns to its shareholders. Moreover, when compared against the
Company’s own peer group, as used in its compensation analysis disclosed
in its 2014 proxy statement, CSU ranks ninth out of twelve for one-year
total shareholder return and tenth out of fifteen for three-year total
shareholder return.

While we are delighted that the Company’s cash flow growth, EBITDAR
margins and occupancy, amongst other key metrics, are healthy and
trending in the right direction, as more time goes by, we do not believe
that the public market is the best channel for value realization.
Therefore, we urge the Board to immediately retain a nationally
recognized investment bank to explore strategic alternatives to maximize
shareholder value. Now is the time for action: the cap rate environment
is favorable, there is strong institutional demand for yield assets,
interest rates are hovering at lows, and there is widespread demand for
stable cash-flowing real estate. We see no reason to delay, and we urge
the Board to take advantage of the opportunities provided by these
favorable conditions.

Over the last few years, sale transactions in the senior living and
healthcare real estate industry have taken place at cash flow multiples
notably in excess of where CSU trades. In addition, comparable
transactions have cleared at cap rates that make CSU look comparatively
attractive as a takeout candidate. Particularly given the significant
synergies a deal with CSU would afford, we believe an acquisition would
look especially attractive to a buyer on a post-synergy creation
multiple basis. Based on our analysis of CSU, we believe that CSU could
be worth between $32 and $35 per share to a third party acquirer,
implying a premium of approximately 57% to the current stock price of
$21.36 (assuming the midpoint of our valuation range).

We believe CSU is a highly suitable candidate for a private equity or
strategic acquirer because of its (i) wide cap rates (as compared to
where individual assets trade in the private market), (ii) ability to
further improve margins, (iii) significant and growing cash flow
generation, (iv) strong borrower relationships (great access to
borrowers, as evidenced by the panel of lenders that spoke supportively
at CSU’s recent investor day), and (v) size (CSU’s market capitalization
is the perfect size for a wide range of acquirers). It is also worth
reiterating the unusually favorable state of the credit markets, which
we believe should allow an acquirer to borrow at very attractive rates.

We strongly disagree with delaying a sale process based on management
and the Board’s belief that the market does not fully appreciate CSU’s
favorable prospects:

  • If the Company has favorable projections that are credible, potential
    buyers will price CSU accordingly. The fact that a company has
    favorable prospects is hardly a reason not to explore a
    value-maximizing transaction. Just the opposite – often an ideal time
    to sell a company is when it has favorable prospects.
  • As discussed above, credit markets may never be as good. The ability
    of an acquirer to pay a premium for CSU is, in significant part,
    informed by its ability to finance the purchase. Do not let this
    substantial opportunity slip away.
  • Factoring in the time value of money and execution risk, in order to
    try to justify not pursuing strategic alternatives now, by our
    calculation, we believe the Board would have to be confident that the
    Company’s stock would exceed $47 per share within three years (at a
    12% discount rate and assuming a $33.50 per share transaction). This
    means that the Board would have to be confident that Adjusted Cash
    From Facility Operations would have to start growing at a
    substantially faster rate.

In conclusion, we believe the Board has a unique opportunity now to
increase shareholder value by exploring strategic alternatives,
including a sale of the Company. We have been CSU shareholders for a
long time. We have talked to a number of investors who share our views.
Despite your best efforts and improved operational performance, the
public markets are not affording the Company credit for your pipeline,
portfolio, and management business. It is now time for the Board to act
with urgency to unlock CSU’s potential, and we ask that you immediately
retain a nationally recognized investment bank to begin this process. We
expect a response and action by January 15, 2016.


Schuster B. Tanger
Managing Member
Lucus Advisors LLC


Sloane & Company
Elliot Sloane, 212-446-1860
Pavia, 212-446-1863