Diversicare Healthcare Services, Inc. (Form: 10-K, Received: 03/02/2017 16:11:29)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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CHECK ONE:



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

For the fiscal year ended December 31, 2016



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

For the transition period from to .

Commission file No.: 1-12996

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Diversicare Healthcare Services, Inc.

(exact name of registrant as specified in its charter)

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Delaware		62-1559667
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)



1621 Galleria Boulevard, Brentwood, TN	37027
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (615) 771-7575

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



Title of each class	Name of each Exchange on which registered
Common Stock, $0.01 par value per share	The NASDAQ Capital Market

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

None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No þ

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 þ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company þ

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

The aggregate market value of Common Stock held by non-affiliates on June 30, 2016 (based on the closing price of such shares on the NASDAQ Capital Market) was approximately $34,068,000 . For purposes of the foregoing calculation only, all directors, named executive officers and persons known to the registrant to be holders of 5% or more of the registrant's Common Stock have been deemed affiliates of the registrant.

On February 15, 2017 , 6,360,676 shares of the registrant's $0.01 par value Common Stock were outstanding.

Documents Incorporated by Reference

Registrant's definitive proxy materials for its 2017 annual meeting of shareholders are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.



Table of Contents
		Page
Part I
Item 1.	Business	1
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	21
Item 2.	Properties	21
Item 3.	Legal Proceedings	21
Item 4.	Mine Safety Disclosures	22

Part II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 6.	Selected Consolidated Financial Data	23
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	44
Item 8.	Financial Statements and Supplementary Data	45
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	45
Item 9A.	Controls and Procedures	45
Item 9B.	Other Information	45

Part III
Item 10.	Directors, Executive Officers and Corporate Governance	45
Item 11.	Executive Compensation	45
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	45
Item 13.	Certain Relationships and Related Transactions, and Director Independence	45
Item 14.	Principal Accountant Fees and Services	45

Part IV
Item 15.	Exhibits and Financial Statement Schedules	46
Item 16.	Form 10-K Summary

PART 1

ITEM 1. BUSINESS

Introductory Summary.

Diversicare Healthcare Services, Inc. provides post-acute care services to skilled nursing facility, referred to as"skilled nursing center", "nursing center", or "center", patients and residents in ten states, primarily in the Southeast, Midwest, and Southwest United States. Unless the context indicates otherwise, references herein to “Diversicare,” “the Company,” “we,” “us” and “our” include Diversicare Healthcare Services, Inc. and all of our consolidated subsidiaries. Diversicare Healthcare Services, Inc. was incorporated as a Delaware corporation in 1994.

The post-acute care profession encompasses a broad range of non-institutional and institutional services. For those among the aging, infirmed, or disabled requiring temporary or limited special services, a variety of home care options exist. As the need for assistance in activities of daily living develop, assisted living centers become the most viable and cost effective option. For those amongst the aging, disabled, or infirmed requiring more extensive assistance and intensive care, skilled nursing center care may become the only viable option. We have chosen to focus our business primarily on the skilled nursing centers sector and to specialize in this aspect of the post-acute care continuum.

Principal Address and Website.

Our principal executive offices are located at 1621 Galleria Boulevard, Brentwood, Tennessee 37027. Our telephone number at that address is 615.771.7575, and our facsimile number is 615.771.7409. Our website is located at www.dvcr.com. The information on our website does not constitute part of this Annual Report on Form 10-K.

Operating and Growth Strategy.

Our operating objective is to optimize market position in the delivery of health care and related services to the patients and residents in need of post-acute care in the communities in which we operate. Our strategic operations development plan focuses on (i) providing a broad range of high quality, cost-effective post-acute care services; (ii) improving skilled mix in our nursing centers via enhanced capabilities for rehabilitation and transitional care; (iii) building clinical competencies and programs consistent with marketplace needs; and (iv) clustering our operations on a regional basis. Interwoven into our objectives and operating strategy is our mission:

• Improve Every Life We Touch

• Provide Exceptional Healthcare

• Exceed Expectations

• Increase Shareholder Value

Strategic operating initiatives. Our key strategic operating initiatives include improving skilled mix in our nursing centers by enhancing our staffing complement to address the increased medical complexity of certain patients, increasing clinical competencies, and adding clinical programs. The investments in nursing and clinical care have been implemented in concert with additional investments in nursing center-based sales representatives to cultivate referral and Managed Care relationships. These investments have positioned us and are expected to continue to position us to be a destination for patients covered by Medicare and Managed Care as well as certain private pay individuals. These enhancements and investments have positioned us to admit higher acuity patients.

Another strategic operating initiative was to implement an Electronic Medical Records (“EMR”) platform. See description of our EMR implementation below. We completed the implementation of Electronic Medical Records in all our nursing centers in December 2011, and implement EMR at all new centers near the time we commence operations.

To achieve our objectives, we:

Provide a broad range of quality cost-effective services. Our objective is to provide a variety of services to meet the needs of the increasing post-acute care population requiring skilled nursing and rehabilitation care. Our service offerings currently include skilled nursing, comprehensive rehabilitation services, programming for Life Steps and Memory Care units (described below) and other specialty programming. By addressing varying levels of acuity, we work to meet the needs of the population we serve. We seek to establish a reputation as the provider of choice in each of our markets. Furthermore, we believe we are able to deliver quality services cost-effectively, compared to other healthcare providers along the spectrum of care, thereby expanding the population base that can benefit from our services.

Improve skilled mix in our nursing centers . By enhancing our registered nurse coverage and adding specialized clinical care, we believe we can admit patients with more medically complex conditions, thereby improving skilled mix and reimbursement. The investments in nursing and clinical care are being conducted in concert with additional investments in nursing center-based sales representatives to develop referral and Managed Care relationships. These investments will better attract quality payor sources for patients covered by Medicare, Managed Care and Medicare replacement payors as well as certain private pay individuals. We will also continue our program for the renovation and improvement of our nursing centers to attract and retain patients and residents.

Cluster operations on a regional basis. We have developed regional concentrations of operations in order to achieve operating efficiencies, generate economies of scale and capitalize on marketing opportunities created by having multiple operations in a regional market area.

Key elements of our growth strategy are to:

Increase revenues and profitability at existing nursing centers. Our strategy includes increasing center revenues and profitability through improving payor mix, providing an increasing level of higher acuity care, obtaining appropriate reimbursement for the care we provide, and providing high quality patient care. Ongoing investments are being made in expanded nursing and clinical care. We continue to enhance center-based marketing initiatives to promote higher occupancy levels and improved skilled mix at our nursing centers.

Development of additional specialty services . Our strategy includes the development of additional specialty units and programming in nursing centers that could benefit from these services. The specialty programming will vary depending on the needs of the specific market, and may include complex medical and rehabilitation services, as well as memory care units and other specialty programming. These services allow our centers to meet market needs while improving census and payor mix. A center specific assessment of the market and the current programming being offered is conducted related to specialty programming to determine if unmet needs exist as a predictor of the success of particular niche offerings and services.

Acquisition, leasing and development of new centers . We continue to pursue and investigate opportunities to acquire, lease or develop new centers, focusing primarily on opportunities that can leverage our existing infrastructure.

Nursing Centers and Services.

Diversicare provides a broad range of post-acute care services to patients and residents including skilled nursing, ancillary health care services and assisted living. In addition to the nursing and social services usually provided in long-term care centers, we offer a variety of rehabilitative, nutritional, respiratory, and other specialized ancillary services. As of December 31, 2016 , our continuing operations consist of 76 nursing centers with 8,453 licensed skilled nursing beds. Our nursing centers range in size from 48 to 320 licensed nursing beds. The licensed nursing bed count does not include 496 licensed assisted living beds. Our continuing operations include centers in Alabama, Florida, Indiana, Kansas, Kentucky, Mississippi, Missouri, Ohio, Tennessee, and Texas.

The following table summarizes certain information with respect to the nursing centers we own or lease as of December 31, 2016 :



	Number of Centers	Licensed Nursing Beds ⁽¹⁾	Available Nursing Beds ⁽¹⁾
Operating Locations:
Alabama	19	2,282	2,203
Florida	1	79	79
Indiana	1	158	158
Kansas	6	464	464
Kentucky	13	1,127	1,123
Mississippi	10	1,138	1,103
Missouri	3	339	289
Ohio	5	404	393
Tennessee	5	617	537
Texas	13	1,845	1,571
	76	8,453	7,920
Classification:
Owned	17	1,504	1,266
Leased	59	6,949	6,654
Total	76	8,453	7,920

____________

(1)

The number of Licensed Nursing Beds is based on the regulatory licenses for the nursing center. The Company reports its occupancy based on licensed nursing beds. The number of Available Nursing Beds represents Licensed Nursing Beds reduced by beds removed from service. Available Nursing Beds is subject to change based upon the needs of the centers, including configuration of patient rooms, common usage areas and offices, status of beds (private, semi-private, ward, etc.) and renovations. The number of Licensed and Available Nursing Beds does not include 496 Licensed Assisted Living/Residential Beds, all of which are also available, and the number of centers excludes one stand-alone Assisted Living Facility in Ohio. These beds are excluded from the bed counts as our operating statistics such as occupancy are calculated using Nursing Beds only.

Our nursing centers provide skilled nursing health care services, including nutrition services, recreational therapy, social services, housekeeping and laundry services. Skilled nursing care is provided for post-acute patients and residents with comorbidities. This care includes assessment using evidence based tools; individualized care plan development based on identified areas of risk and care needs; and skilled interventions such as IV services. We also provide for the delivery of ancillary medical services at the nursing centers we operate. These specialty services include rehabilitation therapy services, such as audiology, speech, occupational and physical therapies, which are provided through licensed therapists and registered nurses, and the provision of medical supplies, nutritional support, infusion therapies and related clinical services. The majority of these services are provided using our internal resources and clinicians.

Within the framework of a nursing center, we may provide other specialty care, including:

Transitional Care Unit . Many of our nursing centers have units designated as transitional care units, our designation for patients requiring transitional care following an acute stay in the hospital. These units specialize in short-term nursing and rehabilitation with the goal of returning the patient to their highest potential level of functionality. These units provide enhanced services with emphasis on upgraded amenities. The design and programming of the units generally appeal to the clinical and hospitality needs of individuals as they progress to the next appropriate level of care. Specialized therapeutic treatment regimens include orthopedic rehabilitation, neurological rehabilitation and complex medical rehabilitation. While these patients generally have a shorter length of stay, the intensive level of nursing and rehabilitation required by these patients typically results in higher levels of reimbursement.

Memory Care Unit . Like our transitional care units, many of our nursing centers have memory care units, our designation for advanced care for dementia-related disorders including Alzheimer's disease. The goal of the units is to provide a safe, homelike and supportive environment for cognitively impaired patients, utilizing an interdisciplinary team approach. Family and community involvement complement structured programming in the secure environment instrumental in fostering as much resident independence and purposeful quality of life as long as possible despite diminished capacity.

Enhanced Therapy Services. We have complemented our traditional therapy services with programs that provide electrotherapy, vital stimulation, ultrasound and shortwave diathermy therapy treatments that promote pain management, wound healing, muscle strengthening, and/or contractures management, improving outcomes for our patients and residents receiving therapy treatments.

Other Specialty Programming. We implement other specialty programming based on a center's specific needs. We have developed two adult day care centers on nursing center campuses. We have developed specialty programming for bariatric patients (generally, patients weighing more than 350 pounds) at one of these centers as these individuals have unique psychosocial and equipment needs.

Quality Assurance and Performance Improvement . We have in place a Quality Assurance and Performance Improvement (“QAPI”) program, which is focused on monitoring and improving all aspects of the care provided in a center by identifying outcomes and acting on areas of improvement. The QAPI program in our centers addresses all systems of care and management practices. Key quality indicators are determined and performance goals and benchmarks are established based on industry research standards via a Balanced Scorecard. Gaps and opportunities in performance versus benchmarks are addressed with analysis and performance improvement plans. Outcomes from each center in the areas of quality, employee workplace, customer satisfaction, and stewardship are collected monthly and overseen by regional and company quality committees.

Implement Electronic Medical Records . We completed the initial implementation of EMR in our nursing centers in December 2011. EMR improves our ability to accurately record the care provided to our patients and quickly respond to areas of need. We now implement the use of EMR near the time of acquisition for new centers. EMR improves customer and employee satisfaction, nursing center regulatory compliance and provides real-time monitoring and scheduling of care delivery. We believe our EMR system supports our quality initiatives and positions us for higher acuity service offerings. Our EMR system is comprehensive in its functionality, providing key components, such as:


•	Tracking Activities of Daily Living (“ADLs”) . ADLs are the functions that each person must perform on a daily basis including, but not limited to, getting dressed, bathing, and eating. ADL tracking allows us to capture the provision of care provided by our nursing, dietary and housekeeping staff in assisting with ADLs quickly, efficiently and electronically.

•

Progress Notes . Progress notes are an important component of our medical records. Licensed nursing professionals provide documentation reflecting assessment of each patient's condition and intervention of skilled care provided. The EMR system provides means for a comprehensive chronological record resulting in improved capture, monitoring and review of documentation of condition and care provided.


•	Medications . Our patients receive a number of daily medications. This module assists with electronic tracking and documenting of required medications and treatments. This provides a more accurate and efficient care system for our nurses and patients.


•	Wound Module. This allows for an evidence-based risk assessment to drive patient specific interventions to prevent skin breakdown. When skin abnormalities are present, it provides for accurate depiction of anatomical location and description which drives individualized care treatments.


•	Incident Module. Allows for capturing any event, such as a fall, and provides quality assurance steps for root cause and patient-specific care plans.

For all modules, the EMR system provides a dashboard that can be reviewed at a number of kiosks throughout the nursing center, allowing our staff to securely access a list of upcoming patient care tasks and providing supervisors a tool to help manage and monitor staff performance. We believe the EMR system provides better support, efficiency, and improves the quality of care for our patients. We originally invested approximately $112,000 per nursing center to deploy EMR in all our centers at the time of implementation. We currently implement EMR at each of the centers we acquire or at which time we assume operations during the transition process.

Organization . Our nursing centers are currently organized into ten regions, each of which is supervised by a regional vice president. The regional vice president is generally supported by specialists in several functions, including clinical, human resources, marketing, revenue cycle management and administration, all of whom are employed by us. The day-to-day operations of each of our nursing centers are led by an on-site, licensed administrator. The administrator of each nursing center is supported by other professional personnel, including a medical director, who assists in the medical management of the nursing center, and a director of nursing, who supervises a team of registered nurses, licensed practical nurses and nurse aides. Other personnel include those providing therapy, dietary, activities and social service, housekeeping, laundry, maintenance and office services. The majority of personnel at our nursing centers, including the administrators, are our employees.

Marketing.

We believe that skilled nursing care is fundamentally a local business in which both patients and their referral sources are typically based in the immediate geographic area in which the nursing center is located. Our marketing plan and related support activities emphasize the role and contributions of the administrators, admissions coordinators and clinical liaisons of each nursing center, all of whom are responsible for developing relationships with various referral sources such as doctors, hospitals, hospital case managers and discharge planners, and various healthcare and community organizations. Training, sales tools and job aids are provided for the sales and marketing teams for the product knowledge, market knowledge, and selling skills necessary to support their efforts in the field. As part of our business strategy, we have dedicated sales and marketing personnel who develop strong partnerships with physicians and hospital executives as well as Accountable Care Organizations ("ACO"), Bundled Payments Initiatives ("BPI"), and Managed Care organizations. We believe these relationships will be mutually beneficial, providing the community with high quality healthcare while helping customers to navigate choices, manage transitions, and control costs.

At the local level, our sales and marketing efforts are designed to:

• Identify and develop strong healthcare partnerships

• Help facilitate smooth transitions between care settings

• Promote collaboration with ACOs, BPIs, and healthcare organizations

• Educate referral sources and community on our key differentiators and capabilities

• Position ourselves as a valuable resource and healthcare partner

• Enhance the customer experience

• Contribute to a strong community presence

• Promote higher occupancy levels

• Foster optimal payor mix

In addition to soliciting admissions from current and potential referral sources, we emphasize involvement in community and healthcare events and opportunities to promote a public awareness of our nursing centers and services. Activities include ongoing family councils and community based “family night” functions, providing the opportunity to educate the public on various topics such as Medicare benefits, powers of attorney, and other topics of interest. We also promote a positive customer experience, best practices, strong surveys, and a high Star Rating; we seek feedback through third-party resident and family surveys. We host tour and “open house” opportunities, where members of the local community are invited to visit the center to see any improvements or to better understand our environment and services. We look for ways to offer increased clinical capabilities and services to better meet the needs of the community and referral sources. In addition, we have regional oversight to support the overall marketing strategies in each local center, in order to promote higher occupancy levels and improved payor and case mixes at our nursing centers. We offer the resources and metrics for strong healthcare partnerships with our referral sources, including ACOs and other Managed Care partners. Our support center marketing personnel support regional and local marketing personnel and efforts.

We have monthly marketing programs and ongoing marketing initiatives, developed internally, that focus on educating and meeting the needs of our customers while growing our business. Resources are also available to assist each nursing center administrator in analysis of local demographics and competition with a view toward complementary service development. We consider the primary referral area in long-term care to generally lie within a five-to-fifteen-mile radius of each nursing center depending on population density; consequently, we focus on local marketing efforts rather than broad-based advertising.

Acquisitions, Significant Transactions and Divestitures.

Acquisitions

On February 26, 2016, the Company exercised its purchase options to acquire the real estate assets for Diversicare of Hutchinson in Hutchinson, Kansas and Clinton Place in Clinton, Kentucky for $4,250,000 and $3,300,000 , respectively. The Company has operated these centers since February 2015 and April 2012, respectively. Hutchinson is an 85 -bed skilled nursing center and Clinton is an 88 -bed skilled nursing center. As a result of the consummation of the Agreements, the Company allocated the purchase price and acquisition costs among the assets acquired. The allocation of the purchase price was determined with the assistance of HealthTrust LLC, a third-party real estate valuation firm.

On November 1, 2015, the Company entered into an Asset Purchase Agreement with Haws Fulton Investors, LLC to acquire a 60 -bed skilled nursing center in Fulton, Kentucky, for an aggregate purchase price of $3,900,000 . As a result of this business combination transaction, the Company allocated the purchase price of $3,900,000 among the assets based on the fair value of the acquired net assets.

$7,000,000 , partially financed through a $5,000,000 mortgage loan with The PrivateBank with the balance paid in cash consideration. As a result of this business combination transaction, the Company allocated the purchase price of $7,000,000 among the assets based on the fair value of the acquired net assets.

Golden Living Transaction

On August 15, 2016, the Company entered into an Operation Transfer Agreement with Golden Living (the "Lessor") to assume the operations of 22 centers in Alabama and Mississippi. On October 1, 2016, the Company entered into a Master Lease Agreement (the "Lease") with Golden Living to directly lease 8 centers located in Mississippi from the Lessor. The Company also assumed individual leases of two centers in Mississippi from third parties. On November, 1 2016, the Company amended and restated the Lease ("Amended Lease") with the Lessor to directly lease an additional twelve centers located in Alabama. Refer to the chart below for a complete listing of these centers' locations and number of licensed beds.

Lease Agreements and Assumption of Operations

During 2016 and 2015, the Company assumed operations at 23 centers comprising a total increase of 2,647 licensed beds. See table below for details of the 2016 and 2015 operations acquired by the Company:



Center	Location	Effective Date	Licensed Bed Count
Diversicare of Hutchinson*	Hutchinson, Kansas	February 1, 2015	73
Diversicare of Amory	Amory, Mississippi	October 1, 2016	152
Diversicare of Batesville	Batesville, Mississippi	October 1, 2016	130
Diversicare of Brookhaven	Brookhaven, Mississippi	October 1, 2016	58
Diversicare of Carthage	Carthage, Mississippi	October 1, 2016	99
Diversicare of Eupora	Eupora, Mississippi	October 1, 2016	119
Diversicare of Meridian	Meridian, Mississippi	October 1, 2016	120
Diversicare of Ripley	Ripley, Mississippi	October 1, 2016	140
Diversicare of Southaven	Southaven, Mississippi	October 1, 2016	140
Diversicare of Tupelo	Tupelo, Mississippi	October 1, 2016	120
Diversicare of Tylertown	Tylertown, Mississippi	October 1, 2016	60
Diversicare of Arab	Arab, Alabama	November 1, 2016	87
Diversicare of Bessemer	Bessemer, Alabama	November 1, 2016	180
Diversicare of Riverchase	Birmingham, Alabama	November 1, 2016	132
Diversicare of Boaz	Boaz, Alabama	November 1, 2016	100
Diversicare of Foley	Foley, Alabama	November 1, 2016	154
Baron House of Hueytown	Hueytown, Alabama	November 1, 2016	50
Diversicare of Lanett	Lanett, Alabama	November 1, 2016	85
Diversicare of Montgomery	Montgomery, Alabama	November 1, 2016	138
Diversicare of Oneonta	Oneonta, Alabama	November 1, 2016	120
Diversicare of Oxford	Oxford, Alabama	November 1, 2016	173
Diversicare of Pell City	Pell City, Alabama	November 1, 2016	94
Diversicare of Winfield	Winfield, Alabama	November 1, 2016	123

*Diversicare of Hutchinson was later purchased in February 2016. Refer to our disclosure above.

Lease Termination

Effective May 31, 2016, the Company entered into an Agreement with Avon Ohio, LLC to amend the original lease agreement, thus terminating the Company's right of possession of the center. As a result, the Company incurred lease termination costs of $2,008,000 in the second quarter of 2016. Under the amended agreement, the Company is required to pay $300,000 per year through the term of the original lease agreement, July 31, 2024. For accounting purposes, this transaction was not reported as a discontinued operation, which is in accordance with the modified authoritative guidance for reporting discontinued operations, effective January 1, 2015. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on the Company's operations and financial results.

Pharmacy Partnership

Effective October 28, 2016, the Company and its partners entered into an asset purchase agreement to sell the pharmacy joint venture. The sale resulted in a $1,366,000 recorded gain on the sale of the Company's interest in the joint venture during the year ended December 31, 2016 . The transaction also resulted in an immaterial gain contingency, which has not been recorded and income has not been recognized.

Discontinued Operations

Effective April 3, 2014, the Company entered into an asset purchase agreement with Rose Terrace Acq., LLC to sell its skilled center facility in Culloden, West Virginia. The original asset purchase agreement was subject to a number of conditions including an amendment to the Master Lease with Omega Health Investors, Inc. ("Omega") to terminate the lease only with respect to two other skilled nursing centers in West Virginia, state licensure and regulatory approval.

Effective July 1, 2014, the Company completed the transaction with Rose Terrace Acq., LLC to sell Rose Terrace, a 90-bed skilled nursing center in Culloden, West Virginia for a sales price of $16,500,000 . The Company also entered into the Fifteenth Amendment to the Master Lease with Omega to terminate the lease only with respect to two other skilled nursing centers in Danville and Ivydale, West Virginia, and concurrently entered into an operations transfer agreement with American Health Care Management, LLC, an affiliate of the purchaser with respect to the two skilled nursing centers located in Danville and Ivydale, West Virginia. The amendment effectively reduced the annual rent payments due under the Master Lease by $1,900,000. Upon completion of the transaction, Diversicare no longer operates any skilled nursing centers in the state of West Virginia. In conjunction with the closing of the sale, the Company paid the balance of the $8,000,000 mortgage loan outstanding on the Rose Terrace center. The Company will continue to defend, and make cash payments related to professional liability claims asserted against these nursing centers for events occurring prior to July 1, 2014.

Nursing Center Industry.

We believe there are a number of significant trends within the post-acute care industry that will support the continued growth of the nursing center profession. These trends are also likely to impact our business. These factors include:

Demographic trends. The primary market for our post-acute health care services is comprised of persons aged 75 and older. This age group is one of the fastest growing segments of the United States population. As the number of persons aged 75 and over continues to grow, we believe that there will be corresponding increases in the number of persons who need skilled nursing care.

Cost containment pressures. In response to rapidly rising health care costs, governmental and other third-party payors have adopted cost-containment measures to reduce admissions and encourage reduced lengths of stays in hospitals and other acute care settings. As a result, hospitals are discharging patients earlier and referring elderly patients, who may be too sick or frail to manage their lives without assistance, to nursing centers where the cost of providing care is typically lower than hospital care.

Limited supply of centers. As the nation's population of seniors continues to grow, life expectancy continues to expand, and there continue to be limitations on granting Certificates of Need (“CON”) for new skilled nursing centers, so we believe that there will be continued demand for skilled nursing beds in the markets in which we operate. CON laws generally require a state agency to determine public need for any construction or expansion of healthcare facilities. We believe that the CON process tends to restrict the supply and availability of licensed skilled nursing center beds. High construction costs, limitations on state and federal government reimbursement for the full costs of construction, and start-up expenses also act to restrict growth in the supply for such centers.

Reduced reliance on family care. Historically, the family has been the primary provider of care for seniors. We believe that the increase in the percentage of dual income families, the reduction of average family size and the increased mobility in society will reduce the role of the family as the traditional care-giver for aging parents. We believe that this trend will make it necessary for many seniors to look outside the family for assistance as they age.

Competition.

The post-acute care business is highly competitive. We face direct competition for additional centers, and our centers face competition for employees and patients. Some of our present and potential competitors for acquisitions are significantly larger and have or may obtain greater financial and marketing resources. Competing companies may offer new or more modern centers or new or different services that may be more attractive to patients than some of the services we offer.

The nursing centers operated by us compete with other centers in their respective markets, including rehabilitation hospitals and other skilled and personal care residential centers. In the few urban markets in which we operate, some of the long-term care

providers with which our centers compete are significantly larger and have or may obtain greater financial and marketing resources than our centers. Some of these providers are not-for-profit organizations with access to sources of funds not available to our centers. Construction of new long-term care centers near our existing centers could adversely affect our business. We believe that the most important competitive factors in the long-term care business are: a nursing center's local reputation with referral sources, such as acute care hospitals, physicians, religious groups, other community organizations, Managed Care organizations, and a patient's family and friends; physical plant condition; the ability to identify and meet particular care needs in the community; the availability of qualified personnel to provide the requisite care; and the rates charged for services. There is limited, if any, price competition with respect to Medicaid and Medicare patients, since revenues for services to such patients are strictly controlled and are based on fixed rates and cost reimbursement principles. Although the degree of success with which our centers compete varies from location to location, we believe that our centers generally compete effectively with respect to these factors.

Revenue Sources

We classify our revenues from patients and residents into four major categories: Medicare, Medicaid, managed care, and private pay and other. Medicaid revenues are those received under the traditional Medicaid program, which provides benefits to those in need of financial assistance in the securing of medical services. Medicare revenues include revenues received under both Part A and Part B. Managed Care revenues are received from insurance entities, including third-party plans that administer Medicare benefits, known as Medicare Advantage plans. The private pay and other revenues are composed primarily of individuals or parties who directly pay for their services. Included in the private pay and other category are patients who are hospice beneficiaries as well as the recipients of Veterans Administration benefits. Veterans Administration payments are made pursuant to renewable contracts negotiated with these payors.

The following table sets forth net patient revenues related to our continuing operations by payor source for the periods presented (dollar amounts in thousands):



	Year Ended December 31,
	2016				2015				2014
Medicaid	$	215,381	50.6	%	$	188,323	48.6	%	$	166,497	48.4	%
Medicare	117,143		27.5	%	112,305		29.0	%	101,806		29.6	%
Managed Care	29,066		6.8	%	27,856		7.2	%	23,178		6.7	%
Private Pay and other	64,473		15.1	%	59,111		15.2	%	52,711		15.3	%
Total	$	426,063	100.0	%	$	387,595	100.0	%	$	344,192	100.0	%

The following table sets forth average daily skilled nursing census by payor source for our continuing operations for the periods presented:



	Year Ended December 31,
	2016			2015			2014
Medicaid	3,448	68.1	%	3,104	67.1	%	2,844	67.0	%
Medicare	591	11.7	%	577	12.5	%	540	12.7	%
Managed Care	178	3.5	%	173	3.7	%	151	3.6	%
Private Pay and other	844	16.7	%	772	16.7	%	709	16.7	%
Total	5,061	100.0	%	4,626	100.0	%	4,244	100.0	%

Consistent with the nursing center industry in general, changes in the mix of a center's patient population among Medicaid, Medicare, Managed Care, and private pay and other can significantly affect the profitability of the center's operations. We will attempt to increase revenues from non-governmental sources to the extent capital is available to do so. However, private payors, including managed care payors, are increasingly demanding that providers accept discounted fees or assume all or a portion of the financial risk for the delivery of health care services. Such measures may include capitated payments, which can result in significant losses to health care providers if patients require expensive treatment not adequately covered by the capitated rate.

Medicare and Medicaid Reimbursement

A significant portion of our revenues are derived from government-sponsored health insurance programs. Our nursing centers derive revenues under Medicaid, Medicare, Managed Care, Private Pay and other third party sources. We employ third-party specialists in reimbursement and also use these services to monitor regulatory developments to comply with reporting requirements and to ensure that proper payments are made to our operated nursing centers.

Medicare

Medicare is a federally-funded and administered health insurance program for the aged and for certain chronically disabled individuals. Part A of the Medicare program covers certain services furnished by skilled nursing centers and other institutional providers and inpatient hospital services. Part B covers physician services, durable medical equipment, various outpatient services and certain ancillary services. Medicare generally covers skilled nursing center services for beneficiaries who require nursing care or rehabilitation services after a qualifying hospital stay. Medicare pays a per diem rate for each beneficiary, adjusted for patient acuity and additional factors such as geographic differences in wage rates. The payment rates are set forth under a prospective payment system that uses nursing and therapy indexes to assign a payment rate to each beneficiary. The Centers for Medicare & Medicaid Services (“CMS”) updates the rates annually. The payment rates cover all services to be provided to a beneficiary, including room and board, skilled nursing care, therapy, and medications.

In July 2016, CMS issued its final rule outlining Medicare payment rates and policies for skilled nursing centers for federal fiscal year 2017, which began October 1, 2016. CMS projects that aggregate payments to skilled nursing centers will increase by a net 2.4% for fiscal year 2017. This reflects a 2.7% market basket increase, reduced by a 0.3% multi-factor productivity adjustment required by Patient Protection and Affordable Care Act ("PPACA"). The payment rates for fiscal year 2016, which were projected to increase aggregate payments to skilled nursing centers by 1.2%, reflected a 0.6% forecast error reduction and the 0.5% productivity reduction required by PPACA. For fiscal year 2018, the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) requires the payment update for skilled nursing centers to be 1%.

In addition to the adjustments described above, payment rates are reduced pursuant to ongoing sequestration. The Budget Control Act of 2011 (“BCA”) requires automatic spending reductions to reduce the federal deficit, including Medicare spending reductions of up to 2% per fiscal year, with a uniform percentage reduction across all Medicare programs. CMS began imposing a 2% reduction on Medicare claims in April of 2013. These reductions have been extended through 2025.

CMS has increasingly introduced policies intended to shift Medicare to value-based payment methodologies, tying reimbursement to quality of care rather than quantity. For example, CMS has implemented the Quality Reporting Program, under which skilled nursing centers are required to report quality data. Beginning in fiscal year 2018, skilled nursing centers that fail to submit required data will be subject to a 2% reduction to the annual market basket update. The Skilled Nursing Facility Value-Based Purchasing (“SNF VBP”) Program, which begins on October 1, 2018, will make incentive payments available to skilled nursing centers based on their past performance on a specified quality measure. The first measure under this program is the 30-day potentially preventable readmission measure, which assesses the rate of unplanned, potentially preventable hospital readmissions for skilled nursing center patients within 30 days of discharge from a prior admission to a hospital. CMS will fund the SNF VPB Program incentive payment pool by withholding and then redistributing 2% of skilled nursing center payments, beginning in fiscal year 2019.

In addition, CMS has established the Five-Star Quality Rating System to assist the public in choosing a skilled care provider. Each nursing home is given a rating between 1 and 5 stars, which is published on the Nursing Home Compare website. The overall star rating is determined by three components: information from the last three years of health inspections, staffing information, and quality measures. The rating is based, in part, on the quality data nursing centers are required to report. For example, nursing centers must report the percentage of short-stay residents who are successfully discharged into the community and the percentage who had an outpatient emergency department visit. We remain diligent in continuing to provide outstanding patient care to achieve high rankings for our centers, as well as assuring that our rankings are correct and appropriately reflect our quality results.

Therapy Services . Reimbursement for physical therapy, occupational therapy, and speech-language pathology services covered under Medicare Part B is determined according to the Medicare Physician Fee Schedule (“MPFS”), which is updated annually. If a beneficiary receives multiple therapy treatments in one day, Medicare Part B pays the full rate for the therapy unit of service that has the highest Practice Expense (“PE”) component. A multiple procedure payment reduction is applied to the second and subsequent therapy units, reducing reimbursement to 50% of the applicable PE component.

Therapy services covered under Medicare Part B are subject to an annual dollar-amount payment cap per beneficiary. These limitations on reimbursement are determined on a calendar year basis. For 2017, the limit on incurred expenses is $1,980 per patient for physical and speech therapy services combined, and a separate $1,980 per patient limit applies for occupational therapy services. Deductible and coinsurance amounts paid by the beneficiary for therapy services count toward the amount applied to the limit.

A temporary two-tier exceptions process permits providers to request reimbursement of therapy services beyond the caps in certain situations. The MACRA extended the exceptions process through December 31, 2017. The first tier, the automatic exceptions process, can be used for claims beyond the caps, up to a $3,700 threshold. The second tier, a targeted review process, may apply when a beneficiary’s incurred expenses exceed a $3,700 threshold. MACRA eliminated a previous requirement for manual medical review of all claims exceeding the $3,700 threshold, instead providing for a targeted post-payment reviews to be conducted by Supplemental Medical Review Contractors. These claim reviews focus on providers with a high percentage of patients receiving therapy beyond the threshold and on therapy provided in specified settings, including skilled nursing centers.

MACRA also provides for a 0.5% increase to the MPFS rates each calendar year through 2019, subject to other adjustments. It required the establishment of the Quality Payment Program (“QPP”), a payment methodology intended to reward high-quality patient care. Beginning in 2017, physicians and certain other clinicians are required to participate in one of two QPP tracks, which will affect Medicare payments in 2019. The Advanced Alternative Payment Model (“Advanced APM”) track makes incentive payments available for participation in specific innovative payment models approved by CMS. A provider with sufficient participation in an Advanced APM is exempt from the reporting requirements and payment adjustments imposed under the second track, the Merit-Based Incentive Payment System (“MIPS”). Providers electing to participate in MIPS will tie payment to performance with respect to clinical quality, resource use, clinical improvement activities, and meaningful use of electronic health records. MIPS will consolidate components of three existing incentive programs, including the Value-Based Payment Modifier program and the Physician Quality Reporting System.

Medicaid

Medicaid is a medical assistance program for the indigent that is funded jointly by the federal and state governments and administered by the states. Federal law requires states to cover certain nursing center services for Medicaid-eligible individuals when other payment options are unavailable. However, Medicaid eligibility requirements and benefits vary by state, and states may impose limitations on nursing services. States may also establish levels of service or payment methodologies by acuity or specialization of a nursing center.

PPACA, as currently structured, requires states to expand Medicaid coverage by adjusting eligibility requirements such as income thresholds. However, the future of the Medicaid expansion is uncertain as a result of the 2016 federal elections. Further, a number of states have opted out of the Medicaid expansion provisions. Some states that opted out of the expansion provisions are evaluating alternatives such as waiver plans to extend or replace existing supplemental payment programs.

For example, effective February 1, 2015, the Company began participating in Indiana's Upper Payment Limit ("UPL") supplemental payment program, which provides supplemental Medicaid payments for skilled nursing centers that are licensed to non-state government entities such as county hospital districts. One skilled nursing center previously operated by the Company entered into a transaction with one such hospital district participating in the UPL program, providing for the transfer of the license from the Company to the hospital district. The Company's operating subsidiary retained the management of the center on behalf of the hospital district. The agreement between the hospital district and the Company is terminable by either party. Termination would fully restore the prior license status.

We receive the majority of our annual Medicaid rate increases during the third quarter of each year. The rate changes received in 2016 and 2015 , along with increased Medicaid acuity in our acuity based states, were the primary contributor to our 2.3% increase

in average rate per day for Medicaid patients in 2016 compared to 2015 . Based on the rate changes received during the third quarter of 2016 , we expect a favorable impact to our rate per day for Medicaid patients as we move into 2017 due to modest rate increases in many of the states within which we operate.

Several states in which we operate face budget shortfalls, which could result in reductions in Medicaid funding for nursing centers. Pressures on state budgets are expected to continue in the future. Certain of the states in which we operate are actively seeking ways to reduce Medicaid spending for nursing center care by such methods as capitated payments and substantial reductions in reimbursement rates. Some states are promoting alternatives such as community and home-based services. We are unable to predict what, if any, reform proposals or reimbursement limitations will be implemented in the future, or the effect such changes would have on our operations. For the year ended December 31, 2016 , we derived 27.5 % and 50.6% of our total patient revenues related to continuing operations from the Medicare and Medicaid programs, respectively. Any health care reforms that significantly limit rates of reimbursement under these programs could, therefore, have a material adverse effect on our financial position and profitability.

Employees.

As of February 2, 2017 , we employed approximately 7,400 employees, referred to as "team members", in connection with our continuing operations, approximately 6,700 of which are considered full-time team members. We believe that our team member relations are good. Approximately 843 of our team members are represented by a labor union.

Although we believe we are able to employ sufficient nurses and therapists to provide our services, a shortage of health care professional personnel in any of the geographic areas in which we operate could affect our ability to recruit and retain qualified team members and could increase our operating costs. We compete with other health care providers for both professional and non-professional team members and with non-health care providers for non-professional team members. This competition contributed to a significant increase in the salaries that we had to pay to hire and retain these team members. As is common in the health care industry, we expect the salary and wage increases for our skilled healthcare providers will continue to be higher than average salary and wage increases nationally.

Supplies and Equipment.

We purchase drugs, solutions and other materials and lease certain equipment required in connection with our business from many suppliers. We have not experienced, and do not anticipate that we will experience, any significant difficulty in purchasing supplies or leasing equipment from current suppliers. In the event that such suppliers are unable or fail to sell us supplies or lease equipment, we believe that other suppliers are available to adequately meet our needs at comparable prices. National purchasing contracts are in place for all major supplies, such as food, linens and medical supplies. These contracts assist in maintaining quality, consistency and efficient pricing. Based on contract pricing for food and other supplies, we expect cost increases in 2017 to be relatively the same or slightly lower than the increases we experienced in 2016 .

Government Regulation.

The health care industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, quality of patient care and Medicare and Medicaid fraud and abuse. Over the last several years, government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of fraud and abuse statutes and regulations, false claims statutes, HIPAA violations, as well as laws and regulations governing quality of care issues in the skilled nursing profession in general. Violations of these laws and regulations could result in exclusion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Compliance with such laws and regulations is subject to ongoing government review and interpretation, as well as regulatory actions in which government agencies seek to impose fines and penalties. The Company is involved in regulatory actions of this type from time to time.

Licensure and Certification.

All our nursing centers must be licensed by the state in which they are located in order to accept patients, regardless of payor source. In most states, nursing centers are subject to CON laws, which require us to obtain government approval for the construction of new nursing centers or the addition of new licensed beds to existing centers. Our nursing centers must comply with detailed statutory and regulatory requirements on an ongoing basis in order to qualify for licensure, as well as for certification as a provider eligible to receive payments from the Medicare and Medicaid programs. Generally, the requirements for licensure and Medicare/Medicaid certification are similar and relate to quality and adequacy of personnel, quality of medical care, record keeping, dietary services, patient rights, and the physical condition of the nursing center and the adequacy of the equipment used therein. Each center is subject to periodic inspections, known as “surveys” by health care regulators, to determine compliance with all applicable

licensure and certification standards. Such requirements are both subjective and subject to change. If the survey concludes that there are deficiencies in compliance, the center is subject to various sanctions, including but not limited to monetary fines and penalties, suspension of new admissions, non-payment for new admissions and loss of licensure or certification. Generally, however, once a center receives written notice of any compliance deficiencies, it may submit a written plan of correction and is given a reasonable opportunity to correct the deficiencies. There can be no assurance that, in the future, we will be able to maintain such licenses and certifications for our centers or that we will not be required to expend significant sums in order to comply with regulatory requirements.

Health care and health insurance reform.

In March 2010, significant legislation concerning health care and health insurance was passed, including the “Patient Protection and Affordable Care Act” (“Patient Protection Act”), along with the “Health Care and Education Reconciliation Act of 2010” (“Reconciliation Act”), collectively defined as the “Legislation.” We expect this Legislation to impact our Company, our employees and our patients in a variety of ways. Some aspects of these new laws have been implemented while others will be phased in over the next several years when all mandates become effective. This Legislation significantly changes the future responsibility of employers with respect to providing health care coverage to employees in the United States. We have not estimated the financial impact of the Legislation and the costs associated with complying with the increased levels of health insurance we will be required to provide our employees and their dependents in future years. We expect the Legislation will result in increased operating expenses.

We also anticipate this Legislation will continue to impact our Medicaid and Medicare reimbursement as well, though the timing and ultimate level of that impact is currently unknown as we anticipate that many of the provisions of the Legislation may be subject to further clarification and modification through the rule making process. The Legislation expands the role of home-based and community services, which may place downward pressure on our sustaining population of Medicaid patients. These reforms include the possible modifications to the conditions of qualification for payment, bundling of payments to cover both acute and post-acute care and the imposition of enrollment limitations on new providers. The provisions of the Legislation discussed above are examples of recently-enacted federal health reform provisions that we believe may have a material impact on the long-term care industry and on our business. However, the foregoing discussion is not intended to constitute, nor does it constitute, an exhaustive review and discussion of the Legislation.

Skilled nursing centers are required to bill Medicare on a consolidated basis for certain items and services that they furnish to patients, regardless of the cost to deliver these services. This consolidated billing requirement essentially makes the skilled nursing center responsible for billing Medicare for all care services delivered to the patient during the length of stay.

CMS has instituted a number of new exploratory test programs designed to extend the reimbursement and financial responsibilities under consolidated billing beyond the traditional discharge date to include a broader set of bundled services. Such examples may include, but are not exclusive to, home health, durable medical equipment, home and community based services, and the cost of re-hospitalizations during a specified bundled period. Today, these test programs for bundled reimbursement are confined to a small set of clinical conditions. This bundled form of reimbursement could be extended to a broader range of diagnosis related conditions in the future. Because of the untested nature of this new form of reimbursement, the potential impact on skilled nursing center utilization and reimbursement is currently unknown. The process for defining bundled services has not been fully determined by CMS and therefore is subject to change during the rule making process.

Health Insurance Portability and Accountability Act of 1996 Compliance . The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) has mandated an extensive set of regulations to standardize electronic patient health, administrative and financial data transactions and to protect the privacy of individually identifiable health information. We have a HIPAA compliance committee and designated privacy and security officers.

The HIPAA transaction standards are intended to simplify the electronic claims process and other healthcare transactions by encouraging electronic transmission rather than paper submission. These regulations provide for uniform standards for data reporting, formatting and coding that we must use in certain transactions with health plans. The HIPAA security regulations establish detailed requirements for safeguarding protected health information that is electronically transmitted or electronically stored. Some of the security regulations are technical in nature, while others are addressed through policies and procedures. We implemented or upgraded computer and information systems as we believe necessary to comply with the new regulations.

The HIPAA regulations related to privacy establish comprehensive federal standards relating to the use and disclosure of individually identifiable health information (“protected health information”). The privacy regulations establish limits on the use and disclosure of protected health information, provide for patients' rights, including rights to access, to request amendment of, and to receive an accounting of certain disclosures of protected health information, and require certain safeguards for protected health information. In addition, each covered entity must contractually bind individuals and entities that furnish services to the covered entity or perform a function on its behalf, and to which the covered entity discloses protected health information, to restrictions on the use

and disclosure of that protected health information. In general, the HIPAA regulations do not supersede state laws that are more stringent or grant greater privacy rights to individuals. Thus, we must reconcile the HIPAA regulations and other state privacy laws.

Although we believe that we are in material compliance with these HIPAA regulations, inadvertent violations of these regulations may occur in the course of our business. For this and other reasons, the HIPAA regulations are expected to continue to impact us operationally and financially and may pose increased regulatory risk.

Self-Referral and Anti-Kickback Legislation.

The health care industry is subject to state and federal laws which regulate the relationships of providers of health care services, physicians and other clinicians. These self-referral laws impose restrictions on physician referrals to any entity with which they have a financial relationship, which is a broadly defined term. We believe our relationships with physicians are in compliance with the self-referral laws. Failure to comply with self-referral laws could subject us to a range of sanctions, including civil monetary penalties and possible exclusion from government reimbursement programs. There are also federal and state laws making it illegal to offer anyone anything of value in return for referral of patients. These laws, generally known as “anti-kickback” laws, are broad and subject to interpretations that are highly fact dependent. Given the lack of clarity of these laws, there can be no absolute assurance that any health care provider, including us, will not be found in violation of the anti-kickback laws in any given factual situation. Strict sanctions, including fines and penalties, exclusion from the Medicare and Medicaid programs and criminal penalties, may be imposed for violation of the anti-kickback laws.

Reporting Obligations under Section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007 (“MMSEA”).

Since January 1, 2010, we have reported specific information regarding all claimants and claim settlements involving Medicare participants so CMS can recover Medicare funds expended to provide healthcare treatment to the claimant. The requirements are to ensure that CMS is notified so that it may recoup the amounts paid for services from the settlement proceeds. This does not result in us making additional payments to CMS for these services provided and does not result in an incremental cost to us. Strict sanctions, including fines and penalties, exclusion from the Medicare and Medicaid programs and criminal penalties, may be imposed for non-compliance with these reporting obligations.

Available Information.

We file reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Copies of our reports filed with the SEC may be obtained by the public at the SEC's Public Reference Room located at 100 F Street, NE, Washington, DC 20549 on official business days during the hours of 10 a.m. to 3 p.m. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of the Company's reports on its website at www.sec.gov . We also make available, free of charge through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other materials filed with the SEC as soon as reasonably practical after such material is electronically filed with or furnished to the SEC via a link to the SEC's EDGAR system. Our website address is www.dvcr.com . The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.

In addition, copies of the Company's annual report will be made available, free of charge, upon written request.

Corporate Governance Principles.

The Company has adopted Corporate Governance Principles relating to the conduct and operations of the Board of Directors. The Corporate Governance Principles are posted on the Company's website ( www.dvcr.com ) and are available in print to any stockholder who requests a copy.

Committee Charters.

The Board of Directors has an Audit Committee, Compensation Committee, Corporate Governance Committee, Risk Management Committee, and Executive Committee. The Board of Directors has adopted written charters for each committee, except for the Executive Committee, which are posted on the Company's website ( www.dvcr.com ) and are available in print to any stockholder who requests a copy.

ITEM 1A. RISK FACTORS

There have been a number of material developments both within the Company and the long-term care industry. These developments have had and are likely to continue to have a material impact on us. This section summarizes these developments, as well as other risks that should be considered by our shareholders and prospective investors.

Risks Related to our Operations

We are substantially self-insured and have significant potential professional liability exposure.

The provision of health care services entails an inherent risk of liability. Participants in the health care industry are subject to an increasing number of lawsuits alleging malpractice, negligence, product liability or related legal theories, many of which involve large claims and significant defense costs. Like many other companies engaged in the long-term care profession in the United States, we have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. We expect to continue to be subject to such suits as a result of the nature of our business. See “Item 3. Legal Proceedings” for further descriptions of pending claims and see “Item 7. Management's Discussion and Analysis of Financial Condition - Accounting Policies and Judgments - Professional Liability and Other Self-Insurance Reserves” for discussion of our reserve for self-insured claims and of our ability to meet our anticipated cash needs.

We have professional liability insurance coverage for our nursing centers that, based on historical claims experience, is likely to be substantially less than the amount required to satisfy claims that are expected to be incurred.

We may have substantial adjustments to our accrual for professional liability claims which could cause significant changes in our net earnings.

Each year, we record adjustments to our accrual for self-insured risks associated with professional liability claims. While these adjustments to the accrual result in changes to reported expenses and income, they are not directly related to changes in cash because the accrual is not funded. These self-insurance reserves are assessed on a quarterly basis, with changes in estimated losses being recorded in the consolidated statements of operations in the period identified. Any increase in the accrual decreases income in the period, and any reduction in the accrual increases income during the period. Our actual professional liabilities may vary significantly from the accrual due to an increase in the number of claims asserted or claim costs in excess of estimates, and the amount of the accrual has and may continue to fluctuate by a material amount in any given quarter. For the years ended December 31, 2016 , 2015 and 2014 , we recorded professional liability expense of $ 8.5 million , $ 8.1 million and $ 7.2 million , respectively.

Our outstanding indebtedness is subject to various financial covenants and floating rates of interest which could be subject to fluctuations based on changing interest rates.

We have long-term indebtedness of $80.1 million at December 31, 2016 . Certain of our debt agreements contain various financial covenants, the most restrictive of which relate to minimum cash deposits, cash flow and debt service coverage ratios. As of December 31, 2016 , we were in compliance with these financial covenants. Our failure to comply with those covenants could result in an event of default, which, if not cured or waived, could result in the acceleration of some or all of our debts. Such non-compliance could result in a material adverse impact to our financial position, results of operations and cash flows. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for additional discussion of our covenants.

In connection with the refinancing transaction in February 2016 discussed in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,” we entered into an interest rate swap with respect to a portion of the mortgage loan to mitigate the floating interest rate risk of such borrowing. The interest rate swap converted the variable rate on our mortgage indebtedness to a fixed interest rate for the five year term of this indebtedness, decreasing our exposure to risks of variable rates of interest. While limiting our risk to increases in interest rates by utilizing the interest rate swap, we forgo benefits that might result from downward fluctuations in interest rates. We also are exposed to the risk that our counterpart to the swap agreement will default on its obligations.

Our accrual for professional liability claims is not funded, and if a material judgment is entered against us in any lawsuit, we may lack adequate cash to pay the judgment.

As of December 31, 2016 , we are engaged in 67 professional liability lawsuits. Although we work diligently to limit the cash required to settle and defend professional liability claims, a significant judgment entered against us in one or more legal actions could have a material adverse impact on our cash flows and could result in our being unable to meet all of our cash needs as they become due.

The U.S. Department of Justice has commenced a civil investigation of potential violations of the False Claims Act, which could adversely affect our operations and financial condition.

Our business is currently under investigation for potential violations of the False Claims Act (FCA). See Legal Proceedings for further information regarding this investigation. Any finding that we are not in compliance with these laws could require us to change our operations or could subject us to treble damages, penalties and/or make us ineligible to participate in certain government funded healthcare programs, any of which could in turn significantly harm our business and financial condition.

Our operational and strategic flexibility is limited due to the number of our centers that are leased from third parties.

A substantial majority of our centers are leased from third parties. The loss or deterioration of our relationship with any of our landlords may adversely affect our business. The terms of such leases generally require us to operate such centers as skilled nursing centers, and generally do not allow us to assign the lease to a third party without the applicable landlord’s consent. Therefore, our ability to divest such leased properties is limited, and we may be forced to continue operating such centers as skilled nursing centers even if doing so becomes unprofitable.

While we expect to renew or extend our leases in the normal course of business, there can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the conditions precedent to exercising any such renewal or extension, to the extent that such provisions exist in our leases. In addition, if we are unable to renew or extend any of our master leases, we may lose all of the facilities subject to that master lease agreement. If we are not able to renew or extend our leases at or prior to the end of the existing lease terms, or if the terms of such options are unfavorable or unacceptable to us, our business, financial condition and results of operation could be adversely affected.

Our failure to pay the rent or otherwise comply with the provisions of any of our lease agreements could result in an “event of default” under such lease agreement and also could result in a cross default under other master lease agreements and the agreements for our indebtedness. Upon an event of default, remedies available to our landlords generally include, without limitation, terminating such lease agreement, repossessing and reletting the leased properties and requiring us to remain liable for all obligations under such lease agreement, including the difference between the rent under such lease agreement and the rent payable as a result of reletting the leased properties, or requiring us to pay the net present value of the rent due for the balance of the term of such lease agreement. The exercise of such remedies would have a material adverse effect on our business, financial position, results of operations and liquidity.

Our failure to pay rent or otherwise comply with the provisions of any of our Master Lease Agreements could materially adversely affect our business, financial position, results of operations, and liquidity.

Many of our facilities are under a Master Lease Agreement. Our failure to pay the rent or otherwise comply with the provisions of any of our Master Lease Agreements would result in an “Event of Default” under such Master Lease Agreement and also could result in a default under the Credit Facilities and, if repayment of the borrowings under the Credit Facilities were accelerated, also under the indentures governing our outstanding notes. The exercise of remedies by any of our landlords would have a material adverse effect on our business, financial position, results of operations, and liquidity.

We are highly dependent on reimbursement by third-party payors and delays in reimbursement for any reason may cause liquidity problems.

Substantially all of our nursing center revenues are directly or indirectly dependent upon reimbursement from third-party payors, including the Medicare and Medicaid programs, and private insurers. For the year ended December 31, 2016 , our patient revenues from continuing operations derived from Medicaid, Medicare, Managed Care and private pay (including private insurers) sources were approximately 50.6% , 27.5 %, 6.8 %, and 15.1 %, respectively. Changes in the mix of our patients among Medicare, Medicaid, Managed Care and private pay categories and among different types of private pay sources may affect our net revenues and profitability. Our net revenues and profitability are also affected by the continuing efforts of all payors to contain or reduce the costs of health care. Efforts to impose reduced payments, greater discounts and more stringent cost controls by government and other payors are expected to continue.

The Federal Government makes frequent changes to the reimbursement provided under the Medicare program and future changes could significantly reduce the reimbursement we receive. Also, a number of state governments, including several of the states in which we operate, have announced projected budget shortfalls and/or deficit spending situations. Possible actions by these states include reductions of Medicaid reimbursement to providers such as us or the failure to increase Medicaid reimbursements to cover increased operating costs, or implementation of alternatives to long-term care, such as community and home-based services.

Any changes in reimbursement levels or in the timing of payments under Medicare, Medicaid or private pay programs and any changes in applicable government regulations could have a material adverse effect on our net revenues, net income (loss) and cash flows. We are unable to predict what reform proposals or reimbursement limitations will be adopted in the future or the effect such changes will have on our operations. We are limited in our ability to reduce the direct costs of providing care when decreases in reimbursement rates are imposed. No assurance can be given that such reforms will not have a material adverse effect on us. See “Item 1. Business - Government Regulation and Reimbursement.”

If we have information systems problems or payment or other issues arise with Medicare, Medicaid or other payors that affect the amount or timeliness of reimbursements, we may encounter delays in our payment cycle. Any significant payment timing delay could cause us to experience working capital shortages. As a result, working capital management, including prompt and diligent billing and collection, is an important factor in our consolidated results of operations and liquidity. Our working capital management procedures may not successfully mitigate the effects of any delays in our receipt of payments or reimbursements. Accordingly, such delays could have an adverse effect on our liquidity and financial condition.

We operate in an industry that is highly competitive .

The long-term care industry generally, and the nursing home business particularly, is highly competitive. We face direct competition for the acquisition of centers. In turn, our centers face competition for patients. Our ability to compete is based on several factors and include, but are not limited to building age, appearance, reputation, relationships with referral sources, availability of patients, survey history and CMS rankings. Some of our present and potential competitors are significantly larger and have or may obtain greater financial and marketing resources than we can. Some hospitals that provide long-term care services are also a potential source of competition. Certain of our competitors are operated by not-for-profit, non-taxpaying or governmental agencies that can finance capital expenditures on a tax exempt basis and receive funds and charitable contributions unavailable to us. In addition, we may encounter substantial competition from new market entrants. Consequently, there can be no assurance that we will not encounter increased competition in the future, which could limit our ability to attract patients or expand our business, and could materially and adversely affect our business or decrease our market share.

We may have difficulty attracting and retaining qualified nurses, therapists, healthcare professionals and other key personnel, which, along with a growing number of minimum wage and compensation related regulations, can increase our costs related to these employees.

Our team members are essential to our business. We rely on our ability to attract and retain qualified nurses, therapists and other healthcare professionals. The market for these key personnel is highly competitive, and we could experience significant increases in our operating costs due to shortages in their availability. Like other healthcare providers, we have at times experienced difficulties in attracting and retaining qualified personnel. We may continue to experience increases in our labor costs, primarily due to higher wages and greater benefits required to attract and retain qualified healthcare personnel, and such increases may adversely affect our profitability. Furthermore, while we attempt to manage overall labor costs in the most efficient way, our efforts to manage them through wage freezes and similar means may have limited effectiveness and may lead to increased turnover and other challenges.

Tight labor markets and high demand for such team members can contribute to high turnover among clinical professional staff. A shortage of qualified personnel at a facility could result in significant increases in labor costs and increased reliance on overtime and expensive temporary staffing agencies, and could otherwise adversely affect operations at the affected centers. If we are unable to attract and retain qualified professionals, our ability to adequately provide services to our residents and patients may decline and our ability to grow may be constrained.

Our cost of labor may be influenced by unanticipated factors in certain markets or, with respect to collective bargaining agreements that we are a party to, we may experience above-market increases. A substantial number of our team members are hourly team members whose wage rates are affected by increases in the federal or state minimum wage rate. As collective bargaining agreements are renegotiated or minimum wage rates increase we may need to increase the wages paid to team members. This may be applicable to not only minimum wage team members but also to team members at wage rates which are currently above the minimum wage.

The Department of Labor recently issued rule changes to the Fair Labor Standards Act that would increase the minimum salary threshold for team members exempt from overtime along with an automatic annual increase to this salary threshold. The future of these rule changes, as well as other potential changes, remains uncertain given the recent change in Presidential administrations. However, these rule changes could increase our cost of services provided.

Because we are largely funded by government programs, we do not have an ability to pass such wage increases through to revenue sources. Any such mandated wage increases could have a material adverse effect on our results of operations, liquidity and financial condition.

Possible changes in the acuity of residents and patients, as well as payor mix and payment methodologies, may significantly affect our profitability.

The sources and amount of our revenues are determined by a number of factors, including the occupancy rates of our facilities, the length of stay, the payor mix of residents and patients, rates of reimbursement among payors, and patient acuity. Changes in patient acuity as well as payor mix among private pay, Medicare, and Medicaid may significantly affect our profitability. In particular, any significant decrease in our population of high-acuity patients or any significant increase in our Medicaid population could have a material adverse effect on our business, financial position, results of operations, and liquidity, especially if state Medicaid programs continue to limit, or more aggressively seek limits on, reimbursement rates or service levels.

Our systems are subject to security breaches and other cybersecurity incidents.

While we maintain information technology security and safeguards, complex medical systems can be targeted for cyber attacks, and as a result, the potential exists for unauthorized parties to obtain access to our computer systems and networks. Such cyber attacks could result in the misappropriation of our patient information protected by privacy laws, private employee information, proprietary business information and technology or result in interruptions to our business. The reliability and security of our information technology infrastructure is critical to our business. To the extent that any disruptions or security breaches result in significant loss or damage to our data, or inappropriate disclosure of significant proprietary information, it could require notice to state and federal agencies of such a breach, cause damage to our reputation and affect our relationships with our patients, may result in civil and/or criminal fines and penalties or related class action litigation, any of which could have a material adverse effect on our business, results of operations and financial condition.

The success of previous and future acquisitions cannot be guaranteed and such acquisitions may consume substantial capital and other resources and could expose us to unforeseen liabilities and integration risks.

We have in the past and plan to in the future make investments in additional centers, whether by opening new centers or acquiring existing centers. Such acquisitions may involve significant cash expenditures, debt incurrence, operating losses and additional expenses that could have a material adverse effect on our financial position, results of operations and liquidity. Acquisitions involve numerous risks, including:


•	difficulties integrating acquired operations, personnel and accounting and information systems, or in realizing projected efficiencies and cost savings;


•	diversion of management's attention from other business concerns;


•	potential loss of key team members or customers of acquired companies;


•	entry into markets in which we may have limited or no experience;


•	increased indebtedness and reduced ability to access additional capital when needed;


•	assumption of unknown liabilities or regulatory issues of acquired companies, including failure to comply with healthcare regulations or to establish internal financial controls; and


•	straining of our resources, including internal controls relating to information and accounting systems, regulatory compliance, logistics and others.

Furthermore, certain of the foregoing risks could be exacerbated when combined with other growth measures that we may pursue.

Investing in our business initiatives and development could adversely impact our results of operations and financial condition.

We plan to invest in business initiatives and development that will increase our operating expenses. These initiatives may or may not be successful in growing our census or revenues. There is typically a time delay between incurring such expenses and the attaining of revenues and cash flows expected from these initiatives and development. As a result, our revenue and operating cash flow may not increase enough during a reporting period to cover these increased expenses. Such additional revenues may not materialize to the level we anticipate, if at all.

Disasters and similar events may seriously harm our business.

Natural and man-made disasters and similar events, including terrorist attacks and acts of nature such as hurricanes, tornados, earthquakes and wildfires, may cause damage or disruption to us, our employees and our centers, which could have an adverse impact on our patients and our business. In order to provide care for our patients, we are dependent on consistent and reliable delivery of food, pharmaceuticals, utilities and other goods to our centers, and the availability of employees to provide services at our centers. If the delivery of goods or the ability of employees to reach our centers were interrupted in any material respect due to a natural disaster or other reasons, it would have a significant impact on our centers and our business. Furthermore, the impact, or impending threat, of a natural disaster has in the past and may in the future require that we evacuate one or more centers, which would be costly and would involve risks, including potentially fatal risks, for the patients. The impact of disasters and similar events is inherently uncertain. Such events could harm our patients and employees, severely damage or destroy one or more of our centers, harm our business, reputation and financial performance, or otherwise cause our business to suffer in ways that we currently cannot predict.

New accounting pronouncements or new interpretations of existing standards could require us to make adjustments in our accounting policies that could affect our financial statements.

The Financial Accounting Standards Board, the SEC, or other accounting organizations or governmental entities issue new pronouncements or new interpretations of existing accounting standards that sometimes require us to change our accounting policies and procedures. Future pronouncements or interpretations could require us to change our policies or procedures and have a significant impact on our future financial statements.

Risks Related to Government Regulations

We are subject to significant government regulation.

The health care industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, protection of patient health information, reimbursement for patient services, quality of patient care and Medicare and Medicaid fraud and abuse. Various federal and state laws regulate relationships among providers of services, including employment or service contracts and investment relationships. The operation of long-term care centers and the provision of services are also subject to extensive federal, state, and local laws relating to, among other things, the adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, environmental compliance, compliance with the Americans with Disabilities Act, fire prevention and compliance with building codes.

Long-term care facilities are subject to periodic inspection to assure continued compliance with various standards and licensing requirements under state law, as well as with Medicare and Medicaid conditions of participation. The failure to obtain or renew any required regulatory approvals or licenses could adversely affect our growth and could prevent us from offering our existing or additional services. In addition, health care is an area of extensive and frequent regulatory change. Changes in the laws or new interpretations of existing laws can have a significant effect on methods and costs of doing business and amounts of payments received from governmental and other payors. Our operations could be adversely affected by, among other things, regulatory developments such as mandatory increases in the scope and quality of care to be afforded patients and revisions in licensing and certification standards. We attempt at all times to comply with all applicable laws; however, there can be no assurance that we will remain in compliance at all times with all applicable laws and regulations or that new legislation or administrative or judicial interpretation of existing laws or regulations will not have a material adverse effect on our operations or financial condition. Federal or state proceedings seeking to impose fines and penalties for violations of applicable laws and regulations, as well as federal and state changes in these laws and regulations, may negatively impact us. See “Item 1. Business - Government Regulation.” See also “Item 3. Legal Proceedings.”

The health care industry has been the subject of increased regulatory scrutiny recently.

The Office of Inspector General (“OIG”), the enforcement arm of the Medicare and Medicaid programs, formulates a formal work plan each year for nursing centers. The OIG's most recent work plan indicates that quality of care, assessment and monitoring, poorly performing nursing facilities, hospitalizations, criminal background checks, Medicare part B services, accuracy of nursing facilities Minimum Data, transparency of ownership, and civil monetary penalty funds will be the investigative focus in 2017 . We cannot predict the likelihood, scope or outcome of any such investigations on our centers.

We are subject to claims under the self-referral, false claims, and anti-kickback legislation.

Federal and state false claims act statutes provide a mechanism for private individuals and governmental entities to seek to recover significant sums for alleged violations of the federal and state laws governing reimbursement for services provided. At least one false claims act case is pending against us, and there can be no assurance that our operations will not be subject to review, scrutiny, penalties or enforcement actions under these laws, or that these laws will not change in the future. Violations of these laws may result in substantial damage awards, civil or criminal penalties for individuals or entities, including large civil monetary penalties and exclusion from participation in the Medicare or Medicaid programs. Such awards, exclusion or penalties, if applied to us, could have a material adverse effect on our financial position and profitability.

In the United States, various state and federal laws regulate the relationships between providers of health care services, physicians, and other clinicians. These self-referral laws impose restrictions on physician referrals for designated health services to entities with which they have financial relationships. These laws also prohibit the offering, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare or state health care program patients or patient care opportunities for the purchase, lease or order of any item or service that is covered by the Medicare and Medicaid programs. Federal and state laws prohibit the submission of false claims and other acts that are considered fraudulent, wasteful or abusive. Under the federal False Claims Act (FCA), actions against a provider can be initiated by the federal government or by a private party on behalf of the federal government. These private parties, who are often referred to as “qui tam relators” or “relators,” are entitled to share in any amounts recovered by the government. Both direct enforcement activity by the government and qui tam relator actions have increased significantly in recent years. The use of private enforcement actions against healthcare providers has increased dramatically, in part because the relators are entitled to share in a portion of any settlement or judgment.

A FCA violation occurs when a provider knowingly submits a claim for items or services not provided. The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the FCA by creating liability for knowingly retaining an overpayment received from the government and broadening protections for whistleblowers. The submission of false claims or the failure to timely repay overpayments may lead to the imposition of significant CMPs, significant criminal fines and imprisonment, and/or exclusion from participation in state and federally-funded healthcare programs, including the Medicare and Medicaid programs.

Allegations of poor quality of care can also lead to FCA actions under a theory of worthless services. Worthless services cases allege that although care was provided it was so deficient that it was tantamount to no service at all.

In recent years, prosecutors and relators are increasingly bringing FCA claims based on the implied certification theory as an expansion of the scope of the FCA. Under the implied certification theory, a violation of the FCA occurs when a provider’s request for payment implies a certification of compliance with the applicable statutes, regulations or contract provisions that are preconditions to payment. This development has increased the risk that a healthcare company will have to defend a false claims action, pay fines and treble damages or settlement amounts or be excluded from the federal and state healthcare programs as a result of an investigation arising out of the FCA. Many states have enacted similar laws providing for imposition of civil and criminal penalties for the filing of fraudulent claims.

Because we submit thousands of claims to Medicare each year, and there is a relatively long statute of limitations under the FCA, there is a risk that intentional, or even negligent or recklessly submitted claims that prove to be incorrect, or even billing errors, cost reporting errors or lapses in statutory or regulatory compliance with regard to the provision of healthcare services (including, without limitation the Anti-Kickback Statue and the federal self-referral law discussed above), could result in significant civil or criminal penalties against us. Any such penalties or allegations, whether valid or not, could have a significant impact on our business. To the extent that we, any of our centers through which we do business, or any of the owners or directors have a financial relationship with each other or with other health care entities providing services to long-term care patients, such relationships could be subject to increased scrutiny.

We are subject to laws governing the confidentiality of patient health information.

Both federal and state laws impose certain requirements regarding maintaining the confidentiality of patient health information. In particular, HIPAA rules and regulations require us to protect the medical records and other personal health information of our patients, limit our use of and ability to disclose such information except under certain circumstances, and give patients a right to access and amend their personal health information. A violation of HIPAA or any other federal or state laws regarding the confidentiality or use of such information could subject us to civil or criminal penalties, and could in turn damage our reputation, affect our ability to attract new patients, and thereby have a material adverse effect on our revenues, financial position, results of operations and cash flows.

Healthcare reform legislation could adversely affect our revenue and financial condition.

In recent years, there have been initiatives on the federal and state levels for comprehensive reforms affecting the availability, payment and reimbursement of healthcare services in the United States. In March 2010, significant legislation concerning health care and health insurance was passed which will significantly change the future of health care in the United States, including the Affordable Care Act (the “Affordable Care Act”), which has affected comprehensive health insurance reform, including the creation of health insurance exchanges, among other reforms. However, as has been widely publicized, the Affordable Care Act has been fraught with challenges. In addition, it is possible that changes in administration and policy, including the potential repeal of all or parts of the Affordable Care Act, resulting from the recent U.S. presidential election could result in additional proposals and continued developments with respect to healthcare reform. Significant changes to, or repeal of, the Affordable Care Act or other healthcare legislation could materially and adversely our business.

State efforts to regulate or deregulate the healthcare services industry or the construction or expansion of healthcare facilities could impair our ability to expand our operations, or could result in increased competition.

Some states require healthcare providers to obtain prior approval, known as a certificate of need, for:

• the purchase, construction or expansion of healthcare facilities;

• capital expenditures exceeding a prescribed amount; or

• changes in services or bed capacity.

In addition, other states that do not require certificates of need have effectively barred the expansion of existing facilities and the development of new ones by placing partial or complete moratoria on the number of new Medicaid beds they will certify in certain areas or in the entire state. Other states have established such stringent development standards and approval procedures for constructing new healthcare facilities that the construction of new facilities, or the expansion or renovation of existing facilities, may become cost prohibitive or extremely time-consuming. In addition, some states the acquisition of a facility being operated by a non-profit organization requires the approval of the state Attorney General.

Our ability to acquire or construct new facilities or expand or provide new services at existing facilities would be adversely affected if we are unable to obtain the necessary approvals, if there are changes in the standards applicable to those approvals, or if we experience delays and increased expenses associated with obtaining those approvals. We may not be able to obtain licensure, certificate of need approval, Medicaid certification, Attorney General approval or other necessary approvals for future expansion projects. Conversely, the elimination or reduction of state regulations that limit the construction, expansion or renovation of new or existing facilities could result in increased competition to us or result in overbuilding of facilities in some of our markets. If overbuilding in the healthcare industry in the markets in which we operate were to occur, it could reduce the occupancy rates of existing facilities and, in some cases, might reduce the private rates that we charge for our services.

Risks Related to our Common Stock

Our ability and intent to pay cash dividends in the future may be limited.

We currently pay a $0.055 quarterly dividend on our common shares, and while the Board of Directors intends to pay quarterly dividends, the Board will make the determination of the amount of future cash dividends, if any, to be declared and paid based on, among other things, our financial condition, funds from operations, the level of our capital expenditures and future business prospects. The Company is restricted by its debt agreements in its ability to pay dividends.

We have a number of policies in place that could be considered anti-takeover protections.

Our Certificate of Incorporation (the “Certificate”) provided for the classification of our Board into three classes, with each class of directors serving staggered terms of three years. Although the classification of our Board has been eliminated, all directors will not be up for election each year until the 2018 annual meeting. Our Certificate requires the approval of the holders of two-thirds of the outstanding shares to amend certain provisions of the Certificate. Section 203 of the Delaware General Corporate Law restricts the ability of a Delaware corporation to engage in any business combination with an interested shareholder. We are also authorized to issue up to 795,000 shares of preferred stock, the rights of which may be fixed by our Board without shareholder approval. Provisions in certain of our executive officers' employment agreements provide for post-termination compensation, including payment of amounts up to two times their annual salary, following certain changes in control (as defined in such agreements). Our stock incentive plans provide for the acceleration of the vesting of options in the event of certain changes in control (as defined in such plans). Certain changes in control

also constitute an event of default under our bank credit facility. The foregoing matters may, together or separately, have the effect of discouraging or making more difficult an acquisition or change of control of the company.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We own 17 and lease 59 long-term care centers as discussed in “Item 1 Business - Nursing Centers and Services.” See further details below.

Our current operations include 59 nursing centers subject to operating leases, including 35 owned by Omega, 20 owned by Golden Living and four owned by other parties. Effective April 1, 2015, Omega acquired Aviv REIT, who owned 12 of our centers at the time of acquisition, which subsequently are owned by Omega. In our role as lessee, we are responsible for the day-to-day operations of all operated centers. These responsibilities include recruiting, hiring and training all nursing and other personnel, and providing patient care, nutrition services, marketing, quality improvement, accounting, and data processing services for each center. The lease agreements pertaining to our 59 leased centers are “triple net” leases, requiring us to maintain the premises, provide insurance, pay taxes and pay for all utilities. The average remaining term of our lease agreements, including renewal options, is approximately 17 years. See the table below for a summary of owned and leased beds operated by the Company.



State	Centers	Leased Beds	Owned Beds	Total Operational Beds
Alabama	19	2,079	203	2,282
Florida	1	79	—	79
Indiana	1	172	—	172
Kansas	6	—	490	490
Kentucky	13	917	252	1,169
Mississippi	10	1,138	—	1,138
Missouri	3	455	—	455
Ohio	5	702	—	702
Tennessee	5	497	120	617
Texas	13	1,370	475	1,845
Total	76	7,409	1,540	8,949

Brentwood Support Center and Regional Offices

We lease approximately 29,000 square feet of office space in Brentwood, Tennessee that houses our executive offices, and centralized management support functions. Lease periods on these centers range up to three years. Regional executives for Kansas work from an office of approximately 1,500 square feet. We believe that our leased properties are adequate for our present needs and that suitable additional or replacement space will be available as required.

ITEM 3. LEGAL PROCEEDINGS

The provision of health care services entails an inherent risk of liability. Participants in the health care industry are subject to lawsuits alleging malpractice, negligence, violations of false claims acts, product liability, or related legal theories, many of which involve large claims and significant defense costs. Like many other companies engaged in the long-term care profession in the United States, we have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. It is expected that we will continue to be subject to such suits as a result of the nature of our business. Further, as with all health care providers, we are periodically subject to regulatory actions seeking fines and penalties for alleged violations of health care laws and are potentially subject to the increased scrutiny of regulators for issues related to compliance with health care fraud and abuse laws and with respect to the quality of care provided to residents of our center. Like other health care providers, in the ordinary course of our business, we are also subject to claims made by employees and other disputes and litigation arising from the conduct of our business.

As of December 31, 2016 , we are engaged in 67 professional liability lawsuits. Seven lawsuits are currently scheduled for trial or arbitration during the next twelve months, and it is expected that additional cases will be set for trial or hearing. The ultimate results of any of our professional liability claims and disputes cannot be predicted. We have limited, and sometimes no, professional liability insurance with regard to most of these claims. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.

In July 2013, the Company learned that the United States Attorney for the Middle District of Tennessee (DOJ) had commenced a civil investigation of potential violations of the False Claims Act (FCA).

In October 2014, the Company learned that the investigation was started by the filing under seal of a false claims action against the two centers that were the subject of the original civil investigative demand ("CID"). In connection with this matter, between July 2013 and early February 2016, the Company has received three civil investigative demands (a form of subpoena) for documents and information relating to our practices and policies for rehabilitation, and other services, our preadmission evaluation forms ("PAEs") required by TennCare and our Pre-Admission Screening and Resident Reviews ("PASRRs"). We have responded to those requests. The DOJ has also issued CID’s for testimony from current and former employees of the Company. The DOJ’s civil investigation of the Company’s practices and policies for rehabilitation now covers all of the Company’s centers, but thus far only documents from six of our centers have been requested.

In June 2016, the Company received an authorized investigative demand (a form of subpoena) for documents in connection with a criminal investigation by the DOJ related to our practices with respect to PAEs and PASRRs, and the Company has provided documents responsive to this subpoena and continues to provide additional information as requested. The Company cannot predict the outcome of these investigations or the related lawsuits, and the outcome could have a materially adverse effect on the Company, including the imposition of treble damages, criminal charges, fines, penalties and/or a corporate integrity agreement. The Company is committed to provide caring and professional services to its patients and residents in compliance with applicable laws and regulations.

In January 2009, a purported class action complaint was filed in the Circuit Court of Garland County, Arkansas against the Company and certain of its subsidiaries and Garland Nursing & Rehabilitation Center (the “Center”). The complaint alleges that the defendants breached their statutory and contractual obligations to the patients of the Center over the five-year period prior to the filing of the complaints. The lawsuit remains in its early stages and has not yet been certified by the court as a class action. The Company intends to defend the lawsuit vigorously.

We cannot currently predict with certainty the ultimate impact of any of the above cases on our financial condition, cash flows or results of operations. Our reserve for professional liability expenses does not include any amounts for the pending DOJ investigation or the purported class action against the Arkansas centers. An unfavorable outcome in any of these lawsuits or any of our professional liability actions, any regulatory action, any investigation or lawsuit alleging violations of fraud and abuse laws or of elderly abuse laws or any state or Federal False Claims Act case could subject us to fines, penalties and damages, including exclusion from the Medicare or Medicaid programs, and could have a material adverse impact on our financial condition, cash flows or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information. Our common stock is traded on the NASDAQ Capital Market and began trading there on September 12, 2006 under the symbol “AVCA.” Effective March 15, 2013, the Company changed its name from Advocat Inc. to Diversicare Healthcare Services, Inc. as a result of a merger of the Company and a wholly-owned subsidiary. In connection with the name change, the Company changed its NASDAQ ticker symbol from “AVCA” to “DVCR” effective with the market open on

Monday, March 18, 2013. The following table sets forth the high and low bid prices of our common stock, as reported by NASDAQ.com, for each quarter in 2016 and 2015 :



Period				High		Low		Dividends
2015	—	1 ^st	Quarter	$	13.95	$	8.46	$	0.055
2015	—	2 ^nd	Quarter	$	17.15	$	11.89	$	0.055
2015	—	3 ^rd	Quarter	$	13.00	$	8.14	$	0.055
2015	—	4 ^th	Quarter	$	10.59	$	6.45	$	0.055
2016	—	1 ^st	Quarter	$	9.95	$	6.75	$	0.055
2016	—	2 ^nd	Quarter	$	8.90	$	7.00	$	0.055
2016	—	3 ^rd	Quarter	$	10.07	$	6.41	$	0.055
2016	—	4 ^th	Quarter	$	12.82	$	9.98	$	0.055

Our common stock has been traded since May 10, 1994. On February 15, 2017 , the closing price for our common stock was $ 9.27 , as reported by NASDAQ.com.

Holders . On February 15, 2017 , there were approximately 264 holders of record. Most of our shareholders have their holdings in the street name of their broker/dealer.

Dividends . For each of the two most recent fiscal years, we have paid a quarterly dividend of $0.055 per common share. While the Board of Directors intends to continue to pay quarterly dividends, the Board will make the determination of the amount of future cash dividends, if any, to be declared and paid based on, among other things, the Company's financial condition, funds from operations, the level of its capital expenditures and its future business prospects. The Company is restricted by its debt agreements in its ability to pay dividends.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected financial data of Diversicare presented in the following table has been derived from our consolidated financial statements, and should be read in conjunction with the annual financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations. This selected financial data for all periods shown has been reclassified to present the effects of certain divestitures as discontinued operations.



	Year Ended December 31,
	2016			2015			2014			2013			2012
Statement of Operations Data				(in thousands, except per share amounts)
REVENUES:
Patient revenues, net	$	426,063		$	387,595		$	344,192		$	260,221		$	231,047
EXPENSES:
Operating	342,932			311,035			275,605			213,064			186,958
Lease	33,364			28,690			26,151			20,396			18,018
Professional liability	8,456			8,122			7,216			5,666			4,304
General and administrative	30,271			24,793			22,133			20,940			19,515
Depreciation and amortization	8,292			7,524			7,078			6,363			5,758
Lease termination costs	2,008			—			—			—			—
Restructuring	—			—			—			1,446			—
	425,323			380,164			338,183			267,875			234,553
OPERATING INCOME (LOSS)	740			7,431			6,009			(7,654		)	(3,506		)
OTHER INCOME (EXPENSE):
Equity in net income (losses) of investment in unconsolidated affiliate	273			339			(5		)	(183		)	(280		)
Gain on sale of investment in unconsolidated affiliate	1,366			—			—			—			—
Interest expense, net	(4,802		)	(4,102		)	(3,697		)	(3,032		)	(2,232		)
Debt retirement costs	(351		)	—			—			(320		)	—
	(3,514		)	(3,763		)	(3,702		)	(3,535		)	(2,512		)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(2,774		)	3,668			2,307			(11,189		)	(6,018		)
BENEFIT (PROVISION) FOR INCOME TAXES	1,030			(916		)	(857		)	4,196			2,147
INCOME (LOSS) FROM CONTINUING OPERATIONS	(1,744		)	2,752			1,450			(6,993		)	(3,871		)
DISCONTINUED OPERATIONS, net of taxes	(67		)	(1,128		)	3,258			(1,469		)	951
NET INCOME (LOSS)	$	(1,811	)	$	1,624		$	4,708		$	(8,462	)	$	(2,920	)
INCOME (LOSS) PER COMMON SHARE:
Basic
Continuing operations	$	(0.28	)	$	0.45		$	0.21		$	(1.26	)	$	(0.74	)
Discontinued operations	(0.01		)	(0.18		)	0.54			(0.25		)	0.16
Net income (loss) per common share	$	(0.29	)	$	0.27		$	0.75		$	(1.51	)	$	(0.58	)
Diluted
Continuing operations	$	(0.28	)	$	0.44		$	0.20		(1.26		)	(0.74		)
Discontinued operations	(0.01		)	(0.18		)	0.52			(0.25		)	0.16
Net income (loss) per common share	$	(0.29	)	$	0.26		$	0.72		$	(1.51	)	$	(0.58	)
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.22		$	0.22		$	0.22		$	0.22		$	0.22
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	6,199			6,100			6,011			5,899			5,821
Diluted	6,199			6,315			6,197			5,899			5,821



	December 31,
	2016		2015		2014		2013		2012
Balance Sheet Data	(in thousands)
Working capital	$	21,165	$	13,052	$	8,797	$	8,044	$	15,663
Total assets	$	163,051	$	137,084	$	129,089	$	137,744	$	114,963
Long-term debt and capitalized lease obligations, including current portion	$	82,133	$	60,867	$	48,265	$	53,577	$	29,462
Preferred Stock - Series C	$	—	$	—	$	—	$	4,918	$	4,918
Total Shareholders' Equity of Diversicare Healthcare Services, Inc.	$	11,420	$	13,267	$	11,754	$	8,129	$	17,178
Total Shareholders' Equity	$	11,420	$	13,267	$	11,754	$	9,566	$	18,751

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Diversicare Healthcare Services, Inc. provides long-term care services to nursing center patients in ten states, primarily in the Southeast, Midwest and Southwest. Our centers provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care centers, we offer a variety of comprehensive rehabilitation services as well as nutritional support services. As of December 31, 2016 , our continuing operations consist of 76 nursing centers with 8,453 licensed skilled nursing beds and 496 assisted-living and other residential beds. We own 17 and lease 59 of our nursing centers included in continuing operations. The Company's continuing operations include centers in Alabama, Florida, Indiana, Kansas, Kentucky, Mississippi, Missouri, Ohio, Tennessee, and Texas.

Strategic Operating Initiatives

We identified several key strategic objectives to increase shareholder value through improved operations and business development. These strategic operating initiatives include: improving skilled mix in our nursing centers, improving our average Medicare rate, implementing and maintaining Electronic Medical Records (“EMR”) to improve Medicaid capture, and completing strategic acquisitions. We have experienced success in these initiatives and expect to continue to build on these improvements.

Improving skilled mix and average Medicare rate:

Our strategic operating initiatives of improving our skilled mix and our average Medicare rate required investing in nursing and clinical care to treat more acute patients along with nursing center-based marketing representatives to attract these patients. These initiatives developed referral and Managed Care relationships that have attracted and are expected to continue to attract payor sources for patients covered by Medicare and Managed Care. The Company's skilled mix for the periods ending December 31, 2016 , 2015 and 2014 was 15.2% , 16.2% and 16.3% , respectively. The graph below illustrates our success with increasing our average Medicare rate per day:

Implementing Electronic Medical Records to improve Medicaid acuity capture:

As another part of our strategic operating initiatives, we implemented EMR to improve Medicaid acuity capture, primarily in our states where the Medicaid payments are acuity based. We completed the implementation of EMR in all our nursing centers in December 2011, on time and under budget, and since implementation, have increased our average Medicaid rate despite rate cuts in certain acuity based states by accurate and timely capture of care delivery. The graph below illustrates our success with increasing our average Medicaid rate per day since implementation:

Completing strategic transactions:

Our strategic operating initiatives include a renewed focus on completing strategic acquisitions. We continue to pursue and investigate opportunities to acquire, lease or develop new centers, focusing primarily on opportunities within our existing geographic areas of operation. We expect to announce additional development projects in the near future.

On October 1, 2016 and November 1, 2016, we assumed the operations of ten centers in Mississippi and 12 centers in Alabama, respectively, which is further discussed in Note 2 to the consolidated financial statements. The completion of this transaction brings the Company's operations to 76 nursing centers with 8,453 skilled nursings beds. These centers are expected to contribute in excess of $185 million in annual revenues.

Divestitures

As part of our strategic efforts, we have also performed thorough analysis on our existing centers in order to determine whether continuing operations within certain markets or regions was in line with the short-term and long-term strategy of the business. As a result, in May 2016, we ceased operations at our Avon, Ohio, facility, thus terminating our lease with Avon Ohio, LLC. This transaction was not reported as a discontinued operation as described in Note 2 to the consolidated financial statements. Additionally, in 2014, we disposed of all operations within the state of West Virginia, including the sale of Rose Terrace. More information on this divestiture is included below.

Effective July 1, 2014, the Company completed the transaction with Rose Terrace Acq., LLC to sell Rose Terrace, a 90-bed skilled nursing center in Culloden, West Virginia for a sales price of $16,500,000 . The Company also entered into the Fifteenth Amendment to Consolidated Amended and Restated Master Lease with Omega Health Investors, Inc. ("Omega") to terminate the lease only with respect to two other skilled nursing centers in West Virginia, and concurrently entered into an operations transfer agreement with American Health Care Management, LLC, an affiliate of the purchaser with respect to two other skilled nursing centers located in Danville and Ivydale, West Virginia. The amendment effectively reduced the annual rent payments due under the Master Lease by $1,900,000. Upon completion of the transaction, Diversicare no longer operates any skilled nursing centers in the state of West Virginia. In conjunction with the closing of the sale, the Company paid the balance of the $8,000,000 mortgage loan outstanding on the Rose Terrace center. The Company will continue to defend, and make cash payments related to professional liability claims asserted against these nursing centers for events occurring prior to July 1, 2014.

Basis of Financial Statements.

Our patient revenues consist of the fees charged for the care of patients in the nursing centers we own and lease. Our operating expenses include the costs, other than lease, depreciation and amortization expenses, incurred in the operation of the nursing centers we own and lease. Our general and administrative expenses consist of the costs of the corporate office and regional support functions. Our interest, depreciation and amortization expenses include all such expenses across the range of our operations.

Selected Financial and Operating Data

The following table summarizes the Diversicare statements of continuing operations for the years ended December 31, 2016 , 2015 and 2014 , and sets forth this data as a percentage of revenues for the same year:



	Year Ended December 31,
	(Dollars in thousands)
	2016					2015					2014
Revenues:
Patient revenues, net	$	426,063		100.0	%	$	387,595		100.0	%	$	344,192		100.0	%
Expenses:
Operating	342,932			80.5	%	311,035			80.2	%	275,605			80.1	%
Lease	33,364			7.8	%	28,690			7.4	%	26,151			7.6	%
Professional liability	8,456			2.0	%	8,122			2.1	%	7,216			2.1	%
General & administrative	30,271			7.1	%	24,793			6.4	%	22,133			6.4	%
Depreciation and amortization	8,292			1.9	%	7,524			1.9	%	7,078			2.1	%
Lease termination costs	2,008			0.5	%	—			—	%	—			—	%
	425,323			99.8	%	380,164			98.0	%	338,183			98.3	%
Operating income (loss)	740			0.2	%	7,431			2.0	%	6,009			1.7	%
Other income (expense):
Equity in net losses of unconsolidated affiliate	273			0.1	%	339			0.1	%	(5		)	—	%
Gain on sale of unconsolidated affiliate	1,366			0.3	%	—			—	%	—			—	%
Interest expense, net	(4,802		)	(1.1	)%	(4,102		)	(1.1	)%	(3,697		)	(1.1	)%
Debt retirement costs	(351		)	(0.1	)%	—			—	%	—			—	%
	(3,514		)	(0.8	)%	(3,763		)	(1.0	)%	(3,702		)	(1.1	)%
Income (loss) from continuing operations before income taxes	(2,774		)	(0.6	)%	3,668			1.0	%	2,307			0.6	%
Benefit (provision) for income taxes	1,030			0.2	%	(916		)	(0.2	)%	(857		)	(0.2	)%
Income (loss) from continuing operations	$	(1,744	)	(0.4	)%	$	2,752		0.8	%	$	1,450		0.4	%

The following table presents data about the centers we operated as part of our continuing operations as of the dates:



	December 31,
	2016	2015	2014
Licensed Nursing Center Beds:
Owned	1,504	1,370	1,220
Leased	6,949	4,690	4,605
Total	8,453	6,060	5,825
Facilities:
Owned	17	15	13
Leased	59	40	39
Total	76	55	52

Critical Accounting Policies and Judgments

A “critical accounting policy” is one which is both important to the understanding of our financial condition and results of operations and requires management's most difficult, subjective or complex judgments, often of the need to make estimates about the effect of matters that are inherently uncertain. Actual results could differ from those estimates and cause our reported net income (loss) to vary significantly from period to period. Our accounting policies that fit this definition include the following:

Revenues

Patient Revenues, Net

The fees we charge patients in our nursing centers are recorded on an accrual basis. These rates are contractually adjusted with respect to individuals receiving benefits under federal and state-funded programs and other third-party payors. Our net revenues are derived substantially from Medicare, Medicaid and other government programs (approximately 78.1% , 77.6% and 78.0% for 2016 , 2015 , and 2014 , respectively). Medicare intermediaries make retroactive adjustments based on changes in allowed claims. In addition, certain of the states in which we operate require complicated detailed cost reports which are subject to review and adjustments. In the opinion of management, adequate provision has been made for adjustments that may result from such reviews. Retroactive adjustments, if any, are recorded when objectively determinable, generally within three years of the close of a reimbursement year depending upon the timing of appeals and third-party settlement reviews or audits.

Allowance for Doubtful Accounts

We evaluate the collectibility of our accounts receivable by reviewing current aging summaries of accounts receivable, historical collections data and other factors. As a percentage of revenue, our provision for doubtful accounts was approximately 1.7% , 1.9% , and 1.7% for 2016 , 2015 , and 2014 , respectively. Historical bad debts have generally resulted from uncollectible private pay balances, some uncollectible coinsurance and deductibles and other factors. Receivables that are deemed to be uncollectible are written off.

Professional Liability and Other Self-Insurance Reserves

Accrual for Professional and General Liability Claims

The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a wholly-owned, consolidated offshore limited purpose insurance subsidiary, SHC Risk Carriers, Inc. (“SHC”), which has issued a policy insuring claims made against all of the Company's nursing centers in Florida and Tennessee, the Company’s formerly operated Arkansas and West Virginia centers, and several of the Company’s nursing centers in Alabama, Kentucky, Ohio, and Texas. The insurance coverage provided for these centers under the SHC policy include coverage limits of $500,000 or $1,000,000 per medical incident with a sublimit per center of $1,000,000 and total annual aggregate policy limits of $5,000,000 . All other centers within the Company’s portfolio are covered through various commercial insurance policies which provide coverage limits of $1,000,000 per claim and have sublimits of $3,000,000 per center, with varying aggregate policy limits and deductibles.

Because our actual liability for existing and anticipated professional liability and general liability claims will exceed our limited insurance coverage, we have recorded total liabilities for reported professional liability claims and estimates for incurred but unreported claims of $20.0 million as of December 31, 2016 , including $1.4 million for settlements that are expected to be paid in 2017 , estimates of liability for incurred but not reported claims, estimates of liability for reported but unresolved claims, and estimates of related legal costs incurred and expected to be incurred. All losses are projected on an undiscounted basis.

The Company evaluates the adequacy of this liability on a quarterly basis. Semi-annually, the Company retains a third-party actuarial firm to assist in the evaluation of this reserve. Since May 2012, Merlinos & Associates, Inc. (“Merlinos”) has assisted management in the preparation of the appropriate accrual for incurred but not reported general and professional liability claims based on data furnished as of May 31 and November 30 of each year. Merlinos primarily utilizes historical data regarding the frequency and cost of the Company's past claims over a multi-year period, industry data and information regarding the number of occupied beds to develop its estimates of the Company's ultimate professional liability cost for current periods.

On a quarterly basis, we obtain reports of asserted claims and lawsuits from our insurers and a third party claims administrator. These reports contain information relevant to the liability actually incurred to date with that claim as well as the third-party administrator's estimate of the anticipated total cost of the claim. This information is reviewed by us quarterly and provided to the actuary semi-annually. We use this information to determine the timing of claims reporting and the development of reserves and compare the information obtained to our previously recorded estimates of liability. Based on the actual claim information obtained, on the semi-annual estimates received from the actuary and on estimates regarding the number and cost of additional claims anticipated in the future, the reserve estimate for a particular period may be revised upward or downward on a quarterly basis. Final determination of our actual liability for claims incurred in any given period is a process that takes years.

The Company's cash expenditures for self-insured professional liability costs from continuing operations were $4.5 million , $3.3 million and $4.8 million for the years ended December 31, 2016 , 2015 and 2014 , respectively.

Although we retain a third-party actuarial firm to assist us, professional and general liability claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. Professional liability cases have a long cycle from the date of an incident to the date a case is resolved, and final determination of our actual liability for claims incurred in any given period is a process that takes years. As a result, our actual liabilities may vary significantly from the accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given quarter due to the significance of judgments and estimates.

Professional liability costs are material to our financial position, and changes in estimates, as well as differences between estimates and the ultimate amount of loss, may cause a material fluctuation in our reported results of operations. Our professional liability expense was $8.5 million , $8.1 million and $7.2 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. These amounts are material in relation to our reported income (loss) from continuing operations for the related periods of $(1.7) million , $2.8 million and $1.5 million , respectively. The total liability recorded at December 31, 2016 was $20.0 million , compared to current assets of $79.3 million and total assets of $163.1 million .

Accrual for Other Self-Insured Claim s

With respect to workers' compensation insurance, substantially all of our employees became covered under either an indemnity insurance plan or state-sponsored programs in May 1997. We are completely self-insured for workers' compensation exposures prior to May 1997. We have been and remain a non-subscriber to the Texas workers' compensation system and are, therefore, completely self-insured for employee injuries with respect to our Texas operations. From June 30, 2003 until June 30, 2007, our workers' compensation insurance programs provided coverage for claims incurred with premium adjustments depending on incurred losses. For the period from July 1, 2007 until June 30, 2008, the Company is completely self-insured for workers' compensation exposure. For the period from July 1, 2008 through December 31, 2016 , we are covered by a prefunded deductible policy. Under this policy, we are self-insured for the first $500,000 per claim, subject to an aggregate maximum of $3,000,000 . We fund a loss fund account with the insurer to pay for claims below the deductible. We account for premium expense under this policy based on its estimate of the level of claims subject to the policy deductibles expected to be incurred.

We are self-insured for health insurance benefits for certain employees and dependents for amounts up to $175,000 per individual annually. We provide reserves for the settlement of outstanding self-insured health claims at amounts believed to be adequate, based on known claims and estimates of unknown claims based on historical information. The differences between actual settlements and reserves are included in expense in the period finalized. Our reserves for health insurance benefits can fluctuate materially from one year to the next depending on the number of significant health issues of our covered employees and their dependents.

Asset Impairment

We evaluate our property, equipment and other long-lived assets on a quarterly basis to determine if facts and circumstances suggest that the assets may be impaired or that the estimated depreciable life of the asset may need to be changed for significant physical changes in the property, or significant adverse changes in general economic conditions, and significant deteriorations of the underlying cash flows or fair values of the property if impairment indicators exist. The need to recognize impairment is based on estimated undiscounted future cash flows from a property compared to the carrying value of that property. If recognition of impairment is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the property.

No impairment of long lived assets was recognized during 2016 , 2015 , or 2014 . If our estimates or assumptions with respect to a property change in the future, we may be required to record additional impairment charges for our assets.

Business Combinations

For business combination transactions, we recognize and measure the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, as well as the goodwill acquired or gain recognized in a bargain purchase, and we make certain valuations to determine the fair value of assets acquired and the liabilities assumed. These valuations are subject to retroactive adjustment during the twelve-month period subsequent to the acquisition date. Such valuations require us to make significant estimates, judgments and assumptions, including projections of future events and operating performance.

Stock-Based Compensation

We recognize compensation cost for all share-based payments granted on a straight-line basis over the vesting period. We calculated the recognized and unrecognized stock-based compensation for options and stock-only stock appreciation rights ("SOSARs")

using the Black-Scholes-Merton option valuation method, which requires us to use certain key assumptions to develop the fair value estimates. These key assumptions include expected volatility, risk-free interest rate, expected dividends and expected term. For restricted shares, we utilize the market price at the grant date in order to calculate the stock-based compensation expense to be recognized during the vesting period. During the years ended December 31, 2016 , 2015 , and 2014 , we recorded charges of approximately $1.0 million , $1.2 million and $0.6 million in stock-based compensation, respectively. Stock-based compensation expense is a non-cash expense and such amounts are included as a component of general and administrative expense or operating expense based upon the classification of cash compensation paid to the related employees.

Income Taxes

We determine deferred tax assets and liabilities based upon differences between financial reporting and tax bases of assets and liabilities and measure them using the enacted tax laws that will be in effect when the differences are expected to reverse. We maintain a valuation allowance of approximately $(0.7) million to reduce the deferred tax assets to amounts we believe can be realized on a more likely than not basis in accordance with generally accepted accounting principles. In future periods, we will continue to assess the need for and adequacy of the remaining valuation allowance. We follow the relevant guidance found in the FASB codification, ASC 740: Accounting for Uncertainty in Income Taxes . The guidance provides information and procedures for financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns.

Contractual Obligations and Commercial Commitments

We have certain contractual obligations of continuing operations as of December 31, 2016 , summarized by the period in which payment is due, as follows (dollar amounts in thousands):



Contractual Obligations	Total		Less than 1 year		1 to 3 Years		3 to 5 Years		After 5 Years
Long-term debt obligations ⁽¹⁾	$	95,263	$	10,786	$	20,889	$	63,588	$	—
Settlement obligations ⁽²⁾	1,398		1,398		—		—		—
Elimination of Preferred Stock Conversion feature ⁽³⁾	1,202		687		515		—		—
Operating leases ⁽⁴⁾	1,131,816		57,051		117,240		121,423		836,102
Required capital expenditures under operating leases ⁽⁵⁾	13,260		1,379		2,736		2,720		6,425
Total	$	1,242,939	$	71,301	$	141,380	$	187,731	$	842,527

(1)

Long-term debt obligations include scheduled future payments of principal and interest of long-term debt and amounts outstanding on our capital lease obligations. Our long-term debt obligations increased $20.6 million between December 31, 2015 and December 31, 2016 , which is related to assumption of operations for the Golden Living centers and our Amended and Restated Credit agreements. See Note 6, "Long-Term Debt and Interest Rate Swap," to the consolidated financial statements included in this report for additional information.


(2)	Settlement obligations relate to professional liability cases that are expected to be paid within the next twelve months. The professional liabilities are included in our current portion of self-insurance reserves.


(3)	Payments to Omega Health Investors ("Omega"), from whom we lease 35 nursing centers, for the elimination of the preferred stock conversion feature in connection with restructuring the preferred stock and master lease agreements. Monthly payments of approximately $57,000 will be made through the end of the initial lease period that ends in September 2018.


(4)	Represents lease payments under our operating lease agreements. Assumes all renewals periods are enacted. Our operating lease obligations increased $558.9 million between December 31, 2015 and December 31, 2016 , which is related to our assumption of the Golden Living centers.


(5)	Includes annual expenditure requirements under operating leases. Our required capital expenditures increased $10.1 million between December 31, 2015 and December 31, 2016 , which is related to our assumption of the Golden Living centers.

We have employment agreements with certain members of management that provide for the payment to these members of amounts up to two times their annual salary in the event of a termination without cause, a constructive discharge (as defined), or upon a change of control of the Company (as defined). The maximum contingent liability under these agreements is approximately $1.8 million as of December 31, 2016 . The terms of such agreements are for one year and automatically renew for one year if not terminated by us or the employee. In addition, upon the occurrence of any triggering event, those certain members of management may elect to require that we purchase equity awards granted to them for a purchase price equal to the difference in the fair market value of our common stock at the date of termination versus the stated equity award exercise price. Based on the closing price of

our common stock on December 31, 2016 , there is $0.5 million in contingent liabilities for the repurchase of the equity grants. No amounts have been accrued for these contingent liabilities.

Results of Operations

As discussed in the overview at the beginning of Management's Discussion and Analysis of Financial Condition and Results of Operations, we have completed certain divestitures, acquisitions and entered several new lease agreements. We have reclassified our Consolidated Financial Statements to present certain divestitures as discontinued operations for all periods presented.



(in thousands)	Year Ended December 31,
	2016			2015			Change			%
PATIENT REVENUES, net	$	426,063		$	387,595		$	38,468		9.9	%
EXPENSES:
Operating	342,932			311,035			31,897			10.3	%
Lease	33,364			28,690			4,674			16.3	%
Professional liability	8,456			8,122			334			4.1	%
General and administrative	30,271			24,793			5,478			22.1	%
Depreciation and amortization	8,292			7,524			768			10.2	%
Lease termination costs	2,008			—			2,008			100.0	%
Total expenses	425,323			380,164			45,159			11.9	%
OPERATING INCOME	740			7,431			(6,691		)	(90.0	)%
OTHER INCOME (EXPENSE):
Equity in net income (losses) of investment in unconsolidated affiliate	273			339			(66		)	(19.5	)%
Gain on sale of investment in unconsolidated affiliate	1,366			—			1,366			100.0	%
Interest expense, net	(4,802		)	(4,102		)	(700		)	(17.1	)%
Debt retirement costs	(351		)	—			(351		)	(100.0	)%
	(3,514		)	(3,763		)	249			6.6	%
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(2,774		)	3,668			(6,442		)	(175.6	)%
BENEFIT (PROVISION) FOR INCOME TAXES	1,030			(916		)	1,946			212.4	%
INCOME (LOSS) FROM CONTINUING OPERATIONS	$	(1,744	)	$	2,752		$	(4,496	)	(163.4	)%



(in thousands)	Year Ended December 31,
	2015			2014			Change			%
PATIENT REVENUES, net	$	387,595		$	344,192		$	43,403		12.6	%
EXPENSES:
Operating	311,035			275,605			35,430			12.9	%
Lease	28,690			26,151			2,539			9.7	%
Professional liability	8,122			7,216			906			12.6	%
General and administrative	24,793			22,133			2,660			12.0	%
Depreciation and amortization	7,524			7,078			446			6.3	%
Total expenses	380,164			338,183			41,981			12.4	%
OPERATING INCOME (LOSS)	7,431			6,009			1,422			23.7	%
OTHER EXPENSE:
Equity in net losses of investee	339			(5		)	344			6,880.0	%
Interest expense, net	(4,102		)	(3,697		)	(405		)	(11.0	)%
	(3,763		)	(3,702		)	(61		)	(1.6	)%
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	3,668			2,307			1,361			59.0	%
PROVISION FOR INCOME TAXES	(916		)	(857		)	(59		)	(6.9	)%
INCOME FROM CONTINUING OPERATIONS	$	2,752		$	1,450		$	1,302		89.8	%

Year Ended December 31, 2016 Compared With Year Ended December 31, 2015

Patient Revenues

Patient revenues were $426.1 million in 2016 and $387.6 million in 2015 , an increase of $38.5 million or 9.9% . This increase is primarily attributable to the acquisition of Golden Living operations in Alabama and Mississippi during the fourth quarter of 2016 . The following table summarizes the revenue increases attributable to our portfolio growth (in thousands):



	Year Ended December 31,
	2016		2015		Change
Same-store revenue	$	372,452	$	376,497	$	(4,045	)
2015 acquisition revenue	16,438		11,098		5,340
2016 acquisition revenue	37,173		—		37,173
Total revenue	$	426,063	$	387,595	38,468

The overall increase in revenue of $38.5 million is primarily attributable to revenue contributions from the acquisition of Golden Living operations in Alabama and Mississippi during the fourth quarter of 2016 of $37.2 million . Additionally, the 2015 acquisitions experienced an incremental increase in revenues of $5.3 million as a result of having a full year in operations during 2016 . The increase from the acquisition activity was partially offset by a decrease in same-store revenue of $4.0 million which is explained in more detail below.

The following table summarizes key revenue and census statistics for continuing operations for each period:



	Year Ended December 31,
	2016			2015
Skilled nursing occupancy	78.1		%	77.1		%
As a percent of total census:
Medicaid census	68.1		%	67.1		%
Medicare census	11.7		%	12.5		%
Managed Care census	3.5		%	3.7		%
As a percent of total revenues:
Medicaid revenues	50.6		%	48.6		%
Medicare revenues	27.5		%	29.0		%
Managed Care revenues	6.8		%	7.2		%
Average rate per day:
Medicare	$	456.30		$	455.24
Medicaid	$	169.91		$	166.16
Managed Care	$	385.71		$	389.73

The average Medicaid rate per patient day for same-store nursing centers in 2016 increased 1.2% compared to 2015 , resulting in an increase in revenue of $2.2 million . This average rate per day for Medicaid patients is the result of rate increases in certain states and increasing patient acuity levels. The average Medicare rate per patient day for same-store nursing centers in 2016 increased 1.0% compared to 2015 , resulting in an increase in revenue of $0.9 million also related to our ability to attract and provide care for patients with increased acuity levels. Same-store Private payors rate per patient day for 2016 also experienced favorable results compared to 2015 resulting in a $1.0 million increase in revenue.

Our total average daily census increased by approximately 9.4% for the full portfolio compared to 2015 on a consolidated basis, but was primarily attributable to the aforementioned acquisition activity. On a same-store basis, our Medicare and Medicaid average daily census for 2016 decreased compared to 2015 , resulting in decreases in revenue of $7.5 million and $0.8 million , respectively.

Operating Expense

Operating expense increased to $342.9 million in 2016 from $311.0 million in 2015 , driven primarily by the $28.0 million in operating costs at the Golden Living nursing centers added in 2016 , and $3.6 million incremental increase from the centers acquired in 2015 due to a full year of operations. Operating expense increased to 80.5% of revenue in 2016 , compared to 80.2% of revenue in 2015 .



	Year Ended December 31,
	2016		2015		Change
Same-store operating expenses	$	301,991	$	301,720	$	271
2015 acquisition operating expenses	12,953		9,315		3,638
2016 acquisition operating expenses	27,988		—		27,988
Total operating expenses	$	342,932	$	311,035	31,897

The largest component of operating expenses is wages, which increased to $199.6 million in 2016 from $180.8 million in 2015 , an increase of $18.8 million, or 10.4% . On a same-store basis, wages were controlled and increased by $0.4 million to $175.8 million in 2016 from $175.4 million in 2015 , which is a direct result from our decrease in same-store revenues during 2016 .

Other factors driving the fluctuation in operating expenses at the same-store nursing centers include an increase in health insurance premiums by $1.2 million, which was offset by a $1.2 million decrease in nursing and ancillary related expenses. Bad debt expenses decreased by $0.3 million. This fluctuation was driven significantly by the growth in Medicare and Medicaid patients undergoing the initial qualification process.

Lease Expense

Lease expense increased to $33.4 million in 2016 from $28.7 million in 2015 , an increase of $4.7 million , or 16.3% . The increase in lease expense was driven by $5.7 million from the assumption of the Golden Living centers in the fourth quarter of 2016 . This was slightly offset from the purchase of Clinton and Hutchinson in February 2016 , and the termination of the Avon, Ohio lease in May 2016 .

Professional Liability

Professional liability expense was $8.5 million in 2016 compared to $8.1 million in 2015 , an increase of $0.4 million, or 4.1% . As centers have been acquired in 2015 and 2016 , the Company has accessed commercial insurance markets, which accounts for a significant portion of the growth in professional liability expense in the current year. We were engaged in 67 professional liability lawsuits as of December 31, 2016 , compared to 55 as of December 31, 2015 . Our cash expenditures for professional liability costs of continuing operations were $4.5 million and $3.3 million for 2016 and 2015 , respectively. Professional liability expense and cash expenditures fluctuate from year to year based respectively on the results of our third-party professional liability actuarial studies, the premium costs of purchased insurance, and on the costs incurred in defending and settling existing claims. See “Liquidity and Capital Resources” for further discussion of the accrual for professional liability.

General and Administrative Expense

General and administrative expenses were approximately $30.3 million in 2016 compared to $24.8 million in 2015 , an increase of $5.5 million , or 22.1% . The overall increase in general and administrative expenses were attributable to a $1.6 million increase in salaries and related expenses associated with continued growth at the regional level, as well as additional corporate infrastructure to support the on-going growth of the portfolio. Legal and consulting fees experienced an increase of $1.2 million and $1.3 million, respectively, related to regulatory and acquisition expenses.

Depreciation and Amortization

Depreciation and amortization expense was approximately $8.3 million in 2016 and $7.5 million in 2015 . The increase in 2016 is primarily due to $0.4 million of depreciation associated with the purchases of Hutchinson and Clinton in February 2016. Additionally, the Company incurred an increase of $0.3 million in depreciation and amortization expenses related to the assumed Golden Living operations in the fourth quarter of 2016.

Lease termination costs

Lease termination costs were $2.0 million in 2016 due to the termination of the Avon, Ohio operating lease in May 2016.

Gain on sale of investment in unconsolidated affiliate

Gain on the sale of the pharmacy joint venture was $1.4 million , which occurred in the fourth quarter of 2016 . This transaction also resulted in an immaterial gain contingency, which has not been recorded and income has not been recognized.

Interest Expense, Net

Interest expense has increased to $4.8 million in 2016 compared to $4.1 million in 2015 , an increase of $0.7 million . The increase was primarily attributable to higher debt balances in 2016 as a result of higher outstanding borrowings on the revolving credit facility from the purchase of Hutchinson and Clinton during the first quarter of 2016 , as well as a result of the change in ownership processes for the newly acquired Golden Living centers.

Debt retirement costs

Debt retirement costs were $0.4 million in 2016 , which relates to the write off of our term loan deferred financing costs, as a result of our debt refinance that took place in February 2016.

Income (loss) from Continuing Operations before Income Taxes; Income (loss) from Continuing Operations per Common Share

As a result of the above, continuing operations reported a loss before taxes of $2.8 million in 2016 , as compared to income of $3.7 million in 2015 . The benefit for income taxes was $1.0 million in 2016 , an effective rate of 37.1% and the provision for income taxes was $0.9 million in 2015 , an effective rate of 25.0% . The increase in our effective tax rate is due to an increase in our Work Opportunity Tax Credit ("WOTC") and the valuation allowance. The basic and diluted loss per common share from continuing operations were $0.28 and $0.28 in 2016 , respectively, compared to a basic and diluted income per common share from continuing operations of $0.45 and $0.44 in 2015 , respectively.

Year Ended December 31, 2015 Compared With Year Ended December 31, 2014

Patient Revenues

Patient revenues were $387.6 million in 2015 and $344.2 million in 2014, an increase of $43.4 million or 12.6%. This increase is primarily attributable to the acquisition of new operations during the period. The following table summarizes the revenue increases attributable to our portfolio growth (in thousands):



	Year Ended December 31,
	2015		2014		Change
Same-store revenue	$	329,463	$	318,096	$	11,367
2014 acquisition revenue	47,034		26,096		20,938
2015 acquisition revenue	11,098		—		11,098
Total revenue	$	387,595	$	344,192	$	43,403

The overall increase in revenue of $43.4 million is primarily attributable to revenue contributions from acquisition activity in 2015 of $11.1 million, as well as an incremental increase in revenues from 2014 acquisitions of $20.9 million as a result of having a full year in operations during 2015. The balance of the increase in revenues year-over-year is attributable to increases in same-store revenue of $11.4 million which is explained in more detail below.

The following table summarizes key revenue and census statistics for continuing operations for each period:



	Year Ended December 31,
	2015			2014
Skilled nursing occupancy	77.1		%	77.5		%
As a percent of total census:
Medicaid census	67.1		%	67.0		%
Medicare census	12.5		%	12.7		%
Managed Care census	3.7		%	3.6		%
As a percent of total revenues:
Medicaid revenues	48.6		%	48.4		%
Medicare revenues	29.0		%	29.6		%
Managed Care revenues	7.2		%	6.7		%
Average rate per day:
Medicare	$	455.24		$	444.63
Medicaid	$	166.16		$	160.43
Managed Care	$	389.73		$	383.44

The average Medicaid rate per patient day for same-store nursing centers in 2015 increased 3.6% compared to 2014, resulting in an increase in revenue of $6.2 million. This average rate per day for Medicaid patients is the result of rate increases in certain states and increasing patient acuity levels. The average Medicare rate per patient day for same-store nursing centers in 2015 increased 2.4% compared to 2014, resulting in an increase in revenue of $1.6 million also related to our ability to attract and provide care for patients with increased acuity levels. Same-store Managed Care rate per patient day for 2015 also experienced favorable results compared to 2014 resulting in a $0.4 million increase in revenue as we continue to see growth in this portion of our patient population.

Our total average daily census increased by approximately 9.0% for the full portfolio compared to 2014 on a consolidated basis, but was primarily attributable to the aforementioned acquisition activity. On a same-store basis, our Medicare and Medicaid average daily census for 2015 decreased compared to 2014, resulting in decreases in revenue of $1.4 million and $0.2 million, respectively. Offsetting these decreases, Managed Care census increased at our same-store nursing centers resulting in a revenue increase of $2.3 million compared to 2014.

In addition to the revenue changes driven by rate and census, the same-store group experienced additional revenue variances from ancillary services and participation in an inter-governmental transfer (IGT) program. Ancillary services at same-store centers

increased $1.9 million in 2015 as compared to 2014, while revenue related to the IGT program in Indiana resulted in $1.1 million in additional revenue in 2015.

Operating Expense

Operating expense increased to $311.0 million in 2015 from $275.6 million in 2014, driven primarily by the $9.3 million in operating costs at the nursing centers added in 2015, and $18.5 million incremental increase from the centers acquired in 2014 due to a full year of operations. Operating expense increased to 80.2% of revenue in 2015, compared to 80.1% of revenue in 2014.



	Year Ended December 31,
	2015		2014		Change
Same-store operating expenses	$	262,378	$	254,769	$	7,609
2014 acquisition operating expenses	39,342		20,836		18,506
2015 acquisition operating expenses	9,315		—		9,315
Total revenue	$	311,035	$	275,605	$	35,430

The largest component of operating expenses is wages, which increased to $180.8 million in 2015 from $160.4 million in 2014, an increase of $20.4 million, or 12.7%. On a same-store basis, wages increased by $5.6 million to $154.1 million in 2015 from $148.5 million in 2014, which is a direct result from our increase in same-store revenues during 2015.

Other factors driving the increase in operating expenses at the same-store nursing centers include bad debt and Medicare crossover claims expense. The expense increased approximately $1.8 million in 2015 compared to 2014 driven significantly by the growth in Medicare and Medicaid patients undergoing the initial qualification process. Provider taxes increased $0.5 million in 2015 compared to 2014 primarily driven by rate increases in Tennessee.

Lease Expense

Lease expense increased to $28.7 million in 2015 from $26.2 million in 2014, an increase of $2.5 million, or 9.7%. The increase in lease expense was primarily driven by $2.3 million in combined lease expense for the newly leased nursing centers acquired in 2014 as a result of a full year of operations. The remaining increase was the result of regular rent adjustments at existing centers.

Professional Liability

Professional liability expense was $8.1 million in 2015 compared to $7.2 million in 2014, an increase of $0.9 million. As centers have been acquired in 2014 and 2015, the Company has accessed commercial insurance markets, which accounts for a significant portion of the growth in professional liability expense in the current year. We were engaged in 55 professional liability lawsuits as of December 31, 2015, compared to 51 as of December 31, 2014. Our cash expenditures for professional liability costs of continuing operations were $3.3 million and $4.8 million for 2015 and 2014, respectively. Professional liability expense and cash expenditures fluctuate from year to year based respectively on the results of our third-party professional liability actuarial studies, the premium costs of purchased insurance, and on the costs incurred in defending and settling existing claims. See “Liquidity and Capital Resources” for further discussion of the accrual for professional liability.

General and Administrative Expense

General and administrative expenses were approximately $24.8 million in 2015 compared to $22.1 million in 2014, an increase of $2.7 million. The overall increase in general and administrative expenses were attributable to a $1.2 million increase in salaries and related expenses associated with continued growth at the regional level, as well as additional corporate infrastructure to support the on-going growth of the portfolio. Stock-based incentive expenses experienced a corresponding increase of $0.6 million. As previously noted, the Company began participating in an inter-governmental transfer program in Indiana during 2015. Certain costs associated with our participation in this program are recorded within general and administrative expense and resulted in $0.3 million of additional costs during 2015.

Depreciation and Amortization

Depreciation and amortization expense was approximately $7.5 million in 2015 and $7.1 million in 2014. The increase in 2015 is primarily due to $0.3 million of depreciation associated with the Glasgow center purchased in February 2015.

Interest Expense, Net

Interest expense has increased to $4.1 million in 2015 compared to $3.7 million in 2014, an increase of $0.4 million. The increase was primarily attributable to higher debt balances in 2015 on the Revolver as a result of on-going change in ownership processes for newly acquired nursing centers, as well as interest on the debt associated with the two buildings purchased in 2015.

Income (Loss) from Continuing Operations before Income Taxes; Income (Loss) from Continuing Operations per Common Share

As a result of the above, continuing operations reported income before taxes of $3.7 million in 2015, as compared to $2.3 million in 2014. The provision for income taxes was $0.9 million in 2015, an effective rate of 25.0% and $0.9 million in 2014, an effective rate of 37.1%. The decrease in our effective tax rate is due to an decrease in our WOTC and the valuation allowance. The basic and diluted income per common share from continuing operations were $0.45 and $0.44 in 2015, respectively, compared to a basic and diluted income per common share from continuing operations of $0.21 and $0.20 in 2014, respectively.

Liquidity and Capital Resources

Liquidity

Our primary source of liquidity is the net cash flow provided by the operating activities of our centers. We believe that these internally generated cash flows will be adequate to service existing debt obligations, fund required capital expenditures as well as provide cash flows for investing opportunities. In determining priorities for our cash flow, we evaluate alternatives available to us and select the ones that we believe will most benefit us over the long term. Options for our cash include, but are not limited to, capital improvements, dividends, repurchase of additional shares of our common stock, acquisitions, and payment of existing debt obligations, as well as initiatives to improve nursing center performance. We review these potential uses and align them to our cash flows with a goal of achieving long-term success.

Net cash used in operating activities of continuing operations totaled $2.1 million in 2016 , compared to net cash provided by operating activities of continuing operations of $10.3 million and $6.0 million in 2015 and 2014 , respectively. One primary driver of the decline in cash provided by operating activities from continuing operations is the acquisition activity throughout the year. The Company is required to complete a Change in Ownership ("CHOW") process for each of the nursing centers for which we assumed operations during the year which results in limited cash inflows from the operations at these centers during this initial process. As of December 31, 2016 , the twenty-two centers for which we assumed operation from Golden Living during 2016 continue to progress through the CHOW process, and we expect this process to be completed in mid- 2017 . Operating activities of discontinued operations used cash of $3.5 million , $7.0 million and $3.0 million in 2016 , 2015 and 2014 , respectively.

Our cash expenditures related to professional liability claims of continuing operations were $4.5 million , $3.3 million and $4.8 million for 2016 , 2015 and 2014 , respectively. We also continue to experience cash expenditures related to professional liability claims of discontinued operations. Our cash expenditures related to professional liability claims of discontinued operations were $3.6 million , $8.2 million , and $5.5 million for 2016 , 2015 and 2014 , respectively. The Company will continue to defend, and make cash payments when required related to, professional liability claims asserted against discontinued operations. Although we work diligently to limit the cash required to settle and defend professional liability claims, a significant judgment entered against us in one or more legal actions could have a material adverse impact on our cash flows and could result in our being unable to meet all of our cash needs as they become due.

Investing activities of continuing operations used cash of $9.8 million and $13.1 million in 2016 and 2015 , respectively, as compared to cash provided of $11.6 million 2014 . The cash used in 2016 was the result of the purchase of Hutchinson and Clinton for $4.3 million and $3.3 million , respectively, and cash used to assume the operations of the twenty-two Golden living centers in the fourth quarter of 2016 . The cash used in 2015 is primarily attributable to the $7.0 million and $3.9 million of assets purchased in the Glasgow and Fulton transactions, respectively. The cash provided in 2014 was the result of the sale of Rose Terrace and disposition of West Virginia operations which provided $16.5 million, and was offset by cash used of $5.5 million for the purchase of property and equipment. We have used $6.0 million , $4.6 million , and $5.5 million in 2016 , 2015 and 2014 , respectively, for capital expenditures of continuing operations.

Financing activities of continuing operations provided cash of $15.1 million and $10.6 million in 2016 and 2015 , respectively, compared to cash used of $8.5 million in 2014 . Cash provided by in 2016 is primarily attributable to the proceeds received from refinancing our credit facility resulting in proceeds of $92.8 million , offset by the repayment of the existing mortgage loan and other debt payments during the year of $73.4 million . Financing activities in 2015 reflect the proceeds received from refinancing our credit facility resulting in proceeds of $27.9 million , offset by the repayment of the existing mortgage loan and other debt payments during the year of $15.3 million . Cash used in 2014 primarily resulted from the $4.9 million in the redemption of preferred stock. Financing activities reflect common stock and preferred stock dividends of $1.4 million 2016 , $1.3 million in 2015 , and $1.5 million in 2014 .

Dividends

On February 24, 2017 , the Board of Directors declared a quarterly dividend on common shares of $0.055 per share. While the Board of Directors intends to pay quarterly dividends, the Board will make the determination of the amount of future cash dividends, if any, to be declared and paid based on, among other things, the Company’s financial condition, funds from operations, the level of its capital expenditures and its future business prospects and opportunities. The Company is restricted by its debt agreements in its ability to pay dividends.

Redeemable Preferred Stock

Effective August 14, 2014, the Company redeemed all of its outstanding shares of Series C Preferred Stock (“Preferred Stock”) from the holder, Omega. The redemption was affected as a result of Omega’s exercise of its pre-existing option to require the Company to redeem the Preferred Stock as provided in the Company’s Certificate of Designation. Following the redemption, the Company no longer has any Series C Preferred Stock outstanding.

Professional Liability

The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a wholly-owned, consolidated offshore limited purpose insurance subsidiary,SHC, which has issued a policy insuring claims made against all of the Company's nursing centers in Florida and Tennessee, the Company’s formerly operated Arkansas and West Virginia centers, and several of the Company’s nursing centers in Alabama, Kentucky, Ohio, and Texas. The insurance coverage provided for these centers under the SHC policy include coverage limits of $500,000 or $1,000,000 per medical incident with a sublimit per center of $1,000,000 and total annual aggregate policy limits of $5,000,000 . All other centers within the Company’s portfolio are covered through various commercial insurance policies which provide coverage limits of $1,000,000 per claim and have sublimits of $3,000,000 per center, with varying aggregate policy limits and deductibles.

As of December 31, 2016 , we have recorded total liabilities for reported professional liability claims and estimates for incurred, but unreported claims of $20.0 million . Our calculation of this estimated liability is based on the Company's best estimates of the likelihood of severely adverse judgments with respect to any asserted claim; however, a significant judgment could be entered against us in one or more of these legal actions, and such a judgment could have a material adverse impact on our financial position and cash flows.

Capital Resources

As of December 31, 2016 , we had $82.1 million of outstanding long-term debt and capital lease obligations. The $82.1 million total includes $2.1 million in capital lease obligations. The balance of the long-term debt is comprised of $58.8 million owed on our collateralized mortgage debt, $15.0 million currently outstanding on the revolving credit facility, and $6.3 million on the acquisition loan facility.

Under the terms of the agreements, the syndicate of banks provided the Amended Mortgage Loan with an original balance of $72.5 million with a five year maturity through February 26, 2021, consisting of $60.0 million term and $12.5 million acquisition loan facilities, and a $52.3 million Amended Revolver through February 26, 2021. The Amended Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25 year amortization. Interest on the term and acquisition loan facilities are based on LIBOR plus 4.0% and 4.75% , respectively. A portion of the Amended Mortgage Loan is effectively fixed at 5.79% pursuant to an interest rate swap with an initial notional amount of $30.0 million . As of December 31, 2016 , the interest rate related to the Amended Mortgage Loan is 4.75% . The Amended Mortgage Loan is secured by 17 owned nursing centers, related equipment and a lien on the accounts receivable of these centers. The Amended Mortgage Loan and the Amended Revolver are cross-collateralized and cross-defaulted. The Company's Amended Revolver has an interest rate of LIBOR plus 4.0% and is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions. Eligible accounts receivable are calculated as defined and consider 80% of certain net receivables while excluding receivables from private pay patients, those pending approval by Medicaid and receivables greater than 120 days.

As of December 31, 2016 , the Company had $15.0 million borrowings outstanding under the Amended Revolver compared to $12.9 million outstanding as of December 31, 2015 . The outstanding borrowings on the revolver primarily reflect the Company's approach to accumulated Medicaid and Medicare receivables at recently acquired centers as these centers proceed through the change in ownership process with CMS. Annual fees for letters of credit issued under the Amended Revolver are 3.0% of the amount outstanding. The Company has letters of credit of $4.8 million and $2.1 million to serve as a security deposit for our Omega and Golden Living leases, respectively. We also have a $1.0 million letter of credit outstanding related to the Company's wholly-owned captive insurance entity. Finally, we have nine other letters of credit, totaling $2.4 million , to serve as security

deposits at certain centers. Considering the balance of eligible accounts receivable at December 31, 2016 , the letters of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $42.7 million , the balance available for borrowing under the Amended Revolver is $14.4 million at December 31, 2016 .

Our lending agreements contain various financial covenants, the most restrictive of which relate to debt service coverage ratios. We are in compliance with all such covenants at December 31, 2016 .

Our calculated compliance with financial covenants is presented below:



	Requirement	Level at December 31, 2016
Minimum fixed charge coverage ratio	1.00:1.00	1.16:1.00
Minimum adjusted EBITDA	$9.5 million	$13.3 million
EBITDAR (mortgaged centers)	$10.0 million	$14.4 million
Current ratio (as defined in agreement)	1.00:1.00	1.49:1.00

As part of the debt agreements entered into in February 2016, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The interest rate swap agreement has the same effective date and maturity date as the Amended Mortgage Loan, and carries an initial notional amount of $30.0 million . The interest rate swap agreement requires the Company to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 5.79% while the bank is obligated to make payments to us based on LIBOR on the same notional amounts. We entered into the interest rate swap agreement to mitigate the variable interest rate risk on our outstanding mortgage borrowings.

Capitalized Lease Obligations

Upon acquisition of certain centers, we assume certain leases, primarily related to equipment, that constitute capital leases. Additionally, the Company leases certain technology equipment that supports the clinical systems, including electronic medical records, at our nursing centers that constitute capital leases.

As a result of the lease agreements above, we have recorded the underlying lease assets and capitalized lease obligations of $2.1 million , $0.6 million , and $0.3 million as of December 31, 2016 , 2015 , and 2014 , respectively. These lease agreements provide terms of three to five years.

Receivables

Our operations could be adversely affected if we experience significant delays in reimbursement from Medicare, Medicaid and other third-party revenue sources. Our future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash, accounts receivable and inventories) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on our liquidity. Continued efforts by governmental and third-party payors to contain or reduce the acceleration of costs by monitoring reimbursement rates, by increasing medical review of bills for services, or by negotiating reduced contract rates, as well as any delay by us in the processing of our invoices, could adversely affect our liquidity and financial position.

Accounts receivable attributable to patient services of continuing operations totaled $72.5 million at December 31, 2016 compared to $52.0 million at December 31, 2015 , representing approximately 47 days and 45 days revenue in accounts receivable, respectively. The increase in accounts receivable is due primarily to accounts associated with centers still in the change in ownership process, which is addressed below. We have adjusted the days of revenue in the accounts receivable calculation to remove the impact of the receivables related to these change in ownerships.

Our accounts receivable at December 31, 2016 , reflects the change in ownership of the twenty-two newly leased Golden Living centers in Alabama and Mississippi. The Company has entered into an agreement with Golden Living to utilize their billing credentials in order to perform the billing of the Medicare and Medicaid receivables until the change in ownership process has been completed. This agreement allows the Medicare and Medicaid receivables to be billed and collected in the interim. Payer sources could be delayed due to setting up new agreements and credentialing with those payers.

The allowance for bad debt was $10.3 million and $8.2 million at December 31, 2016 and 2015 , respectively, which is commensurate with our overall revenue and receivables growth. We continually evaluate the adequacy of our bad debt reserves based on patient mix trends, aging of older balances, payment terms and delays with regard to third-party payors, collateral and deposit resources,

as well as other factors. We continue to evaluate and implement additional procedures to strengthen our collection efforts and reduce the incidence of uncollectible accounts.

Inflation

Based on contract pricing for food and other supplies and recent market conditions, we expect cost increases in 2017 to be relatively the same or slightly lower than the increases in 2016 . We expect salary and wage increases for our skilled health care providers to continue to be higher than average salary and wage increases, as is common in the healthcare industry.

Off-Balance Sheet Arrangements

We have twelve letters of credit outstanding totaling approximately $10.2 million as of December 31, 2016 . Eleven of these letters of credit serve as a security deposits for certain center leases, while one was issued in conjunction with the initial funding of our wholly-owned captive insurance company. The letters of credit were issued under our revolving credit facility. Our accounts receivable serve as the collateral for this revolving credit facility.

Forward-Looking Statements

The foregoing discussion and analysis provides information deemed by management to be relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion and analysis should be read in conjunction with our consolidated financial statements included herein. Certain statements made by or on behalf of us, including those contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by the forward-looking statements made herein. Forward-looking statements are predictive in nature and are frequently identified by the use of terms such as "may," "will," "should," "expect," "believe," "estimate," "intend," and similar words indicating possible future expectations, events or actions. In addition to any assumptions and other factors referred to specifically in connection with such statements, other factors, many of which are beyond our ability to control or predict, could cause our actual results to differ materially from the results expressed or implied in any forward-looking statements including, but not limited to, our ability to successfully integrate the operations of our new nursing centers in Alabama, Mississippi, Kansas and Kentucky, as well as successfully operate all of our centers, our ability to increase census at our centers, changes in governmental reimbursement, including the impact of the CMS final rule that has resulted in a reduction in Medicare reimbursement and our ability to mitigate the impact of the revenue reduction, government regulation, the impact of the recently adopted federal health care reform or any future health care reform, any increases in the cost of borrowing under our credit agreements, our ability to extend or replace our current credit facility, our ability to comply with covenants contained in those credit agreements, the outcome of professional liability lawsuits and claims, our ability to control ultimate professional liability costs, the accuracy of our estimate of our anticipated professional liability expense, the impact of future licensing surveys, the outcome of proceedings alleging violations of state or Federal False Claims Acts, laws and regulations governing quality of care or other laws and regulations applicable to our business including HIPAA and laws governing reimbursement from government payors, impacts associated with the implementation of our electronic medical records plan, the costs of investing in our business initiatives and development, our ability to control costs, changes to our valuation of deferred tax assets, changes in occupancy rates in our centers, changing economic and competitive conditions, changes in anticipated revenue and cost growth, changes in the anticipated results of operations, the effect of changes in accounting policies as well as others. Investors also should refer to the risks identified in this “Management's Discussion and Analysis of Financial Condition and Results of Operations” as well as risks identified in “Part I. Item 1A. Risk Factors” for a discussion of various risk factors of the Company and that are inherent in the health care industry. Given these risks and uncertainties, we can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them. These assumptions may not materialize to the extent assumed, and risks and uncertainties may cause actual results to be different from anticipated results. These risks and uncertainties also may result in changes to the Company’s business plans and prospects. Such cautionary statements identify important factors that could cause our actual results to materially differ from those projected in forward-looking statements. In addition, we disclaim any intent or obligation to update these forward-looking statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The chief market risk factor affecting our financial condition and operating results is interest rate risk. As of December 31, 2016 , we had outstanding borrowings of approximately $80.1 million , $50.6 million of which were subject to variable interest rates. In connection with February 2016 financing agreement, we entered into an interest rate swap with respect to one half of the Amended Mortgage Loan to mitigate the floating interest rate risk of such borrowing. In the event that interest rates were to change 1%, the impact on future pre-tax cash flows would be approximately $0.5 million annually, representing the impact of increased or decreased interest expense on variable rate debt.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Audited financial statements are contained on pages F-1 through F-33 of this Annual Report on Form 10-K and are incorporated herein by reference. Audited supplemental schedule data is contained on pages S-1 through S-2 of this Annual Report on Form 10-K and is incorporated herein by reference.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Diversicare, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of December 31, 2016 . Based on this evaluation, the principal executive and financial officers have determined that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission's rules and forms.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Our review excluded the centers assumed from Golden Living during 2016, whose consolidated assets of approximately $6.6 million and whose revenues of approximately $37.2 million , were included in the Company’s consolidated balance sheet and statement of operations as of and for the year ended December 31, 2016 . Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2016 . Management reviewed the results of its assessment with our Audit Committee.

Changes in Internal Control over Financial Reporting

There has been no change (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal control over financial reporting that has occurred during our fiscal quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our management does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information concerning our Directors, Executive Officers and Corporate Governance is incorporated herein by reference to our definitive proxy statement for our 2017 Annual Meeting of Shareholders, which we will file within 120 days of the end of the fiscal year to which this Report relates.

ITEM 11. EXECUTIVE COMPENSATION

Information concerning Executive Compensation is incorporated herein by reference to our definitive proxy statement for our 2017 Annual Meeting of Shareholders, which we will file within 120 days of the end of the fiscal year to which this Report relates.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

Information concerning Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters is incorporated herein by reference to our definitive proxy statement for our 2017 Annual Meeting of Shareholders, which we will file within 120 days of the end of the fiscal year to which this Report relates.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information concerning Certain Relationships and Related Transactions, and Director Independence is incorporated herein by reference to our definitive proxy statement for our 2017 Annual Meeting of Shareholders, which we will file within 120 days of the end of the fiscal year to which this Report relates.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning the fees and services provided by our principal accountant is incorporated herein by reference to our definitive proxy statement for our 2017 Annual Meeting of Shareholders, which we will file within 120 days of the end of the fiscal year to which this Report relates.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The Financial statements and schedule for us and our subsidiaries required to be included in Part II, Item 8 are listed below.



	Form 10-K Pages
Financial Statements
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of December 31, 2016 and 2015	F-2
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014	F-3
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016, 2015 and 2014	F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2016, 2015 and 2014	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014	F-6
Notes to Consolidated Financial Statements as of December 31, 2016, 2015 and 2014	F-8 to F-33
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts	S-1 to S-2

Exhibits

The exhibits filed as part of this Report on Form 10-K are listed in the Exhibit Index immediately following the financial statement pages.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DIVERSICARE HEALTHCARE SERVICES, INC.

/s/ Chad A. McCurdy

Chad A. McCurdy

Chairman of the Board

March 2, 2017

/s/ Kelly J. Gill

Kelly J. Gill

President and Chief Executive Officer

(Principal Executive Officer)

March 2, 2017

/s/ James R. McKnight, Jr.

James R. McKnight, Jr.

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

March 2, 2017

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



/s/ Chad A. McCurdy	/s/ Robert Z. Hensley
Chad A. McCurdy	Robert Z. Hensley
Chairman of the Board and Director	Director
March 2, 2017	March 2, 2017

/s/ Wallace E. Olson	/s/ William C. O'Neil, Jr.
Wallace E. Olson	William C. O'Neil, Jr.
Director	Director
March 2, 2017	March 2, 2017

/s/ Kelly J. Gill	/s/ Richard M. Brame
Kelly J. Gill	Richard M. Brame
President and Chief Executive Officer	Director
Director	March 2, 2017
March 2, 2017

/s/ Robert A. McCabe, Jr.
Robert A. McCabe, Jr.
Director
March 2, 2017

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

Consolidated Financial Statements

For the Years Ended December 31, 2016 , 2015 and 2014

Together with Report of Independent Registered Public Accounting Firm

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Report of Independent Registered Public Accounting Firm	F-1

Consolidated Balance Sheets	F-2

Consolidated Statements of Operations	F-3

Consolidated Statements of Comprehensive Income (Loss)	F-4

Consolidated Statements of Shareholders' Equity	F-5

Consolidated Statements of Cash Flows	F-6

Notes to Consolidated Financial Statements	F-8 to F-33

Schedule II - Valuation and Qualifying Accounts	S-1 to S-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Diversicare Healthcare Services, Inc.

Brentwood, Tennessee

We have audited the accompanying consolidated balance sheets of Diversicare Healthcare Services, Inc. and subsidiaries as of December 31, 2016 and 2015 and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2016 . In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diversicare Healthcare Services, Inc. and subsidiaries at December 31, 2016 and 2015 , and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016 , in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ BDO USA, LLP

Nashville, Tennessee

March 2, 2017

F-1

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2016 AND 2015



ASSETS	2016			2015			LIABILITIES AND SHAREHOLDERS' EQUITY	2016			2015

CURRENT ASSETS:							CURRENT LIABILITIES:
Cash and cash equivalents	$	4,263,000		$	4,585,000		Current portion of long-term debt and capitalized lease obligations, net	$	7,715,000		$	6,603,000
Receivables, less allowance for doubtful accounts of $10,326,000 and $8,180,000, respectively	62,152,000			43,819,000			Trade accounts payable	12,972,000			10,136,000
Other receivables	1,193,000			1,407,000			Current liabilities of discontinued operations	427,000			345,000
Prepaid expenses and other current assets	3,623,000			2,223,000			Accrued expenses:
Income tax refundable	431,000			347,000			Payroll and employee benefits	20,108,000			14,404,000
Current assets of discontinued operations	28,000			36,000			Self-insurance reserves, current portion	9,401,000			10,224,000
Deferred income taxes	7,644,000			7,999,000			Provider taxes	3,114,000			1,603,000
Total current assets	79,334,000			60,416,000			Other current liabilities	4,432,000			4,049,000
							Total current liabilities	58,169,000			47,364,000
							NONCURRENT LIABILITIES:
PROPERTY AND EQUIPMENT, at cost	128,822,000			114,383,000			Long-term debt and capitalized lease obligations, less current portion, net	72,145,000			53,297,000
Less accumulated depreciation and amortization	(69,022,000		)	(62,110,000		)	Self-insurance reserves, noncurrent portion	11,766,000			12,344,000
	59,800,000			52,273,000			Other noncurrent liabilities	9,551,000			10,812,000
							Total noncurrent liabilities	93,462,000			76,453,000
							COMMITMENTS AND CONTINGENCIES
OTHER ASSETS:							SHAREHOLDERS’ EQUITY:
Deferred income taxes	13,541,000			11,762,000			Common stock, authorized 20,000,000 shares, $.01 par value, 6,592,000 and 6,513,000 shares issued, and 6,361,000 and 6,281,000 shares outstanding, respectively	66,000			65,000
Deferred financing and other costs, net	193,000			382,000			Treasury stock at cost, 232,000 shares of common stock	(2,500,000		)	(2,500,000		)
Investment in unconsolidated affiliate	—			798,000			Paid-in capital	21,935,000			21,142,000
Other noncurrent assets	3,108,000			3,994,000			Accumulated deficit	(8,276,000		)	(5,053,000		)
Acquired leasehold interest, net	7,075,000			7,459,000			Accumulated other comprehensive income (loss)	195,000			(387,000		)
Total other assets	23,917,000			24,395,000			Total shareholders’ equity	11,420,000			13,267,000
	$	163,051,000		$	137,084,000			$	163,051,000		$	137,084,000

The accompanying notes are an integral part of these consolidated financial statements.

F-2

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



	Years Ended December 31,
	2016			2015			2014
PATIENT REVENUES, net	$	426,063,000		$	387,595,000		$	344,192,000
EXPENSES:
Operating	342,932,000			311,035,000			275,605,000
Lease and rent expense	33,364,000			28,690,000			26,151,000
Professional liability	8,456,000			8,122,000			7,216,000
General and administrative	30,271,000			24,793,000			22,133,000
Depreciation and amortization	8,292,000			7,524,000			7,078,000
Lease termination costs	2,008,000			—			—
Total expenses	425,323,000			380,164,000			338,183,000
OPERATING INCOME	740,000			7,431,000			6,009,000
OTHER INCOME (EXPENSE):
Equity in net income (losses) of investment in unconsolidated affiliate	273,000			339,000			(5,000		)
Gain on sale of investment in unconsolidated affiliate	1,366,000			—			—
Interest expense, net	(4,802,000		)	(4,102,000		)	(3,697,000		)
Debt retirement costs	(351,000		)	—			—
	(3,514,000		)	(3,763,000		)	(3,702,000		)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(2,774,000		)	3,668,000			2,307,000
BENEFIT (PROVISION) FOR INCOME TAXES	1,030,000			(916,000		)	(857,000		)
INCOME (LOSS) FROM CONTINUING OPERATIONS	(1,744,000		)	2,752,000			1,450,000
INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Operating loss, net of income tax benefit of $41,000, $375,000 and $878,000, respectively	(67,000		)	(1,128,000		)	(1,486,000		)
Gain on disposal, net of income tax provision of $0, $0 and $2,802,000, respectively	—			—			4,744,000
INCOME (LOSS) FROM DISCONTINUED OPERATIONS	(67,000		)	(1,128,000		)	3,258,000
NET INCOME (LOSS)	(1,811,000		)	1,624,000			4,708,000
Less: net (income) loss attributable to noncontrolling interests	—			—			25,000
NET INCOME (LOSS) ATTRIBUTABLE TO DIVERSICARE HEALTHCARE SERVICES, INC.	(1,811,000		)	1,624,000			4,733,000
PREFERRED STOCK DIVIDENDS	—			—			(220,000		)
NET INCOME (LOSS) FOR DIVERSICARE HEALTHCARE SERVICES, INC. COMMON SHAREHOLDERS	$	(1,811,000	)	$	1,624,000		$	4,513,000
NET INCOME (LOSS) PER COMMON SHARE FOR DIVERSICARE HEALTHCARE SERVICES, INC. COMMON SHAREHOLDERS:
Per common share – basic
Continuing operations	$	(0.28	)	$	0.45		$	0.21
Discontinued operations	(0.01		)	(0.18		)	0.54
	$	(0.29	)	$	0.27		$	0.75
Per common share – diluted
Continuing operations	$	(0.28	)	$	0.44		$	0.20
Discontinued operations	(0.01		)	(0.18		)	0.52
	$	(0.29	)	$	0.26		$	0.72
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK	$	0.22		$	0.22		$	0.22
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	6,199,000			6,100,000			6,011,000
Diluted	6,199,000			6,315,000			6,197,000

The accompanying notes are an integral part of these consolidated financial statements.

F-3

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)



	Years Ended December 31,
	2016			2015			2014
NET INCOME (LOSS)	$	(1,811,000	)	$	1,624,000		$	4,708,000
OTHER COMPREHENSIVE INCOME (LOSS):
Change in fair value of cash flow hedge, net of tax	1,082,000			556,000			368,000
Less: reclassification adjustment for amounts recognized in net income	(500,000		)	(448,000		)	(294,000		)
Total other comprehensive income	582,000			108,000			74,000
COMPREHENSIVE INCOME (LOSS)	(1,229,000		)	1,732,000			4,782,000
Less: comprehensive loss attributable to noncontrolling interest	—			—			25,000
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO DIVERSICARE HEALTHCARE SERVICES, INC.	$	(1,229,000	)	$	1,732,000		$	4,807,000

The accompanying notes are an integral part of these consolidated financial statements.

F-4

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



	Common Stock			Treasury Stock				Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity of Diversicare Healthcare Services, Inc.			Non- Controlling Interests			Total Shareholders' Equity
	Shares Issued	Amount		Shares	Amount			Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)						Non- Controlling Interests			Total Shareholders' Equity

BALANCE, DECEMBER 31, 2013	6,307,000	$	63,000	232,000	$	(2,500,000	)	$	19,570,000		$	(8,435,000	)	$	(569,000	)	$	8,129,000		$	1,437,000		$	9,566,000
Net income (loss)	—	—		—	—			—			4,733,000			—			4,733,000			(25,000		)	4,708,000
Preferred stock dividends	—	—		—	—			—			(220,000		)	—			(220,000		)	—			(220,000		)
Common stock dividends declared	—	—		—	—			41,000			(1,363,000		)	—			(1,322,000		)	—			(1,322,000		)
Issuance/redemption of equity grants, net	81,000	1,000		—	—			(49,000		)	—			—			(48,000		)	—			(48,000		)
Interest rate cash flow hedge	—	—		—	—			—			—			74,000			74,000			—			74,000
Tax impact of equity grant exercises	—	—		—	—			(10,000		)	—			—			(10,000		)	—			(10,000		)
Deconsolidation of noncontrolling interest	—	—		—	—			—			—			—			—			(1,412,000		)	(1,412,000		)
Stock based compensation	—	—		—	—			418,000			—			—			418,000			—			418,000

BALANCE, DECEMBER 31, 2014	6,388,000	64,000		232,000	(2,500,000		)	19,970,000			(5,285,000		)	(495,000		)	11,754,000			—			11,754,000
Net income	—	—		—	—			—			1,624,000			—			1,624,000			—			1,624,000
Common stock dividends declared	—	—		—	—			45,000			(1,392,000		)	—			(1,347,000		)	—			(1,347,000		)
Issuance/redemption of equity grants, net	125,000	1,000		—	—			78,000			—			—			79,000			—			79,000
Interest rate cash flow hedge	—	—		—	—			—			—			108,000			108,000			—			108,000
Tax impact of equity grant exercises	—	—		—	—			62,000			—			—			62,000			—			62,000
Stock based compensation	—	—		—	—			987,000			—			—			987,000			—			987,000

BALANCE, DECEMBER 31, 2015	6,513,000	65,000		232,000	(2,500,000		)	21,142,000			(5,053,000		)	(387,000		)	13,267,000			—			13,267,000
Net loss	—	—		—	—			—			(1,811,000		)	—			(1,811,000		)	—			(1,811,000		)
Common stock dividends declared	—	—		—	—			46,000			(1,412,000		)	—			(1,366,000		)	—			(1,366,000		)
Issuance/redemption of equity grants, net	79,000	1,000		—	—			(106,000		)	—			—			(105,000		)	—			(105,000		)
Interest rate cash flow hedge	—	—		—	—			—			—			582,000			582,000			—			582,000
Tax impact of equity grant exercises	—	—		—	—			65,000			—			—			65,000			—			65,000
Stock based compensation	—	—		—	—			788,000			—			—			788,000			—			788,000

BALANCE, DECEMBER 31, 2016	6,592,000	$	66,000	232,000	$	(2,500,000	)	$	21,935,000		$	(8,276,000	)	$	195,000		$	11,420,000		$	—		$	11,420,000

The accompanying notes are an integral part of these consolidated financial statements.

F-5

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Years Ended December 31,
	2016			2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,811,000	)	$	1,624,000		$	4,708,000
Discontinued operations	(67,000		)	(1,128,000		)	3,258,000
Income (loss) from continuing operations	(1,744,000		)	2,752,000			1,450,000
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
Depreciation and amortization	8,292,000			7,524,000			7,078,000
Provision for doubtful accounts	7,163,000			7,507,000			5,710,000
Deferred income tax provision (benefit)	(1,569,000		)	(1,222,000		)	837,000
Provision for self-insured professional liability, net of cash payments	1,968,000			3,200,000			1,173,000
Stock based compensation	1,012,000			1,152,000			580,000
Debt retirement costs	351,000			—			—
Provision for leases net of cash payments	(1,773,000		)	(1,749,000		)	(1,180,000		)
Lease termination costs, net of cash payments	1,863,000			—			—
Equity in net income of investment in unconsolidated affiliate	(271,000		)	(335,000		)	—
Gain on sale of investment in unconsolidated affiliate	(1,366,000		)	—			—
Deferred bonus	350,000			—			—
Other	576,000			396,000			316,000
Changes in other assets and liabilities affecting operating activities:
Receivables, net	(25,551,000		)	(9,883,000		)	(14,592,000		)
Prepaid expenses and other assets	(1,620,000		)	(60,000		)	(184,000		)
Trade accounts payable and accrued expenses	10,224,000			1,009,000			4,771,000
Net cash provided by (used in) continuing operations	(2,095,000		)	10,291,000			5,959,000
Net cash used in discontinued operations	(3,523,000		)	(7,014,000		)	(2,978,000		)
Net cash provided by (used in) operating activities	(5,618,000		)	3,277,000			2,981,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(6,022,000		)	(4,646,000		)	(5,494,000		)
Property acquisitions	(7,550,000		)	—			—
Acquisition of property and equipment through business combination	—			(10,900,000		)	—
Proceeds from sale of discontinued operations	—			—			17,124,000
Proceeds from sale of unconsolidated affiliate	2,068,000			—			—
Change in restricted cash	1,658,000			2,489,000			31,000
Deposits and other deferred balances	—			(9,000		)	(64,000		)
Net cash provided by (used in) continuing operations	(9,846,000		)	(13,066,000		)	11,597,000
Net cash used in discontinued operations	—			—			(61,000		)
Net cash provided by (used in) investing activities	(9,846,000		)	(13,066,000		)	11,536,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations	(73,374,000		)	(15,342,000		)	(21,645,000		)
Proceeds from issuance of debt	92,789,000			27,945,000			21,808,000
Financing costs	(2,162,000		)	(160,000		)	(195,000		)
Issuance and redemption of employee equity awards	(105,000		)	79,000			(47,000		)
Redemption of preferred stock	—			—			(4,918,000		)
Payment of common stock dividends	(1,366,000		)	(1,347,000		)	(1,322,000		)
Payment of preferred stock dividends	—			—			(220,000		)
Deconsolidation of noncontrolling interests, net of income taxes	—			—			(1,385,000		)
Payment for preferred stock restructuring	(640,000		)	(619,000		)	(600,000		)
Net cash provided by (used in) continuing operations	15,142,000			10,556,000			(8,524,000		)
Net cash used in discontinued operations	—			—			(5,956,000		)
Net cash provided by (used in) financing activities	15,142,000			10,556,000			(14,480,000		)

(Continued)

F-6

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)



	Years Ended December 31,
	2016			2015		2014
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	(322,000	)	$	767,000	$	37,000
CASH AND CASH EQUIVALENTS, beginning of period	4,585,000			3,818,000		3,781,000
CASH AND CASH EQUIVALENTS, end of period	$	4,263,000		$	4,585,000	$	3,818,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments of interest, net of amounts capitalized	$	3,965,000		$	3,629,000	$	3,324,000
Cash payments of income taxes	$	549,000		$	205,000	$	84,000
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Acquisition of equipment through capital lease	$	1,851,000		$	—	$	—

The accompanying notes are an integral part of these consolidated financial statements.

F-7

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016 , 2015 , and 2014

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Diversicare Healthcare Services, Inc. ("Diversicare" or the "Company") provides a broad range of post-acute care services to patients and residents including skilled nursing, ancillary health care services and assisted living. In addition to the nursing and social services usually provided in long-term care centers, we offer a variety of rehabilitative, nutritional, respiratory, and other specialized ancillary services.

As of December 31, 2016 , our continuing operations consist of 76 nursing centers with 8,453 licensed skilled nursing beds. Our nursing centers range in size from 48 to 320 licensed nursing beds. The licensed nursing bed count does not include 496 licensed assisted living beds. Our continuing operations include centers in Alabama, Florida, Indiana, Kansas, Kentucky, Mississippi, Missouri, Ohio, Tennessee, and Texas.

Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the financial position, operations and accounts of Diversicare and its subsidiaries, all wholly-owned. All significant intercompany accounts and transactions have been eliminated in consolidation. Any variable interest entities (“VIEs”) in which the Company has an interest are consolidated when the Company identifies that it is the primary beneficiary. The Company had one variable interest entity through 2014 and it related to a nursing center in West Virginia described in Note 7, "Variable Interest Entity".

Any joint ventures are accounted for using the equity method, which is an investment in an entity over which the Company lacks control, but otherwise has the ability to exercise significant influence over operating and financial policies. The Company had one equity method investee through the fourth quarter of 2016 . The investment in unconsolidated affiliate reflected on the 2015 consolidated balance sheet related to a pharmacy joint venture partnership in which the Company owned a 50% interest. The Company’s share of the profits and losses from this investment are reported in equity in earnings of investment in unconsolidated affiliate and the proceeds received from the sale are reported in gain on sale of investment in unconsolidated affiliate in the accompanying consolidated statement of operations.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The fees charged by the Company to patients in its nursing centers are recorded on an accrual basis. These rates are contractually adjusted with respect to individuals receiving benefits under federal and state-funded programs and other third-party payors. Rates under federal and state-funded programs are determined prospectively for each center and may be based on the acuity of the care and services provided. These rates may be based on a center's actual costs subject to program ceilings and other limitations or on established rates based on acuity and services provided as determined by the federal and state-funded programs. Amounts earned under federal and state programs with respect to nursing home patients are subject to review by the third-party payors which may result in retroactive adjustments. In the opinion of management, adequate provision has been made for any adjustments that may result from such reviews. Retroactive adjustments, if any, are recorded when objectively determinable, generally within three years of the close of a reimbursement year depending upon the timing of appeals and third-party settlement reviews or audits. During the years ended December 31, 2016 , 2015 and 2014 , the Company recorded $38,000 , $141,000 and $298,000 of net unfavorable estimated settlements from federal and state programs for periods prior to the beginning of fiscal 2016 , 2015 and 2014 , respectively.

Allowance for Doubtful Accounts

The Company's allowance for doubtful accounts is estimated utilizing current agings of accounts receivable, historical collections data and other factors. Management monitors these factors and determines the estimated provision for doubtful accounts. Historical bad debts have generally resulted from uncollectible private balances, some uncollectible coinsurance and deductibles and other

F-8

factors. Receivables that are deemed to be uncollectible are written off. The allowance for doubtful accounts balance is assessed on a quarterly basis, with changes in estimated losses being recorded in the Consolidated Statements of Operations in the period identified.

The Company includes the provision for doubtful accounts in operating expenses in its Consolidated Statements of Operations. The provisions for doubtful accounts of continuing operations were $7,163,000 , $7,507,000 , and $5,710,000 for 2016 , 2015 and 2014 , respectively. The provision for doubtful accounts of continuing operations was 1.7% , 1.9% , and 1.7% of net revenue during 2016 , 2015 , and 2014 , respectively.

Lease Expense

As of December 31, 2016 , the Company operates 59 nursing centers under operating leases, including 35 owned by Omega, 20 owned by Golden Living and four owned by other parties. The Company's operating leases generally require the Company to pay stated rent, subject to increases based on changes in the Consumer Price Index, a minimum percentage increase, or increases in the net revenues of the leased properties. The Company's Omega and Golden Living leases require the Company to pay certain scheduled rent increases. Such scheduled rent increases are recorded as additional lease expense on a straight-line basis recognized over the term of the related leases and the difference between the amounts recorded for rent expense as compared to rent payments as an accrued liability.

See Note 2, "Business Development and Other Significant Transactions", Note 3, "Discontinued Operations", and Note 11, "Commitments and Contingencies" for a discussion regarding the Company's Master Leases with Omega and Golden Living, the termination of leases for certain centers, and the addition of certain leased centers.

Classification of Expenses

The Company classifies all expenses (except lease, interest, depreciation and amortization expenses) that are associated with its corporate and regional management support functions as general and administrative expenses. All other expenses (except lease, professional liability, interest, depreciation and amortization expenses) incurred by the Company at the center level are classified as operating expenses.

Property and Equipment

Property and equipment are recorded at cost or at fair value determined on the respective dates of acquisition for assets obtained in a business combination, with depreciation and amortization being provided over the shorter of the remaining lease term (where applicable) or the assets' estimated useful lives on the straight-line basis as follows:



Buildings and improvements	-	5 to 40 years
Leasehold improvements	-	2 to 10 years
Furniture, fixtures and equipment	-	2 to 15 years

Interest incurred during construction periods for qualifying expenditures is capitalized as part of the building cost. Maintenance and repairs are expensed as incurred, and major betterments and improvements are capitalized.

The Company routinely evaluates the recoverability of the carrying value of its long-lived assets, including when significant adverse changes in the general economic conditions and significant deteriorations of the underlying undiscounted cash flows or fair values of the property indicate that the carrying amount of the property may not be recoverable. If circumstances suggest that the recorded amounts are not recoverable based upon estimated future undiscounted cash flows, the carrying values of such assets are reduced to fair value.

Cash and Cash Equivalents

Cash and cash equivalents include cash on deposit with banks and all highly liquid investments with original maturities of three months or less when purchased. Our cash on deposit with banks was subject to the Federal Deposit Insurance Corporation ("FDIC") minimum insurance levels. Effective January 1, 2013, the coverage provided by the FDIC that had been unlimited under the Dodd-Frank Deposit Insurance Provision is limited to the legal maximum, which is generally $250,000 per ownership category.

Deferred Financing and Other Costs

The Company records deferred financing and lease costs for direct and incremental expenditures related to entering into or amending debt and lease agreements. These expenditures include lenders and attorneys fees. Financing costs are amortized using the effective interest method over the term of the related debt. The amortization is reflected as interest expense in the accompanying consolidated statements of operations. Deferred lease costs are amortized on a straight-line basis over the term of the related leases. See Note

F-9

6, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations" for further discussion. As a result of our adoption of ASU No. 2015-03, which is further discussed below, the Company nets long-term debt and deferred financing costs in the consolidated balance sheets.

Acquired Leasehold Interest

The Company has recorded an acquired leasehold interest intangible asset related to an acquisition completed during 2007. The intangible asset is accounted for in accordance with the FASB's guidance on goodwill and other intangible assets, and is amortized on a straight-line basis over the remaining life of the acquired lease, including renewal periods, the original period of which is approximately 28 years from the date of acquisition. The lease terms for the seven centers this intangible relates to provide for an initial term and renewal periods at the Company's option through May 31, 2035. As the renewal periods of the acquired leased centers are solely based on the Company's option, it is expected that costs (if any) to renew the lease through its current amortization period would be nominal and the decision to continue to lease the acquired centers lies solely within the Company's intent to continue to operate the seven centers. Any renewal costs would be included in deferred lease costs and amortized over the renewal period. Amortization expense of approximately $384,000 related to this intangible asset was recorded during each of the years ended December 31, 2016 , 2015 and 2014 , respectively.

The carrying value of the acquired leasehold interest intangible and the accumulated amortization are as follows:



	December 31,
	2016			2015
Intangible assets	$	10,652,000		$	10,652,000
Accumulated amortization	(3,577,000		)	(3,193,000		)
Net intangible assets	$	7,075,000		$	7,459,000

The Company evaluates the recoverability of the carrying value of the acquired leasehold intangible in accordance with the FASB's guidance on accounting for the impairment or disposal of long-lived assets. Included in this evaluation is whether significant adverse changes in general economic conditions, and significant deteriorations of the underlying cash flows or fair values of the intangible asset, indicate that the carrying amount of the intangible asset may not be recoverable. The need to recognize an impairment charge is based on estimated future undiscounted cash flows from the asset compared to the carrying value of that asset. If recognition of an impairment charge is necessary, it is measured as the amount by which the carrying amount of the intangible asset exceeds the fair value of the intangible asset.

The expected amortization expense for the acquired leasehold interest intangible asset is as follows:



2017	$	384,000
2018	384,000
2019	384,000
2020	384,000
2021	384,000
Thereafter	5,155,000
	$	7,075,000

Self-Insurance

Self-insurance liabilities primarily represent the unfunded accrual for self insured risks associated with general and professional liability claims, employee health insurance and workers' compensation. The Company's health insurance liability is based on known claims incurred and an estimate of incurred but unreported claims determined by an analysis of historical claims paid. The Company's workers' compensation liability relates primarily to periods of self insurance prior to May 1997 and consists of an estimate of the future costs to be incurred for the known claims.

Final determination of the Company's actual liability for incurred general and professional liability claims is a process that takes years. The Company evaluates the adequacy of this liability on a quarterly basis. Semi-annually, the Company retains a third-party actuarial firm to assist in the evaluation of this unfunded accrual. Since May 2012, Merlinos & Associates, Inc. (“Merlinos”) has assisted management in the preparation of the appropriate accrual for incurred but not reported general and professional liability claims based on data furnished by the Company. Merlinos primarily utilizes historical data regarding the frequency and cost of the Company's past claims over a multi-year period, industry data and information regarding the number of occupied beds to develop its estimates of the Company's ultimate professional liability cost for current periods.

F-10

On a quarterly basis, the Company obtains reports of asserted claims and lawsuits incurred. These reports, which are provided by the Company's insurers and a third party claims administrator, contain information relevant to the actual expense already incurred with each claim as well as the third-party administrator's estimate of the anticipated total cost of the claim. This information is reviewed by the Company quarterly and provided to the actuary semi-annually. Based on the Company's evaluation of the actual claim information obtained, the semi-annual estimates received from the third-party actuary, the amounts paid and committed for settlements of claims and on estimates regarding the number and cost of additional claims anticipated in the future, the reserve estimate for a particular period may be revised upward or downward on a quarterly basis. Any increase in the accrual has an unfavorable impact on results of operations in the period and any reduction in the accrual increases results of operations during the period.

All losses are projected on an undiscounted basis. The self-insurance liabilities include estimates of liability for incurred but not reported claims, estimates of liability for reported but unresolved claims, actual liabilities related to settlements, including settlements to be paid over time, and estimates of related legal costs incurred and expected to be incurred.

One of the key assumptions in the actuarial analysis is that historical losses provide an accurate forecast of future losses. Changes in legislation such as tort reform, changes in our financial condition, changes in our risk management practices and other factors may affect the severity and frequency of claims incurred in future periods as compared to historical claims.

The facts and circumstances of each claim vary significantly, and the amount of ultimate liability for an individual claim may vary due to many factors, including whether the case can be settled by agreement, the quality of legal representation, the individual jurisdiction in which the claim is pending, and the views of the particular judge or jury deciding the case.

Although the Company adjusts its unfunded accrual for professional and general liability claims on a quarterly basis and retains a third-party actuarial firm semi-annually to assist management in estimating the appropriate accrual, professional and general liability claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. Professional liability cases have a long cycle from the date of an incident to the date a case is resolved, and final determination of the Company's actual liability for claims incurred in any given period is a process that takes years. As a result, the Company's actual liabilities may vary significantly from the unfunded accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given period. Each change in the amount of this accrual will directly affect the Company's results of operations and financial position for the period in which the change in accrual is made.

Income Taxes

The Company follows the FASB's guidance on Accounting for Income Taxes , which requires the asset and liability method of accounting for income taxes whereby deferred income taxes are recorded for the future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are provided against any estimated non-realizable deferred tax assets where necessary.

Where the Company believes that a tax position is supportable for income tax purposes, the item is included in its income tax returns. Where treatment of a position is uncertain, liabilities are recorded based upon the Company’s evaluation of the “more likely than not” outcome considering the technical merits of the position. While the judgments and estimates made by the Company are based on management’s evaluation of the technical merits of a matter, historical experience and other assumptions that management believes are appropriate and reasonable under current circumstances, actual resolution of these matters may differ from recorded estimated amounts, resulting in charges or credits that could materially affect future financial statements. See Note 10, "Income Taxes" for additional information related to the provision for income taxes.

Disclosure of Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. In calculating fair value, a company must maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements. The carrying amounts of cash and cash equivalents, receivables, trade accounts payable and accrued expenses approximate fair value because of the short-term nature of these accounts. The Company's self-insurance liabilities are reported on an undiscounted basis as the timing of estimated settlements cannot be determined.

The Company follows the FASB's guidance on Fair Value Measurements and Disclosures which provides rules for using fair value to measure assets and liabilities as well as a fair value hierarchy that prioritizes the information used to develop the measurements. It applies whenever other guidance requires (or permits) assets or liabilities to be measured at fair value and gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

F-11

A summary of the fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels is described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

As further discussed in Note 6, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations", in conjunction with the debt agreements entered into in February 2016, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The applicable guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in a company's balance sheets.

As the Company's interest rate swap, a cash flow hedge, is not traded on a market exchange, the fair value is determined using a valuation model based on a discounted cash flow analysis. This analysis reflects the contractual terms of the interest rate swap agreement and uses observable market-based inputs, including estimated future LIBOR interest rates. The fair value of the Company's interest rate swap is the net difference in the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates and are observable inputs available to a market participant. The interest rate swap valuation is classified in Level 2 of the fair value hierarchy. The debt balances as presented in the consolidated balance sheets approximate the fair value of the respective instruments as the debt is at a variable rate, the estimates of which are considered Level 2 fair value calculations within the fair value hierarchy.

The following table presents by level, within the fair value hierarchy, assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 and 2015 :



December 31, 2016	Fair Value Measurements - Assets (Liabilities)
	Total			Level 1		Level 2			Level 3
Interest rate swap	$	(129,000	)	$	—	$	(129,000	)	$	—

December 31, 2015	Fair Value Measurements - Assets (Liabilities)
	Total			Level 1		Level 2			Level 3
Interest rate swap	$	(625,000	)	$	—	$	(625,000	)	$	—

The change in fair value of the Company's cash flow hedge is detailed in the Company's Consolidated Statements of Comprehensive Income (Loss).

Net Income (Loss) per Common Share

The Company follows the FASB's guidance on Earnings Per Share for the financial reporting of net income (loss) per common share. Basic earnings per common share excludes dilution and restricted shares and is computed by dividing income available to common shareholders by the weighted-average number of common shares, excluding restricted shares, outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or otherwise resulted in the issuance of common stock that then shared in the earnings of the Company. See Note 9, "Net Income (Loss) per Common Share" for additional disclosures about the Company's Net Income (Loss) per Common Share.

Stock Based Compensation

The Company follows the FASB's guidance on Stock Compensation to account for share-based payments granted to team members and recorded non-cash stock based compensation expense of $1,012,000 , $1,152,000 and $580,000 during the years ended December 31, 2016 , 2015 and 2014 , respectively. Such amounts are included as components of general and administrative expense or operating expense based upon the classification of cash compensation paid to the related employees. See Note 8, "Shareholders' Equity, Stock Plans and Preferred Stock" for additional disclosures about the Company's stock based compensation plans.

Accumulated Other Comprehensive Income (Loss)

F-12

Accumulated other comprehensive income consists of other comprehensive income (loss). Comprehensive income (loss) is a more inclusive financial reporting method that includes disclosure of financial information that historically has not been recognized in the calculation of net income (loss). The Company has chosen to present the components of other comprehensive income in a separate statement of comprehensive income (loss). Currently, the Company's other comprehensive income (loss) consists of the change in fair value of the Company's interest rate swap transaction accounted for as a cash flow hedge.

Recent Accounting Guidance

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In March 2016, the FASB issued an update to ASU No. 2014-09 in the form of ASU No. 2016-08, which amended the principal-versus-agent implementation guidance and illustrations in the new revenue guidance. The update clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued another update to the new revenue standard in the form of ASU No. 2016-10, which amends the guidance on identifying performance obligations and the implementation guidance on licensing. In May 2016, ASU No. 2016-12 was issued, which amends the new revenue recognition guidance on transition, collectibility, noncash consideration and the presentation of taxes. The new revenue standard (including updates) will be effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. The Company will adopt the requirements of this standard effective January 1, 2018. We are in the early stages of evaluating the expected adoption method of ASU No. 2014-09, and we are analyzing whether enhancements are needed to our business and accounting systems.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (Topic 835), which amends and simplifies the presentation of debt issuance costs. The main provisions of the standard require that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, and amortization of the debt issuance costs continues to be reported as interest expense. The Company adopted ASU No. 2015-03 as of January 1, 2016. The new standard was applied on a retroactive basis. The adoption of this guidance resulted in a $967,000 reclass between deferred financing costs and long-term debt.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which changes how deferred taxes are classified on the Company's balance sheets and is effective for financial statements issued for annual periods beginning after December 15, 2016, with early adoption permitted. ASU 2015-17 requires all deferred tax assets and liabilities to be classified as non-current. Upon adoption on January 1, 2017, the Company anticipates reclassifying deferred income taxes of approximately $7,644,000 from current to non-current assets.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Disclosures will be required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We anticipate this standard will have a material impact on our consolidated financial statements. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to our accounting for building and equipment operating leases and will result in a significant increase in the assets and liabilities on the consolidated balance sheet.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU was issued as part of the FASB Simplification Initiative and involves several aspects of accounting for shared-based payment transactions, including the income tax consequences and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, which will be the Company's fiscal year 2017, and interim periods within those annual periods. Early adoption is permitted. The Company is in the early stages of evaluating the impact this standard will have on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This update is intended to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. This update requires that financial statement assets measured at an amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. This standard is effective for the fiscal year beginning after December 15, 2019 with early adoption permitted. The Company is in the initial stages of evaluating the impact from the adoption of this new standard on the Consolidated Financial Statements and related notes.

F-13

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). The ASU provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The ASU is effective for annual and interim periods beginning after December 15, 2017, which will require the Company to adopt these provisions in the first quarter of fiscal 2018 using a retrospective approach. Early adoption is permitted. The Company is currently evaluating the impact this standard will have on our consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that the Statement of Cash Flows explain the changes during the period of cash and cash equivalents inclusive of amounts categorized as Restricted Cash. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for periods beginning after December 15, 2017.

Reclassifications

As discussed above, the Company adopted ASU No. 2015-03 as of January 1, 2016, and was applied on a retroactive basis. We reclassified $967,000 of debt issuance costs to long-term debt as of December 31, 2015.

As discussed in Note 3, "Discontinued Operations" the consolidated financial statements of the Company have been retroactively reclassified for all periods presented to reflect as discontinued operations certain divestitures and lease terminations.

2. BUSINESS DEVELOPMENT AND OTHER SIGNIFICANT TRANSACTIONS

Golden Living Transaction

On August 15, 2016, the Company entered into an Operation Transfer Agreement with Golden Living (the "Lessor") to assume the operations of 22 centers in Alabama and Mississippi.

On October 1, 2016, the Company entered into a Master Lease Agreement (the "Lease") with Golden Living to directly lease eight centers located in Mississippi from the Lessor, which include: (i) a 152 -bed skilled nursing center known as Golden Living Center - Amory; (ii) a 130 -bed skilled nursing center known as Golden Living Center - Batesville; (iii) a 58 -bed skilled nursing center known as Golden Living Center - Brook Manor; (iv) a 119 -bed skilled nursing center known as Golden Living Center - Eupora; (v) a 140 -bed skilled nursing center known as Golden Living Center - Ripley; (vi) a 140 -bed skilled nursing center known as Golden Living Center - Southaven; (vii) a 120 -bed skilled nursing center known as Golden Living Center - Eason Blvd; (viii) a 60 -bed skilled nursing center known as Golden Living Center - Tylertown. The Lease is triple net and has an initial term of ten years with two separate five year options to extend the term. The Company also assumed the individual leases of a 120 -bed center known as Broadmoor Nursing Home, with an initial lease term of ten years with first year rent of $540,000 , escalating to $780,000 in the second year, and 2% annually thereafter, and a 99 -bed skilled nursing center known as Leake County Nursing Home, with a lease term of two years with annual rent of $300,000 .

On November, 1 2016, the Company amended and restated the Lease ("Amended Lease") with the Lessor to directly lease an additional twelve centers located in Alabama from the Lessor, which include: (i) a 87 -bed skilled nursing center known as Golden Living Center - Arab; (ii) a 180 -bed skilled nursing center known as Golden Living Center - Meadowood; (iii) a 132 -bed skilled nursing center known as Golden Living Center - Riverchase; (iv) a 100 -bed skilled nursing center known as Golden Living Center - Boaz; (v) a 154 -bed skilled nursing center known as Golden Living Center - Foley; (vi) a 50 -bed skilled nursing center known as Golden Living Center - Hueytown; (vii) a 85 -bed skilled nursing center known as Golden Living Center - Lanett; (viii) a 138 -bed skilled nursing center known as Golden Living Center - Montgomery; (ix) a 120 -bed skilled nursing center known as Golden Living Center - Oneonta; (x) a 173 -bed skilled nursing center known as Golden Living Center - Oxford; (xi) a 94 -bed skilled nursing center known as Golden Living Center - Pell City; (xii) a 123 -bed skilled nursing center known as Golden Living Center - Winfield. The Amended Lease is triple net and has an initial term of ten years with two separate five year options to extend the term. Base rent for the amended lease is $24,675,000 for the first year and escalates 2% annually thereafter.

2016 Acquisitions

On February 26, 2016, the Company exercised its purchase options to acquire the real estate assets for Diversicare of Hutchinson in Hutchinson, Kansas and Clinton Place in Clinton, Kentucky for $4,250,000 and $3,300,000 , respectively. The Company has operated these centers since February 2015 and April 2012, respectively. Hutchinson is an 85 -bed skilled nursing center and Clinton is an 88 -bed skilled nursing center. As a result of the consummation of the Agreements, the Company allocated the purchase price and acquisition costs between the assets acquired. The relative fair value allocation of the purchase price was determined with the assistance of HealthTrust LLC, a third-party real estate valuation firm. The allocation for the assets acquired is as follows:

F-14



	Hutchinson	Clinton Place
Purchase Price	4,250,000	3,300,000
Acquisition Costs	43,000	34,000
	4,293,000	3,334,000

Allocation:
Buildings	3,443,000	2,898,000
Land	365,000	267,000
Furniture, Fixtures and Equipment	485,000	169,000
	4,293,000	3,334,000

2015 Acquisitions

On February 1, 2015, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Barren County Health Care Center, Inc. to acquire a 94 -bed skilled nursing center in Glasgow, Kentucky, for an aggregate purchase price of $7,000,000 , partially financed through a $5,000,000 mortgage loan with The PrivateBank with the balance paid in cash consideration.

As a result of this business combination transaction, the Company allocated the purchase price of $7,000,000 based on the fair value of the acquired net assets. The allocation of the purchase price was determined with the assistance of HealthTrust LLC, a third-party real estate valuation firm. The allocation for the net assets acquired is as follows:



	February 1, 2015
Purchase Price	$	7,000,000

Land	672,000
Buildings	5,778,000
Furniture, Fixtures, and Equipment	550,000
	$	7,000,000

On November 1, 2015, the Company entered into an Asset Purchase Agreement with Haws Fulton Investors, LLC to acquire a 60 -bed skilled nursing center in Fulton, Kentucky, for an aggregate purchase price of $3,900,000 . As a result of this business combination transaction, the Company allocated the purchase price of $3,900,000 based on the fair value of the acquired net assets. The allocation for the net assets acquired is as follows:



	November 1, 2015
Purchase Price	$	3,900,000

Land	300,000
Buildings	3,338,000
Furniture, Fixtures, and Equipment	262,000
	$	3,900,000

2015 Lease Agreement

On February 1, 2015, the Company assumed operations of a 85 -bed skilled nursing center in Hutchinson, Kansas. This center has an initial lease term of 10 years, and included an option to purchase exercisable after the first year of operations. The center was already operating and treating patients on the transition date. There was no purchase price paid to enter into the lease agreement. As disclosed above, the Company purchased this center on February 26, 2016.

2016 Lease Termination

F-15

On May 31, 2016, the Company entered into an Agreement with Avon Ohio, LLC to amend the original lease agreement, thus terminating the Company's right of possession of the center. As a result, the Company incurred lease termination costs of $2,008,000 in the second quarter of 2016. Under the amended agreement, the Company is required to pay $300,000 per year through the term of the original lease agreement, July 31, 2024. For accounting purposes, this transaction was not reported as a discontinued operation, which is in accordance with the modified authoritative guidance for reporting discontinued operations, effective January 1, 2015. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on the Company's operations and financial results.

2016 Sale of Investment in Unconsolidated Affiliate

On October 28, 2016, the Company and its partners entered into an asset purchase agreement to sell the pharmacy joint venture. The sale resulted in a $1,366,000 recorded gain for the Company for the year ended December 31, 2016 . The transaction also resulted in an immaterial gain contingency. The Company accounts for gain contingencies in accordance with the provisions of ASC 450, Contingencies , and, therefore, we do not record gain contingencies and recognize income until realized.

3. DISCONTINUED OPERATIONS

West Virginia Disposition

Effective April 3, 2014, the Company entered into an asset purchase agreement with Rose Terrace Acq., LLC (“Purchaser”) to sell its skilled nursing center in Culloden, West Virginia. The original asset purchase agreement was subject to a number of conditions including an amendment to the Consolidated Amended and Restated Master Lease ("Master Lease") with Omega to terminate the lease only with respect to two other skilled nursing centers in West Virginia, state licensure and regulatory approval.

Effective July 1, 2014, the Company completed the transaction with Rose Terrace Acq., LLC to sell Rose Terrace, a 90 -bed skilled nursing center in Culloden, West Virginia for a sales price of $16,500,000 . The Company also entered into the Fifteenth Amendment to the Master Lease with Omega to terminate the lease only with respect to two other skilled nursing centers in West Virginia, and concurrently entered into an operations transfer agreement with American Health Care Management, LLC, an affiliate of the purchaser with respect to two other skilled nursing centers located in Danville and Ivydale, West Virginia. The amendment effectively reduced the annual rent payments due under the Master Lease by $1,900,000 . Upon completion of the transaction, Diversicare no longer operates any skilled nursing centers in the state of West Virginia. In conjunction with the closing of the sale, the Company paid the balance of the $8,000,000 mortgage loan outstanding on the Rose Terrace center.

The transaction resulted in a gain on the disposition of Rose Terrace which, along with the results of operations for these nursing centers, is presented within Discontinued Operations on the Consolidated Statements of Operations. The pretax gain on the transaction was $7,522,000 . The tax expense associated with the gain was $2,793,000 for which the Company applied net operating loss carryforwards from our deferred tax assets to substantially offset and minimize the cash outlay for this transaction.

These centers contributed revenues of $0 , $0 , and $10,961,000 and net loss of $51,000 , $225,000 , and $26,000 during the years ended December 31, 2016 , 2015 , and 2014 , respectively. In addition to the West Virginia centers, other discontinued operations that were disposed of prior to 2014 contributed net income (loss) of $(16,000) , $(903,000) , and $3,284,000 during the years ended December 31, 2016 , 2015 , and 2014 , respectively. The net income or loss for the nursing centers included in discontinued operations does not reflect any allocation of corporate general and administrative expense or any allocation of corporate interest expense. The Company considered these additional costs along with the centers' future prospects based upon operating history when determining the contribution of the skilled nursing centers to its operations.

4. RECEIVABLES

Receivables, before the allowance for doubtful accounts, consist of the following components:



	December 31,
	2016		2015

Medicare	$	20,402,000	$	14,415,000
Medicaid and other non-federal government programs	31,208,000		20,133,000
Other patient and resident receivables	20,868,000		17,451,000
	$	72,478,000	$	51,999,000
Other receivables and advances	$	1,193,000	$	1,407,000

F-16

The other receivables and advances balance include of $474,000 and $938,000 related to renovation projects to be funded by Omega at December 31, 2016 and 2015 , respectively. See Note 11, "Commitments and Contingencies" for additional discussion of these receivables and leased center construction projects.

The Company provides credit for a substantial portion of its revenues and continually monitors the credit worthiness and collectability from its patients, including proper documentation of third-party coverage. The Company is subject to accounting losses from uncollectible receivables in excess of its reserves.

Substantially all receivables are pledged as collateral on the Company's debt obligations.

5. PROPERTY AND EQUIPMENT

Property and equipment, at cost, consists of the following:



	December 31,
	2016			2015

Land	$	5,761,000		$	4,859,000
Buildings and leasehold improvements	85,660,000			76,025,000
Furniture, fixtures and equipment	37,401,000			33,499,000
	128,822,000			114,383,000
Less: accumulated depreciation	(69,022,000		)	(62,110,000		)
Net property and equipment	$	59,800,000		$	52,273,000

As discussed further in Note 6, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations", the property and equipment of certain skilled nursing centers are pledged as collateral for mortgage debt obligations. In addition, the Company has assets recorded as capital leased assets purchased through capitalized lease obligations. The Company capitalizes leasehold improvements which will revert back to the lessor of the property at the expiration or termination of the lease, and depreciates these improvements over the shorter of the remaining lease term or the assets' estimated useful lives.

6. LONG-TERM DEBT, INTEREST RATE SWAP AND CAPITALIZED LEASE OBLIGATIONS

Long-term debt consists of the following:



	December 31,
	2016			2015
Mortgage loan with a syndicate of banks; issued in March 2011, amended May 2013; and further amended February 2016; payable monthly, interest at 4.0% above LIBOR, a portion of which is fixed at 5.79% based on the interest rate swap described below.	$	58,792,000		$	47,401,000
Acquisition loan with The PrivateBank, issued in February 2016, interest at 4.75% above LIBOR.	6,289,000			—
Revolving credit facility borrowings payable to a bank; entered into in March 2010; amended in March 2011 and further amended May 2013, March 2014, February 2016 and October 2016; secured by receivables of the Company; interest at 4.0% above LIBOR.	15,000,000			12,900,000
	80,081,000			60,301,000
Less current portion	(6,663,000		)	(6,276,000		)
	$	73,418,000		$	54,025,000

As of December 31, 2016 , the Company's weighted average interest rate on long-term debt, including the impact of the interest rate swap, was approximately 5.17% .

F-17

The Company has agreements with a syndicate of banks for a mortgage term loan ("Original Mortgage Loan") and the Company’s revolving credit agreement ("Original Revolver"). On February 26, 2016, the Company executed an Amended and Restated Credit Agreement (the "Credit Agreement") which modified the terms of the Original Mortgage Loan and the Original Revolver Agreements dated April 30, 2013. The Credit Agreement increases the Company's borrowing capacity to $100,000,000 allocated between a $72,500,000 Mortgage Loan ("Amended Mortgage Loan") and a $27,500,000 Revolver ("Amended Revolver"). The Amended Mortgage Loan consists of $60,000,000 term and $12,500,000 acquisition loan facilities. Loan acquisition costs associated with the Amended Mortgage Loan and the Amended Revolver were capitalized in the amount of $2,162,000 and are being amortized over the five -year term of the agreements. Additionally, the Glasgow term loan balance of $5,000,000 was consolidated into the new Credit Agreement.

Under the terms of the amended agreements, the syndicate of banks provided the Amended Mortgage Loan with an original balance of $72,500,000 with a five -year maturity through February 26, 2021, and a $27,500,000 Amended Revolver through February 26, 2021. The Amended Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25 -year amortization. Interest on the term and acquisition loan facilities are based on LIBOR plus 4.0% and 4.75% , respectively. A portion of the Amended Mortgage Loan is effectively fixed at 5.79% pursuant to an interest rate swap with an initial notional amount of $30,000,000 . As of December 31, 2016 , the interest rate related to the Amended Mortgage Loan was 4.75% . The Amended Mortgage Loan is secured by 17 owned nursing centers, related equipment and a lien on the accounts receivable of these centers. The Amended Mortgage Loan and the Amended Revolver are cross-collateralized and cross-defaulted. The Company’s Amended Revolver has an interest rate of LIBOR plus 4.0% and is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions.

Effective October 3, 2016, the Company entered into the Second Amendment to the Third Amended and Restated Revolver ("Second Amendment"). The Second Amendment increased the Amended Revolver capacity from the $27,500,000 in the original Amended Revolver to $52,250,000 ; provided that the maximum revolving facility be reduced to $42,250,000 on August 1, 2017. The change to the borrowing capacity is a result of the increase in receivables related to new centers that continue to progress through the change in ownership process.

On December 29, 2016, the Company executed a Third Amendment to the Third Amended and Restated Revolver ("Third Amendment"). The Third Amendment modifies the terms of the Loan Agreement by increasing the Company’s letter of credit sublimit from $10,000,000 to $15,000,000 .

As of December 31, 2016 , the Company had $15,000,000 in borrowings outstanding under the Amended Revolver compared to $12,900,000 outstanding as of December 31, 2015 . The outstanding borrowings on the Amended Revolver primarily reflect the Company's approach to accumulated Medicaid and Medicare receivables at recently acquired centers as these centers proceed through the change in ownership process with CMS. Annual fees for letters of credit issued under the Amended Revolver are 3.0% of the amount outstanding. The Company has 12 letters of credit with a total value of $10,230,000 outstanding as of December 31, 2016 . Considering the balance of eligible accounts receivable, the letter of credit, the amounts outstanding under the Amended Revolver and the maximum loan amount of $42,674,000 , the balance available for borrowing under the Amended Revolver is $14,443,000 at December 31, 2016 .

The Company’s debt agreements contain various financial covenants, the most restrictive of which relates to debt service coverage ratios. The Company is in compliance with all such covenants at December 31, 2016 .

In connection with the Company's 2016 and 2015 financing agreements, the Company recorded the following deferred loan costs related to the new financing agreements as a reduction of the debt balances discussed above:



	2016		2015
Write-off of deferred financing costs	$	351,000	$	—
Deferred financing costs capitalized	$	2,162,000	$	160,000

The deferred financing costs included in the current and long-term balances were $2,273,000 at December 31, 2016 and $967,000 at December 31, 2015 .

Scheduled principal payments of long-term debt are as follows:

F-18



2017	$	6,663,000
2018	6,740,000
2019	6,820,000
2020	8,196,000
2021	$	51,662,000
Total	$	80,081,000

Interest Rate Swap Cash Flow Hedge

As part of the debt agreements entered into in April 2013, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The Company entered into the interest rate swap agreement to mitigate the variable interest rate risk on its outstanding mortgage borrowings. The Company designated its interest rate swap as a cash flow hedge and the effective portion of the hedge, net of taxes, is reflected as a component of other comprehensive income (loss). In conjunction with the aforementioned amendment to the Credit Agreement that occurred in February 2016, the Company retained the previously agreed upon interest rate swap modifying the terms of the swap to reflect the amended Credit Agreement. The Company redesignated the interest rate swap as a cash flow hedge. The interest rate swap agreement has the same effective date and maturity date as the Amended Mortgage Loan, and has an amortizing notional amount that was $29,329,000 as of December 31, 2016 . The interest rate swap agreement requires the Company to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 5.79% while the bank is obligated to make payments to the Company based on LIBOR on the same notional amounts. The applicable guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in a company's balance sheets.

The Company assesses the effectiveness of its interest rate swap on a quarterly basis and at December 31, 2016 , the Company determined that the interest rate swap was effective. The interest rate swap valuation model indicated a net liability of $129,000 at December 31, 2016 . The fair value of the interest rate swap is included in “other noncurrent liabilities” on the Company's consolidated balance sheets. The liability related to the change in the interest rate swap included in accumulated other comprehensive income at December 31, 2016 is $80,000 , net of income tax benefit of $49,000 . As the Company's interest rate swap is not traded on a market exchange, the fair value is determined using a valuation model based on a discounted cash flow analysis. This analysis reflects the contractual terms of the interest rate swap agreement and uses observable market-based inputs, including estimated future LIBOR interest rates. The fair value of the Company's interest rate swap is the net difference in the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates and are observable inputs available to a market participant. The interest rate swap valuation is classified in Level 2 of the fair value hierarchy, in accordance with the FASB's guidance on Fair Value Measurements and Disclosures .

Capitalized Lease Obligations

Upon acquisition of some centers, we assumed certain leases, primarily related to equipment, that constitute capital leases. As a result, we have recorded the underlying lease assets and capitalized lease obligations of $2,052,000 and $566,000 as of December 31, 2016 and 2015 , respectively. These lease agreements provide three to five year terms.

Scheduled payments of the capitalized lease obligations are as follows:



2017	$	1,133,000
2018	955,000
2019	75,000
Total	2,163,000
Amounts related to interest	(111,000		)
Principal payments on capitalized lease obligation	$	2,052,000

7. VARIABLE INTEREST ENTITY

On December 28, 2011, the Company completed construction of Rose Terrace Health and Rehabilitation Center (“Rose Terrace”), its third health care center in West Virginia.

The Company initially entered into a lease agreement with the real estate developer that constructed, furnished, and equipped Rose Terrace. The agreement included the right to purchase the center and all associated assets beginning at the end of the first year of the initial term of the lease and continuing through the fifth year for a purchase price ranging from 110% to 120% of the

F-19

total project cost. On March 27, 2014, the Company exercised this purchase option and acquired the land, building, and all other assets of the Rose Terrace nursing center from the real estate developer for the contractually agreed upon price of $7,693,000 .

Prior to the exercise of the purchase option, the Company had determined it was the primary beneficiary of the variable interest entity ("VIE") that developed the Rose Terrace nursing center based on the ownership of the Certificate of Need, the fixed price purchase option described above, the Company’s ability to direct the activities that most significantly impact the economic performance of the VIE, and the right to receive potentially significant benefits from the VIE. Accordingly, as the primary beneficiary, the Company consolidated the balance sheet and results of operations of the VIE for periods prior to the exercise of the purchase option. However, after the exercise of the purchase option, the previous owners paid the outstanding debt related to the entity in full. Subsequently, as further disclosed in Note 3, "Discontinued Operations", the Company sold the Rose Terrace facility and all assets associated with the facility. As a result of these events, the real estate development entity is no longer consolidated.

8. SHAREHOLDERS' EQUITY, STOCK PLANS AND PREFERRED STOCK

Shareholders' Rights Plan

On May 7, 2014, the Company entered into a fourth amendment (the “Fourth Amendment”) to the Amended and Restated Rights Agreement, dated as of December 7, 1998, as amended March 19, 2005, August 15, 2008, and August 14, 2009 between the Company (formerly Advocat Inc.) and ComputerShare Trust Company, N.A., as successor to SunTrust Bank, as Rights Agent. In the Fourth Amendment, the Company changed the Expiration Date of the preferred share purchase rights (the “Rights”) under the Rights Agreement from August 2, 2018 to May 15, 2014. As a result of the Fourth Amendment, the Rights Agreement terminated by its terms and is of no further force and effect and the Rights expired at the close of business on May 15, 2014.

Stock Based Compensation Plans

The Company follows the FASB's guidance on Stock Compensation to account for stock-based payments granted to employees and non-employee directors.

Overview of Plans

In December 2005, the Compensation Committee of the Board of Directors adopted the 2005 Long-Term Incentive Plan (“2005 Plan”). The 2005 Plan allows the Company to issue stock options and other share and cash based awards. Under the 2005 Plan, 700,000 shares of the Company's common stock have been reserved for issuance upon exercise of equity awards granted thereunder. All grants under this plan expire 10 years from the date the grants were authorized by the Board of Directors.

In June 2008, the Company adopted the Advocat Inc. 2008 Stock Purchase Plan for Key Personnel (“Stock Purchase Plan”). The Stock Purchase Plan provides for the granting of rights to purchase shares of the Company's common stock to directors and officers and 150,000 shares of the Company's common stock has been reserved for issuance under the Stock Purchase Plan. The Stock Purchase Plan allows participants to elect to utilize a specified portion of base salary, annual cash bonus, or director compensation to purchase restricted shares or restricted share units (“RSU's”) at 85% of the quoted market price of a share of the Company's common stock on the date of purchase. The restriction period under the Stock Purchase Plan is generally two years from the date of purchase and during which the shares will have the rights to receive dividends, however, the restricted share certificates will not be delivered to the shareholder and the shares cannot be sold, assigned or disposed of during the restriction period and are subject to forfeiture. In June 2016, our shareholders approved an amendment to the Stock Purchase Plan to increase the number of shares of our common stock authorized under the Plan from 150,000 shares to 350,000 shares. No grants can be made under the Stock Purchase Plan after April 25, 2028.

In April 2010, the Compensation Committee of the Board of Directors adopted the 2010 Long-Term Incentive Plan (“2010 Plan”), followed by approval by the Company's shareholders in June 2010. The 2010 Plan allows the Company to issue stock appreciation rights, stock options and other share and cash based awards. Under the 2010 Plan, 380,000 shares of the Company's common stock have been reserved for issuance upon exercise of equity awards granted.

Equity Grants and Valuations

During 2016 and 2015 , the Compensation Committee of the Board of Directors approved grants totaling approximately 83,000 and 74,000 , respectively, shares of restricted common stock to certain employees and members of the Board of Directors. These restricted shares vest one-third on the first, second and third anniversaries of the grant date. Unvested shares may not be sold or transferred. During the vesting period, dividends accrue on the restricted shares, but are paid in additional shares of common stock upon vesting, subject to the vesting provisions of the underlying restricted shares. The restricted shares are entitled to the same voting rights as other common shares. Upon vesting, all restrictions are removed.

F-20

The Company recorded non-cash stock-based compensation expense from continuing operations for equity grants and RSU's issued under the Plans of $1,012,000 , $1,152,000 , and $580,000 during the years ended December 31, 2016 , 2015 , and 2014 , respectively. Such amounts are included as components of general and administrative expense or operating expense based upon the classification of cash compensation paid to the related employees. As of December 31, 2016 , there was $537,000 in unrecognized compensation costs related to stock-based compensation to be recognized over the applicable remaining vesting periods. The Company estimated the total recognized and unrecognized compensation for all options and SOSARs using the Black-Scholes-Merton equity grant valuation model. Restricted stock awards are valued using the market price on the grant date.

The table below shows the weighted average assumptions the Company used to develop the fair value estimates under its option valuation model:



	Year Ended December 31,
	2016	2015	2014
Expected volatility (range)	N/A ⁽¹⁾	44%-49%	N/A ⁽¹⁾
Risk free interest rate (range)	N/A ⁽¹⁾	1.52%-1.87%	N/A ⁽¹⁾
Expected dividends	N/A ⁽¹⁾	2.15%	N/A ⁽¹⁾
Weighted average expected term (years)	N/A ⁽¹⁾	6	N/A ⁽¹⁾

___________


(1)	The Company did not issue any options or other equity grants that would require application of the Black-Scholes-Merton equity grant valuation model during the years ended December 31, 2016 and 2014. All equity grants during these periods were restricted common shares which are valued using an intrinsic valuation method based on market price.

In computing the fair value estimates using the Black-Scholes-Merton valuation model, the Company took into consideration the exercise price of the equity grants and the market price of the Company's stock on the date of grant. The Company used an expected volatility that equals the historical volatility over the most recent period equal to the expected life of the equity grants. The risk free interest rate is based on the U.S. treasury yield curve in effect at the time of grant. The Company used the expected dividend yield at the date of grant, reflecting the level of annual cash dividends currently being paid on its common stock.

In computing the fair value of these equity grants, the Company estimated the equity grants' expected term based on the average of the vesting term and the original contractual terms of the grants, consistent with the Securities and Exchange Commission's interpretive guidance often referred to as the “Simplified Method.” The Company's recent exercise history is primarily from options granted in 2005 that were vested at grant date and were significantly in-the-money due to an increase in stock price during the period between grant date and formal approval by shareholders, and from older options granted several years ago that had fully vested.

The table below describes the resulting weighted average grant date fair values calculated as well as the intrinsic value of options exercised under the Company's equity awards during each of the following years:



	Year Ended December 31,
	2016 ⁽¹⁾		2015		2014 ⁽¹⁾
Weighted average grant date fair value	—		$	3.78	$	—
Total intrinsic value of exercises	$	3,000	$	249,000	$	126,000

___________


(1)	The Company did not issue any options or other equity grants that would require application of the Black-Scholes-Merton equity grant valuation model during the years ended December 31, 2016 and 2014. All equity grants during this period were restricted common shares which are valued using an intrinsic valuation method based on market price.

The following table summarizes information regarding stock options and SOSAR grants outstanding as of December 31, 2016 :

F-21



	Weighted
	Average			Intrinsic			Intrinsic
Range of	Exercise		Grants	Value-Grants		Grants	Value-Grants
Exercise Prices	Prices		Outstanding	Outstanding		Exercisable	Exercisable
$10.21 to $11.59	$	10.88	62,000	$	3,000	57,000	$	—
$2.37 to $6.21	$	5.54	169,000	822,000		169,000	822,000
			231,000			226,000

As of December 31, 2016 , the outstanding equity grants have a weighted average remaining life of 3.94 and those outstanding equity grants that are exercisable have a weighted average remaining life of 3.84 . During the year ended December 31, 2016 , approximately 1,000 stock option and SOSAR grants were exercised under these plans. All of the equity grants exercised were net settled. The net proceeds from equity grants exercised in 2016 was $(105,000) .

Summarized activity of the equity compensation plans is presented below:



			Weighted
	SOSARs/		Average
	Options		Exercise Price
Outstanding, December 31, 2015	232,000		$	6.97
Granted	—		—
Exercised	(1,000	)	7.24
Expired or cancelled	—		—
Outstanding, December 31, 2016	231,000		$	6.97

Exercisable, December 31, 2016	226,000		$	6.90



			Weighted
			Average
	Restricted		Grant Date
	Shares		Fair Value
Outstanding, December 31, 2015	141,000		$	9.07
Granted	83,000		8.87
Dividend Equivalents	4,000		9.21
Vested	(68,000	)	7.85
Cancelled	(7,000	)	9.80
Outstanding December 31, 2016	153,000		$	9.47

Summarized activity of the Restricted Share Units for the Stock Purchase Plan is as follows:



			Weighted
			Average
	Restricted		Grant Date
	Share Units		Fair Value
Outstanding, December 31, 2015	62,000		$	9.58
Granted	17,000		8.87
Dividend Equivalents	2,000		9.19
Vested	(27,000	)	6.13
Cancelled	—		—
Outstanding December 31, 2016	54,000		$	11.10

F-22

Series A Preferred Stock

The Company is authorized to issue up to 200,000 shares of Series A Preferred Stock. The Company's Board of Directors is authorized to establish the terms and rights of each series, including the voting powers, designations, preferences, and other special rights, qualifications, limitations, or restrictions thereof.

Series B and Series C Redeemable Preferred Stock

As part of the consideration paid to Omega for restructuring the terms of the Omega Master Lease in November 2000, the Company issued to Omega 393,658 shares of the Company's Series B Redeemable Convertible Preferred Stock (“Series B Preferred Stock”) with a stated value of $3,300,000 and an annual dividend rate of 7% of the stated value. In October 2006, the Company and Omega entered into a Restructuring Stock Issuance and Subscription Agreement (“Restructuring Agreement”) to restructure the Series B Preferred Stock, eliminating the option of Omega to convert the Series B Preferred Stock into shares of Diversicare (formerly Advocat) common stock.

At the time of the Restructuring Agreement, the Series B Preferred Stock had a recorded value (including accrued dividends) of approximately $4,918,000 and was convertible into approximately 792,000 shares of common stock. The Company issued 5,000 shares of a new Series C Redeemable Preferred Stock (“Series C Preferred Stock”) to Omega in exchange for the 393,658 shares of Series B Preferred Stock held by Omega. The Series C Preferred Stock had a stated value of approximately $4,918,000 and an annual dividend rate of 7% of its stated value payable quarterly in cash. The Series C Preferred Stock was not convertible, but was redeemable at its stated value at Omega's option since September 30, 2010, and since September 30, 2007, was redeemable at its stated value at the Company's option.

In connection with the termination of the conversion feature, the Company agreed to pay Omega an additional $687,000 per year under the Lease Amendment. The additional annual payments of $687,000 were discounted over the twelve year term of the renewal to arrive at a net present value of $6,701,000 , the preferred stock premium. The Company recorded the fair value of the elimination of the conversion feature as a reduction in Paid In Capital with an offsetting increase to record a premium on the Series C Preferred Stock. As a result, the Series C Preferred Stock was initially recorded at a total value of $11,619,000 , equal to the stated value of the Series B Preferred Stock, $4,918,000 , plus the value of the conversion feature, $6,701,000 which was fully amortized in 2010. The stated value of the preferred stock was classified as temporary equity and the additional obligation was classified as a noncurrent in the accompanying consolidated balance sheet. As the related cash payments were made, the preferred stock premium was reduced and interest expense was recorded.

Effective August 14, 2014, the Company redeemed all of its outstanding shares of Series C Preferred Stock for approximately $4,918,000 from the holder. The redemption was affected as a result of Omega’s exercise of its pre-existing option to require the Company to redeem the Preferred Stock as provided in the Company’s Certificate of Designation. As a result of the redemption, the Company no longer has any Series C Preferred Stock outstanding. The following table reflects activity in the Series C Preferred Stock:



Series C Preferred Stock
	2016		2015		2014
Balance at the beginning of the period	$	—	$	—	$	4,918,000
Redemption of preferred stock	—		—		(4,918,000		)
Balance at the end of the period	$	—	$	—	$	—


9.	NET INCOME (LOSS) PER COMMON SHARE

Information with respect to the calculation of basic and diluted net income (loss) per common share is presented below:

F-23



	Years Ended December 31,
	2016			2015			2014
Numerator: Income (loss) attributable to Diversicare Healthcare Services, Inc. common shareholders:
Income (loss) from continuing operations	$	(1,744,000	)	$	2,752,000		$	1,450,000
Less: net loss attributable to noncontrolling interests	—			—			25,000
Income (loss) from continuing operations attributable to Diversicare Healthcare Services, Inc.	(1,744,000		)	2,752,000			1,475,000
Preferred stock dividends	—			—			(220,000		)
Income (loss) from continuing operations attributable to Diversicare Healthcare Services, Inc. common shareholders	(1,744,000		)	2,752,000			1,255,000
Income (loss) from discontinued operations, net of income taxes	(67,000		)	(1,128,000		)	3,258,000
Net income (loss) attributable to Diversicare Healthcare Services, Inc. common shareholders	$	(1,811,000	)	$	1,624,000		$	4,513,000

Denominator: Basic Weighted Average Common Shares Outstanding:	6,199,000			6,100,000			6,011,000

Basic net income per common share
Income (loss) from continuing operations	$	(0.28	)	$	0.45		$	0.21
Income (loss) from discontinued operations
Operating loss, net of taxes	(0.01		)	(0.18		)	(0.25		)
Gain on disposal, net of taxes	—			—			0.79
Discontinued operations, net of taxes	(0.01		)	(0.18		)	0.54
Basic net income (loss) per common share	$	(0.29	)	$	0.27		$	0.75



	2016			2015			2014
Numerator: Income (loss) from continuing operations attributable to Diversicare Healthcare Services, Inc. common shareholders	(1,744,000		)	2,752,000			1,255,000
Income (loss) from discontinued operations, net of income taxes	(67,000		)	(1,128,000		)	3,258,000
Net income (loss) attributable to Diversicare Healthcare Services, Inc. common shareholders	$	(1,811,000	)	$	1,624,000		$	4,513,000

Basic weighted average common shares outstanding	6,199,000			6,100,000			6,011,000
Incremental shares from assumed exercise of options, SOSARS and Restricted Stock Units	—			215,000			186,000
Denominator: Diluted Weighted Average Common Shares Outstanding:	6,199,000			6,315,000			6,197,000

Diluted net income per common share
Income (loss) from continuing operations	$	(0.28	)	$	0.44		$	0.20
Income (loss) from discontinued operations
Operating loss, net of taxes	(0.01		)	(0.18		)	(0.25		)
Gain on disposal, net of taxes	—			—			0.77
Discontinued operations, net of taxes	(0.01		)	(0.18		)	0.52
Diluted net income (loss) per common share	$	(0.29	)	$	0.26		$	0.72

F-24

The dilutive effects of the Company's stock options, SOSARs, Restricted Shares and Restricted Share Units are included in the computation of diluted income per common share during the periods they are considered dilutive.

The following table reflects the weighted average outstanding SOSARs and Options that were excluded from the computation of diluted earnings per share, as they would have been anti-dilutive:



	2016	2015	2014
SOSARs/Options Excluded	31,000	62,000	57,000

The weighted average common shares for basic and diluted earnings for common shares was the same due to the losses in 2016.

10. INCOME TAXES

Overview

For the year ended December 31, 2016 , the Company recorded a benefit for income taxes from continuing operations of $1,030,000 , and a provision for income taxes from continuing operations of $916,000 and $857,000 for the years ended December 31, 2015 and 2014 , respectively . The provision (benefit) for income taxes of continuing operations is composed of the following components:



	Year Ended December 31,
	2016			2015			2014
Current provision (benefit) :
Federal	$	17,000		$	1,191,000		$	10,000
State	522,000			947,000			10,000
	539,000			2,138,000			20,000
Deferred provision (benefit):
Federal	(1,284,000		)	(783,000		)	798,000
State	(285,000		)	(439,000		)	39,000
	(1,569,000		)	(1,222,000		)	837,000
Provision (benefit) for income taxes of continuing operations	$	(1,030,000	)	$	916,000		$	857,000

A reconciliation of taxes computed at statutory income tax rates on income (loss) from continuing operations is as follows:



	Year Ended December 31,
	2016			2015			2014
Provision (benefit) for federal income taxes at statutory rates	$	(889,000	)	$	1,247,000		$	784,000
Provision for state income taxes, net of federal benefit	120,000			688,000			76,000
Valuation allowance changes affecting the provision for income taxes	(45,000		)	(534,000		)	(66,000		)
Employment tax credits	(529,000		)	(1,249,000		)	(169,000		)
Nondeductible expenses	453,000			862,000			123,000
Stock based compensation expense	(62,000		)	(105,000		)	3,000
Other	(78,000		)	7,000			106,000
Provision (benefit) for income taxes of continuing operations	$	(1,030,000	)	$	916,000		$	857,000

F-25

Deferred Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are reduced by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that we will realize only some portion of the deferred tax assets. The net deferred tax assets and liabilities, at the respective income tax rates, are as follows:



	December 31,
	2016			2015
Current deferred tax assets:
Allowance for doubtful accounts	3,772,000			3,049,000
Accrued liabilities	5,011,000			5,895,000
	8,783,000			8,944,000
Less valuation allowance	(272,000		)	(319,000		)
	8,511,000			8,625,000
Current deferred tax liabilities:
Prepaid expenses	(867,000		)	(626,000		)
	$	7,644,000		$	7,999,000



	December 31,
	2016			2015
Noncurrent deferred tax assets:
Net operating loss and other carryforwards	$	1,260,000		$	1,040,000
Credit carryforwards	3,162,000			2,612,000
Deferred lease costs	107,000			167,000
Depreciation	2,122,000			1,184,000
Tax goodwill and intangibles	(1,296,000		)	(1,172,000		)
Stock-based compensation	629,000			534,000
Accrued rent	3,118,000			3,055,000
Kentucky and Kansas acquisition costs	6,000			113,000
Impairment of long-lived assets	269,000			267,000
Interest rate swap	49,000			237,000
Hedge Ineffectiveness	(69,000		)	—
Noncurrent self-insurance liabilities	4,633,000			4,185,000
Other	11,000			—
	14,001,000			12,222,000
Less valuation allowance	(460,000		)	(460,000		)
	$	13,541,000		$	11,762,000

Deferred Tax Valuation Allowance

The assessment of the amount of value assigned to our deferred tax assets under the applicable accounting standards is highly judgmental. We are required to consider all available positive and negative evidence in evaluating the likelihood that we will be able to realize the benefit of our deferred tax assets in the future. Such evidence includes scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax-planning strategies, and the results of recent operations. Since this evaluation requires consideration of historical and future events, there is significant judgment involved, and our conclusion could be materially different should certain of our expectations not transpire.

When assessing all available evidence, we consider the weight of the evidence, both positive and negative, based on the objectivity of the underlying evidence and the extent to which it can be verified. For the three-year period ended December 31, 2016 , the Company has a cumulative pre-tax income from continuing operations of $3,201,000 , which includes $2,774,000 of loss attributable to the year ended December 31, 2016 . Additionally, the Company recognized governmental and regulatory changes have put downward revenue pressure on the long-term care industry as a piece of negative evidence in our analysis. As a result of this negative evidence, the Company performed a thorough assessment of the available positive and negative evidence in order to ascertain whether it is more-likely-than-not that in future periods the Company will generate sufficient pre-tax income to utilize

F-26

all of our federal deferred tax assets and our net operating loss and other carryforwards and credits. State deferred tax assets are considered for valuation separately and on a state-by-state basis.

The Company also identified several pieces of objective positive evidence which were considered and weighed in the analysis performed regarding the valuation of deferred tax assets, including, but not limited to the expected accretive strategic acquisitions completed by us during the three-year period, corporate and regional restructuring expected to reduce costs while maintaining revenue levels, the long-term expiration dates of a majority of the net operating losses and credits, our history of not having carryforwards or credits expire unutilized, and the completed divestiture of the centers in Ohio in 2016 and West Virginia in 2014. The operations in the state of West Virginia demonstrated a trend of growing losses in recent years primarily as a result of disproportionate amount of professional liability expense relative to the revenue contributed. Additionally, the net operating loss created in 2013 was fully utilized during 2014 as a result of the income produced from operations and the taxable gain on the sale of Rose Terrace.

In performing the analysis, the Company contemplated utilization of the deferred tax assets under multiple scenarios. After consideration of these factors, the Company determined that it was more likely than not that future taxable income would be sufficient to realize substantially all of the recorded value of the Company's deferred tax assets for federal income tax purposes.

Realization of the deferred tax assets is not assured and future events could result in a change in judgment. If future events result in a conclusion that realization is no longer more likely than not to occur, the Company would be required to establish a valuation allowance on the deferred tax assets at that time, which would result in a charge to income tax expense and a potentially material decrease in net income in the period in which the factors change our judgment.

At December 31, 2016 , the Company had $7,385,000 of net operating losses, which expire at various dates beginning in 2019 and continue through 2036. The use of a portion of these loss carryforwards is limited by change in ownership provisions of the Federal tax code to a maximum of approximately $2,519,000 . The Company has reduced the deferred tax asset and the corresponding valuation allowances for net operating loss deductions permanently lost as a result of the change in ownership provisions.

With respect to state deferred tax assets, the Company reduced the valuation allowance by approximately $47,000 in 2016 , primarily related to the expectation that deferred tax assets for which valuation allowances had previously been applied would more-likely-than-not be utilized as a result of the increase in taxable income during the year ended December 31, 2016 . In 2015 and 2014 , the Company recorded a deferred tax provision to adjust approximately $315,000 and $215,000 , respectively, of the valuation allowance on state deferred tax assets. The changes in valuation allowance were based on the Company's assessment of the realization of certain individual tax assets. The Company has recorded a total valuation allowance of approximately $732,000 at December 31, 2016 to reduce the deferred tax assets by the amount management believes is more likely than not to not be realized through the turnaround of existing temporary differences, future earnings, or a combination thereof.

Under the Work Opportunity Tax Credit ("WOTC") program, the Company recorded $550,000 , $737,000 and $550,000 in Work Opportunity Tax Credits during 2016 , 2015 and 2014 , respectively. On December 19, 2014, the Tax Increase Prevention Act of 2012 (the "Act") was signed into law. The Act retroactively reinstated the federal Work Opportunity Tax Credit for qualifying costs paid during 2014. Pursuant to ASC 740-10-25-47, the effect of changes in the tax laws including retroactive changes are recognized in the period the law was enacted, and as a result of the retroactive treatment, the credit was recognized in the financial statements during the fourth quarter of 2014. The remaining WOTC credit carryforwards expire at various dates beginning in 2031 and continue through 2036.

The Company received a notice of an audit by the Internal Revenue Service related to the 2012 tax year, which was closed in 2015 . As of December 31, 2016 , the Company’s tax years for 2013 forward are subject to examination by tax authorities.

F-27

11. COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company is committed under long-term operating leases with various expiration dates and varying renewal options. Minimum annual rentals, including renewal option periods (exclusive of taxes, insurance, and maintenance costs) under these leases beginning January 1, 2017 , are as follows:



2017	$	57,051,000
2018	58,076,000
2019	59,165,000
2020	60,231,000
2021	61,191,000
Thereafter	836,102,000
	$	1,131,816,000

Under these lease agreements, the Company's lease payments are subject to periodic annual escalations as described below and in Note 1, "Business and Summary of Significant Accounting Policies". Total lease expense for continuing operations was $33,364,000 , $28,690,000 and $26,151,000 for 2016 , 2015 and 2014 , respectively. The accrued liability related to straight line rent was $7,920,000 and $7,830,000 at December 31, 2016 and 2015 , respectively, and is included in “Other noncurrent liabilities” on the accompanying consolidated balance sheets.

Omega Master Lease

The Company leases 35 nursing centers from Omega, 15 of which are subject to a Master Lease. On October 20, 2006, the Company and Omega entered into a Third Amendment to Consolidated Amended and Restated Master Lease (“Lease Amendment”) to extend the term of its centers leased from Omega. The Lease amendment extended the term to September 30, 2018 and provided a renewal option of an additional twelve years , and the Company must notify Omega by September 30, 2017 about exercising the renewal option. Consistent with prior terms, the lease provides for annual increases in lease payments equal to the lesser of two times the increase in the consumer price index or 3% . Under generally accepted accounting principles, the Company is required to report these scheduled rent increases on a straight line basis over the term of the lease including the 12 year term of the renewal period. These scheduled increases had no effect on cash rent payments at the start of the lease term and only result in additional cash outlay as the annual increases take effect each year.

The Company amended the Master Lease by entering into the Fifteenth Amendment to Consolidated Amended and Restated Master Lease as a result of the disposition and transfer of operations of the Company's West Virginia nursing centers. This amendment effectively modified the terms of the Master Lease to terminate the lease with regard to the two West Virginia nursing centers, and effectively reduced the annual rent payable under the Master Lease by $1,900,000 .

The Master Lease requires the Company to fund annual capital expenditures related to the leased centers at an amount currently equal to $440 per licensed bed. These amounts are subject to adjustment for increases in the Consumer Price Index. The Company is in compliance with the capital expenditure requirements. Total required capital expenditures during the remaining lease term and renewal options are $1,700,000 . These capital expenditures are being depreciated on a straight-line basis over the shorter of the asset life or the appropriate lease term.

Upon expiration of the Master Lease or in the event of a default under the Master Lease, the Company is required to transfer all of the leasehold improvements, equipment, furniture and fixtures of the leased centers to Omega. The assets to be transferred to Omega are being amortized on a straight-line basis over the shorter of the remaining lease term or estimated useful life, and will be fully depreciated upon the expiration of the lease. All of the equipment, inventory and other related assets of the centers leased pursuant to the Master Lease have been pledged as security under the Master Lease. In addition, the Company has a letter of credit of $4,792,000 as a security deposit for the Company's leases with Omega, as described in Note 6, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations".

Renovation Funding

In January 2013, we entered into an amendment to the Master lease with Omega under which Omega agreed to provide an additional $5,000,000 to fund renovations to two nursing centers located in Texas that are leased from Omega. The annual base rent related to these centers will be increased to reflect the amount of capital improvements to the respective centers as the related expenditures are made. The increase is based on a rate of 10.25% per year of the amount financed under this amendment.

F-28

The Company completed an expansion to one of its centers by making use of fifteen licensed beds it acquired in 2005. This expansion project was funded by Omega with the renovation funding previously described. Accordingly, the costs incurred to expand the center are recorded as a leasehold improvement asset with the amounts reimbursed by Omega for this project included as a long-term liability and amortized to rent expense over the remaining term of the lease. The capitalized leasehold improvements and lessor reimbursed costs are being amortized over the initial lease term ending in September 2018. The leasehold improvement asset and accumulated amortization are as follows:



	December 31
	2016			2015
Leasehold improvement	$	921,000		$	921,000
Accumulated Amortization	(737,000		)	(631,000		)
Net	$	184,000		$	290,000

Golden Living Master Lease

The Company leases 20 nursing centers from Golden Living under a Master Lease. On October 1, 2016, the Company and Golden Living entered into a Master Lease agreement to lease eight centers located in Mississippi. On November 1, 2016, the Company and Golden Living entered into an Amended and Restated Master Lease ("Golden Living Lease Amendment") to extend the term of its centers leased from Golden Living and lease an additional twelve centers located in Alabama. The Amended Lease is triple net and has an initial term of ten years with two separate five year options to extend the term. Base rent for the amended lease is $24,675,000 for the first year and escalates 2% annually thereafter. Under generally accepted accounting principles, the Company is required to report these scheduled rent increases on a straight line basis over the term of the lease including the 10 year term of the renewal period. These scheduled increases had no effect on cash rent payments at the start of the lease term and only result in additional cash outlay as the annual increases take effect each year.

The Master Lease requires the Company to fund annual capital expenditures related to the leased centers at an amount currently equal to $500 per licensed bed. These amounts are subject to adjustment for increases in the Consumer Price Index. The Company is in compliance with the capital expenditure requirements. Total required capital expenditures during the remaining lease term and renewal options are $11,560,000 . These capital expenditures are being depreciated on a straight-line basis over the shorter of the asset life or the appropriate lease term.

Upon expiration of the Master Lease or in the event of a default under the Master Lease, the Company is required to transfer all of the leasehold improvements, equipment, furniture and fixtures of the leased centers to Golden Living. The assets to be transferred to Golden Living are being amortized on a straight-line basis over the shorter of the remaining lease term or estimated useful life, and will be fully depreciated upon the expiration of the lease. All of the equipment, inventory and other related assets of the center leased pursuant to the Master Lease have been pledged as security under the Master Lease. In addition, the Company has a letter of credit of $2,056,000 as a security deposit for the Company's leases with Golden Living, as described in Note 6, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations".

Other Operating Leases

In addition to the Omega and Golden Living Master Leases, the Company currently leases 24 other nursing centers which primarily operate under individual leases. The lease terms for these centers range from two years to twenty years including renewal options. While the individual lease terms vary from center to center, the majority of the leases include annual lease increases which are capped and, in most cases, are subject to adjustment for increases in the Consumer Price Index. All operating leases are accounted for using a straight-line rent methodology.

F-29

Insurance Matters

Professional Liability and Other Liability Insurance

The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a wholly-owned, offshore limited purpose insurance subsidiary, SHC Risk Carriers, Inc. (“SHC”), to replace some of the expiring commercial policies. SHC covers losses up to specified limits per occurrence. All of the Company's nursing centers in Florida, Tennessee, and West Virginia are now covered under the captive insurance policies along with most of the nursing centers in Alabama, Kentucky, and Texas. The insurance coverage provided for these centers under the SHC policy includes coverage limits of at least $500,000 per medical incident with a sublimit per center of $1,000,000 and total annual aggregate policy limits of $5,000,000 . All other centers within the Company’s portfolio are covered through various commercial insurance policies which provide similar coverage limits per medical incident, per location, and on an aggregate basis for covered centers.

Reserve for Estimated Self-Insured Professional Liability Claims

Because the Company’s actual liability for existing and anticipated professional liability and general liability claims will exceed the Company’s limited insurance coverage, the Company has recorded total liabilities for reported and incurred, but not reported claims of $19,977,000 as of December 31, 2016 . This accrual includes estimates of liability for incurred but not reported claims, estimates of liability for reported but unresolved claims, actual liabilities related to settlements, including settlements to be paid over time, and estimates of legal costs related to these claims. All losses are projected on an undiscounted basis and are presented without regard to any potential insurance recoveries. Amounts are added to the accrual for estimates of anticipated liability for claims incurred during each period, and amounts are deducted from the accrual for settlements paid on existing claims during each period.

The Company evaluates the adequacy of this liability on a quarterly basis. Semi-annually, the Company retains a third-party actuarial firm to assist in the evaluation of this reserve. Since May 2012, Merlinos & Associates, Inc. (“Merlinos”) has assisted management in the preparation of the appropriate accrual for incurred but not reported general and professional liability claims based on data furnished as of May 31 and November 30 of each year. Merlinos primarily utilizes historical data regarding the frequency and cost of the Company’s past claims over a multi-year period, industry data and information regarding the number of occupied beds to develop its estimates of the Company’s ultimate professional liability cost for current periods.

On a quarterly basis, the Company obtains reports of asserted claims and lawsuits incurred. These reports, which are provided by the Company’s insurers and a third party claims administrator, contain information relevant to the actual expense already incurred with each claim as well as the third-party administrator’s estimate of the anticipated total cost of the claim. This information is reviewed by the Company quarterly and provided to the actuary semi-annually. Based on the Company’s evaluation of the actual claim information obtained, the semi-annual estimates received from the third-party actuary, the amounts paid and committed for settlements of claims and on estimates regarding the number and cost of additional claims anticipated in the future, the reserve estimate for a particular period may be revised upward or downward on a quarterly basis. Any increase in the accrual decreases results of operations in the period and any reduction in the accrual increases results of operations during the period.

The Company’s cash expenditures for self-insured professional liability costs from continuing operations were $4,456,000 , $3,328,000 , and $4,757,000 for the years ended December 31, 2016 , 2015 and 2014 , respectively.

The Company follows the FASB Accounting Standards Update, “Presentation of Insurance Claims and Related Insurance Recoveries,” that clarifies that a health care entity should not net insurance recoveries against a related professional liability claim and that the amount of the claim liability should be determined without consideration of insurance recoveries. Accordingly, the estimated insurance recovery receivables are included within "Other Current Assets" on the Consolidated Balance Sheet. As of December 31, 2016 and 2015 , there are no estimated insurance recovery receivables.

Although the Company adjusts its accrual for professional and general liability claims on a quarterly basis and retains a third-party actuarial firm semi-annually to assist management in estimating the appropriate accrual, professional and general liability claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. Professional liability cases have a long cycle from the date of an incident to the date a case is resolved, and final determination of the Company’s actual liability for claims incurred in any given period is a process that takes years. As a result, the Company’s actual liabilities may vary significantly from the accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given period. Each change in the amount of this accrual will directly affect the Company’s reported earnings and financial position for the period in which the change in accrual is made.

F-30

Other Insurance

With respect to workers’ compensation insurance, substantially all of the Company’s employees became covered under either an indemnity insurance plan or state-sponsored programs in May 1997. The Company is completely self-insured for workers’ compensation exposures prior to May 1997. The Company has been and remains a non-subscriber to the Texas workers’ compensation system and is, therefore, completely self-insured for employee injuries with respect to its Texas operations. From June 30, 2003 until June 30, 2007, the Company’s workers’ compensation insurance programs provided coverage for claims incurred with premium adjustments depending on incurred losses. For the period from July 1, 2007 until June 30, 2008, the Company is completely self-insured for workers' compensation exposure. For the period from July 1, 2008 through December 31, 2013, the Company is covered by a prefunded deductible policy. Under this policy, the Company is self-insured for the first $500,000 per claim, subject to an aggregate maximum of $3,000,000 . The Company funds a loss fund account with the insurer to pay for claims below the deductible. The Company accounts for premium expense under this policy based on its estimate of the level of claims subject to the policy deductibles expected to be incurred. The liability for workers’ compensation claims is $171,000 at December 31, 2016 . The Company has a non-current receivable for workers’ compensation policies covering previous years of $1,310,000 as of December 31, 2016 . The non-current receivable is a function of payments paid to the Company’s insurance carrier in excess of the estimated level of claims expected to be incurred.

As of December 31, 2016 , the Company is self-insured for health insurance benefits for certain employees and dependents for amounts up to $175,000 per individual annually. The Company provides reserves for the settlement of outstanding self-insured health claims at amounts believed to be adequate. The liability for reported claims and estimates for incurred but unreported claims is $1,019,000 at December 31, 2016 . The differences between actual settlements and reserves are included in expense in the period finalized.

Employment Agreements

The Company has employment agreements with certain members of management that provide for the payment to these members of amounts up to 2.0 times their annual salary in the event of a termination without cause, a constructive discharge (as defined in each employee agreement), or upon a change in control of the Company (as defined in each employee agreement). The maximum contingent liability under these agreements is $1,789,000 as of December 31, 2016 . The terms of such agreements are from 1 to 3 years and automatically renew for 1 year if not terminated by the employee or the Company. In addition, upon the occurrence of any triggering event, these certain members of management may elect to require the Company to purchase equity awards granted to them for a purchase price equal to the difference in the fair market value of the Company's common stock at the date of termination versus the stated equity award exercise price. Based on the closing price of our common stock on December 31, 2016 , there is $461,000 of contingent liabilities for the repurchase of the equity grants.

No amounts have been accrued for these contingent liabilities for members of management the Company currently employs.

Health Care Industry and Legal Proceedings

The provision of health care services entails an inherent risk of liability. Participants in the health care industry are subject to lawsuits alleging malpractice, violations of false claims acts, product liability, or related legal theories, many of which involve large claims and significant defense costs. Like many other companies engaged in the long-term care profession in the United States, we have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. It is expected that we will continue to be subject to such suits as a result of the nature of our business. Further, as with all health care providers, we are periodically subject to regulatory actions seeking fines and penalties for alleged violations of health care laws and are potentially subject to the increased scrutiny of regulators for issues related to compliance with health care fraud and abuse laws and with respect to the quality of care provided to residents of our center. Like other health care providers, in the ordinary course of our business, we are also subject to claims made by employees and other disputes and litigation arising from the conduct of our business.

As of December 31, 2016 , we are engaged in 67 professional liability lawsuits, which are reserved for as discussed above. Seven lawsuits are currently scheduled for trial or arbitration during the next twelve months, and it is expected that additional cases will be set for trial or hearing. The ultimate results of any of our professional liability claims and disputes cannot be predicted. We have limited, and sometimes no, professional liability insurance with regard to most of these claims. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.

In July 2013, the Company learned that the United States Attorney for the Middle District of Tennessee (DOJ) had commenced a civil investigation of potential violations of the False Claims Act (FCA).

F-31

to our practices and policies for rehabilitation, and other services, our preadmission evaluation forms ("PAEs") required by TennCare and our Pre-Admission Screening and Resident Reviews ("PASRRs"). We have responded to those requests. The DOJ has also issued CID’s for testimony from current and former employees of the Company. The DOJ’s civil investigation of the Company’s practices and policies for rehabilitation now covers all of the Company’s centers, but thus far only documents from six of our centers have been requested.

In January 2009, a purported class action complaint was filed in the Circuit Court of Garland County, Arkansas against the Company and certain of its subsidiaries and Garland Nursing & Rehabilitation Center (the “Center”). The complaint alleges that the defendants breached their statutory and contractual obligations to the patients of the Center over the five -year period prior to the filing of the complaints. The lawsuit remains in its early stages and has not yet been certified by the court as a class action. The Company intends to defend the lawsuit vigorously.

12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Selected quarterly financial information for each of the quarters in the years ended December 31, 2016 and 2015 is as follows:



	Quarter
2016	First			Second			Third			Fourth

Patient revenues, net	$	97,945,000		$	95,805,000		$	97,313,000		$	135,000,000
Professional liability expense ⁽¹⁾	2,066,000			1,934,000			1,977,000			2,479,000
Income (loss) from continuing operations	(74,000		)	(2,150,000		)	(958,000		)	1,438,000
Loss from discontinued operations	(37,000		)	—			(17,000		)	(13,000		)
Net income (loss) attributable to Diversicare Healthcare Services, Inc. common shareholders	$	(111,000	)	$	(2,150,000	)	$	(975,000	)	$	1,425,000

Basic net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders:
Income (loss) from continuing operations	$	(0.01	)	$	(0.35	)	$	(0.16	)	$	0.24
Loss from discontinued operations	(0.01		)	—			—			—
Net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders	$	(0.02	)	$	(0.35	)	$	(0.16	)	$	0.24

F-32



Diluted net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders:
Income (loss) from continuing operations	$	(0.01	)	$	(0.35	)	$	(0.16	)	$	0.24
Loss from discontinued operations	(0.01		)	—			—			—
Net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders	$	(0.02	)	$	(0.35	)	$	(0.16	)	$	0.24


(1)	The Company's quarterly results are significantly affected by the amounts recorded for professional liability expense, as discussed further in Note 11, "Commitments and Contingencies". The amount of expense recorded for professional liability in each quarter of 2016 is set forth in the table above.



	Quarter
2015	First			Second			Third			Fourth

Patient revenues, net	$	95,225,000		$	96,288,000		$	98,105,000		$	97,977,000
Professional liability expense ⁽¹⁾	2,155,000			1,926,000			2,069,000			1,972,000
Income (loss) from continuing operations	5,000			807,000			669,000			1,271,000
Loss from discontinued operations	(263,000		)	(299,000		)	(238,000		)	(328,000		)
Net income (loss) attributable to Diversicare Healthcare Services, Inc. common shareholders	$	(258,000	)	$	508,000		$	431,000		$	943,000

Basic net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders:
Income from continuing operations	$	—		$	0.13		$	0.11		$	0.21
Loss from discontinued operations	(0.04		)	(0.05		)	(0.04		)	(0.05		)
Net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders	$	(0.04	)	$	0.08		$	0.07		$	0.16



Diluted net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders:
Income from continuing operations	$	—		$	0.13		$	0.11		$	0.20
Loss from discontinued operations	(0.04		)	(0.05		)	(0.04		)	(0.05		)
Net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders	$	(0.04	)	$	0.08		$	0.07		$	0.15


(1)	The Company's quarterly results are significantly affected by the amounts recorded for professional liability expense, as discussed further in Note 11, "Commitments and Contingencies". The amount of expense recorded for professional liability in each quarter of 2015 is set forth in the table above.

F-33

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

OF CONTINUING OPERATIONS

(in thousands)



Column A	Column B		Column C			Column D	Column E
			Additions			Deductions
Description	Balance at Beginning of Period	Charged to Costs and Expenses		Charged to Other Accounts	Other	(Write-offs) net of Recoveries	Balance at End of Period
Year ended December 31, 2016: Allowance for doubtful accounts	$8,180		$7,163	$—	$—	$(5,017)	$10,326
Year ended December 31, 2015: Allowance for doubtful accounts	$6,044		$7,507	$—	$—	$(5,371)	$8,180
Year ended December 31, 2014: Allowance for doubtful accounts	$3,879		$5,710	$—	$—	$(3,545)	$6,044

S-1

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

(in thousands)



Column A	Column B	Column C			Column D	Column E
			Additions		Deductions
Description	Balance at Beginning of Period	Charged to Costs and Expenses	Charged to Other Accounts ⁽²⁾	Other	Payments ⁽¹⁾	Balance at End of Period
Year ended December 31, 2016:
Professional Liability Reserve	$21,618	$6,423	$—	$114	$(8,178)	$19,977
Workers Compensation Reserve	$227	$372	$—	$—	$(428)	$171
Health Insurance Reserve	$686	$8,896	$—	$(137)	$(8,426)	$1,019
Year ended December 31, 2015:
Professional Liability Reserve	$25,163	$5,213	$1,010	$—	$(9,768)	$21,618
Workers Compensation Reserve	$250	$364	$—	$—	$(387)	$227
Health Insurance Reserve	$687	$6,294	$—	$—	$(6,295)	$686
Year ended December 31, 2014:
Professional Liability Reserve	$27,067	$5,930	$2,440	$—	$(10,274)	$25,163
Workers Compensation Reserve	$176	$372	$—	$18	$(316)	$250
Health Insurance Reserve	$843	$6,748	$237	$—	$(7,141)	$687


(1)	Payments for the Professional Liability Reserve include amounts paid for claims settled during the period as well as payments made under structured arrangements for claims settled in earlier periods.


(2)	As discussed in Note 3, "Discontinued Operations" of the Consolidated Financial Statements, the Company has presented the results of certain divestiture and lease termination transactions as discontinued operations. The amounts charged to Other Accounts represent the amounts charged to discontinued operations.

S-2

ITEM 16. FORM 10-K SUMMARY

None.

S-3



Exhibit
Number		Description of Exhibits



3.1			Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement No. 33-76150 on Form S-1).

3.2			Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.5 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2006).

3.3			Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement No. 33-76150 on Form S-1).

3.4			Bylaw Amendment adopted November 5, 2007 (incorporated by reference to Exhibit 3.4 to the Company's annual report on Form 10-K for the year ended December 31, 2007).

3.5			Amendment to Certificate of Incorporation dated March 23, 1995 (incorporated by reference to Exhibit A of Exhibit 1 to the Company's Form 8-A filed March 30, 1995).

3.6			Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.4 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2001).

3.7			Certificate of Ownership and Merger of Diversicare Healthcare Services, Inc. with and into Advocat Inc. (incorporated by reference to Exhibit 3.1 to the Company's current report on Form 8-K filed March 14, 2013).

3.8			Amendment to Certificate of Incorporation dated June 9, 2016 (incorporated by reference to Exhibit 3.8 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2016).

4.1			Form of Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company's Registration Statement No. 33-76150 on Form S-1).

*10.1			Master Agreement and Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement No. 33-76150 on Form S-1).

10.2			Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement No. 33-76150 on Form S-1).

10.3			Advocat Inc. Guaranty in favor of Omega Healthcare Investors, Inc. dated May 10, 1994 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).

10.4			Settlement and Restructuring Agreement dated as of October 1, 2000 among Registrant, Diversicare Leasing Corp., Sterling Health Care Management, Inc., Diversicare Management Services Co., Advocat Finance, Inc., Omega Healthcare Investors, Inc. and Sterling Acquisition Corp. (incorporated by reference to Exhibit 10.83 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.5			Consolidated Amended and Restated Master Lease dated November 8, 2000, effective October 1, 2000, between Sterling Acquisition Corp. (as Lessor) and Diversicare Leasing Corp. (as Lessee) (incorporated by reference to Exhibit 10.84 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.6			Management Agreement effective October 1, 2000, between Diversicare Leasing Corp. and Diversicare Management Services Co. (incorporated by reference to Exhibit 10.85 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.7			Amended and Restated Security Agreement dated as of November 8, 2000 between Diversicare Leasing Corp. and Sterling Acquisition Corp. (incorporated by reference to Exhibit 10.86 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).



10.8			Security Agreement dated as of November 8, 2000 between Sterling Health Care Management, Inc. and Sterling Acquisition Corp. (incorporated by reference to Exhibit 10.87 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.9			Guaranty given as of November 8, 2000 by Registrant, Advocat Finance, Inc., and Diversicare Management Services Co., in favor of Sterling Acquisition Corp. (incorporated by reference to Exhibit 10.88 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.10			First Amendment to Consolidated Amended and Restated Master Lease dated September 30, 2001 by and between Sterling Acquisition Corp. and Diversicare Leasing Corporation (incorporated by reference to Exhibit 10.126 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001).

10.11			Second Amendment to Consolidated Amended and Restated Master Lease dated as of June 15, 2005 by and between Sterling Acquisition Corp. and Diversicare Leasing Corporation (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).

10.12			Restructuring Stock Issuance and Subscription Agreement dated as of October 20, 2006 between Advocat Inc. and Omega Healthcare Investors, Inc. (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed October 24, 2006).

10.13			Third Amendment to Consolidated Amended and Restated Master Lease executed as of October 20, 2006, to be effective as of October 1, 2006 by and between Sterling Acquisition Corp. and Diversicare Leasing Corporation (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K filed October 24, 2006).

10.14			Subordinated Promissory Note in the amount of $2,533,614.53 issued to Omega HealthCare Investors Inc. dated as of October 1, 2006 (incorporated by reference to Exhibit 10.3 to the Company's current report on Form 8-K filed October 24, 2006).

10.15			Fourth Amendment to Consolidated Amended and Restated Master Lease executed and delivered as of April 1, 2007 by and between Sterling Acquisition Corp., a Kentucky corporation, and Diversicare Leasing Corp., a Tennessee corporation (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2007).

10.16			Fifth Amendment to Consolidated Amended and Restated Master Lease dated as of August 10, 2007 by and between Sterling Acquisition Corp., a Kentucky corporation, and Diversicare Leasing Corp., a Tennessee corporation (incorporated by reference to Exhibit 10.7 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2007).

10.17			Sixth Amendment to Consolidated Amended and Restated Master Lease dated as of March 14, 2008 by and between Sterling Acquisition Corp., a Kentucky corporation, and Diversicare Leasing Corp., a Tennessee corporation (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2008).

10.18			Seventh Amendment to Consolidated Amended and Restated Master Lease dated as of October 24, 2008 by and between Sterling Acquisition Corp., a Kentucky corporation, and Diversicare Leasing Corp., a Tennessee corporation (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2008).

*10.19			Advocat Inc. 2005 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A filed on April 20, 2006).

*10.20			First Amendment to the Advocat Inc. 2005 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.63 to the Company's annual report on Form 10-K for the year ended December 31, 2008).

*10.21			Advocat Inc. 2010 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A filed on April 28, 2010).

*10.22			Advocat Inc. 2008 Stock Purchase Plan for Key Personnel (incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A filed May 2, 2008).

10.23			Ninth Amendment to Consolidated Amended and Restated Master Lease dated as of May 5, 2009 by and between Sterling Acquisition Corp., a Kentucky corporation, and Diversicare Leasing Corp., a Tennessee corporation (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2009).



10.24			Tenth Amendment to Consolidated Amended and Restated Master Lease dated as of September 8, 2009 by and between Sterling Acquisition Corp., a Kentucky corporation, and Diversicare Leasing Corp., a Tennessee corporation (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2009).

10.25			Lease Agreement dated as of July 14, 2010 by and between Diversicare Rose Terrace, LLC, a subsidiary of the registrant, and A.B.E., LLC (incorporated by reference to Exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2010).

10.26			Eleventh Amendment to the Amended and Restated Master Lease between the Company and Sterling Acquisition Corp., an affiliate of Omega Healthcare Investors, Inc. (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2011).

10.27			Swap Agreement between the Company and The PrivateBank and Trust Company dated as of March 1, 2011 (incorporated by reference to Exhibit 10.6 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2011).

*10.28			Amended and Restated Employment Agreement effective as of April 1, 2012, by and between Advocat Inc., a Delaware corporation, and Kelly Gill (incorporated by reference to Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2012).

*10.29			Employment Agreement effective August 20, 2012, between James R. McKnight, Jr. and Advocat Inc. (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2012).

*10.30			Employment Agreement effective January 1, 2013, between Leslie Campbell and Advocat Inc. (incorporated by reference to Exhibit 10.49 to the Company’s annual report on Form 10-K for the year ended December 31, 2012).

*10.31			Amendment No. 1 to Amended and Restated Employment Agreement effective as of March 1, 2013 by and between Advocat Inc., a Delaware corporation, and Kelly Gill (incorporated by reference to Exhibit 10.50 to the Company's annual report on Form 10-K for the year ended December 31, 2012).

10.32			Asset Purchase Agreement effective March 6, 2013 between the Company and Cumberland & Ohio Co. of Texas, as receiver of the assets of SeniorTrust of Florida, Inc. (incorporated by reference to Exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2013).

10.33			Operations Transfer Agreement effective March 6, 2013 by and between certain subsidiaries of the Company and the Cumberland & Ohio Co. of Texas, as receiver of the assets of SeniorTrust of Florida, Inc. (incorporated by reference to Exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2013).

10.34			Amended and Restated Revolving Loan and Security Agreement dated April 30, 2013 among the Company and a syndicate of financial institutions and banks, including The PrivateBank as the Administering Agent (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2013).

10.35			Amended and Restated Term Loan and Security Agreement dated April 30, 2013 among the Company and a syndicate of financial institutions and banks, including The PrivateBank as the Administering Agent (incorporated by reference to Exhibit 10.6 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2013).

10.36			Amended and Restated Guaranty (Revolver) dated as of April 30, 2013, by the Company to and for the benefit of The PrivateBank in its capacity as administrative agent (incorporated by reference to Exhibit 10.7 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2013).

10.37			Amended and Restated Guaranty (Term Loan) dated as of April 30, 2013, by the Company to and for the benefit of The PrivateBank in its capacity as administrative agent (incorporated by reference to Exhibit 10.8 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2013).

10.38			Thirteenth Amendment to Consolidated Amended and Restated Master Lease effective September 1, 2013 by and between Sterling Acquisition Corp. and Diversicare Leasing Corp. (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2013).




**10.39			First Amendment and Consent to Amended and Restated Revolving Loan and Security Agreement dated as of November 1, 2013 among the Company and a syndicate of financial institutions and banks, including The PrivateBank as the Administering Agent (incorporated by reference to Exhibit 10.1 to the Company's annual report on Form 10-K for the year ended Decemeber 31, 2014).

10.40			Asset Purchase Agreement dated April 3, 2014, by and between Diversicare Rose Terrace, LLC, and Rose Terrace Acq., LLC (incorporated by reference to exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2014).

10.41			Second Amendment and Consent to Amended and Restated Revolving Loan and Security Agreement dated as of March 31, 2014, among the Company and a syndicate of financial institutions and banks, including The PrivateBank as the Administering Agent (incorporated by reference to exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2014).

10.42			Term Loan and Security Agreement effective as of March 27, 2014, by and between Diversicare Rose Terrace, LLC and The PrivateBank And Trust Company (incorporated by reference to exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2014).

10.43			Third Amendment and Consent to Amended And Restated Revolving Loan and Security Agreement dated as of July 1, 2014 by and among the Company and a syndicate of financial institutions and banks, including The PrivateBank as the Administering Agent (incorporated by reference to exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2014).

10.44			Third Amendment to Amended and Restated Term Loan And Security Agreement dated as of July 1, 2014, by and among the Company and a syndicate of financial institutions and banks, including The PrivateBank as the Administering Agent (incorporated by reference to exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2014).

10.45			Fifteenth Amendment to Consolidated Amended and Restated Master Lease dated as of June 30, 2014 by and between the Company and Sterling Acquisition Corp. (incorporated by reference to exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2014).

10.46			Asset Purchase Agreement dated February 1, 2015 by and between Diversicare Healthcare Services, Inc. and Barren County Health Care Center, Inc. (incorporated by reference to exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2015).

10.47			Term Loan and Security Agreement dated as of February 2, 2015 by and between Diversicare Glasgow Property, LLC and The PrivateBank And Trust Company (incorporated by reference to exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2015).

10.48			Asset Purchase Agreement dated November 1, 2015 by and between Diversicare Healthcare Services, Inc. and Haws Fulton Investors, LLC.

10.49			Second Amended and Restated Term Loan and Security Agreement dated February 26, 2016 (incorporated by reference to exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2016).

10.50			Third Amended and Restated Revolving Loan and Security Agreement dated February 26, 2016 (incorporated by reference to exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2016).

10.51			Amendment to Diversicare Healthcare Services, Inc. 2008 Employee Stock Purchase Plan for Key Personnel (incorporated by reference to exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2016).

10.52			First Amendment to Third Amended and Restated Revolving Loan and Security Agreement dated August 3, 2016 (incorporated by reference to exhibit 10.12 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2016).

10.53			First Amendment to Second Amended and Restated Term Loan and Security Agreement dated August 3, 2016 (incorporated by reference to exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2016).

10.54			Second Amendment to Third Amended and Restated Revolving Loan and Security Agreement dated October 3, 2016 (incorporated by reference to exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2016).

10.55			Third Amendment to the Third Amended and Restated Revolving Loan and Security Agreement dated December 29, 2016.



10.56		Golden Living Master Lease Agreement dated October 1, 2016.

**10.57		Amended and Restated Golden Living Master Lease Agreement dated November 1, 2016.

21		Subsidiaries of the Registrant.

23.1		Consent of BDO USA, LLP.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b).

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 Labels Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

	*	Indicates management contract or compensatory plan or arrangement.
	**	Confidential treatment has been requested for portions of this exhibit

THIRD AMENDMENT TO THIRD
AMENDED AND RESTATED REVOLVING LOAN AND SECURITY AGREEMENT

This THIRD AMENDMENT TO THIRD AMENDED AND RESTATED REVOLVING LOAN AND SECURITY AGREEMENT (this “ Amendment ”) dated as of December 29, 2016, is by and among THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation (together with its successors and assigns, “ Administrative Agent ”) in its capacity as administrative agent for the Lenders (as defined below), the Lenders, DIVERSICARE MANAGEMENT SERVICES CO. , a Tennessee corporation, and certain of its affiliates parties hereto identified on the signature pages as “Borrower” (individually and collectively, “ Borrower ”).

RECITALS :

WHEREAS , Borrower, Administrative Agent, and the financial institutions signatories thereto (the “ Lenders ”) are parties to that certain Third Amended and Restated Revolving Loan and Security Agreement dated as of February 26, 2016 (as the same has been, and may hereafter be, amended, restated, supplemented or otherwise modified from time to time, the “ Loan Agreement ”; all capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Loan Agreement as amended by this Amendment); and

WHEREAS , Borrower, Administrative Agent and Lenders desire to amend the Loan Agreement as provided in and subject to the terms and conditions of this Amendment.

NOW, THEREFORE , for and in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto (intending to be legally bound) hereby agree as follows:

1. Amendments to Loan Agreement . Subject to the satisfaction of the conditions set forth in Section 4 below and in reliance upon the representations and warranties set forth in Section 3 below, Borrower, Administrative Agent and Lenders hereby amend the Loan Agreement as follows:

(a) The following definition shall be inserted in correct alphabetical order in Section 1.1 of the Loan Agreement:

“ Third Amendment Effective Date ” means December 29, 2016.

(b) The first sentence of Section 2.1(B) of the Loan Agreement is hereby amended and restated in its entirety as follows:

On and after the Third Amendment Effective Date and subject to the terms and conditions of this Agreement (and any other reasonable documentation or Letter of Credit Documents required by the applicable Issuing Lender for the benefit of the Lenders from Borrower in connection with the issuance of any Letter of Credit) and upon (i) the execution by Borrower Agent, the Borrower and the Issuing Lender of a Master Letter of Credit Agreement in form and substance acceptable to the Issuing Lender (together with all amendments, modifications and restatements thereof, the “ Master Letter of Credit Agreement ”), and (ii) the execution and delivery by the Borrower, and the acceptance by the Issuing Lender, in its sole and absolute discretion, of a Letter of Credit Application (in all material respects satisfactory to Issuing Lender and Administrative Agent), and provided there does not then exist a Default or an Event of Default, the Issuing Lender (on behalf of the Lenders, on a Pro Rata Share basis) agrees to issue for the account of the Borrower such Letters of Credit from the Revolving Loan facility provided hereunder in the standard form of the Issuing Lender and otherwise in form and substance acceptable to the Issuing Lender, from time to time during the term of this Agreement, provided that the Letter of Credit Obligations may not at any time exceed, in the aggregate at any time, the lesser of (A) the lesser of the Borrowing Base and the Maximum Revolving Facility (minus (x) any reserves established by the Administrative Agent pursuant to Section 2.1(b) hereof), and (y) the outstanding aggregate principal amount of the Revolving Loans (which, for clarification, includes all then existing Letter of Credit Obligations), or (B) Fifteen Million and No/100 Dollars ($15,000,000.00); provided , further , the expiration date on any Letter of Credit will not be more than one (1) year from the date of issuance for such Letter of Credit and not later than the date that is five (5) Business Days prior to the Credit Termination Date.

2. No Other Amendments . Borrower acknowledges and expressly agrees that this Amendment is limited to the extent expressly set forth herein and shall not constitute a modification or amendment of the Loan Agreement or any other Financing Agreements or a course of dealing at variance with the terms or conditions of the Loan Agreement or any other Financing Agreements (other than as expressly set forth in this Amendment).

3. Representations and Warranties . In order to induce Administrative Agent and Lenders to enter into this Amendment, Borrower hereby represents and warrants to Administrative Agent and Lenders (which representations and warranties shall survive the execution and delivery hereof), both before and after giving effect to this Amendment that:

(a) Each of the representations and warranties of each Borrower contained in the Loan Agreement and the other Financing Agreements to which Borrower is a party are true and correct in all material respects (without duplication of any materiality carve out already provided therein) on and as of the date hereof, in each case as if made on and as of such date, other than representations and warranties that expressly relate solely to an earlier date (in which case such representations and warranties were true and correct on and as of such earlier date);

(b) Borrower has the corporate or limited liability company (as applicable) power and authority (i) to enter into the Loan Agreement as amended by this Amendment and (ii) to do all acts and things as are required or contemplated hereunder to be done, observed and performed by Borrower;

(c) This Amendment has been duly authorized, validly executed and delivered by one or more Duly Authorized Officers of Borrower, and each of this Amendment, the Loan Agreement as amended hereby, and each of the other Financing Agreements to which Borrower is a party, constitutes the legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, subject to bankruptcy, insolvency or other similar laws affecting the enforcement of creditor’s rights and remedies generally;

(d) The execution and delivery of this Amendment and performance by Borrower under this Amendment, the Loan Agreement and each of the other Financing Agreements to which Borrower is a party do not and will not require the consent or approval of any regulatory authority or governmental authority or agency having jurisdiction over Borrower that has not already been obtained, nor be in contravention of or in conflict with the organizational documents of Borrower, or any provision of any statute, judgment, order, indenture, instrument, agreement, or undertaking, to which Borrower is party or by which Borrower’s respective assets or properties are bound; and

(e) No Default or Event of Default will result after giving effect to this Amendment, and no event has occurred that has had or could reasonably be expected to have a Material Adverse Effect after giving effect to this Amendment.

4. Conditions Precedent to Effectiveness of this Amendment . The amendments contained in Section 1 of this Amendment shall become effective on the date hereof as long as each of the following conditions precedent is satisfied as determined by Administrative Agent:

(a) all of the representations and warranties of Borrower under Section 3 hereof, which are made as of the date hereof, are true and correct;

(b) receipt by Administrative Agent of duly executed signature pages to this Amendment from Borrower and Lenders; and

(c) receipt by Administrative Agent of such other certificates, schedules, exhibits, documents, opinions, instruments, reaffirmations, amendments or consents Administrative Agent may reasonably require, if any.

5. Reaffirmation; References to Loan Agreement; Etc .

(a) Borrower acknowledges and agrees that all of Borrower’s obligations and Liabilities under the Loan Agreement and the other Financing Agreements, as amended hereby, are and shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment. The first priority perfected security interests and Liens and rights in the Collateral securing payment of the Liabilities are hereby ratified and confirmed by Borrower in all respects.

(b) Upon the effectiveness of this Amendment, each reference in the Loan Agreement to “this Agreement,” “hereunder,” “hereof,” “herein” or words of like import shall mean and be a reference to the Loan Agreement, as amended by this Amendment.

(c) The failure by Administrative Agent, at any time or times hereafter, to require strict performance by any Borrower of any provision or term of the Loan Agreement, this Amendment or any of the Financing Agreements shall not waive, affect or diminish any right of Administrative Agent hereafter to demand strict compliance and performance herewith or therewith. Any suspension or waiver by Administrative Agent of a breach of this Amendment or any Event of Default under or pursuant to the Loan Agreement shall not, except as expressly set forth in a writing signed by Administrative Agent, suspend, waive or affect any other breach of this Amendment or any Event of Default under or pursuant to the Loan Agreement, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. None of the undertakings, agreements, warranties, covenants and representations of any Borrower contained in this Amendment, shall be deemed to have been suspended or waived by Administrative Agent unless such suspension or waiver is (i) in writing and signed by Administrative Agent (and, if applicable, the Required Lenders) and (ii) delivered to Borrower by Administrative Agent or its counsel.

(d) In no event shall Administrative Agent’s execution and delivery of this Amendment establish a course of dealing among Administrative Agent, any Borrower, pledgor or Guarantor or any other obligor, or in any other way obligate Administrative Agent to hereafter provide any amendments or modifications or, if at any time applicable, consents or waivers with respect to the Loan Agreement or any other Financing Agreement. The terms and provisions of this Amendment shall be limited precisely as written and shall not be deemed (x) to be a consent to any amendment or modification of any other term or condition of the Loan Agreement or of any of the Financing Agreements (except as expressly provided herein); or (y) to prejudice any right or remedy which Administrative Agent may now have under or in connection with the Loan Agreement or any of the other Financing Agreements. In the event an ambiguity or question of intent or interpretation arises, this Amendment shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Amendment.

(e) Except as expressly provided herein, the Loan Agreement and all of the other Financing Agreements shall remain unaltered, and the Loan Agreement and all of the other Financing Agreements shall remain in full force and effect and are hereby ratified and confirmed in all respects.

6. Release .

(a) In consideration of, among other things, the consent and amendments provided for herein, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Borrower and Guarantor (on behalf of themselves and their respective subsidiaries, Affiliates, successors and assigns), and, to the extent permitted by applicable law and the same is claimed by right of, through or under the above, for their past, present and future employees, directors, members, managers, partners, agents, representatives, officers, directors, and equity holders (all collectively, with Borrower and Guarantor, the “ Releasing Parties ”), do hereby unconditionally, irrevocably, fully, and forever remise, satisfy, acquit, release and discharge Administrative Agent, Issuing Lender, and Lenders and each of Administrative Agent’s, Issuing Lender’s and Lender’s past, present and future officers, directors, agents, employees, attorneys, parent, shareholders, successors, assigns, subsidiaries and Affiliates and all other persons and entities to whom Administrative Agent or Lenders would be liable if such persons or entities were found in any way to be liable to any of the Releasing Parties (collectively, the “ Lender Parties ”), of and from any and all manner of action and actions, cause and causes of action, claims, cross-claims, charges, demands, counterclaims, suits, proceedings, disputes, debts, dues, sums of money, accounts, bonds, covenants, contracts, controversies, damages, judgments, liabilities, damages, costs, expenses, executions, liens, claims of liens, claims of costs, penalties, attorneys’ fees, or any other compensation, recovery or relief on account of any liability, obligation, demand, proceedings or cause of action of whatever nature, whether in law, equity or otherwise (including, without limitation, those arising under 11 U.S.C. §§ 541-550 and interest or other carrying costs, penalties, legal, accounting and other professional fees and expenses, and incidental, consequential and punitive damages payable to third parties), whether known or unknown, fixed or contingent, joint and/or several, secured or unsecured, due or not due, primary or secondary, liquidated or unliquidated, contractual or tortious, direct, indirect, or derivative, asserted or unasserted, foreseen or unforeseen, suspected or unsuspected, now existing, heretofore existing or which may have heretofore accrued against any or all of Lender Parties, whether held in a personal or representative capacity, that the Releasing Parties (or any of them) have or may have against the Lender Parties or any of them (whether directly or indirectly) and which are based on any act, fact, event, action or omission or any other matter, condition, cause or thing occurring at or from any time prior to and including the date hereof in any way, directly or indirectly arising out of, connected with or relating to this Amendment, the Loan Agreement or any other Financing Agreement and the transactions contemplated hereby and thereby, the Collateral or the Liabilities, and all other agreements, certificates, instruments and other documents and statements (whether written or oral) related to any of the foregoing, other than any applicable good faith claim as to which a final determination is made in a judicial proceeding (in which Administrative Agent and any of the Released Parties have had an opportunity to be heard) which determination includes a specific finding that Administrative Agent acted in a grossly negligent manner or with actual willful misconduct or illegal activity. Borrower and Guarantor each acknowledges that Administrative Agent and Lenders are specifically relying upon the representations, warranties and agreements contained herein and that such representations, warranties and agreements constitute a material inducement to Administrative Agent and Lenders in entering into this Amendment.

(b) Borrower and Guarantor each understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release.

(c) To the furthest extent permitted by law, Borrower and Guarantor each hereby knowingly, voluntarily, intentionally and expressly waives and relinquishes any and all rights and benefits that it respectively may have as against Lender Parties under any law, rule or regulation of any jurisdiction that would or could have the effect of limiting the extent to which a general release extends to claims which a Lender Party or Releasing Party does not know or suspect to exist as of the date hereof. Borrower and Guarantor each hereby acknowledges that the waiver set forth in the prior sentence was separately bargained for and that such waiver is an essential term and condition of this Amendment (and without which the amendments in Section 1 hereof would not have been agreed to by Administrative Agent and Lenders).

7. Costs and Expenses . Without limiting the obligation of Borrower to reimburse Administrative Agent for all costs, fees, disbursements and expenses incurred by Administrative Agent as specified in the Loan Agreement, Borrower agrees to and shall pay on demand all reasonable costs, fees, disbursements and expenses of Administrative Agent in connection with the preparation, negotiation, revision, execution and delivery of this Amendment and the other agreements, amendments, modifications, reaffirmations, instruments and documents contemplated hereby, including, without limitation, reasonable attorneys’ fees and out-of-pocket expenses. All obligations provided herein shall survive any termination of this Amendment and the Loan Agreement as amended hereby.

8. Financing Agreement . This Amendment shall constitute a Financing Agreement.

9. Titles. Titles and section headings herein shall be without substantive meaning and are provided solely for the convenience of the parties.

10. Severability; Etc. Whenever possible, each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Amendment. The parties hereto have participated jointly in the negotiation and drafting of this Amendment. In the event an ambiguity or question of intent or interpretation arises, this Amendment shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Amendment.

11. Successors and Assigns . This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided , however , no Borrower may assign any of its respective rights or obligations under this Amendment without the prior written consent of Administrative Agent.

12. Further Assurances . Borrower shall, at its own cost and expense, cause to be promptly and duly taken, executed, acknowledged and delivered all such further acts, certificates, instruments, reaffirmations, amendments, documents and assurances as may from time to time be necessary or as Administrative Agent may from time to time reasonably request in order to more fully carry out the intent and purposes of this Amendment.

13. Counterparts; Faxes . This Amendment may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for all purposes.

14. Governing Law . This Amendment shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois, without regard to conflict of law principles that would require the application of any other laws.

[Signature Page Follows]

IN WITNESS WHEREOF , the parties hereto have duly executed this Third Amendment to Third Amended and Restated Revolving Loan and Security Agreement as of the day and year first above written.



BORROWER : ADVOCAT FINANCE, INC. DIVERSICARE MANAGEMENT SERVICES CO. DIVERSICARE LEASING CORP. STERLING HEALTH CARE MANAGEMENT, INC. DIVERSICARE TEXAS I, LLC DIVERSICARE HOLDING COMPANY, LLC DIVERSICARE KANSAS, LLC DIVERSICARE LEASING COMPANY II, LLC DIVERSICARE PROPERTY CO., LLC
By:	/s/ James R. McKnight, Jr.
Name:		James R. McKnight, Jr.
Its:		Executive Vice President & Chief Financial Officer



SENIOR CARE CEDAR HILLS, LLC SENIOR CARE GOLFCREST, LLC SENIOR CARE GOLFVIEW, LLC SENIOR CARE SOUTHERN PINES, LLC
BY:	SENIOR CARE FLORIDA LEASING, LLC , its sole member
	BY:	DIVERSICARE LEASING CORP. , its sole member
	By:	/s/ James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		Executive Vice President & Chief Financial Officer



SENIOR CARE FLORIDA LEASING, LLC DIVERSICARE AFTON OAKS, LLC DIVERSICARE BRIARCLIFF, LLC DIVERSICARE CHISOLM, LLC DIVERSICARE HARTFORD, LLC DIVERSICARE HILLCREST, LLC DIVERSICARE LAMPASAS, LLC DIVERSICARE PINEDALE, LLC DIVERSICARE WINDSOR HOUSE, LLC DIVERSICARE YORKTOWN, LLC DIVERSICARE ROSE TERRACE, LLC DIVERSICARE THERAPY SERVICES, LLC DIVERSICARE CLINTON, LLC DIVERSICARE HIGHLANDS, LLC
BY:	DIVERSICARE LEASING CORP. , its sole member
	By:	/s/ James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		Executive Vice President & Chief Financial Officer



DIVERSICARE BALLINGER, LLC DIVERSICARE DOCTORS, LLC DIVERSICARE ESTATES, LLC DIVERSICARE HUMBLE, LLC DIVERSICARE KATY, LLC DIVERSICARE NORMANDY TERRACE, LLC DIVERSICARE TREEMONT, LLC DIVERSICARE PARIS, LLC
BY:	DIVERSICARE TEXAS I, LLC , its sole member
	By:	/s/ James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		Executive Vice President & Chief Financial Officer



DIVERSICARE OF CHANUTE, LLC DIVERSICARE OF COUNCIL GROVE, LLC DIVERSICARE OF HAYSVILLE, LLC DIVERSICARE OF SEDGWICK, LLC DIVERSICARE OF HUTCHINSON, LLC DIVERSICARE OF LARNED, LLC
BY:	DIVERSICARE KANSAS, LLC its sole member

	By:	/s/ James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		Executive Vice President & Chief Financial Officer

DIVERSICARE OF SENECA PLACE, LLC

DIVERSICARE OF BRADFORD PLACE, LLC

DIVERSICARE OF PROVIDENCE, LLC

DIVERSICARE OF SIENA WOODS, LLC

DIVERSICARE OF ST. THERESA, LLC

DIVERSICARE OF BIG SPRINGS, LLC

DIVERSICARE OF NICHOLASVILLE, LLC

DIVERSICARE OF AVON, LLC

DIVERSICARE OF MANSFIELD, LLC

DIVERSICARE OF RIVERSIDE, LLC

DIVERSICARE OF CHATEAU, LLC

DIVERSICARE OF ST. JOSEPH, LLC
DIVERSICARE OF GREENVILLE, LLC


By:	DIVERSICARE LEASING COMPANY II, LLC, its sole member

By: /s/ James R. McKnight, Jr.



Name:	James R. McKnight, Jr.
Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE AFTON OAKS PROPERTY, LLC

DIVERSICARE BRIARCLIFF PROPERTY, LLC

DIVERSICARE CHANUTE PROPERTY, LLC

DIVERSICARE CHISOLM PROPERTY, LLC

DIVERSICARE COUNCIL GROVE PROPERTY, LLC

DIVERSICARE HAYSVILLE PROPERTY, LLC

DIVERSICARE HARTFORD PROPERTY, LLC

DIVERSICARE HILLCREST PROPERTY, LLC

DIVERSICARE HUTCHINSON PROPERTY, LLC

DIVERSICARE LAMPASAS PROPERTY, LLC

DIVERSICARE LARNED PROPERTY, LLC

DIVERSICARE SEDGWICK PROPERTY, LLC

DIVERSICARE WINDSOR HOUSE PROPERTY, LLC

DIVERSICARE YORKTOWN PROPERTY, LLC

DIVERSICARE GLASGOW PROPERTY, LLC

DIVERSICARE CLINTON PROPERTY, LLC

DIVERSICARE FULTON PROPERTY, LLC


By:	DIVERSICARE PROPERTY CO., LLC , its sole member

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	Executive Vice President & Chief

Financial Officer

DIVERSICARE OF GLASGOW, LLC

DIVERSICARE OF FULTON, LLC


By:	DIVERSICARE HOLDING COMPANY, LLC , its sole member

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	Executive Vice President & Chief

Financial Officer

DIVERSICARE LEASING COMPANY III, LLC

By: /s/ James R. McKnight, Jr.



Name:	James R. McKnight, Jr.
Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE OF ARAB, LLC

DIVERSICARE OF BOAZ, LLC

DIVERSICARE OF FOLEY, LLC

DIVERSICARE OF HUEYTOWN, LLC

DIVERSICARE OF LANETT, LLC

DIVERSICARE OF BESSEMER, LLC

DIVERSICARE OF MONTGOMERY, LLC

DIVERSICARE OF ONEONTA, LLC

DIVERSICARE OF OXFORD, LLC

DIVERSICARE OF PELL CITY, LLC

DIVERSICARE OF RIVERCHASE, LLC

DIVERSICARE OF WINFIELD, LLC

DIVERSICARE OF AMORY, LLC

DIVERSICARE OF BATESVILLE, LLC

DIVERSICARE OF BROOKHAVEN, LLC

DIVERSICARE OF CARTHAGE, LLC

DIVERSICARE OF EUPORA, LLC

DIVERSICARE OF MERIDIAN, LLC

DIVERSICARE OF RIPLEY, LLC

DIVERSICARE OF SOUTHAVEN, LLC

DIVERSICARE OF TUPELO, LLC

DIVERSICARE OF TYLERTOWN, LLC


By:	DIVERSICARE LEASING COMPANY III, LLC, its sole member

By: /s/ James R. McKnight, Jr.



Name:	James R. McKnight, Jr.
Its:	Executive Vice President & Chief Financial Officer



Acknowledged and Agreed : DIVERSICARE HEALTHCARE SERVICES, INC.
/s/ Kelly J. Gill
Name:	Kelly J. Gill
Its:	President and Chief Executive Officer

ADMINISTRATIVE AGENT :

THE PRIVATEBANK AND TRUST COMPANY , in its capacity as administrative agent

By: /s/ Jeffrey Groenewold

Name: Jeffrey Groenewold

Its: Associate Managing Director

LENDER :

THE PRIVATEBANK AND TRUST COMPANY

By: /s/ Jeffrey Groenewold

Name: Jeffrey Groenewold

Its: Associate Managing Director



LENDER : BANKERS TRUST COMPANY
By: /s/ Jon M. Doll
Name:	Jon M. Doll
Its:	Vice President



LENDER : BOKF, NA D/B/A BANK OF OKLAHOMA
By: /s/ Ryan Kirk
Name:	Ryan Kirk
Its:	Vice President



LENDER : CIT BANK N.A.
By: /s/ Edward Shuster
Name:	Edward Shuster
Its:	Director



LENDER : OPUS BANK , a California commercial bank
By: /s/ Bryan Nance
Name:	Bryan Nance
Its:	VP, Portfolio Manager Healthcare Banking



LENDER : FRANKLIN SYNERGY BANK
By: /s/ Lisa Fletcher
Name:	Lisa Fletcher
Its:	Senior Vice President

DM3\4390237.2

MASTER LEASE

THIS MASTER LEASE (this “ Lease ”) is entered into as of October 1, 2016, by and among each entity identified as “Landlord” on Schedule 1A attached hereto (individually and collectively, “ Landlord ”), on the one hand, and each entity identified as “Tenant” on Schedule 1B attached hereto (individually and collectively, “ Tenant ”), on the other hand.

INDIVISIBLE MASTER LEASE;
ACKNOWLEDGEMENT AND WAIVER

As a condition precedent to Landlord entering into and continuing to remain obligated under this Lease, each of Tenant and, by execution of the Guaranty, Guarantor acknowledges and agrees that this Lease constitutes a single, indivisible lease of the entire Premises, and the Premises constitutes a single economic unit. The Base Rent, Additional Rent, other amounts payable hereunder and all other provisions contained herein have been negotiated and agreed upon based on the intent to lease the entirety of the Premises as a single and inseparable transaction, and such Base Rent, Additional Rent, other amounts and other provisions would have been materially different had the parties intended to enter into separate leases or a divisible lease. Any Event of Default under this Lease shall constitute an Event of Default as to the entire Premises. Notwithstanding the foregoing, however, no Tenant shall, by virtue of this Lease, have any rights to, or title or interest in, the Facility leased by another Tenant, or any right or obligation to operate the same, to the extent it does not have the Authorization necessary or required to do so from the Governmental Authority of the Situs State for such Facility. Each of Tenant and, by executing the Guaranty, Guarantor, in order to induce Landlord to enter into, and as a continuing condition to Landlord’s obligations under, this Lease, to the extent permitted by law:

(a) Agrees, acknowledges and is forever estopped from asserting to the contrary that the statements set forth in the first sentence of this Section are true, correct and complete;

(b) Agrees, acknowledges and is forever estopped from asserting to the contrary that this Lease is a new and de novo lease, separate and distinct from any other lease between any of the entities comprising Tenant and any of the entities comprising Landlord that may have existed prior to the date hereof;

(c) Agrees, acknowledges and is forever estopped from asserting to the contrary that this Lease is a single lease pursuant to which the collective Premises are demised as a whole to Tenant;

(d) Agrees, acknowledges and is forever estopped from asserting to the contrary that if, notwithstanding the provisions of this Section, this Lease were to be determined or found to be in any proceeding, action or arbitration under state or federal bankruptcy, insolvency, debtor-relief or other applicable laws to constitute multiple leases demising multiple properties, such multiple leases could not, by the debtor, trustee, or any other party, be selectively or individually assumed, rejected or assigned; and

(e) Forever knowingly waives and relinquishes any and all rights under or benefits of the provisions of the Federal Bankruptcy Code Section 365 (11 U.S.C. § 365), or any successor or replacement thereof or any analogous state law, to selectively or individually assume, reject or assign the multiple leases comprising this Lease following a determination or finding in the nature of that described in the foregoing Paragraph (d) .

Article I
DEFINITIONS; PREMISES; TERM

1.1 Definitions . Certain initially capitalized terms used in this Lease are defined in Exhibit A . All accounting terms not otherwise defined in this Lease have the meanings assigned to them in accordance with GAAP, as applicable.

1.2 Lease of Premises; Ownership .

1.2.1 Upon the terms and subject to the conditions set forth in this Lease, Landlord leases to Tenant, and Tenant leases from Landlord, all of Landlord’s right, title and interest in and to the Premises.

1.2.2 Tenant acknowledges that the Premises are the property of Landlord and that Tenant has only the right to the possession and use of the Premises upon and subject to the terms and conditions of this Lease. Tenant will not, at any time during the Term, take any position, whether in any tax return, public filing, contractual arrangement, financial statement or otherwise, other than that Landlord is the owner of the Premises for federal, state and local income tax purposes and that this Lease is a “true lease”.

1.3 Term . The initial term of this Lease (the “ Initial Term ”) shall be for a period of ten (10) years commencing as of the Commencement Date and expiring at 11:59 p.m. on the Initial Expiration Date. The term of this Lease may be extended by Tenant for two (2) separate terms of five (5) years each (each, an “ Extension Term ”) if: (a) at least twelve (12), but not more than eighteen (18) months prior to the end of the then current Term, Tenant delivers to Landlord a written notice (an “ Extension Notice ”) that it desires to exercise its right to extend the Term for one (1) Extension Term; and (b) no Event of Default shall have occurred and be continuing on the date Landlord receives the Extension Notice or on the last day of the then current Term. During any such Extension Term, except as otherwise specifically provided for herein, all of the terms and conditions of this Lease shall remain in full force and effect. Once delivered to Landlord, an Extension Notice shall be irrevocable; provided, however, that, Tenant shall have ten (10) Business Days following Landlord’s notice to Tenant of the final determination of the Base Rent for the first Lease Year of the applicable Extension Term to elect to withdraw the applicable Extension Notice, which election must be in writing and once made, shall be irrevocable. Notwithstanding the foregoing, Tenant shall have no right to withdraw an Extension Notice if the Base Rent for the first Lease Year of the applicable Extension Term was calculated based on the Base Rent payable during the immediately preceding Lease Year rather than on the Fair Market Rental for the Premises as determined pursuant to Exhibit E .

1.4 Net Lease . This Lease is intended to be and shall be construed as an absolutely net lease, commonly referred to as a “net, net, net” or “triple net” lease, pursuant to which Landlord shall not, under any circumstances or conditions, whether presently existing or hereafter arising, and whether foreseen or unforeseen by the parties, be required to make any payment or expenditure of any kind whatsoever or be under any other obligation or liability whatsoever, except as expressly set forth herein, in connection with the Premises. All Rent payments shall be absolutely net to Landlord, free of all Impositions, utility charges, operating expenses, insurance premiums or any other charges or expenses in connection with the Premises, all of which shall be paid by Tenant.

Article II
RENT

2.1 Base Rent .

2.1.1 During the Term, commencing as of the Commencement Date, Tenant will pay to Landlord as base rent hereunder (the “ Base Rent ”), an annual amount equal to Ten Million Seven Hundred Seventy-Five Thousand Dollars ($10,775,000). Notwithstanding the foregoing, on the first day of the second (2 ^nd ) Lease Year and the first (1 ^st ) day of each Lease Year thereafter during the Term (including, without limitation, any Extension Term), the Base Rent shall increase to an annual amount equal to the sum of (a) the Base Rent for the immediately preceding Lease Year, and (b) the Base Rent for the immediately preceding Lease Year multiplied by the Adjusted CPI Increase. The Base Rent shall be payable in advance in twelve (12) equal monthly installments on or before the first (1 ^st ) Business Day of each calendar month; provided, however, the Base Rent attributable to the first (1 ^st ) full calendar month of the Term and the calendar month in which the Commencement Date occurs, which may be a partial month, shall be payable on the Commencement Date. Base Rent is also subject to increase from time to time pursuant to Section 7.10.8.

2.1.2 Notwithstanding anything in Section 2.1.1 to the contrary, the Base Rent for the first Lease Year of each Extension Term shall be reset and expressed as an annual amount equal to the greater of: (a) the Fair Market Rental of the Premises, or (b) the sum of (i) the Base Rent payable during the immediately preceding Lease Year, and (ii) the Base Rent for the immediately preceding Lease Year multiplied by the Adjusted CPI Increase. Notwithstanding the foregoing, on the first day of the second (2 ^nd ) Lease Year of any Extension Term, and the first day of each Lease Year thereafter during such Extension Term, the Base Rent shall increase to an annual amount equal to the sum of (1) the Base Rent for the immediately preceding Lease Year, and (2) the Base Rent for the immediately preceding Lease Year multiplied by the Adjusted CPI Increase.

2.2 Additional Rent . In addition to the Base Rent, commencing as of the Commencement Date, Tenant shall also pay and discharge as and when due and payable all other amounts, liabilities and obligations which Tenant assumes or agrees to pay under this Lease. In the event of any failure on the part of Tenant to pay any of those items referred to in the previous sentence, Tenant will also promptly pay and discharge every fine, penalty, interest and cost which may be added for non-payment or late payment of the same. Collectively, the items referred to in the first two sentences of this Section 2.2 are referred to as “ Additional Rent .” Except as may otherwise be set forth herein, any costs or expenses paid or incurred by Landlord on behalf of Tenant that constitute Additional Rent shall be reimbursed by Tenant to Landlord within ten (10) days after the presentation by Landlord to Tenant of invoices therefor.

2.3 Method of Payment . All Rent payable hereunder shall be paid in lawful money of the United States of America. Except as may otherwise be specifically set forth herein, Rent shall be prorated as to any partial months at the beginning and end of the Term. Rent to be paid to Landlord shall be paid by electronic funds transfer and shall be initiated by Tenant for settlement on or before the Payment Date; provided, however, if the Payment Date is not a Business Day, then settlement shall be made on the next succeeding day which is a Business Day. If Landlord directs Tenant to pay any Base Rent to any party other than Landlord, Tenant shall send to Landlord, simultaneously with such payment, a copy of the transmittal letter or invoice and a check whereby such payment is made or such other evidence of payment as Landlord may reasonably require.

2.4 Late Payment of Rent . Tenant hereby acknowledges that the late payment of Rent will cause Landlord to incur costs not contemplated hereunder, the exact amount of which is presently anticipated to be extremely difficult to ascertain. Accordingly, if any installment of Rent other than Additional Rent payable to a Person other than Landlord (or a Facility Mortgagee) shall not be paid within five (5) days of its Payment Date, Tenant shall pay to Landlord, on demand, a late charge equal to the lesser of (a) five percent (5%) of the amount of such installment or (b) the maximum amount permitted by law. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of late payment by Tenant. The parties further agree that such late charge is Rent and not interest and such assessment does not constitute a lender or borrower/creditor relationship between Landlord and Tenant. In addition, if any installment of Rent other than Additional Rent payable to a Person other than Landlord (or a Facility Mortgagee) shall not be paid within ten (10) days after its Payment Date, the amount unpaid, including any late charges, shall bear interest at the Agreed Rate compounded monthly from such Payment Date to the date of payment thereof, and Tenant shall pay such interest to Landlord on demand. The payment of such late charge or such interest shall neither constitute waiver of nor excuse or cure any default under this Lease, nor prevent Landlord from exercising any other rights and remedies available to Landlord.

2.5 Guaranty . Tenant’s obligations under this Lease are guarantied under that certain Guaranty of Master Lease of even date herewith (as amended, modified or revised, the “ Guaranty ”). The guarantor or guarantors that are party to the Guaranty from time to time, together with all successors and assigns, are referred to in this Lease, individually and collectively, as “ Guarantor ”.

Article III
SECURITY DEPOSIT; LETTER OF CREDIT

3.1 Security Deposit . Unless Tenant has made the LC Election pursuant to Section 3.2, Tenant shall pay to and deposit with Landlord an amount equal to three and (3) monthly payments of Base Rent as of the Commencement Date (subject to increase as described in this Section 3.1) as security (the “ Security Deposit ”) for the full and faithful performance by Tenant of each and every term, provision, covenant and condition of this Lease. The Security Deposit shall be paid by Tenant and deposited with Landlord in three (3) equal monthly installments, with the first (1 ^st ) installment due on or prior to the Commencement Date, the second (2 ^nd ) installment due on or prior to the first (1 ^st ) Business Day of the sixth (6 ^th ) calendar month of the Term, and third (3 ^rd ) installment due on the first (1 ^st ) Business Day of the ninth (9 ^th ) calendar month of the Term.

3.1.1 The Security Deposit shall not be deemed an advance payment of Rent or a measure of Landlord’s damages for any default under this Lease by Tenant, nor shall it be a bar or defense to any action that Landlord may at any time commence against Tenant. The Security Deposit shall be the property of Landlord and it may commingle the Security Deposit with other assets of Landlord, and Tenant shall not be entitled to any interest on the Security Deposit.

3.1.2 Upon the occurrence of any Event of Default, Landlord, at its option and in such order as Landlord in its sole discretion may determine, may apply the Security Deposit to any (a) obligation of Tenant under this Lease, or (b) Losses that Landlord may incur in connection with, or related to, this Lease, or any Event of Default under this Lease, whether such obligation or Loss accrues before or after the Event of Default.

3.1.3 If Landlord sells or transfers the Premises or Landlord ceases to have an interest in the Premises, Landlord may remit any unapplied part of the Security Deposit to the successor owner of the Premises, and from and after such payment or transfer, Landlord shall be relieved of all liability with respect thereto. In the case of any partial transfer or cessation, Landlord may transfer such portion of the Security Deposit as Landlord allocates to such part of the Premises, in its reasonable discretion, and from and after such partial transfer or cessation, Landlord shall be relieved of all liability only with respect to such portion of the Security Deposit so transferred.

3.1.4 If Landlord applies the Security Deposit (or any portion thereof), Tenant shall replenish the Security Deposit in full within five (5) Business Days after demand by Landlord, by paying to Landlord the amount of the Security Deposit as so applied. The amount of the Security Deposit is also subject to adjustment from time to time pursuant to the provisions of Sections 6.12.1.

3.1.5 If no Event of Default has occurred and is continuing under this Lease and Tenant has fully performed and satisfied all of its obligations under this Lease, then Landlord shall pay the Security Deposit, or remaining unapplied portion thereof, to Tenant within sixty (60) days after the expiration or earlier termination of this Lease and the surrender of the Premises to Landlord in accordance with the terms of this Lease.

3.1.6 If the Base Rent is reduced pursuant to Sections 6.15, 6.16, 11.4, 11.5, 12.3 or 12.4 hereof, then the amount of the Security Deposit required hereunder shall be reduced by the applicable amount of the reduction in monthly payments of Base Rent as a result of such reduction in the Base Rent payable hereunder.

3.2 Letter of Credit . In lieu of depositing cash with Landlord as and when required pursuant to Section 3.1, and upon prior written notice to Landlord, Tenant may elect (such election, the “ LC Election ”) and Tenant shall deliver to Landlord and maintain during the Term and for sixty (60) days after the Expiration Date, a Letter of Credit in an undrawn face amount equal to three (3) monthly payments of Base Rent (subject to adjustment as provided herein, the “ LC Amount ”) as partial collateral for Tenant’s obligations under this Lease. The Letter of Credit may be deposited by Tenant with Landlord in three (3) equal installments in the same manner as the cash Security Deposit under Section 3.1. During any period in which the LC Election has been made, the following terms and provisions shall apply:

3.2.1 Upon the occurrence of an Event of Default, Landlord may, but shall not be required to, draw upon the Letter of Credit (in whole or in part) and apply the cash proceeds thereof to the obligations due from Tenant under this Lease and to compensate Landlord for the damages suffered or incurred by it in connection with such Event of Default (or any other Event of Default). Any amount drawn by Landlord shall not be deemed: (a) to fix or determine the amounts to which Landlord is entitled to recover under this Lease or otherwise; (b) to waive or cure any default under this Lease; or (c) to limit or waive Landlord’s right to pursue any remedies provided for in this Lease.

3.2.2 Together with any increase in the Base Rent, the LC Amount shall be increased by the amount necessary to make the LC Amount equal to three (3) monthly installments of Base Rent. Within five (5) days after such increase in the LC Amount, Tenant shall deposit with Landlord a replacement or supplementary Letter of Credit such that at all times during the Term of this Lease and for sixty (60) days after the Expiration Date, Landlord shall be holding one or more Letters of Credit totaling, in the aggregate, the LC Amount (as so increased). Tenant covenants as follows: (a) on or before thirty (30) days prior to the expiration date of the then issued and outstanding Letter of Credit, Tenant shall deposit with Landlord a replacement Letter of Credit in the LC Amount; (b) if all or any portion of the Letter of Credit is drawn against by Landlord, Tenant shall, within five (5) Business Days after demand by Landlord, deposit with Landlord a replacement or supplementary Letter of Credit such that at all times during the term of this Lease and for sixty (60) days after the Expiration Date, Landlord shall have the ability to draw on one or more Letters of Credit totaling, in the aggregate, the LC Amount; and (c) following an Issuer Revocation, Tenant shall obtain a replacement Letter of Credit in the LC Amount from another Issuer within fifteen (15) days of Landlord’s written demand therefor. If Tenant fails to timely perform any of the foregoing, then in addition to any other rights and remedies available under this Lease, Landlord may immediately draw upon the full amount of the then issued and outstanding Letter of Credit. The LC Amount is also subject to adjustment from time to time pursuant to the provisions of Sections 6.12.1. If Landlord has not drawn upon the then issued and outstanding Letter of Credit, Landlord shall return said Letter of Credit to Tenant sixty (60) days after the Expiration Date.

3.2.3 Upon the issuance of a replacement Letter of Credit, Landlord shall have the right to draw solely on such replacement Letter of Credit and Landlord shall have no right to draw against the Letter of Credit which is replaced by such replacement Letter of Credit.

3.2.4 Tenant shall have the right to deposit with Landlord one or more Letters of Credit to satisfy the requirements of this Section 3.2, so long as the aggregate undrawn face amount of all issued and outstanding Letters of Credit equal the LC Amount.

3.2.5 Within five (5) Business Days after receipt of any written demand by Landlord, Tenant shall produce to Landlord (a) evidence satisfactory to Landlord, in the exercise of its commercially reasonable judgment, that Issuer is then in compliance with the Issuer Standards, and (b) such other information concerning Issuer as Landlord may reasonably request.

3.2.6 If Landlord draws on a Letter of Credit, the cash proceeds thereof not used to compensate Landlord for amounts due to Landlord under this Lease by reason of an Event of Default shall be held by Landlord as an additional security deposit under this Lease and Landlord may, from time to time, without prejudice to any other right or remedy, apply such cash proceeds to the obligations due from Tenant under this Lease and to compensate Landlord for the damages suffered or incurred by it in connection with such Event of Default (or any other Event of Default). The holding of such cash proceeds by Landlord shall not limit or stay Tenant’s obligation hereunder to cause to be issued a Letter of Credit in the LC Amount. Provided no Event of Default has occurred and is then continuing (except an Event a Default that would be fully cured by the posting of a Letter of Credit in the LC Amount), upon Landlord’s receipt of a Letter of Credit in the LC Amount, any such cash proceeds then held by Landlord shall be returned to Tenant. If requested by Tenant, Landlord shall make such cash proceeds available to collateralize a replacement Letter of Credit or supplemental Letter of Credit pursuant to a written agreement with the applicable Issuer, whereby Landlord shall agree to disburse such cash proceeds to the applicable Issuer upon such Issuer’s irrevocable and unconditional commitment to issue the applicable replacement Letter of Credit or supplemental Letter of Credit upon its receipt of such cash proceeds. Notwithstanding the foregoing, Landlord shall not be required to make such cash proceeds available if an Event of Default then exists. If no Event of Default exists under this Lease as of the Expiration Date, any cash proceeds then held by Landlord shall be returned to Tenant within sixty (60) days following the Expiration Date.

3.2.7 If Landlord sells or transfers the Premises or Landlord ceases to have an interest in the Premises, Landlord may transfer the Letter of Credit to the successor owner of the Premises, and from and after such transfer, Landlord shall be relieved of all liability with respect thereto.

3.2.8 In the event that when the LC Election is made, Landlord is holding the Security Deposit pursuant to Section 3.1 above, then upon Landlord’s receipt of (i) written notice from Tenant making the LC Election and (ii) a Letter of Credit in the LC Amount satisfying the provisions of this Section 3.2, any such cash Security Deposit then held by Landlord shall be returned to Tenant.

Article IV
IMPOSITIONS AND OTHER CHARGES

4.1 Impositions .

4.1.1 Subject to Section 4.5, Tenant shall pay all Impositions attributable to a tax period, or portion thereof, occurring during the Term (irrespective of whether the Impositions for such tax period are due and payable after the Term), when due and before any fine, penalty, premium, interest or other cost may be added for non-payment. Where feasible, such payments shall be made directly to the taxing authorities. If any such Imposition may, at the option of the taxpayer, lawfully be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Tenant may exercise the option to pay same (and any accrued interest on the unpaid balance of such Imposition) in installments (provided no such installments shall extend beyond the Term) and, in such event, shall pay such installments during the Term before any fine, penalty, premium, further interest or cost may be added thereto. Tenant shall deliver to Landlord, not less than five (5) days prior to the due date of each Imposition, copies of the invoice for such Imposition, the check delivered for payment thereof and an original receipt evidencing such payment or other proof of payment satisfactory to Landlord.

4.1.2 Notwithstanding Section 4.1.1 to the contrary, with respect to those Impositions, if any, that Landlord is required by Legal Requirements to remit directly to the applicable taxing authority, Landlord shall pay such Impositions directly to such taxing authority and within ten (10) Business Days after Landlord delivering to Tenant notice and evidence of such payment, Tenant shall reimburse Landlord for such paid Impositions. Landlord and Tenant shall, upon request of the other, promptly provide such data as is maintained by the party to whom the request is made with respect to any Facility as may be necessary to prepare any required returns and reports.

4.1.3 Tenant shall prepare and file all tax returns and reports as may be required by Legal Requirements with respect to or relating to all Impositions (other than those Impositions, if any, based on Landlord’s net income, gross receipts, franchise taxes and taxes on its capital stock).

4.1.4 Tenant may, upon notice to Landlord, at Tenant’s option and at Tenant’s sole cost and expense, protest, appeal or institute such other proceedings as Tenant may deem appropriate to effect a reduction of real estate or personal property assessments and Landlord, at Tenant’s expense, shall reasonably cooperate with Tenant in such protest, appeal or other action; provided, however, that upon Landlord’s request in connection with any such protest or appeal, Tenant shall post an adequate bond or deposit sufficient sums with Landlord to insure payment of any such real estate or personal property assessments during the pendency of any such protest or appeal.

4.1.5 Landlord or Landlord’s designee shall use reasonable efforts to give prompt notice to Tenant of all Impositions payable by Tenant hereunder of which Landlord at any time has knowledge, provided, however, that any failure by Landlord to provide such notice to Tenant shall in no way relieve Tenant of its obligation to timely pay the Impositions, but, with respect to any such Impositions of which Tenant does not otherwise have knowledge, such failure by Landlord shall suspend any default by Tenant hereunder for a reasonable time after Tenant receives notice of any Impositions which it is obligated to pay.

4.1.6 Impositions imposed or assessed in respect of the tax-fiscal period during which the Term commences or terminates shall be adjusted and prorated between Landlord and Tenant, whether or not such Imposition is imposed or assessed before or after such commencement or termination, and Tenant’s obligation to pay its prorated share thereof shall survive such termination.

4.2 Utilities; CC&Rs . Tenant shall pay any and all charges for electricity, power, gas, oil, water and other utilities used in connection with each Facility during the Term. Tenant shall also pay all costs and expenses of any kind whatsoever which may be imposed against Landlord during the Term by reason of any of the covenants, conditions and/or restrictions affecting any Facility or any portion thereof, or with respect to easements, licenses or other rights over, across or with respect to any adjacent or other property which benefits any Facility, including any and all costs and expenses associated with any utility, drainage and parking easements. If Landlord is billed directly for any of the foregoing costs, Landlord shall send Tenant the bill and Tenant shall pay the same before it is due.

4.3 Insurance . Tenant shall pay or cause to be paid all premiums for the insurance coverage required to be maintained by Tenant hereunder.

4.4 Other Charges . Tenant shall pay all other amounts, liabilities, obligations, costs and expenses paid or incurred with respect to the repair, replacement, restoration, maintenance and operation of each Facility.

4.5 Real Property Imposition Impounds .

4.5.1 At Landlord’s election and upon written notice to Tenant, Tenant shall include with each payment of Base Rent a sum equal to one-twelfth (1/12 ^th ) of 100% of the amount required to discharge the annual amount of Real Property Impositions. Landlord may, at its option, from time to time require that any particular deposit be greater than one-twelfth (1/12 ^th ) of 100% of the estimated annual Real Property Impositions if necessary, in the exercise of Landlord’s reasonable judgment, to provide a sufficient fund from which to make payment of such Real Property Impositions on or before the next due date of any installment thereof. Additionally, Landlord may change its estimate of any Real Property Imposition for any period on the basis of a change in an assessment or tax rate or for any other good faith reason. In such event, Tenant shall deposit with Landlord the amount in excess of the sums previously deposited with Landlord for the applicable period within ten (10) days after Landlord’s request therefor. If at any time within thirty (30) days before the due date of any Real Property Imposition, the deposits are insufficient for the payment in full of the obligation for which the deposits are being held, Tenant shall remit the amount of the deficiency to Landlord within ten (10) days after written demand from Landlord. If Landlord elects to require Tenant to impound Real Property Impositions hereunder, Tenant shall, as soon as they are received, deliver to Landlord copies of all notices, demands, claims, bills and receipts in relation to the Real Property Impositions. To the extent Tenant pays Impositions to Landlord pursuant to this Section 4.5, Tenant shall be relieved of its obligation under this Lease to pay such Impositions to the taxing authority to which such Impositions would otherwise be due. Upon Tenant’s written request, which may be made within fifteen (15) days after the expiration of each calendar year, Landlord shall, within thirty (30) days after receipt of Tenant’s request, provide Tenant with an accounting showing all credits and debits to and from such impounded funds for Real Estate Impositions received by Landlord from Tenant for the prior calendar year.

4.5.2 The sums deposited by Tenant under this Section 4.5 shall be held by Landlord, shall not bear interest nor be held by Landlord in trust or as an agent of Tenant, and may be commingled with the other assets of Landlord. Provided no Event of Default then exists under this Lease, and provided that Tenant has timely delivered to Landlord copies of any bills, claims or notices that Tenant has received, the sums deposited by Tenant under this Section 4.5 shall be used by Landlord to pay Real Property Impositions as the same become due. Upon the occurrence of any Event of Default, Landlord may apply any funds held by it under this Section 4.5 to cure such Event of Default or on account of any damages suffered or incurred by Landlord in connection therewith or to any other obligations of Tenant arising under this Lease, in such order as Landlord in its discretion may determine.

4.5.3 If Landlord transfers this Lease, it shall transfer all amounts then held by it under this Section 4.5 to the transferee, and Landlord shall thereafter have no liability of any kind with respect thereto. As of the Expiration Date, any sums held by Landlord under this Section 4.5 shall be returned to Tenant, only as and when the conditions of Section 3.1, or if the LC Election has been made, of Section 3.2, for the return of the Security Deposit or Letter of Credit, as applicable, have been met and provided that any and all Real Property Impositions accrued or due and owing hereunder have been paid in full.

4.5.4 Notwithstanding anything herein which may be construed to the contrary, if Landlord elects to require Tenant to impound Real Property Impositions hereunder, Landlord shall have no liability to Tenant for failing to pay any Real Property Impositions to the extent that: (a) any Event of Default has occurred and is continuing, (b) insufficient deposits under this Section 4.5 are held by Landlord at the time such Real Property Impositions become due and payable, or (c) Tenant has failed to provide Landlord with copies of the bills, notices, and claims for such Real Property Impositions as required pursuant to Section 4.5.1.

Article V
ACCEPTANCE OF PREMISES; NO IMPAIRMENT

5.1 Acceptance of Premises . Tenant acknowledges that it or its Affiliates has expertise in business and industry of operating healthcare facilities for the Primary Intended Use and, in deciding to enter into this Lease, has not relied on any representations or warranties, express or implied, of any kind from Landlord other than as expressly set forth in this Lease. Tenant acknowledges receipt and delivery of possession of the Premises and confirms that Tenant has examined and otherwise has knowledge of the condition of the Premises, including the condition of title thereto, prior to the execution and delivery of this Lease and has found the same to be in good order and repair, free from Hazardous Materials not in compliance with applicable Hazardous Materials Laws and satisfactory for its purposes hereunder, including the operation of the Facilities for the Primary Intended Use. Regardless, however, of any examination or inspection made by Tenant and whether or not any patent or latent defect or condition was revealed or discovered thereby, Tenant is leasing the Premises “as is” in its present condition. Other than as expressly set forth in this Lease, Tenant waives any claim or action against Landlord in respect of the condition of the Premises including any defects or adverse conditions not discovered or otherwise known by Tenant as of the Commencement Date. LANDLORD MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE PREMISES, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, OR AS TO THE NATURE OR QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, OR THE EXISTENCE OF ANY HAZARDOUS MATERIALS, IT BEING AGREED THAT ALL SUCH RISKS, LATENT OR PATENT, ARE TO BE BORNE SOLELY BY TENANT, OTHER THAN AS EXPRESSLY SET FORTH IN THIS LEASE .

5.2 No Impairment . The respective obligations of Landlord and Tenant shall not be affected or impaired by reason of (a) any damage to, or destruction of, any Facility, from whatever cause, or any Condemnation of any Facility (except as otherwise expressly and specifically provided in Article XI or Article XII); (b) the interruption or discontinuation of any service or utility servicing any Facility; (c) the lawful or unlawful prohibition of, or restriction upon, Tenant’s use of any Facility due to the interference with such use by any Person or eviction by paramount title (other than Landlord, or those claiming by, through or under Landlord, in contravention of this Lease); (d) any claim that Tenant has or might have against Landlord on account of any breach of warranty or default by Landlord under this Lease or any other agreement by which Landlord is bound; (e) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceedings affecting Landlord or any assignee or transferee of Landlord; (f) any Licensing Impairment; or (g) for any other cause whether similar or dissimilar to any of the foregoing. Tenant hereby specifically waives all rights, arising from any occurrence whatsoever, which may now or hereafter be conferred upon it by law or equity (x) to modify, surrender or terminate this Lease or quit or surrender any Facility, or (y) that would entitle Tenant to any abatement, reduction, offset, suspension or deferment of Rent, except if and to the extent otherwise expressly provided in this Lease. Nothing herein shall preclude Tenant from bringing a separate action and Tenant is not waiving other rights or remedies not expressly waived herein. The obligations of Landlord and Tenant hereunder shall be separate and independent covenants and agreements and Rent shall continue to be payable in all events unless, until and to the extent the obligations to pay the same shall be terminated pursuant to the express provisions of this Lease. Tenant’s sole right to recover damages against Landlord under this Lease shall be to prove such damages in a separate action.

Article VI
OPERATING COVENANTS

6.1 Tenant Personal Property . Tenant shall obtain and install all items of furniture, fixtures, supplies and equipment not included as Landlord Personal Property as shall be necessary or reasonably appropriate to operate each Facility in compliance with this Lease (the “ Tenant Personal Property ”). Except to the extent expressly provided in this Lease, Landlord shall have no rights to Tenant Personal Property and, provided no Event of Default shall have occurred and be continuing at the time, Tenant shall have the right to remove all Tenant Personal Property from the Premises at the expiration or sooner termination of this Lease. Tenant may remove items of Tenant Personal Property from time to time during the Term, provided that any such Tenant Personal Property as is then required, necessary or appropriate for Tenant’s operation of the Facility from which such items are removed for its Primary Intended Use shall be replaced by like items as are then required, necessary or appropriate for the operation of the Premises in accordance with the terms of this Lease.

6.2 Landlord Personal Property . Tenant may, from time to time, in Tenant’s reasonable discretion, without notice to or approval of Landlord, sell or dispose of any item of the Landlord Personal Property; provided, however, that, unless such item is functionally obsolete, Tenant shall promptly replace such item with an item of similar or superior quality, use and functionality, and any such replacement item shall, for all purposes of this Lease, continue to be treated as part of the “Landlord Personal Property.” Tenant shall, promptly upon Landlord’s written request from time to time, provide such information as Landlord may reasonably request relative to any sales, dispositions or replacements of the Landlord Personal Property pursuant to this Section 6.2 and, within a reasonable time upon Landlord’s written request from time to time (a) not to exceed one (1) in any twelve (12) month period and (b) promptly during the continuance of an Event of Default, shall provide to Landlord with an updated inventory of the Landlord Personal Property.

6.3 Primary Intended Use . During the entire Term, Tenant shall continually use each Facility for its Primary Intended Use (subject temporary suspension due casualty or condemnation as provided in Articles XI and XII) and for no other use or purposes and shall operate each Facility in a manner consistent with a good quality healthcare facility, including employing sound reimbursement principles under all applicable Third Party Payor Programs. Notwithstanding the foregoing, upon Landlord’s prior written approval (which shall not be unreasonably withheld), and provided that it is permitted by the applicable Governmental Authority of the Situs State in which the Facility is located, Tenant may from time to time remove beds from service at a Facility without reducing the number of licensed Medicare and Medicaid certified beds that may be operated at such Facility and while retaining the right to return any such beds to service at such Facility (so-called “bed banking”) provided further that (i) such removal shall not exceed more than ten percent (10%) of the number of beds at the applicable Facility, (ii) not less than thirty (30) days prior to removing such beds from service, Tenant shall request in writing Landlord’s approval, which request shall include, or have delivered therewith, (a) detailed descriptions of the beds being removed, the reasons for such bed removal, estimates of the cost of implementing such bed changes, and the projected impact of such bed changes upon such Facility, and (b) evidence reasonably satisfactory to Landlord that Tenant has obtained all necessary regulatory approvals for the proposed reduction of beds in service, that such beds continue to be considered “licensed” and “certified” beds by the applicable governmental authority and agencies and that Tenant or any successor operator of such Facility retains the right, at the end of the bed banking period, to return such beds to service at the applicable Facility as licensed Medicare and Medicaid certified beds.

6.4 Compliance with Legal Requirements and Authorizations .

6.4.1 Tenant, at its sole cost and expense, shall promptly (a) comply with all Legal Requirements and Insurance Requirements regarding the use, condition and operation of each Facility, the Landlord Personal Property and the Tenant Personal Property, and (b) procure, maintain and comply with all Authorizations. The Authorizations for any Facility shall, to the maximum extent permitted by Legal Requirements, relate and apply exclusively to such Facility, and Tenant acknowledges and agrees that, subject to all applicable Legal Requirements, the Authorizations (other than the Provider Agreements) are appurtenant to the Facilities to which they apply, both during and following the termination or expiration of the Term. Landlord will cooperate with Tenant and use commercially reasonable efforts, where necessary or required of Landlord as owner of the Premises, to enable Tenant to obtain and maintain the Authorizations necessary or required to use and operate any Facility for its Primary Intended Use.

6.4.2 Tenant and the Premises shall comply in all respects with all licensing and other Legal Requirements applicable to the Premises and the business conducted thereon and, to the extent applicable, all Third Party Payor Program requirements. Tenant shall not commit any act or omission that would in any way violate any certificate of occupancy affecting any Facility, result in closure of any Facility, result in the termination or suspension of Tenant’s ability to operate any Facility for its Primary Intended Use or result in the termination, suspension, non-renewal or other limitation of any Authorization, including, but not limited to, the authority to admit residents to any Facility or right to receive reimbursement for items or services provided at any Facility from any Third Party Payor Program.

6.4.3 Tenant shall not transfer any Authorizations to any location operated by Tenant other than the Facility or as otherwise required by the terms of this Lease nor pledge any Authorizations as collateral security for any loan or indebtedness except as required by the terms of this Lease and subject to the intercreditor agreement with Tenant’s working capital lender as provided in Section 20.2 to the extent applicable.

6.4.4 Anything herein to the contrary notwithstanding, to the extent that on the Commencement Date any of the Leased Improvements constitute a legally permitted non-conforming use or structure, or are the subject of any waiver, variance or special use permit, under applicable zoning, subdivision or other land use laws, ordinances or regulations, Landlord acknowledges and agrees that the terms of this Lease with respect to Tenant’s compliance with all Legal Requirements in this Section 6.4 and Tenant’s maintenance and repair obligations under Section 7.1 shall not be deemed to be breached, nor shall Tenant be deemed to have failed to perform its obligations hereunder, by Tenant maintaining such Leased Improvements in good order and repair for at least the same use and in at least the same configuration and condition as exists on the Commencement Date and in compliance with the applicable waiver, variance, special use permit or similar exception to the applicable Legal Requirement.

6.5 Preservation of Business . Tenant acknowledges that a fair return to Landlord on and protection of its investment in the Premises is dependent, in part, on the concentration of similar businesses of Tenant and its Affiliates in the geographical area of each Facility. Tenant further acknowledges that the diversion of staff, residents, or patient care activities from any Facility to other facilities owned or operated by Tenant, Guarantor, or any of their respective Affiliates will have a material adverse effect on the value and utility of such Facility. Therefore, Tenant agrees that none of Tenant, Guarantor, nor any of their respective Affiliates shall, without the prior written consent of Landlord (which may be granted or withheld in Landlord’s sole and absolute discretion): (a) during the Term and for a period of one (1) year thereafter (i) operate, own, develop, lease, manage, control, invest in, participate in or otherwise receive revenues from a Competing Facility, (ii) permit his, her or its name to be used by, or in connection with, any Competing Facility, (iii) except as is necessary to provide residents or patients with an alternative level of care, or in connection with a casualty, or as is otherwise necessary to the health and welfare of any resident or patient, recommend or solicit directly (as contrasted with a general advertising campaign) the removal or transfer of any resident or patient from any Facility to any other nursing, health care, senior housing, or retirement housing facility or divert actual or potential residents, patients or care activities of any Facility to any other facilities owned or operated by Tenant, Guarantor, or any of their respective Affiliates or from which they receive any type of referral fees or other compensation for transfers, or (b) during the last year of the Term or any applicable Extension Term (unless Tenant has elected to renew this Lease for the next applicable Extension Term) employ for any other businesses any Administrator, Executive Director or Director of Nursing working on or in connection with any Facility or the operations thereof provided that this clause shall not preclude the promotion or career development of any Administrator, Executive Director or Director of Nursing. The obligations of Tenant and Guarantor under this Section 6.5 shall survive the expiration or earlier termination of this Lease.

6.6 Maintenance of Books and Records . Tenant shall keep and maintain, or cause to be kept and maintained, proper and accurate books and records in accordance with GAAP, and a standard modern system of accounting, in all material respects reflecting the financial affairs of Tenant and the results from operations of each Facility, individually and collectively. Landlord shall have the right, from time to time during normal business hours after three (3) Business Days’ prior oral or written notice to Tenant, itself or through any of Landlord’s Representatives, to examine and audit such books and records at the office of Tenant or other Person maintaining such books and records and to make such copies or extracts thereof as Landlord or Landlord’s Representatives shall request and Tenant hereby agrees to reasonably cooperate with any such examination or audit at Tenant’s cost and expense.

6.7 Financial, Management and Regulatory Reports . Tenant shall provide Landlord with the reports listed in Exhibit D within the applicable time specified therein. All financial information provided shall be prepared in accordance with GAAP and, provided that such template is provide to Tenant sufficiently in advance for Tenant to review and implement, shall be submitted electronically using the applicable template approved by Landlord in its reasonable discretion from time to time or, if no such template is provided by Landlord, in the form of unrestricted, unlocked “.xls” spreadsheets created using Microsoft Excel (2003 or newer editions). If Tenant or any Guarantor becomes subject to any reporting requirements of the Securities and Exchange Commission during the Term, it shall concurrently deliver to Landlord such quarterly and annual reports not otherwise provided for on Exhibit D as are delivered pursuant to applicable securities laws. In addition to, and without limiting any other remedies which Landlord may have under this Lease, at law, or in equity, Tenant shall be assessed with a $500 administrative fee for each instance in which Tenant fails to provide Landlord with the reports listed in Exhibit D within the applicable time specified therein, which administrative fee shall be immediately due and payable to Landlord. Notwithstanding the foregoing, such administrative fee shall not be assessed to Tenant so long as (a) Tenant is not delinquent in the delivery of such financial reports more than one (1) time in any consecutive twelve (12) month period, and (b) Tenant remits any delinquent report to Landlord within five (5) days of Landlord’s written demand therefor.

6.7.1 In addition to the reports required under Section 6.7 above, upon Landlord’s request from time to time, Tenant shall provide Landlord with such additional information and unaudited quarterly financial information concerning each Facility, the operations thereof and Tenant and Guarantor as Landlord may reasonably require for purposes of securing financing for the Premises or its ongoing filings with the Securities and Exchange Commission, under both the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, including, but not limited to, 10-Q Quarterly Reports, 10-K Annual Reports and registration statements to be filed by Landlord during the Term, subject to the conditions that neither Tenant nor Guarantor shall be required to disclose information that is materially non-public information or is subject to the quality assurance immunity or is subject to attorney-client privilege or the attorney work product doctrine.

6.7.2 Tenant specifically agrees that Landlord may include financial information and such information concerning the operation of any Facility which does not violate the confidentiality of the facility-patient relationship and the physician-patient privilege under applicable laws, in offering memoranda or prospectuses, or similar publications in connection with syndications, private placements or public offerings of Landlord’s securities or interests, and any other reporting requirements under applicable federal or state laws, including those of any successor to Landlord.

6.7.3 Landlord acknowledges and agrees that certain of the information contained in the financial statements and/or in the financials may be non-public financial or operational information with respect to Guarantor, Tenant and/or the Facilities. Landlord agrees to maintain the confidentiality of such non-public information to the extent specifically identified by Tenant or Guarantor as non-public; provided, however, Landlord shall have the right to disclose such information with its accountants, attorneys and other consultants provided such disclosure is not prohibited by applicable Legal Requirements.

6.8 Estoppel Certificates . Tenant shall, at any time upon not less than five (5) Business Days’ prior written request by Landlord, have an authorized representative execute, acknowledge and deliver to Landlord or its designee a written statement certifying, to the extent true at that time (a) that this Lease, together with any specified modifications, is in full force and effect, (b) the dates to which Rent and additional charges have been paid, (c) that no default by either party exists or specifying any such default and (d) as to such other matters as Landlord may reasonably request.

6.9 Furnish Information . Tenant shall, promptly upon Tenant or Guarantor obtaining knowledge of the same, notify Landlord of any condition or event that constitutes a breach of any term, condition, warranty, representation, or provision of this Lease and of any material adverse change in the financial condition of any Tenant or Guarantor and of any Event of Default.

6.10 Affiliate Transactions . Tenant shall not enter into, nor be a party to, any transaction with any Affiliate of Tenant or any of the partners, members or shareholders of Tenant except in the Ordinary Course of Business and on terms that are materially no less favorable to Tenant than would be obtained in a comparable arm’s-length transaction with an unrelated third party in the current market. As of the Commencement Date, Tenant is a party to certain agreements identified on Schedule 6.10 attached hereto (collectively, the “ Affiliate Agreements ”). Tenant shall provide Landlord annually during the Term, within ten (10) Business Days after each anniversary of the Commencement Date, with an updated Schedule 6.10 reflecting any additional Affiliate Agreements that have been entered into by Tenant or modifications to or terminations of existing Affiliate Agreements, and, upon request from Landlord, executed copies thereof.

6.11 Waste . Tenant shall not commit or suffer to be committed any waste on any of the Premises, nor shall Tenant cause or permit any nuisance thereon.

6.12 Additional Covenants . Tenant shall satisfy and comply with the following performance covenants throughout the Term:

6.12.1 Tenant shall maintain a Portfolio Coverage Ratio equal to or greater than the Minimum Rent Coverage Ratio. In the event that as of the applicable Testing Date, the Portfolio Coverage Ratio for the applicable period of determination is less than the Minimum Rent Coverage Ratio, an Event of Default shall not be deemed to occur provided that: (a) no other Event of Default shall have occurred and then be continuing, (b) with respect to any period after expiration of the third (3 ^rd ) Lease Year, the Portfolio Coverage Ratio as of such Testing Date is greater than 1.00 to 1.00, and (c) Tenant shall immediately deposit with Landlord an amount equal to the difference between: (i) the amount equal to four (4) monthly payments of then Base Rent, and (ii) the then amount of any Security Deposit or Letters of Credit, as applicable, then held by Landlord pursuant to Section 3.1 or 3.2 (the amount of said difference, the “ Additional Deposit ”). The Additional Deposit shall be held by Landlord as an additional security deposit under this Lease and Landlord may, from time to time, without prejudice to any other right or remedy, apply such Additional Deposit to the obligations due from Tenant under this Lease. The Additional Deposit shall not be deemed an advance payment of Rent or a measure of Landlord’s damages for any default under this Lease by Tenant, nor shall it be a bar or defense to any action that Landlord may at any time commence against Tenant. The Additional Deposit shall be the property of Landlord and it may commingle the Additional Deposit with other assets of Landlord, and Tenant shall not be entitled to any interest on the Additional Deposit. Provided that no Event of Default then exists and is continuing, following the date on which Landlord determines that the Portfolio Coverage Ratio for two (2) consecutive Testing Dates is greater than or equal to the Minimum Rent Coverage Ratio, Landlord will cause the Additional Deposit to be returned to Tenant.

6.12.2 Subject to Section 20.2, Tenant shall not, directly or indirectly, create, incur, assume, guarantee or otherwise become or remain directly or indirectly liable with respect to (i) any Debt except for Permitted Debt; or (ii) any Contingent Obligations except for Permitted Contingent Obligations. Tenant shall not default on the payment of any Permitted Debt or Permitted Contingent Obligations that is not cured within any applicable cure period provided for therein, which default could reasonably be expected to have a material adverse effect on the ability of Tenant to perform it obligations under this Lease.

6.12.3 Tenant shall not, directly or indirectly, (i) acquire or enter into any agreement to acquire any assets other than in the Ordinary Course of Business, or (ii) engage or enter into any agreement to engage in any joint venture or partnership with any other Person other than an Affiliate.

6.12.4 Tenant shall not cancel or otherwise forgive or release any material claim or material debt owed to any Tenant by any Person for goods or services provided by or rendered at any Facility, except in the Ordinary Course of Business and consistent with prudent business practices. If any proceedings are filed seeking to enjoin or otherwise prevent or declare invalid or unlawful Tenant’s occupancy, maintenance, or operation of a Facility or any portion thereof for its Primary Intended Use, Tenant shall cause such proceedings to be vigorously contested in good faith, and shall, without limiting the generality of the foregoing, use all reasonable commercial efforts to bring about a favorable and speedy disposition of all such proceedings and any other proceedings.

6.12.5 After the occurrence of an Event of Default, then until such Event of Default is cured in accordance with the provisions of this Lease, no Tenant shall make any payments or distributions of cash or the assets of the Facilities (including dividends, liquidating distributions, or cash flow distributions) to any Guarantor or any Affiliate of any Tenant or any Guarantor, or any shareholder, member, partner or other equity interest holder of any Tenant, any Guarantor or any Affiliate of any Tenant or any Guarantor. For purposes of this Section 6.12.5, none of the following shall be deemed to be a payment or distribution: (i) salaries, bonuses and other compensation paid to employees, (ii) payments of Permitted Debt, (iii) reimbursement for third party expenses paid on behalf of or which are fairly allocable to the Facilities, or (iv) payment of any other fees, costs or expenses necessary or required in the Ordinary Course of Business for the continued operation and maintenance of the Facilities, including without limitation payment of the fees permitted under the Affiliate Agreements necessary or required for the continued operation and maintenance of the Facilities.

6.13 No Liens . Subject to the provisions of Article VIII relating to permitted contests and excluding the applicable Permitted Encumbrances, Tenant will not directly or indirectly create or allow to remain and will promptly, but in all events within thirty (30) days after written notice of the existence thereof from Landlord or Tenant otherwise obtaining knowledge of the same, discharge (which discharge may include the filing or recording of any bond permitted or required by applicable law) at its expense any lien, encumbrance, attachment, title retention agreement or claim upon any Facility, this Lease or Tenant’s interest in any Facility or any attachment, levy, claim or encumbrance in respect of the Rent. Without Landlord’s prior written consent, Tenant shall not cause or permit any of Landlord Personal Property to be subject to any lien, charge, encumbrance, financing statement, contract of sale or the like, except for (i) equipment leases, if any, that will be assumed by Tenant on or prior to the Commencement Date with respect to certain equipment located at a Facility on the Commencement Date, and (ii) equipment leases that constitute Permitted Debt.

6.14 Landlord Trade Names and Marks . Tenant shall not use any trade or service name or mark of, or any fictitious business name used by, Landlord or its Affiliates, or any variations thereof, including “Golden Living,” “Aegis, “AseraCare” or any variation of any of the foregoing.

6.15 Reserved .

6.16 Reserved .

Article VII
MAINTENANCE AND REPAIR

7.1 Tenant’s Maintenance Obligation . Tenant, at Tenant’s expense, shall (a) keep and maintain each Facility in good appearance, repair and condition, and maintain proper housekeeping, (b) promptly make all repairs (interior and exterior, structural and nonstructural, ordinary and extraordinary, foreseen and unforeseen) necessary to keep each Facility in good and lawful order and condition and in compliance with all Legal Requirements, Insurance Requirements and Authorizations and to maintain each Facility in a good quality operating and structural condition for use for its Primary Intended Use (ordinary wear and tear excepted subject to Tenant's obligation to maintain, repair and replace the same in accordance with the terms of this Lease), and (c) keep and maintain all Landlord Personal Property and Tenant Personal Property in good condition and repair and replace such property consistent with prudent industry practice, excepting damage due to casualty or condemnation to the extent provided in Articles XI and XII respectively. All repairs performed by Tenant shall be done in a good and workmanlike manner. Landlord shall under no circumstances be required to repair, replace, build or rebuild any improvements on any Facility, or to make any repairs, replacements, alterations, restorations or renewals of any nature or description to any Facility, whether ordinary or extraordinary, structural or non-structural, foreseen or unforeseen, or to make any expenditure whatsoever with respect thereto, or to maintain any Facility in any way. Tenant hereby waives, to the extent permitted by law or any equitable principle, the right to make repairs at the expense of Landlord pursuant to any law currently in effect or hereafter enacted.

7.2 Premises Condition Report . Landlord may from time to time cause a qualified consultant designated by Landlord, in its sole discretion, to inspect any Facility and issue a report (a “ Premises Condition Report ”) with respect to such Facility’s condition. Without limitation of any other obligation of Tenant under this Lease, Tenant shall, at its own expense, immediately make any and all repairs or replacements that are recommended by such Premises Condition Report that relate to life safety. Tenant shall pay the cost of any Premises Condition Report ordered by Landlord (a) during the continuance of and Event of Default, and (b) at all other times, not to exceed one (1) time per Facility in any eighteen (18) month period, the cost of which shall not exceed $2,500 per report, per Facility.

7.3 Notice of Non-Responsibility . Nothing contained in this Lease and no action or inaction by Landlord shall be construed as (a) constituting the consent or request of Landlord, expressed or implied, to any contractor, subcontractor, laborer, materialman or vendor to or for the performance of any labor or services or the furnishing of any materials or other property for the construction, alteration, addition, repair or demolition of or to any Facility or any part thereof; or (b) giving Tenant any right, power or permission to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would permit the making of any claim against Landlord in respect thereof or to make any agreement that may create, or in any way be the basis for, any right, title, interest, lien, claim or other encumbrance upon the estate of Landlord in any Facility or any portion thereof. Landlord may post, at Tenant’s sole cost, such notices of non-responsibility upon, or of record against, any Facility to prevent the lien of any contractor, subcontractor, laborer, materialman or vendor providing work, services or supplies to Tenant from attaching against such Facility. Tenant agrees to promptly execute and record any such notice of non-responsibility at Tenant’s sole cost.

7.4 Permitted Alterations . Without Landlord’s prior written consent, which consent shall not be unreasonably withheld, Tenant shall not make any Capital Alterations or Material Alterations. Tenant may, without Landlord’s consent, make any other Alterations provided the same (a) do not decrease the value of the applicable Facility, (b) do not adversely affect the exterior appearance of such Facility and (c) are consistent in terms of style, quality and workmanship to the original Leased Improvements and Fixtures of such Facility, and provided further that the same are constructed and performed in accordance with the following:

7.4.1 Such construction shall not commence until Tenant shall have procured and paid for all municipal and other governmental permits and authorizations required therefor (as well as any permits or approvals required in connection with any Permitted Encumbrance of such Facility); provided, however, that any Plans and Specifications required to be filed in connection with any such permits or authorizations that require the approval of Landlord shall have been so approved by Landlord.

7.4.2 During and following completion of such construction, the parking that is located on the Land of such Facility shall remain adequate for the operation of such Facility for its Primary Intended Use and in no event shall such parking be less than what is required by any applicable Legal Requirements or was located on such Land prior to such construction.

7.4.3 All work done in connection with such construction shall be done promptly and in a good and workmanlike manner using materials of appropriate grade and quality consistent with the existing materials and in conformity with all Legal Requirements and any Plans and Specifications.

7.4.4 If, by reason of the construction of any Alteration, a new or revised certificate of occupancy for any component of such Facility is required, Tenant shall obtain such certificate in compliance with all applicable Legal Requirements and furnish a copy of the same to Landlord promptly upon receipt thereof.

7.4.5 Upon completion of any Alteration, Tenant shall promptly deliver to Landlord final lien waivers from each and every general contractor and, with respect to Alterations costing in excess of $10,000, each and every subcontractor that provided goods or services costing in excess of $10,000 in connection with such Alterations indicating that such contractor or subcontractor has been paid in full for such goods or services, together with such other evidence as Landlord may reasonably require to satisfy Landlord that no liens have been or may be created in connection with such Alteration.

7.4.6 Each and every Alteration, renovation or improvement made by Tenant under this Section 7.4 (or Section 7.5) shall immediately become a part of the Premises and shall belong to Landlord subject to the terms and conditions of this Lease.

7.5 Capital and Material Alterations . If Landlord consents to the making of any Capital Alterations or Material Alterations, Landlord may impose commercially reasonable conditions thereon in connection with its approval thereof. In addition to any such imposed conditions, all such Alterations shall be constructed and performed in accordance with Sections 7.4.1 through 7.4.5 above, together with the following:

7.5.1 Prior to commencing any such Alterations, Tenant shall have submitted to Landlord a written proposal describing in reasonable detail such proposed Alteration and shall provide to Landlord for approval such plans and specifications, permits, licenses, construction budgets and other information (collectively, the “ Plans and Specifications ”) as Landlord shall request, showing in reasonable detail the scope and nature of the proposed Alteration.

7.5.2 Such construction shall not, and prior to commencement of such construction Tenant’s licensed architect or engineer (to the extent the services of a licensed architect or engineer are required in connection with such Alterations) shall certify to Landlord that such construction shall not, impair the structural strength of such Facility or overburden or impair the operating efficiency of the electrical, water, plumbing, HVAC or other building systems of such Facility.

7.5.3 Prior to commencing any such Alterations, Tenant’s licensed architect or engineer (to the extent the services of a licensed architect or engineer are required in connection with such Alterations) shall certify to Landlord that the Plans and Specifications conform to and comply with all applicable Legal Requirements and Authorizations.

7.5.4 Promptly following the completion of the construction of any such Alterations, Tenant shall deliver to Landlord: (a) “as built” drawings of any such Alterations included therein, if applicable, certified as accurate by the licensed architect or engineer selected by Tenant to supervise such work; and (b) a certificate from Tenant’s licensed architect or engineer certifying to Landlord that such Alterations have been completed in compliance with the Plans and Specifications and all applicable Legal Requirements.

7.6 Capital Expenditures .

7.6.1 With respect to all Facilities in the aggregate, Tenant agrees to expend, during each Lease Year, an amount (the “ Required Capital Expenditures Amount ”) equal to the product of (a) the Required Per Bed Annual Capital Expenditures Amount (as increased at the end of each Lease Year to reflect the Adjusted CPI Increase during the immediately preceding Lease Year), times (b) the weighted average of the number of licensed beds in all Facilities during such Lease Year, on Capital Expenditures, provided that, with respect to any Facility individually, such expenditures shall not be less than (x) the Facility Required Per Bed Annual Capital Expenditures Amount times (y) the weighted average of the number of licensed beds in such Facility during such Lease Year. Within thirty (30) days following the end of each Lease Year, Tenant shall deliver to Landlord a report (a “ Capital Expenditures Report ”), certified as true, correct and complete by an officer of Tenant, summarizing and describing in reasonable detail all of the Capital Expenditures made by Tenant during the preceding Lease Year on each Facility, and such receipts and other information as Landlord may reasonably request relative to the Capital Expenditures made by Tenant during the applicable Lease Year. If, with respect to any Facility individually or all Facilities in the aggregate, the amount of the Capital Expenditures so made and reported by Tenant during a particular Lease Year (the “ Actual Capital Expenditures Amount ”) is less than the Required Capital Expenditures Amount applicable to such period, Tenant shall, on or prior to the due date of the Capital Expenditures Report for such period, deposit (a “ Capital Expenditures Deposit ”) with Landlord an amount equal to the amount by which the Required Capital Expenditures Amount for the applicable period exceeds the Actual Capital Expenditures Amount for such period. If, with respect to any Facility individually or all Facilities in the aggregate, the Actual Capital Expenditures Amount so made and reported by Tenant during a particular Lease Year is greater than the Required Capital Expenditures Amount applicable to such period (such difference being referred to herein as the “ Excess Capital Expenditures Amount ”), then, (a) provided no Event of Default then exists hereunder, within ten (10) days after Tenant’s presentation of its Capital Expenditures Report reflecting such greater expenditure, subject to reasonable extension if required under the Facility Mortgage Documents, Landlord shall pay to Tenant the lesser of (x) the Excess Capital Expenditures Amount or (y) the amount of funds then held by Landlord as Capital Expenditures Deposits with respect to the applicable Facility or Facilities, and (b) to the extent that the Excess Capital Expenditures Amount exceeds the amount of funds then held by Landlord as Capital Expenditures Deposits with respect to such Facility or Facilities, such excess shall be credited against the Required Capital Expenditures Amount for up to the next two (2) succeeding Lease Years with respect to such Facility or Facilities.

7.6.2 Tenant’s obligation to deliver the Capital Expenditures Report applicable to the last Lease Year, together with Tenant’s obligation to deliver any Capital Expenditures Deposit associated therewith, shall survive the expiration or termination of this Lease. If, on the basis of such Capital Expenditures Report, Tenant is entitled to a payment of any Excess Capital Expenditures Amount as described in Section 7.6.1 above, then, notwithstanding anything to the contrary, such payment shall be due and payable to Tenant only as and when the conditions of Section 3.1 or 3.2 for the return of the Security Deposit or Letter of Credit, as applicable, have been met. Except as provided in the preceding sentence, upon the expiration or termination of this Lease, all Capital Expenditures Deposits held by Landlord (including, without limitation, any Capital Expenditures Deposits that are required to be deposited by Tenant with respect to the last Lease Year) shall automatically and without further action of the parties become the property of Landlord, without any obligation on Landlord’s part to credit Tenant in any manner therefor.

7.6.3 The Capital Expenditures Deposits held by Landlord shall not bear interest and may be commingled with the other assets of Landlord. If Landlord transfers this Lease, it shall transfer all Capital Expenditures Deposits then held by it to the transferee, and Landlord shall thereafter have no liability of any kind with respect thereto. Following any Event of Default and at Landlord’s option, the Capital Expenditures Deposits held by Landlord may, in its sole discretion, be applied to Tenant’s obligations in the order that Landlord in its sole discretion may determine.

7.7 Construction Consultant . In connection with any Capital Alterations or Material Alterations, Landlord may engage a construction consultant (a “ Construction Consultant ”) to perform or assist with Landlord’s review and approval of the Plans and Specifications, periodic inspection of the improvement work, certification of progress and completion, review of disbursement requests and lien waivers and such other matters as Landlord may require in connection with such Alterations. The reasonable costs and expenses of the Construction Consultant shall be the sole responsibility of Tenant. Tenant shall cooperate with any Construction Consultant and provide such access to books, records, information and the Premises as Construction Consultant may reasonably request in connection with his or her work.

7.8 Encroachments . Except for any such encroachments existing on the Commencement Date, if any of the Leased Improvements of any Facility shall, at any time, encroach upon any property, street or right-of-way adjacent to such Facility, then, promptly upon the request of Landlord, Tenant shall, at its expense, subject to its right to contest the existence of any encroachment and, in such case, in the event of any adverse final determination, either (a) obtain valid waivers or settlements of all claims, liabilities and damages resulting from each such encroachment, whether the same shall affect Landlord or Tenant, or (b) make such changes in such Leased Improvements, and take such other actions, as Tenant, in the good faith exercise of its judgment, deems reasonably practicable, to remove such encroachment, including, if necessary, the alteration of any of such Leased Improvements, and in any event take all such actions as may be necessary to be able to continue the operation of such Leased Improvements for the Primary Intended Use of such Facility substantially in the manner and to the extent such Leased Improvements were operated prior to the assertion of such encroachment. Any such alteration shall be made in conformity with the applicable requirements of Sections 7.4 and 7.5.

7.9 Capital Alterations Financed by Landlord . From time to time during the Term, Tenant may request that Landlord provide financing for a Capital Alteration by providing Landlord such information about the proposed Capital Alteration as Landlord may reasonably request. Landlord may in its sole and absolute discretion, but shall be under no obligation to, agree to provide such financing (“ Improvement Funds ”) for such Capital Alteration through an appropriate increase in Base Rent as agreed upon by Landlord and Tenant. Within thirty (30) days of receipt of a request to finance a proposed Capital Alteration, Landlord shall notify Tenant as to whether it will finance the proposed Capital Alteration and, if so, the terms and conditions upon which it would do so, including the terms of the increase in Base Rent and other required amendments to this Lease. Tenant shall have ten (10) Business Days to accept or reject Landlord's financing proposal. In no event shall the portion of the projected Capital Alteration comprised of land, if any, materials, labor charges and fixtures be less than ninety percent (90%) of the total amount of the projected cost of such Capital Alteration. If Landlord agrees to provide Improvement Funds for a proposed Capital Alteration and Tenant accepts the terms thereof, Tenant shall provide Landlord with the following prior to any advance of funds:

7.9.1 any information, certificates, licenses, permits or documents requested by Landlord which are necessary and obtainable to confirm that Tenant will be able to use the Capital Alteration upon completion thereof in accordance with the Primary Intended Use and all Legal Requirements;

7.9.2 an officer’s certificate and, if requested, a certificate from Tenant's architect, setting forth in reasonable detail the projected or actual Capital Alteration costs;

7.9.3 an amendment to this Lease, in a form prepared by Landlord and reasonably agreed to by Tenant, providing for an increase in the Base Rent in amounts as agreed upon by Landlord and Tenant and other provisions as may be necessary or appropriate;

7.9.4 a deed conveying title to Landlord to any land acquired for the purpose of constructing the Capital Alteration free and clear of any liens or encumbrances except those approved by Landlord, and accompanied by an ALTA survey thereof satisfactory to Landlord;

7.9.5 for each advance, endorsements to any outstanding policy of title insurance covering the Premises or commitments therefor satisfactory in form and substance to Landlord (i) updating the same without any additional exception except those as may be approved by Landlord, which approval shall not be unreasonably withheld and (ii) increasing the coverage thereof by an amount equal to, at a minimum, the aggregate amount of Improvement Funds advanced by Landlord;

7.9.6 if appropriate, an owner's policy of title insurance insuring fee simple title to any land conveyed to Landlord free and clear of all liens and encumbrances except those as may be approved by Landlord, which approval shall not be unreasonably withheld;

7.9.7 if requested by Landlord, an MAI appraisal of the applicable Facility indicating that the fair market value of such Facility upon completion of the Capital Alteration will exceed the fair market value of such Facility immediately prior thereto by an amount not less than ninety-five percent (95%) of the cost of the Capital Alteration; and

7.9.8 such other billing statements, invoices, certificates, endorsements, opinions, site assessments, surveys, resolutions, ratifications, lien releases and waivers and other instruments and information reasonably required by Landlord.

7.10 Upgrade Allowance . From and after January 1, 2017, Landlord shall provide Tenant up to One Million Four Hundred Thousand Dollars ($1,400,000) minus the sum of all Related Lease Upgrade Disbursements (the “ Upgrade Allowance ”) (which is an aggregate amount and shall be allocated among the Facilities as mutually determined by Landlord and Tenant) as an allowance for the cost of certain Alterations and other upgrade and capital expenditures pertaining to the Premises (each an “ Upgrade Expenditure ”), upon the following terms and conditions and the other applicable terms and conditions of this Article VII and this Lease:

7.10.1 The Upgrade Allowance shall be used to pay for the cost of the Upgrade Expenditures identified by Tenant and approved by Landlord in its reasonable discretion as provided herein to the extent such identified and approved expenditures may be capitalized by Landlord in accordance with GAAP. Prior to commencing any work for which Tenant will request disbursement of the Upgrade Allowance, Tenant shall provide Landlord with a brief proposal summarizing the work to be completed together with such written documentation as may be reasonably requested by Landlord with respect thereto, which may include, to the extent applicable, plans and specifications, budgets, a work completion schedule, pro forma operating projections and copies of permits required in connection with such repairs or improvements, and Landlord shall have a reasonable period of time, not to exceed forty-five (45) days, to review and approve the same, which shall not be unreasonably withheld, conditioned or delayed.

7.10.2 Tenant shall have the right to request disbursements of the Upgrade Allowance from time to time, but not more frequently than once per calendar month, in increments of not less than Twenty-Five Thousand Dollars ($25,000). All such requests shall be in writing and shall be accompanied with such supporting documentation as may be reasonably requested by Landlord, which may include, without limitation, (a) an itemized account of expenditures to be paid or reimbursed from the requested disbursement, certified by Tenant to be true and correct expenditures which have already been paid or are due and owing and for which no previous disbursement was made hereunder, and (b) copies of invoices or purchase orders from each payee with an identifying reference to the applicable vendor or supplier, which invoices or purchase orders shall support the full amount of costs contained in the requested disbursement. Landlord shall, within thirty (30) calendar days of Tenant’s delivery of a request for disbursement and compliance with the conditions for disbursement set forth in this Section 7.10.2, make disbursements of the requested Upgrade Allowance funds to pay or reimburse Tenant for the costs of the applicable capital repairs or improvements.

7.10.3 All work that has been funded in whole or in part by the Upgrade Allowance shall be invoiced and completed by July 1, 2018 (without consideration for any extension thereof).

7.10.4 No Event of Default shall have occurred and be continuing at the time of (a) any request for Landlord’s approval of the Upgrade Expenditures to be funded by the Upgrade Allowance or (b) any request for disbursement of the Upgrade Allowance.

7.10.5 All Alterations, repairs or improvements funded with the Upgrade Allowance shall be completed in a good, workmanlike and lien-free manner and in accordance with the other applicable provisions of this Article VII and this Lease. If any of such Alterations, repairs or improvements are completed in a manner not in compliance with this Section 7.10 and the other applicable provisions of this Lease, Tenant shall, promptly after obtaining knowledge thereof or Landlord’s demand therefor, repair or remediate the applicable work to the extent necessary to attain such compliance at its sole cost and expense.

7.10.6 Each and every Alteration, renovation or improvement funded by Landlord under this Section 7.10 shall immediately become a part of the Premises and shall belong to Landlord subject to the terms and conditions of this Lease.

7.10.7 No disbursement of the Upgrade Allowance shall be used to remedy any condition which constitutes a default by Tenant under the provisions of this Lease unless such condition pertains to the Premises and existed as of the Commencement Date for such portion of the Premises.

7.10.8 From and after the date of disbursement of each advance of the Upgrade Allowance by Landlord in excess of the Base Upgrade Allowance Amount, the annual amount of Base Rent then payable under this Lease shall be increased by the product of: (a) the amount of such Upgrade Allowance disbursed by Landlord in excess of the Base Upgrade Allowance Amount, and (ii) five percent (5.0%). Such increased Base Rent shall commence to be payable on the next Payment Date for Base Rent following disbursement of such Upgrade Allowance (together with any prorated portion of the increased Base Rent payable with respect to the month in which such Upgrade Allowance was advanced).

7.10.9 As used in this Section 7.10, (a) “ Base Upgrade Allowance Amount ” shall mean the amount of One Million Dollars ($1,000,000) minus the sum of all Related Lease Upgrade Disbursements (irrespective of when such Related Lease Upgrade Disbursements are disbursed); and (b) “ Related Lease Upgrade Disbursement ” shall mean each advance or disbursement made by any Affiliate of Landlord (each a “ Related Lease Landlord ”) to any Affiliate of Guarantor or Tenant (each a “ Related Lease Tenant ”) for repair, maintenance or alteration of the premises demised under a Related Lease pursuant to the assignment and assumption, operations transfer agreements or similar agreements entered into by any Related Lease Landlord and any Related Lease Tenant in connection with the applicable Related Lease.

Article VIII
PERMITTED CONTESTS

Tenant, upon prior written notice to Landlord and at Tenant’s expense, may contest, by appropriate legal proceedings conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any licensure or certification decision, Imposition, Legal Requirement, Insurance Requirement, lien, attachment, levy, encumbrance, charge or claim; provided, however, that (a) in the case of an unpaid Imposition, lien, attachment, levy, encumbrance, charge, or claim, the commencement and continuation of such proceedings shall suspend the collection thereof from Landlord and from the applicable Facility, (b) neither the applicable Facility nor any Rent therefrom nor any part thereof or interest therein would be reasonably likely to be in danger of being sold, forfeited, attached or lost pending the outcome of such proceedings, (c) in the case of a Legal Requirement, neither Landlord nor Tenant would be in any danger of civil or criminal liability for failure to comply therewith pending the outcome of such proceedings; (d) Tenant shall give such security as may be demanded by Landlord to insure ultimate payment of, or compliance with, the same and to prevent any sale or forfeiture (or risk thereof) of the applicable Facility or the Rent by reason of such non-payment or non-compliance; (e) in the case of the contest of an Insurance Requirement, the coverage required by Article IX shall be maintained, and (f) if such contest is resolved against Landlord or Tenant, Tenant shall pay to the appropriate payee the amount required to be paid, together with all interest and penalties accrued thereon, and otherwise comply with the applicable Legal Requirement or Insurance Requirement. Landlord, at Tenant’s expense, shall execute and deliver to Tenant such authorizations and other documents as may reasonably be required in any such contest, and, if reasonably requested by Tenant or if Landlord so desires, shall join as a party therein. The provisions of this Article VIII shall not be construed to permit Tenant to contest the payment of Rent or any other amount payable by Tenant to Landlord hereunder. Tenant shall indemnify, defend, protect and hold harmless Landlord from and against any Losses of any kind that may be imposed upon Landlord in connection with any such contest and any Losses resulting therefrom and the provisions of this Article VIII shall survive the termination or expiration of this Lease.

Article IX
INSURANCE

9.1 Required Policies . During the Term, Tenant shall maintain the following insurance with respect to each Facility at its sole cost and expense:

9.1.1 With respect to the Premises, Tenant shall maintain commercial, property insurance on the Premises (including Tenant Personal Property and all Landlord Personal Property) written on a “special cause of loss form”, including but not limited to sprinkler leakage, in a per occurrence amount not less than 100% of current replacement cost for all real and business personal property; and including business income (subject to terms of Section 9.1.2), and providing or containing, as applicable: (a) an Agreed Amount Endorsement with respect to the Premises (including all Tenant Personal Property and Landlord Personal Property) waiving all co-insurance provisions; (b) an “Ordinance or Law Coverage” (Code Upgrade coverage) which shall provide coverage for the increased cost of construction, demolition cost, value of the undamaged portion of the structure and any increased time to rebuild due to the enforcement of building or zoning laws or requirements; (c) coverage for: (i) flood hazard (if such Facility is located in whole or in part within a designated 100 year flood plain area) (ii) earthquake, and (iii) coastal windstorm insurance, if applicable; provided that the insurance pursuant to the foregoing clauses (i), (ii) and (ii) shall be required only to the extent it is available at commercially reasonable rates and terms and is customarily carried for similar properties, as reasonably determined by Landlord;

9.1.2 Business income insurance covering all risks required to be covered by the insurance provided for in Section 9.1.1 above, as applicable for a period of twelve (12) months and including an extended period of indemnity endorsement which provides that after the physical loss to the Premises (including Tenant Personal Property and Landlord Personal Property) has been repaired, the continued loss of income will be insured until such income either returns to the same level it was at prior to the loss, or the expiration of six (6) months from the date that the applicable Facility is repaired or replaced and operations are resumed, whichever first occurs, and notwithstanding that the policy may expire prior to the end of such period;

(a) Deductibles/self-insured retentions for the insurance policies required under Section 9.1.1 shall not be greater than $100,000; provided, however, that the deductibles/self-insured retentions for losses sustained from earthquake (including earth movement), or windstorm (i.e., wind/hail) may be equal to, but not greater than, five percent (5%) of the replacement cost of the total insured value of the applicable Facility, or $250,000, whichever is greater. The flood deductible shall not be greater than $100,000, unless the Facility is in the designated 100 year flood plain area, in which event the deductible may be $500,000 or less and the Tenant shall obtain and maintain flood coverage from the National Flood Insurance Program for the applicable Facility, if required by Landlord;

(b) the commercial property and business income insurance required under Sections 9.1.1 and 9.1.2 above shall cover perils of terrorism and acts of terrorism defined as certified acts by the Terrorism Risk Insurance Act (TRIA) and Tenant shall maintain commercial property and business income insurance for loss resulting from perils and acts of terrorism on terms (including amounts) consistent with those required under Sections 9.1.1 and 9.1.2 above at all times during the term of the Lease as long as such coverage is available in the commercial market at a premium no greater than 300% of the premium for such coverage paid as of the Commencement Date;

(c) all times Tenant will provide coverage during which structural construction, repairs or alterations are being made with respect to the improvements, under the coverages and terms specified in Sections 9.1.1 and 9.1.2 or alternatively (i) commercial property insurance written on a “special cause of loss” builder's risk completed value form on a non-reporting basis, against all risks insured against pursuant to Section 9.1.1 above, including permission to occupy the Facility; and with an agreed amount endorsement waiving co-insurance provisions; and (ii) owner's contingent or protective liability insurance covering claims not covered by or under the terms or provisions of the commercial general liability insurance policy required sections;

9.1.3 Tenant shall maintain comprehensive boiler and machinery insurance, in amount of Five Million dollars ($5,000,000) or other such amounts as shall be reasonably required by Landlord or any Facility Mortgagee on terms consistent with the commercial property insurance policy required above and any applicable governmental regulations;

9.1.4 If there is any storage tank, whether above ground or below ground, located at a Facility, whether or not in use, Pollution Liability Insurance with limits of at least One Million Dollars ($1,000,000) per occurrence and aggregate or other such higher amounts if required by regulation. All policies shall comply with all applicable regulatory requirements and shall insure both the interest of the Tenant and Landlord;

9.1.5 Commercial General Liability Coverage (“ CGL ”) (including products and completed operations liability and broad form coverage, host liquor liability, broad form property damage, blanket contractual liability, no exclusion for independent contractors, personal injury and advertising injury coverage against claims for bodily injury, death or property damage occurring on, in or about such Facility, affording the parties protection of not less than $1,000,000 per occurrence and $3,000,000 in the annual aggregate;

9.1.6 Professional Liability Coverage (“ PL ”) for damages for injury, death, loss of service or otherwise on account of professional services rendered or which should have been rendered, in a minimum amount of $1,000,000 per occurrence and $3,000,000 in the annual aggregate or higher amounts as may be required by state specific regulations or if participation is required in or provided by a state professional liability fund, then the state applicable limits;

(a) Policies required under Sections 9.1.5 and 9.1.6 shall (i) to the extent it is available at commercially available rates and terms, contain a cross liability endorsement or separation of insureds clause; provided that the separation of insureds shall not apply to the limits of liability; (ii) provide that any waiver of subrogation rights or release prior to a loss does not void coverage; and (iii) provide that it is primary to and not contributing with, any policy of insurance carried by Landlord covering the same loss;

(b) Tenant shall either (i) require each medical director at each Facility to carry Professional Liability Coverage with limits of not less than $1,000,000 per occurrence (claim) and $3,000,000 in the aggregate or applicable required state limits or cover the same, in their capacity as medical director, under the Policy described in Section 9.1.6;

(c) Policies required under Sections 9.1.5 and 9.1.6 shall require minimum limits of CGL and PL insurance to apply on a per Facility basis, subject to an All Tenant Aggregate Maximum Limited Liability of $5,000,000 per annual policy period;

(d) Deductibles/Self Insured Retentions applicable to Sections 9.1.5 and 9.1.6 shall not be greater than $500,000 per claim; and

9.1.7 Worker’s Compensation Coverage for injuries sustained by Tenant’s employees in the course of their employment and otherwise consistent with all applicable State regulations and employer’s liability coverage with limits of not less than $500,000 each accident, $500,000 bodily injury due to disease each employee and $500,000 bodily injury due to disease.

9.2 General Insurance Requirements .

9.2.1 All of the policies of insurance required to be maintained by Tenant under this Lease shall (a) be written in form satisfactory to Landlord and any Facility Mortgage and, with the exception of any policies written by a captive insurance program pursuant to Section 9.9, issued by insurance companies (i) with a policyholder and financial rating of not less than A- VII in the most recent version of Best’s Key Rating Guide and (ii) authorized to do insurance business in the applicable Situs State; (b) provide that any insurance maintained by Landlord for or with respect to the Premises shall be excess and noncontributory with Tenant’s insurance; and (c) include a waiver of all rights of subrogation and recovery against Landlord.

9.2.2 All liability type policies (with the exception of Tenant’s workers’ compensation/employer’s liability insurance and professional liability insurance) must name Landlord, agents and managers, as an “additional insured.” All property policies shall name Landlord as “loss payee.” All business interruption policies shall name Landlord as “loss payee” with respect to Rent only. Losses shall be payable to Landlord and/or Tenant as provided herein. In addition, the policies, as appropriate, shall name as an “additional insured” or “loss payee” any Facility Mortgagee by way of a standard form of mortgagee’s loss payable endorsement. Any loss adjustment shall require the written consent of Landlord, Tenant, and each Facility Mortgagee unless the amount of the loss is less than $100,000 in which event no consent shall be required.

9.2.3 Tenant shall provide Landlord a satisfactory ACORD evidencing the existence of the insurance required by this Lease and showing the interest of Landlord (and any Facility Mortgagee(s)) prior to the commencement of the Term or, for a renewal policy, not less than ten (10) days prior to the expiration date of the policy being renewed. If Landlord is provided with an ACORD certificate and thereafter requests a complete copy of the applicable policy, Tenant shall provide a complete copy of such policy within ten (10) days of Landlord’s request.

9.2.4 Tenant’s obligations to carry the insurance provided for herein may be brought within the coverage of a so-called “blanket” policy or policies of insurance carried and maintained by Tenant; provided, however, that the coverage afforded Landlord will not be reduced or diminished or otherwise be materially different from that which would exist under a separate policy meeting all other requirements hereof by reason of the use of the blanket policy, and provided further that the requirements of this section (including satisfaction of the Facility Mortgagee’s requirements and the approval of the Facility Mortgagee) are otherwise satisfied, and provided further that Tenant maintains specific allocations acceptable to Landlord. For any liability policies covering one or more other properties in addition to the Premises, Landlord may require excess limits as Landlord reasonably determines.

9.2.5 Tenant shall provide to Landlord thirty (30) days’ written notice before the policy or policies in question required under this Article IX shall be materially altered, non-renewed or cancelled.

9.3 Replacement Costs . The term “replacement cost” shall mean the actual replacement cost of the insured property from time to time with new materials and workmanship of like kind and quality (including the cost of compliance with changes in zoning and building codes and other laws and regulations, demolition and debris removal and increased cost of construction). If Landlord believes that the replacement cost has increased at any time during the Term, it shall have the right to have such replacement cost determined by an impartial appraiser reasonably acceptable to both parties (the “impartial appraiser”). The determination of the impartial appraiser shall be final and binding, and, as necessary, Tenant shall increase, but not decrease, the amount of the insurance carried pursuant to this section to the amount so determined by the impartial appraiser. Each party shall pay one-half (1/2) of the fee, if any, of the impartial appraiser. If Tenant has made Alterations, Landlord may at Tenant’s expense have the replacement cost redetermined at any time after such Alterations are made.

9.4 Claims-Made Policies . If Tenant obtains and maintains the commercial general liability coverage and/or professional liability coverage described in Sections 9.1.5 and 9.1.6 on a “claims-made” basis, Tenant shall provide continuous liability coverage for claims arising during the Term providing for an extended reporting period reasonably acceptable to Landlord for a minimum of two (2) years after expiration of the Term. If such policy is canceled or not renewed for any reason whatsoever other than the expiration of the Term, Tenant must provide evidence of a replacement policy reflecting coverage with retroactive coverage back to the Commencement Date and maintain such coverage for a period of at least two (2) years beyond the expiration of the Term or Tenant must obtain tail coverage for the length of the remaining Term plus an additional two (2) years beyond the expiration of the Term.

9.5 Non-Renewal . If Tenant fails to cause the insurance required under Article IX to be issued in the names herein called for, fails to pay the premiums therefor or fails to deliver such policies or certificates thereof to Landlord, at the times required, Landlord shall be entitled, but shall have no obligation, to obtain such insurance and pay the premiums therefor, in which event the cost thereof, together with interest thereon at the Agreed Rate, shall be repayable to Landlord upon demand therefor.

9.6 Increase in Limits; Types of Coverages . If Landlord determines in the exercise of its commercially reasonable judgment that the limits of the insurance required to be maintained by Tenant hereunder are no longer commensurate to the limits being regularly required by institutional landlords of similar properties in the applicable Situs State or their institutional lenders or that a particular type of insurance coverage is being regularly required by institutional landlords of similar properties in the applicable Situs State or their institutional lenders and is not then required hereunder, Landlord may notify Tenant of the same, indicating the particular limit or type of coverage that Landlord has determined should be increased or carried by Tenant, as applicable. Unless Tenant, in the exercise of its commercially reasonable judgment, objects to Landlord’s determination, then within thirty (30) days after the receipt of such notice, Tenant shall thereafter increase the particular limit or obtain the particular coverage, as applicable, unless and until further modified pursuant to the provisions of this Section 9.6. Notwithstanding anything herein to the contrary, Landlord shall not request a modification of the insurance requirements of this Lease more frequently than once every two (2) years. If Tenant, in the exercise of its commercially reasonable judgment, objects to Landlord’s determination made under this Section 9.6 and Landlord and Tenant are unable to agree upon the matter within fifteen (15) days of Tenant’s receipt of the applicable notice from Landlord, such determination shall be made by a reputable insurance or risk management consultant or expert (an “ Insurance Arbitrator ”) with experience in the healthcare insurance industry as mutually identified by Landlord and Tenant in the exercise of their reasonable judgment. As a condition to a determination of commercial reasonableness with respect to any particular matter, the Insurance Arbitrator shall be capable of providing, procuring or identifying particular policies or coverages that would be available to Tenant and would satisfy the requirement in issue. The determinations made by any such experts shall be binding on Landlord and Tenant for purposes of this Section 9.6, and the costs, fees and expenses of the same shall be shared equally by Tenant and Landlord. If Tenant and Landlord are unable to mutually agree upon an Insurance Arbitrator, each party shall within ten (10) days after written demand by the other select one Insurance Arbitrator. Within ten (10) days of such selection, the Insurance Arbitrators so selected by the parties shall select a third (3 ^rd ) Insurance Arbitrator who shall be solely responsible for rendering a final determination with respect to the insurance requirement in issue. If either party fails to select an Insurance Arbitrator within the time period set forth above, the Insurance Arbitrator selected by the other party shall alone render the final determination with respect to the insurance requirement in issue in accordance with the foregoing provisions and such final determination shall be binding upon the parties. If the Insurance Arbitrators selected by the parties are unable to agree upon a third (3 ^rd ) Insurance Arbitrator within the time period set forth above, either party shall have the right to apply at Tenant’s and Landlord’s joint expense to the presiding judge of the court of original trial jurisdiction in the county in which any Facility is located to name the third (3rd) Insurance Arbitrator.

9.7 No Separate Insurance . Tenant shall not, on Tenant’s own initiative or pursuant to the request or requirement of any third party, (a) take out separate insurance concurrent in form or contributing in the event of loss with that required in this Article IX to be furnished by, or which may reasonably be required to be furnished by, Tenant or (b) increase the amounts of any then existing insurance by securing an additional policy or additional policies, unless all parties having an insurable interest in the subject matter of the insurance, including in all cases Landlord and all Facility Mortgagees, are included therein as additional insureds and the loss is payable under such insurance in the same manner as losses are payable under this Lease. Notwithstanding the foregoing, nothing herein shall prohibit Tenant from insuring against risks not required to be insured hereby, and as to such insurance, Landlord and any Facility Mortgagee need not be included therein as additional insureds, nor must the loss thereunder be payable in the same manner as losses are payable hereunder except to the extent required to avoid a default under the Facility Mortgage.

9.8 Alternate Coverages . In the event that at any time during the Term the professional liability insurance coverage required under Section 9.1.6 is not generally available to operators of skilled nursing facilities in the market area in which the Facilities are located at commercially affordable rates and on commercially reasonable terms and conditions, Landlord agrees that, the provisions of Section 9.1.6 to the contrary notwithstanding, Tenant shall not be required to obtain the coverages required therein and Landlord agrees to accept, which acceptance shall not be unreasonably withheld or conditioned, in place thereof to cover the risk either or a combination of (i) a policy or policies of professional liability insurance limits and coverages that are generally available to operators of skilled nursing facilities in the market area in which the Facilities are located at commercially affordable rates and on commercially reasonable terms and conditions, and/or (ii) an additional security deposit, self-insurance by Tenant, the establishment of a loss reserve to be funded by Tenant and held by Landlord, or other alternative insurance containing commercially reasonable terms and conditions, provided that such alternative insurance is (a) permitted under all Legal Requirements applicable to Tenant and/or the Facilities at the time in question and (b) such alternative insurance is in compliance with all Legal Requirements applicable to such alternative insurance. Prior to making any such switch, Tenant shall be obligated to provide Landlord with supporting evidence from its insurance broker or carrier demonstrating the existence of the conditions set forth herein permitting Tenant to do so and the sufficiency of such evidence shall be subject to the advance written approval of Landlord, which shall not be unreasonably withheld, conditioned or delayed. At such time as the professional liability insurance coverages required under Section 9.1.6 are available to Tenant at commercially affordable rates and on commercially reasonable terms and conditions, then Tenant shall immediately purchase and provide Landlord with evidence of professional liability insurance coverage necessary to meet the requirements of Section 9.1.6. In the event that, as a result of the professional liability coverage required under Section 9.1.6 not being available as provided in this Section 9.8, the general liability insurance coverage required under Section 9.1.5 is also not available to Tenant at commercially affordable rates and on commercially reasonable terms and conditions, then the provisions of this Section 9.8 shall likewise apply to and include the general liability coverage required under Section 9.15.

9.9 Captive Insurance Program . Notwithstanding anything to the contrary contained in this Article 9, so long as Diversicare Healthcare Services, Inc. or its permitted successor is a Guarantor, Tenant shall have the right to satisfy its insurance obligations under Sections 9.1.5 and 9.1.6 (the “ Specified Non-Property Insurance ”) of this Lease by means of an alternative “captive” insurance program to the extent of all or part of the Specified Non-Property Insurance required under this Article 9, provide that (a) such alternative “captive” insurance program is permitted under all Legal Requirements applicable to Tenant and/or the Facilities at the time in question and (b) such alternative “captive” insurance program is in compliance with all Legal Requirements applicable to such alternative “captive” insurance. To the extent Tenant chooses to provide any of the Specified Non-Property Insurance otherwise required by this Lease through an alternative “captive” insurance program, then Tenant and Guarantor shall have all of the obligations and liabilities of an insurer, and the protection afforded Landlord, any Facility Mortgagee, and each Facility shall be the same as if provided by a non-affiliated third-party insurer under the coverages required under this Lease. Without limiting the generality of the foregoing, all amounts which a “captive” insurer pays or is required to pay and all losses or damages resulting from risks for which Tenant has elected to maintain an alternative “captive” insurance program with respect to shall be subject to the waiver of subrogation provisions of Section 9.2.1, and shall not limit any of Tenant’s indemnification obligations pursuant to this Lease. In the event that Tenant elects to maintain an alternative “captive” insurance program and an event or claim occurs for which a defense and/or coverage would have been available from a third-party insurer, Tenant and Guarantor shall undertake to cause its “captive” insurer to undertake the defense of any such claim, including a defense of Landlord, at their sole cost and expense, and use their own funds to pay any claim or replace any property or otherwise provide the funding which would have been available from insurance proceeds but for such election by Tenant to maintain an alternative “captive” insurance program. In the event that Tenant elects to maintain an alternative “captive” insurance program pursuant to this Section 9.9, Tenant shall provide Lessor and any Facility Mortgagee with certificates of insurance specifying the extent of such insurance coverage and Tenant shall provide Landlord with a copy of the captive’s audited financial statements on an annual basis. Notwithstanding anything to the contrary in this Section 9.9, Tenant shall not have the right to satisfy its insurance obligations under Sections 9.1.1, 9.1.2, 9.1.3 and 9.1.4 by means of an alternative “captive” insurance program. In the event that Tenant converts any insurance provided through an alternative “captive” insurance program to insurance provided by a non-affiliated third-party insurer, Tenant shall provide to Landlord evidence of such insurance concurrently with the effectiveness thereof.

Article X
REPRESENTATIONS AND WARRANTIES

10.1 General . Each party represents and warrants to the other that: (a) this Lease and all other documents executed or to be executed by it or its respective Affiliate in connection herewith have been duly authorized and shall be binding upon it; (b) it is duly organized, validly existing and in good standing under the laws of the state of its formation and is duly authorized and qualified to perform this Lease within the applicable Situs State; and (c) neither this Lease nor any other document executed or to be executed in connection herewith violates the terms of any other agreement of such party.

10.2 Anti-Terrorism Representations .

10.2.1 Tenant hereby represents and warrants that neither Tenant, nor any persons or entities holding any legal or beneficial interest whatsoever in Tenant, are (a) the target of any sanctions program that is established by Executive Order of the President or published by the Office of Foreign Assets Control, U.S. Department of the Treasury (“ OFAC ”); (b) designated by the President or OFAC pursuant to the Trading with the Enemy Act, 50 U.S.C. App. § 5, the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701-06, the Patriot Act, Public Law 107-56, Executive Order 13224 (September 23, 2001) or any Executive Order of the President issued pursuant to such statutes; or (c) named on the following list that is published by OFAC: “List of Specially Designated Nationals and Blocked Persons” (collectively, “ Prohibited Persons ”). Tenant hereby represents and warrants to Landlord that no funds tendered to Landlord by Tenant under the terms of this Lease are or will be directly or indirectly derived from activities that may contravene U.S. federal, state or international laws and regulations, including anti-money laundering laws. If the foregoing representations are untrue at any time during the Term, an Event of Default will be deemed to have occurred, without the necessity of notice to Tenant.

10.2.2 Tenant will not during the Term of this Lease engage in any transactions or dealings, or be otherwise associated with, any Prohibited Persons in connection with the use or occupancy of the Premises. A breach of the representations contained in this Section 10.2 by Tenant shall constitute a material breach of this Lease and shall entitle Landlord to any and all remedies available hereunder, or at law or in equity.

10.3 Additional Representations and Warranties . To induce Landlord to execute this Lease and perform its obligations hereunder, Tenant hereby represents and warrants to Landlord that the following are true and correct as of the Commencement Date:

10.3.1 No consent or approval of, or filing, registration or qualification with any Governmental Authority or any other Person is required to be obtained or completed by Tenant or any Affiliate in connection with the execution, delivery, or performance of this Lease that has not already been obtained or completed.

10.3.2 The identity of the holders of the partnership or membership interests or shares of stock, as applicable, in Tenant and their respective percentage of ownership as of the Commencement Date are set forth on Schedule 3 . No partnership or limited liability company interests, or shares of stock, in Tenant, other than those described above, are issued and outstanding. There are no preemptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from Tenant of any partnership or limited liability company interest of or shares of stock in Tenant except as may be set forth in Tenant’s organizational and formation documents, complete, true and accurate copies of which have been provided to Landlord.

10.3.3 Neither Tenant nor Guarantor is insolvent and there has been no Bankruptcy Action by or against any of them. Tenant’s assets do not constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted.

10.3.4 All financial statements and other documents and information previously furnished by or on behalf of any Tenant or Guarantor to Landlord in connection with the Facilities and this Lease are true, complete and correct in all material respects and fairly present on a consistent basis with the financial conditions of the subjects thereof for the immediately prior periods as of the respective dates thereof and do not fail to state any material fact necessary to make such statements or information not misleading, and no material adverse change with respect to any Facility, Tenant or Guarantor has occurred since the respective dates of such statements and information. Neither Tenant nor any Guarantor has any material liability, contingent or otherwise, not disclosed in such financial statements and which is required to be disclosed in such financial statements in accordance with GAAP.

10.3.5 As of the Commencement Date, Tenant has each Authorization and other rights from, and has made all declarations and filings with, all applicable Governmental Authorities, all self-regulatory authorities and all courts and other tribunals necessary, to Tenant’s knowledge, to engage in the management and operation of the Facilities for the Primary Intended Use. As of the Commencement Date, no Governmental Authority is, to Tenant’s knowledge, considering limiting, suspending or revoking any such Authorization. As of the Commencement Date, all such Authorizations are valid and in full force and effect and Tenant is in material compliance with the terms and conditions of all such Authorizations.

Article XI
DAMAGE AND DESTRUCTION

11.1 Notice of Damage or Destruction . Tenant shall promptly notify Landlord of any damage or destruction of any Facility in excess of $50,000. Said notification shall include: (a) the date of the damage or destruction and the Facility or Facilities damaged, (b) the nature of the damage or destruction together with a description of the extent of such damage or destruction, (c) a preliminary estimate of the cost to repair, rebuild, restore or replace the Facility, and (d) a preliminary estimate of the schedule to complete the repair, rebuilding, restoration or replacement of the Facility.

11.2 Restoration . Subject to its receipt of net insurance proceeds to the extent provided in this Lease, Tenant shall diligently repair or reconstruct any Facility that has been damaged or destroyed to a like or better condition than existed prior to such damage or destruction in accordance with Section 7.5. Any net insurance proceeds payable with respect to such damage or destruction (i) if $50,000 or less shall be paid directly to Tenant for the repair or reconstruction of such Facility or (ii) if in excess of $50,000, shall be paid directly to Landlord and; provided Tenant is diligently performing the restoration and repair work with respect to such Facility and no Event of Default has occurred hereunder, shall be used for the repair or reconstruction of such Facility. Landlord shall disburse any such net insurance proceeds as and when required by Tenant in accordance with normal and customary practice for the payment of a general contractor in connection with construction projects similar in scope and nature to the work being performed by or on behalf of Tenant, including, without limitation, the withholding of ten percent (10%) of each disbursement until the required work is completed as evidenced by a certificate of occupancy or similar evidence issued upon an inspection by the applicable Governmental Authority and proof has been furnished to Landlord that no lien has attached or will attach to the applicable Facility in connection with the restoration and repair work. If the Facility is able to be restored as provided herein but the applicable laws, rules or regulations of any Governmental Authority having jurisdiction over the repair or reconstruction then in effect results in a reduced number of licensed beds at the Facility, then the current Base Rent shall be proportionally reduced as provided in Section 12.4 in the case of a Partial Taking.

11.3 Insufficient or Excess Proceeds . If the net insurance proceeds paid to Landlord in connection with any such damage or destruction are insufficient, Tenant shall nevertheless remain responsible, at its sole cost and expense, to repair and reconstruct the applicable Facility as required in this Article XI and Tenant shall provide the required additional funds. Except as provided in Section 11.4, and except to the extent such damage or destruction is caused by the gross negligence or willful misconduct of Landlord or those for whom it may at law be responsible, Tenant expressly assumes all risk of loss in connection with any damage or destruction to a Facility, whether or not such damage or destruction is insurable or insured against. Tenant shall pay any insurance deductible and any other uninsured Losses, except in the event such damage or destruction is caused by the gross negligence or willful misconduct of Landlord or those for whom it may at law be responsible, in which event Landlord shall be responsible for the deductible and any other uninsured Losses. If the net insurance proceeds paid to Landlord in connection with any such damage or destruction are more than sufficient, the surplus shall belong and be paid to Tenant; provided, however, that any such surplus shall be paid by Landlord to Tenant only following the disbursement of net insurance proceeds necessary to complete the repair and restoration work as required pursuant to this Article XI. Except as provided in Section 11.4, Tenant shall not have any right under this Lease, and hereby waives all rights under applicable law, to abate, reduce, or offset rent by reason of any damage or destruction of any Facility by reason of an insured or uninsured casualty.

11.4 Facility Mortgagee . Notwithstanding anything in this Lease to the contrary, Tenant hereby acknowledges and agrees that any Facility Mortgagee may retain and disburse any net insurance proceeds payable in connection with any damage or destruction to a Facility. In such event, Tenant shall comply with the requests and requirements of such Facility Mortgagee in connection with the performance of the repair and restoration work and the disbursement of the net insurance proceeds in connection therewith. If, in connection with any damage or destruction to a Facility that results in the loss of fifty percent (50%) or more of the licensed beds at the affected Facility or that would cost more than fifty percent (50%) of the value of such Facility to restore, any Facility Mortgagee elects to require that any net insurance proceeds payable in connection with such damage or destruction to a Facility be applied by Landlord to reduce the outstanding principal balance of any Facility Mortgage, Landlord may elect, in its sole discretion and by notice to Tenant delivered promptly after the receipt by Landlord of notice of such election from Facility Mortgagee, to terminate this Lease as to the affected Facility, in which event the Facility shall be removed from this Lease and the then current Base Rent shall be equitably abated as of the effective date of such termination based on the allocable share of Landlord’s investment in the Premises to the affected Facility. Notwithstanding anything in this Lease to the contrary, Tenant shall remain liable for any uninsured portion of any damage or destruction if this Lease is so terminated as to the applicable Facility, except to the extent such damage or destruction is caused by the gross negligence or willful misconduct of Landlord or those for whom it may at law be responsible. If Landlord elects not to terminate this Lease as to the affected Facility (despite the applicable Facility Mortgagee having made the election to require that any net insurance proceeds payable in connection with such damage or destruction to a Facility be applied by Landlord to reduce the outstanding principal balance of such Facility Mortgage), Landlord’s own funds shall be disbursed to Tenant from time to time as, when, and subject to the satisfaction of the same terms, conditions and requirements as would have governed the disbursement of net insurance proceeds that Landlord’s funds replace.

11.5 Tenant’s Termination Right . Notwithstanding anything in this Lease to the contrary, if in connection with any damage or destruction to a Facility that results in the loss of fifty percent (50%) or less of the licensed beds at the affected Facility or that would cost less than fifty percent (50%) of the value of such Facility to restore, a Facility Mortgagee elects to apply the insurance proceeds, or any portion thereof, to the indebtedness secured by the Facility Mortgage such that the full amount of the net insurance proceeds payable as a result of the damage or destruction are not made available to Tenant for the repair or restoration of the Facility, then Tenant may elect to terminate this Lease as to the affected Facility upon written notice of termination to Landlord, such termination to be effective as of the first (1 ^st ) day of the calendar month following the later of (a) the date Tenant learns of the action of the Facility Mortgagee or (b) fifteen (15) days after the date Landlord learns of the action of the Facility Mortgagee, unless, in either case, within fifteen (15) Business Days after Landlord’s receipt of the notice from Tenant, Landlord agrees to make available to Tenant for restoration to or repair of the Facility cash funds equal to the amount of the net insurance proceeds so applied to such indebtedness secured by the Facility Mortgagee. Landlord shall disburse such funds to Tenant as provided in Section 11.2 and upon receipt of such funds Tenant shall restore the Facility as required by Section 11.2. In the event this Lease is terminated as to a Facility pursuant to this Section 11.5, the Facility shall be removed from this Lease and the then current Base Rent shall be proportionally reduced as provided in Section 11.4. Notwithstanding anything in this Lease to the contrary, Tenant shall remain liable for any uninsured portion of any damage or destruction if this Lease is so terminated as to the applicable Facility, except to the extent such damage or destruction is caused by the gross negligence or willful misconduct of Landlord or those for whom it may at law be responsible.

Article XII
CONDEMNATION

12.1 General . Except as provided to the contrary in this Article XII, a Condemnation of any Facility or any portion thereof shall not terminate this Lease, which shall remain in full force and effect, and Tenant hereby waives all rights under applicable law to abate, reduce or offset Rent by reason of any such Condemnation.

12.2 Notice of Taking . Tenant and Landlord, as the case may be, promptly upon obtaining knowledge of the institution of any proceeding for a Condemnation, shall each notify the other and any Facility Mortgagee thereof and Tenant, Landlord and Facility Mortgagee shall be entitled to participate in any Condemnation proceeding.

12.3 Complete Taking . In the event of a Complete Taking of any Facility and as of the effective date of such Complete Taking, this Lease shall automatically terminate with respect to such Facility, the Facility shall be removed from this Lease and the then current Base Rent shall be proportionally reduced based on the ratio of the applicable Facility’s EBITDARM to the EBITDARM of all Facilities. The applicable calculations of EBITDARM shall be based on Tenant’s financials for the calendar quarter most recently ended as of the effective date of such Complete Taking.

12.4 Partial Taking . In the event of a Partial Taking of any Facility, this Lease shall remain in effect as to such Facility and, except as specifically set forth herein, Tenant’s obligation to make payments of Rent and to pay all other charges required under this Lease with respect to such Facility shall remain unabated during the Term notwithstanding such Partial Taking. If Landlord determines in its commercially reasonable judgment that the Facility subject to the Partial Taking is fully or partially restorable, Tenant shall diligently repair or reconstruct such Facility to a like or better condition than existed prior to such damage or destruction in accordance with Section 7.5, provided that any net condemnation award received by Landlord with respect to such Partial Taking shall be paid directly to Landlord and, provided Tenant is diligently performing the restoration and repair work with respect to such Facility and no Event of Default has occurred hereunder, shall be made available to Tenant to be used by Tenant for costs of the repair or reconstruction of such Facility. If, after Tenant’s compliance with the restoration obligation in the foregoing sentence, such Partial Taking results in a reduced number of licensed beds at such Facility, then the current Base Rent shall be proportionally reduced based on (a) the ratio of the number of licensed beds reduced at such Facility to the total number of licensed beds at such Facility (prior to such Partial Taking) and (b) the ratio of the applicable Facility’s EBITDARM to the EBITDARM of all Facilities. The applicable calculations of EBITDARM shall be based on Tenant’s financials for the calendar quarter most recently ended as of the effective date of such Partial Taking. By way of example only, if (1) a Facility originally containing 100 licensed beds suffers a casualty and the number of licensed beds is reduced to 80; (2) the total Base Rent under this Lease, prior to such casualty, is $1,000,000; (3) the total EBITDARM for all Facilities is $12,000,000.00; and (4) the EBITDARM for the damaged Facility is $4,000,000.00, then the Base Rent would be reduced by $66,666.67 (i.e., (20 licensed beds /100 licensed beds) * ($4,000,000/$12,000,000) *($1,000,000).

12.5 Temporary Taking . In the event of a Temporary Taking of any Facility, this Lease shall remain in effect as to such Facility, Tenant’s obligation to make payments of Rent and to pay all other charges required under this Lease with respect to such Facility shall remain unabated during the Term notwithstanding such Temporary Taking, and Tenant shall be responsible for all obligations hereunder not affected by such Temporary Taking.

12.6 Award Distribution . Landlord alone shall be entitled to receive and retain any award for a Condemnation other than a Temporary Taking; provided, however, Landlord shall make available to Tenant the portion of the award necessary and specifically identified for restoration of the affected Facility (pursuant to Landlord’s disbursement requirements); and provided, further, that Tenant shall be entitled to submit its own claim in the event of any such Condemnation with respect to the value of Tenant’s leasehold interest in the applicable Facility, Tenant’s Personal Property, Tenant’s lost profits and/or the relocation costs incurred by Tenant as a result thereof. In the event of a Temporary Taking of any Facility, Tenant shall be entitled to receive and retain any and all awards for the Temporary Taking. If the period of the Temporary Taking shall extend beyond the Expiration Date, that part of the award for such Temporary Taking which represents compensation for the use or occupancy of such Facility (or a part thereof) shall be divided between Landlord and Tenant so that Tenant shall receive so much thereof as represents the period to and including the Expiration Date and Landlord shall receive so much as represents the period subsequent to the Expiration Date and, if applicable, Landlord shall be entitled to receive that portion which represents reimbursement for the cost of restoring the Premises as a result of such Temporary Taking.

12.7 Relationship to Facility Mortgage . Notwithstanding anything herein to the contrary, in the event that any Facility Mortgagee is entitled to any Condemnation award, or any portion thereof, under the terms of any Facility Mortgage, such award shall be applied, held and/or disbursed in accordance with the terms of the Facility Mortgage. In the event that the Facility Mortgagee elects to apply the award to the indebtedness secured by the Facility Mortgage in the case of a Partial Taking as to which the restoration provisions of this Article XII apply, Landlord agrees to make available to Tenant for restoration of such Facility funds equal to the amount applied by the Facility Mortgagee.

Article XIII
DEFAULT

13.1 Events of Default . The occurrence of any of the following shall constitute an “ Event of Default ” and there shall be no cure period therefor except as otherwise expressly provided in this Section 13.1:

13.1.1 Tenant shall fail to pay any installment of Rent, or any installment of the Security Deposit due pursuant to Section 3.1, within three (3) Business Days of its Payment Date;

13.1.2 (a) The final and non-appealable (provided that during any period of appeal Tenant is permitted to continue and continues operation of the affected Facility in compliance with this Lease) revocation or termination of any Authorization that would have a material adverse effect on the operation of any Facility for its Primary Intended Use; (b) except as permitted pursuant to the terms of Article XI or Article XII in connection with a casualty or Condemnation, the voluntarily cessation of operations at any Facility; (c) the sale or transfer of all or any portion of any Authorization; or (d) the use of any Facility other than for its Primary Intended Use;

13.1.3 Any material suspension, limitation or restriction placed upon Tenant, any Authorization, any Facility, the operations at any Facility or Tenant’s ability to admit residents or patients at the Premises (e.g., an admissions ban or non-payment for new admissions by any Thirty Party Payor Program resulting from an inspection survey); provided, however, if any such material suspension, limitation or restriction (each a “ Citation ”) is curable by Tenant under the applicable Authorization or Legal Requirement, it shall not constitute an Event of Default if Tenant promptly commences to cure such Citation and thereafter diligently pursues such cure to the completion thereof (a) within thirty (30) days prior to expiration of the time period in which the applicable Governmental Authority has given Tenant to undertake corrective action or (b) if such period is sixty (60) days or less, then no later than the number of days ( rounded up to the next full day in case of a partial day) equal to one-half (1/2) of the time period within which the applicable Governmental Authority has given Tenant to undertake corrective action (the “ Citation Cure Period ”). Landlord shall extend the Citation Cure Period with respect to any Citation to the extent that Tenant has received from such Governmental Authority an extension of the time within which such noncompliance is required to be cured or Tenant is contesting or appealing such Citation in good faith by appropriate proceedings, timely filed and diligently prosecuted by Tenant (provided that during any period of contest appeal Tenant is permitted under all Legal Requirements to continue, and continues, operation of the affected Facility in compliance with this Lease). Upon the occurrence of any Citation, Tenant will promptly provide Landlord with notice of such Citation as required under this Lease and, upon becoming available, will provide Landlord with a copy of Tenant’s plan of correction for the cure or abatement of the Citation or, if contested or appealed, a copy of such contest or appeal. During any cure or appeal period, Tenant will promptly provide Landlord with any additional notices or documents submitted or received by Tenant with respect to the progress of such cure or appeal. If during such cure or appeal period, Landlord reasonably and in good faith determines that the Citation Cure Period is likely to expire without completion of necessary efforts to cure the Citation, or Tenant’s contest or appeal period is likely to expire without removal of the Citation, then Landlord may (but shall not be obligated to), at its option and regardless of whether Tenant is proceeding to cure or attempting to cure the Citation, and without waiving or releasing any obligation on the part of Tenant or waiving or suspending any Event of Default, take and perform such actions as Landlord, in its reasonable business judgment deems necessary, required or appropriate to attempt to cure or abate the Citation within the time period allowed or specified by the governmental agency, or prevent the Citation from becoming final and non-appealable, and may enter upon the Facility for such purpose. If Landlord so proceeds to attempt to cure the Citation, Tenant agrees to reimburse Landlord for the reasonable amount of all costs and expenses, including attorneys’ fees, incurred by Landlord in curing or attempting to cure, the Citation;

13.1.4 A default shall occur under any other lease or agreement between Landlord or an Affiliate of Landlord and Tenant (or Guarantor) or an Affiliate of Tenant (or Guarantor), or any letter of credit, guaranty, mortgage, deed of trust, or other instrument executed by Tenant (or Guarantor) or an Affiliate of Tenant (or Guarantor) in favor of Landlord or an Affiliate of Landlord, in every case, whether now or hereafter existing, where the default is not cured within any applicable grace period set forth therein;

13.1.5 (a) A breach of or default by Guarantor of its financial covenants under Guarantor’s Senior Credit Facility, which breach or default is not cured within any applicable grace or cure period provided therein, unless a waiver or amendment addressing such breach or default is obtained from the lenders under the Senior Credit Facility, (b) a material default or breach by the Affiliate of Tenant that is the tenant/lessee or subtenant/sublessee under any Related Lease that is not cured within any applicable cure period provided for therein and with respect to which a claim is made by the landlord/lessor under such Related Lease against the Affiliate of Landlord responsible for the obligations of the tenant/lessee under such Related Lease, or (c) a default by Tenant or Guarantor shall occur under any lease, guaranty, loan or financing agreement, with any other party that is not cured within any applicable cure period provided for therein, which default could reasonably be expected to have a material adverse effect on the ability of Tenant to perform it obligations under this Lease or of Guarantor to perform its obligations under the Guaranty;

13.1.6 Tenant, any Guarantor or any Affiliate of either if the same results in a substantive consolidation affecting Tenant or any Guarantor (each a “ Tenant Party ”) shall (a) admit in writing its inability to pay its debts generally as they become due; (b) file a petition in bankruptcy or a petition to take advantage of any insolvency act; (c) make an assignment for the benefit of its creditors; (d) consent to the appointment of a receiver of itself or of the whole or any substantial part of its property; or (e) file a petition or answer seeking reorganization or arrangement under the Federal bankruptcy laws or any other applicable law or statute of the United States of America or any state thereof;

13.1.7 Any petition is filed by or against any Tenant Party under federal bankruptcy laws, or any other proceeding is instituted by or against any Tenant Party seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for any Tenant Party, or for any substantial part of the property of any Tenant Party, and Tenant fails to notify Landlord of such proceeding within three (3) Business Days of the institution thereof and such proceeding is not dismissed within sixty (60) days after institution thereof, or any Tenant Party shall take any action to authorize or effect any of the actions set forth above in this Section 13.1.7;

13.1.8 Any of the representations or warranties made by Tenant in this Lease or by Guarantor in the Guaranty proves to be untrue when made in any material respect;

13.1.9 Tenant fails to observe or perform any term, covenant or other obligation of Tenant set forth in Section 6.7 and such failure is not cured within ten (10) days after receipt of written notice of such failure from Landlord;

13.1.10 Tenant fails to perform or comply with the provisions of Section 3.1 or Section 3.2, as applicable, Section 6.12, Section 6.13, Article IX or Article XVII within the applicable time periods set forth therein, if any; or

13.1.11 Tenant fails to observe or perform any other term, covenant or condition of this Lease and such failure is not cured by Tenant within thirty (30) days after notice thereof from Landlord, unless such failure cannot with due diligence be cured within a period of thirty (30) days, in which case such failure shall not be deemed to be an Event of Default if Tenant proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof within sixty (60) days after such notice from Landlord; provided, however, that such notice shall be in lieu of and not in addition to any notice required under applicable law. No Event of Default (other than those consisting of payments and other financial obligations, including, without limitation, the payment of Rent hereunder) shall be deemed to exist under this Section 13.1.11 during any time the curing thereof is prevented by an “ Force Majeure ,” provided that Tenant shall use its reasonable best efforts to remedy the Force Majeure to the extent Tenant is reasonably or practically able to do so and that, upon the cessation of the Force Majeure, Tenant immediately shall proceed to diligently remedy the action or condition giving rise to the Event of Default within the applicable cure period as extended by the Force Majeure. For purposes of the foregoing sentence, “ Force Majeure ” shall mean delays due to power failure, acts of God, enemy action, civil commotion, extreme weather or, to the extent approved Landlord in its reasonable discretion, other causes beyond the control of the party responsible for performing an obligation. Neither lack of funds nor general economic and or market factors shall not be deemed Force Majeure event that is beyond the control of Tenant. In the event of any occurrence which Tenant believes constitutes a cause beyond the reasonable control of Tenant and which will delay cure of the subject default, Tenant shall promptly notify Landlord in writing of the occurrence and nature of such cause, the anticipated period of delay and the steps being taken by Tenant to mitigate the effects of such delay.

13.2 Remedies . Upon the occurrence of an Event of Default, Landlord may exercise all rights and remedies under this Lease and the laws of the applicable Situs State that are available to a lessor of real and personal property in the event of a default by its lessee, and as to the Lease Collateral, all remedies granted under the laws of the applicable Situs State to a secured party under its Uniform Commercial Code. Landlord shall have no duty to mitigate damages unless required by applicable law and shall not be responsible or liable for any failure to relet any Facility or to collect any rent due upon any such reletting. Tenant shall pay Landlord, immediately upon demand, all expenses incurred by it in obtaining possession and reletting any Facility, including fees, commissions and costs of attorneys, architects, agents and brokers.

13.2.1 Without limiting the foregoing, Landlord shall have the right (but not the obligation) to do any of the following upon an Event of Default, in each case to the extent permitted under applicable law: (a) sue for the specific performance of any covenant of Tenant as to which it is in breach and/or sue for summary possession of the Premises; (b) enter upon any Facility, terminate this Lease, dispossess Tenant from any Facility and/or collect money damages by reason of Tenant’s breach, including the acceleration of all Rent which would have accrued after such termination and all obligations and liabilities of Tenant under this Lease which survive the termination of the Term; (c) elect to leave this Lease in place and sue for Rent and other money damages as the same come due; (d) (before or after repossession of a Facility pursuant to clause (b) above and whether or not this Lease has been terminated) relet such Facility to such tenant, for such term (which may be greater or less than the remaining balance of the Term), rent, conditions (which may include concessions or free rent) and uses as it may determine in its sole discretion and collect and receive any rents payable by reason of such reletting; (e) sell any Lease Collateral in a non-judicial foreclosure sale; and (f) sue for distress of unpaid Rent.

13.2.2 Upon the occurrence of an Event of Default, and upon commencement of proceedings to enforce the rights of Landlord hereunder, Landlord shall be entitled, as a matter of right, to appoint a receiver to take possession of the Premises, pending the outcome of such proceedings, to manage the operation of the Premises, to collect and disburse all rents, issues, profits and income generated thereby and to the extent applicable and possible, to preserve or replace any Authorization or to otherwise substitute the licensee or provider thereof. If a receiver is appointed pursuant hereto, the receiver shall be paid a reasonable fee for its services and all such fees and other expenses incurred by Landlord in connection with the appointment of the receiver shall be paid in addition to, and not in limitation of, the Rent otherwise due to Landlord hereunder. Tenant irrevocably consents to the appointment of a receiver following an Event of Default and thus stipulates to and agrees not to contest the appointment of a receiver under such circumstances and for such purposes.

13.2.3 If Tenant at any time shall fail to make any payment or perform any act on its part required to be made or performed under this Lease, then Landlord may, without waiving or releasing Tenant from any obligations or default hereunder, make such payment or perform such act for the account and at the expense of Tenant, and enter upon the applicable Facility for the purpose of taking all such action as may be reasonably necessary. No such entry shall be deemed an eviction of Tenant. All sums so paid by Landlord and all necessary and incidental costs and expenses (including reasonable attorneys’ fees and expenses) incurred in connection with the performance of any such act by it, together with interest at the Agreed Rate from the date of the making of such payment or the incurring of such costs and expenses, shall be payable by Tenant to Landlord upon Landlord’s written demand therefor.

13.2.4 No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity. Any notice or cure period provided herein shall run concurrently with any provided by applicable law.

13.2.5 If Landlord initiates judicial proceedings or if this Lease is terminated by Landlord pursuant to this Article XIII, Tenant waives, to the extent permitted by applicable law, (a) any right of redemption, re-entry, or repossession; and (b) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt.

Article XIV
OBLIGATIONS OF TENANT ON EXPIRATION OR TERMINATION OF LEASE

14.1 Surrender . On the Expiration Date or earlier termination or cancellation of this Lease (or the earlier dispossession of Tenant from any Facility), Tenant shall deliver to Landlord or Landlord’s designee (a) possession of each Facility in a neat and clean condition, with each Facility being fully operational as of such date and in compliance with all Authorizations, and (b) all business records (other than corporate financial records or proprietary materials), data, patient and resident records, and patient and resident trust accounts, which may be necessary, desirable or advisable for the operation of each Facility for its Primary Intended Use. Tenant shall have no obligation to perform any Alterations necessitated by, or imposed in connection with, a change of ownership inspection survey for the transfer of operation of such Facility to Landlord or Landlord’s designee unless such Alterations were previously required hereunder or by the applicable licensing authorities to be undertaken by Tenant prior to the Expiration Date (or earlier termination date or cancellation of this Lease or earlier dispossession of Tenant from any Facility) and Tenant failed to do so. From and after the Expiration Date or an earlier dispossession of Tenant not resulting from an Event of Default, Landlord and Landlord’s designee shall allow Tenant and its agents and representatives to have reasonable access to (upon reasonable prior notice and during normal business hours), and to make copies of, the business records (other than corporate financial records or proprietary materials), data, patient and resident records, and patient and resident trust accounts of the Facilities relating to the period of occupancy by Tenant, to the extent reasonably necessary to enable Tenant to among other things investigate and defend resident, employee or other claims, to file or defend cost reports and tax returns, to complete/revise, as needed, any patient assessments which may be required for Tenant to seek reimbursement for services rendered during its occupancy of the Facilities, to verify accounts receivable collections due Tenant, and to enable Tenant to complete post termination, accounting, reconciliation and closing procedures.

14.2 Transition .

14.2.1 In connection with the expiration or earlier termination of this Lease with respect to any Facility, or the earlier dispossession of Tenant from any Facility, Landlord shall have the right to require an Operational Transfer with respect to such Facility by delivery to Tenant of a Transition Notice (as defined below). As used in this Lease, “ Operational Transfer ” shall mean the transfer and transition, practically and legally, of the day-to-day operations of a Facility for the Primary Intended Use of such Facility to Landlord and/or Landlord’s designee without interruption of the business activities therein, regulatory or otherwise. Landlord may exercise its right to require an Operational Transfer by delivering written notice to Tenant of Landlord’s election to require an Operational Transfer (a “ Transition Notice ”) at any time in connection with the expiration or earlier termination of this Lease, or the earlier dispossession of Tenant from any Facility.

14.2.2 In connection with an Operational Transfer, or at the time of Tenant’s surrender of a Facility to Landlord or its designee, Tenant shall cooperate fully with Landlord or its designee in transferring (or obtaining) all Authorizations and Governmental Payors’ certifications and shall take all necessary actions, including, without limitation, filing such applications, petitions and transfer notices and making such assignments, conveyances and transfers as are necessary, desirable or advisable to accomplish an Operational Transfer and cooperating with Landlord or its designee to obtain new Medicaid Provider Agreements, Medicaid provider numbers and/or Medicaid certifications. In connection therewith, Tenant shall transfer, to the extent permitted by applicable law, to Landlord or Landlord’s designee all contracts, including contracts with Governmental Authorities, which may be necessary, desirable or advisable for the operation of each Facility for its Primary Intended Use. Subject to all applicable Legal Requirements, Tenant hereby assigns, effective upon the Expiration Date or earlier termination or cancellation of this Lease (or the earlier dispossession of Tenant from any Facility), all rights to operate the Facility to Landlord or its designee, including all required Authorizations, to the extent assignable in accordance with Legal Requirements, and all rights to apply for or otherwise obtain them; provided that Tenant’s Medicaid Provider Agreements and provider numbers shall remain the sole and exclusive property of Tenant and shall not be assigned. Landlord’s designees shall be responsible for obtaining all new Medicaid Provider Agreements, Medicaid provider numbers and/or Medicaid certifications as may be necessary for the continued operation of the Facilities. In furtherance of the foregoing, Tenant agrees to enter into a commercially reasonable operations transfer agreement with Landlord or Landlord’s designee, which agreement shall provide, inter alia, for the proration of operational revenues and liabilities based on when Landlord or its designee actually takes possession of the applicable Facility or Facilities.

14.2.3 To the extent permissible under the Legal Requirements, for the period commencing on the expiration or earlier termination of this Lease, or the earlier dispossession of Tenant from any Facility, and ending on the earlier to occur of (i) the date designated by Landlord following Landlord’s or its designee’s receipt of all required Authorizations that Landlord or its designee will assume the operation of the Facility or Facilities, as specified in a written notice from Landlord to Tenant given not less than thirty (30) days prior to the date of such assumption of operations, or (ii) the date that is one hundred eighty (180) days after the applicable expiration, termination or dispossession date, Tenant agrees to (or will cause its Manager to agree to) enter into reasonable and customary interim sublease agreements an management agreements as may be necessary to effect a transfer of the operations of the Facility or Facilities for their Primary Intended Use prior to the time that Landlord or its designee, as applicable, holds all Authorizations from all applicable Governmental Authorities necessary to so operate such Facility or Facilities, and Tenant shall remain as licensee and participating provider in any payment programs with Governmental Payors or third party payors in which a Facility participates until such time as Landlord or its designee has received all Authorizations necessary to operate any Facility. Any such management agreement with Landlord or its designee, shall be on such customary and reasonable terms as Landlord, or its designee, shall request (which shall include an agreement to pay a management fee of five per cent (5%) of gross operating receipts and to reimburse Manager for its reasonable out-of-pocket costs and expenses and reasonable and administrative costs). Landlord, or its designee, shall reimburse Manager for any reasonable operating deficits of the Facility that Manager may be required to fund out-of-pocket on account of operating losses and expenses of the Facility incurred by Manager with respect to such period. Any such reimbursement shall be due from Landlord, or its designee, to Manager within thirty (30) days after written request by Manager, provided that Manager shall furnish such documentation of such operating deficits, losses and expenses as Landlord, or its designee, may reasonably request. For purposes of determining the amount of any operating deficits, or operating losses and expenses, incurred by Manager with respect to such period, Landlord and Tenant agree that there shall be included therein, without limitation, (a) Rent, which shall continue to be due and payable at the same rate as is in effect prior to the applicable expiration, termination or dispossession date, and (ii) any increase in employee severance, and all costs and liabilities, that may be incurred by Manager in connection with Manager’s employees’ by virtue of any delayed compliance with the Worker Adjustment and Retraining Notification Act, or any similar State law, due to Tenant’s cooperation and other obligations under this Section 14.2.3.

14.2.4 Notwithstanding anything in this Lease which may be construed to the contrary, if (i) Landlord delivers a Transition Notice as to a particular Facility or Facilities, (ii) the Term expires prior to the delivery of a Transition Notice but Landlord has not delivered a Closure Notice, or (iii) this Lease is terminated as a result of an Event of Default and Landlord has not delivered a Closure Notice, then in all such cases Tenant shall thereafter continue to operate the Facility or Facilities in accordance with all of the requirements of this Lease until the earliest to occur of the following: (a) the date on which a successor operator assumes operation of such Facility, (b) the date that is one hundred eighty (180) days after the Expiration Date, or (c) the date on which such Facility is closed by Tenant in accordance with and pursuant to the requirements of this Lease and in connection with a Closure Notice delivered by Landlord .

14.2.5 If Tenant operates one or more Facilities after the Expiration Date or earlier termination of this Lease (either pursuant to Landlord’s request or pursuant to Section 14.2.4, then, from and after the expiration of this Lease and until the earliest to occur of the dates described in Section 14.2.4 (the “ Reimbursement Period ”), (a) Landlord shall provide Tenant with an operating budget, (b) Landlord shall include in the aforesaid operating budget, and Tenant shall continue to pay during the Reimbursement Period, all Rent that would have been owing under this Lease if this Lease had not expired (equitably prorated if Tenant operates less than all of the Facilities), and (c) Landlord shall reimburse Tenant for any operating deficits that Tenant may be required to fund out-of-pocket on account of operating losses and expenses incurred by Tenant by reason of, or arising out of compliance with, such budget with respect to the Reimbursement Period. Any such reimbursement shall be due from Landlord to Tenant within thirty (30) days after request by Tenant, provided that Tenant shall furnish such documentation of any operating deficits, losses and expenses as Landlord may reasonably request.

14.2.6 Notwithstanding anything to the contrary contained in this Lease, Tenant shall not, prior to delivery of a Closure Notice by Landlord to Tenant, commence to wind up and terminate the operations of any Facility or relocate the patients or occupants of any Facility to any other health care facility (a “ Facility Termination ”). Notwithstanding the foregoing, if Landlord has not delivered a Closure Notice or a Transition Notice to Tenant prior to the day that is one hundred twenty (120) days following the Expiration Date, then Tenant may commence the Facility Termination as to such Facility or Facilities and, upon the closure of such Facility or Facilities in accordance with this Lease and all applicable Legal Requirements, Tenant shall vacate such Facility or Facilities and surrender possession thereof to Landlord in accordance with all applicable requirements of this Lease. If, prior to the day that is one hundred twenty (120) days following the Expiration Date, Landlord delivers a Transition Notice to Tenant, Tenant shall not commence or otherwise engage in a Facility Termination with respect to the applicable Facility or Facilities. If Landlord delivers a Closure Notice and elects to institute a Facility Termination, Tenant shall, upon the prior written approval of Landlord, take all commercially reasonable steps necessary, in compliance with all Legal Requirements and Authorizations, to timely effectuate the same, all at Tenant’s sole cost and expense.

14.2.7 The terms of this Section 14.2 shall survive the expiration or sooner termination of this Lease.

14.3 Tenant Personal Property . Provided that no Event of Default then exists, in connection with the surrender of the Premises, Tenant may upon at least five (5) Business Days prior notice to Landlord remove from the Premises in a workmanlike manner all Tenant Personal Property, leaving the Premises in good and presentable condition and appearance, including repairing any damage caused by such removal; provided that Landlord shall have the right and option to purchase for itself or its designee the Tenant Personal Property (other than the Excluded Tenant Personal Property) for its then net book value during such five (5) Business Day notice period, in which case Tenant shall so convey the Tenant Personal Property to Landlord or its designee by executing a bill of sale in a form reasonably required by Landlord. If there is any Event of Default then existing, Tenant will not remove any Tenant Personal Property from the Premises and instead will, on demand from Landlord, convey it (other than the Excluded Tenant Personal Property) to Landlord or its designee for no additional consideration by executing a bill of sale in a form reasonably required by Landlord. Title to any Tenant Personal Property which is not removed by Tenant as permitted above upon the expiration of the Term shall, at Landlord’s election, vest in Landlord or its designee; provided, however, that Landlord may remove and store or dispose at Tenant’s expense any or all of such Tenant Personal Property which is not so removed by Tenant without obligation or accounting to Tenant.

14.4 Facility Trade Name . If this Lease is terminated by reason of an Event of Default or Landlord exercises its option to purchase or is otherwise entitled to retain the Tenant Personal Property pursuant to Section 14.3 above, Landlord or its designee shall be permitted to use the name under which each Facility has done business during the Term in connection with the continued operation of such Facility for its Primary Intended Use, but for no other use and not in connection with any other property or facility, provided that Landlord shall have no right to retain or use the name “Diversicare” or any derivative thereof.

14.5 Holding Over . Except as provided in Sections 14.2.5 and 14.2.6, if Tenant shall for any reason remain in possession of any Facility after the Expiration Date, such possession shall be a month-to-month tenancy during which time Tenant shall pay as rental on the first (1 ^st ) Business Day of each month one and one-half (1½) times the total of the monthly Base Rent payable with respect to the last Lease Year, plus all Additional Rent accruing during the month and all other sums, if any, payable by Tenant pursuant to this Lease. Nothing contained herein shall constitute the consent, express or implied, of Landlord to the holding over of Tenant after the Expiration Date, nor shall anything contained herein be deemed to limit Landlord’s remedies.

Article XV
INDEMNIFICATION

In addition to the other indemnities contained in this Lease, and notwithstanding the existence of any insurance carried by or for the benefit of Landlord or Tenant, and without regard to the policy limits of any such insurance, Tenant shall protect, indemnify, save harmless and defend Landlord and the Landlord Indemnified Parties from and against all Losses imposed upon or incurred by or asserted against Landlord or any Landlord Indemnified Parties by reason of: (a) any accident, injury to or death of Persons or loss of or damage to property occurring on or about any Facility during the Term; (b) any use, misuse, non-use, condition, maintenance or repair of any Facility by Tenant; (c) any failure on the part of Tenant to perform or comply with any of the terms of this Lease or the breach of any representation or warranty made by Tenant herein; and (d) any claim for malpractice, negligence or misconduct committed by any Person on or working from any Facility during the Term. Any amounts which become payable by Tenant under this Article XV shall be paid within ten (10) days after demand by Landlord, and if not timely paid, shall bear interest at the Agreed Rate from the date of such demand until paid. Tenant, at its expense, shall contest, resist and defend any such claim, action or proceeding asserted or instituted against Landlord or any Landlord Indemnified Parties with counsel acceptable to Landlord in its sole discretion and shall not, under any circumstances, compromise or otherwise dispose of any suit, action or proceeding without obtaining Landlord’s written consent. Landlord, at its election and sole cost and expense, shall have the right, but not the obligation, to participate in the defense of any claim for which Landlord or any Landlord Indemnified Parties are indemnified hereunder. If Tenant does not act promptly and completely to satisfy its indemnification obligations hereunder, Landlord may resist and defend any such claims or causes of action against Landlord or any Landlord Indemnified Party at Tenant’s sole cost. The terms of this Article XV shall survive the expiration or sooner termination of this Lease. For purposes of this Article XV, any acts or omissions of Tenant, or by employees, agents, assignees, contractors, subcontractors or others acting for or on behalf of Tenant (whether or not they are negligent, intentional, willful or unlawful), shall be strictly attributable to Tenant. Nothing herein shall be construed as indemnifying, saving harmless and defending, or protecting, and Tenant shall not be required to protect, indemnify, save harmless or defend, Landlord or Landlord Indemnified Parties from any Losses imposed upon, incurred by or asserted against Landlord or the Landlord Indemnified Parties to the extent resulting from the gross negligence or willful misconduct of Landlord or any Landlord Indemnified Parties.

Article XVI
LANDLORD’S FINANCING

16.1 Grant Lien . Without the consent of Tenant, Landlord may from time to time, directly or indirectly, create or otherwise cause to exist any Facility Mortgage upon any Facility or interest therein. This Lease is and at all times shall be subject and subordinate to any such Facility Mortgage which may now or hereafter affect any Facility or interest therein and to all renewals, modifications, consolidations, replacements, restatements and extensions thereof or any parts or portions thereof; provided, however, so long as no Event of Default has occurred, no Facility Mortgagee shall have the right to disturb Tenant’s leasehold interest or possession of any Facility or interfere with any other rights of Tenant accorded by the terms of this Lease. This provision shall be self-operative and no further instrument of subordination shall be required to give it full force and effect; provided, however, that in confirmation of such subordination, Tenant shall execute promptly any certificate or document that Landlord or any Facility Mortgagee may request for such purposes so long as the same contains commercially reasonable non-disturbance and attornment provisions.

16.2 Attornment . If Landlord’s interest in any Facility or interest therein is sold, conveyed or terminated upon the exercise of any remedy provided for in any Facility Mortgage Documents (or in lieu of such exercise), or otherwise by operation of law: (a) at the request and option of the new owner or superior lessor, as the case may be, Tenant shall attorn to and recognize the new owner or superior lessor as Tenant’s “landlord” under this Lease or enter into a new lease substantially in the form of this Lease with the new owner or superior lessor, and Tenant shall take such actions to confirm the foregoing within ten (10) days after request; and (b) the new owner or superior lessor shall not be (i) liable for any act or omission of Landlord under this Lease occurring prior to such sale, conveyance or termination; (ii) subject to any offset, abatement or reduction of rent because of any default of Landlord under this Lease occurring prior to such sale, conveyance or termination; (iii) bound by any previous modification or amendment to this Lease or any previous prepayment of more than one month’s rent, unless such modification, amendment or prepayment shall have been approved in writing by such Facility Mortgagee or, in the case of such prepayment, such prepayment of rent has actually been delivered to such new owner or superior lessor; or (iv) liable for any security deposit or other collateral deposited or delivered to Landlord pursuant to this Lease unless such security deposit or other collateral has actually been delivered to such new owner or superior lessor.

16.3 Cooperation; Modifications . Notwithstanding anything in this Lease to the contrary, Tenant hereby agrees that in connection with obtaining any Facility Mortgage for any Facility or interest therein, including, without limitation, where the Facility Mortgagee is an Agency Lender, Tenant shall: (i) execute and deliver to such Agency Lender or other Facility Mortgagee (on the form required by such Agency Lender or other Facility Mortgagee) any tenant regulatory agreements (including, without limitation, the form of regulatory agreement typically required by Agency Lenders), subordination agreements (including, without limitation, the form of subordination, assignment and security agreement typically required by Agency Lenders), or other similar agreements customarily required by Agency Lenders and other Facility Mortgagees in connection with a mortgage relating to a skilled nursing facility or assisted living facility, (ii) modify this Lease as necessary to incorporate the provisions and requirements generally imposed by an Agency Lender or other Facility Mortgagee in connection with a facility lease relating to a skilled nursing facility or assisted living facility encumbered with a Facility Mortgage by an Agency Lender or other Facility Mortgagee, including, without limitation, requirements that: (a) Tenant comply with the operational requirements set forth in the applicable Facility Mortgage Documents (including, without limitation, the obligations under any regulatory agreement or subordination agreement with an Agency Lender or other Facility Mortgagee), and (b) in lieu of any duplicative impound and/or reserve obligations hereunder, obligate Tenant to fund reserves with the Agency Lender or other Facility Mortgagee for taxes, insurance and/or capital improvement and repair obligations as may be required by said Agency Lender or other Facility Mortgagee and (iii) provide, within ten (10) days of request therefor from Landlord, such reasonable documents and materials requested by any Agency Lender or other Facility Mortgagee, including without limitation, insurance certificates. In connection with the foregoing, and notwithstanding the provisions of Section 7.6, in the event that any Facility Mortgagee requires that reserves for capital improvements and repairs be impounded with Facility Mortgagee in advance of the expenditure thereof, Tenant agrees to deliver such impound deposits in advance monthly deposits for impounding directly with Facility Mortgagee; provided, however, that (1) the aggregate annual amount of such impound requirements shall not exceed the product of (x) the Required Per Bed Annual Capital Expenditures Amount, times (y) the weighted average of the number of licensed beds in all Facilities during the applicable Lease Year, and (2) any amounts which Tenant is required to fund into a Facility Mortgage Repair Reserve Account to satisfy any repair or replacement reserve requirements imposed by a Facility Mortgagee shall be credited on a dollar for dollar basis against the mandatory expenditure obligations of Tenant for such applicable Facilities under Section 7.6. During the Term, and provided that no Event of Default shall have occurred and be continuing hereunder, Tenant shall, subject to the terms and conditions of such Facility Mortgage Repair Reserve Account and the requirements of the applicable Facility Mortgagee thereunder, have access to and the right to apply or use (including for reimbursement) all monies held in each such Facility Mortgage Repair Reserve Account for the purposes and subject to the limitations for which such Facility Mortgage Repair Reserve Account is maintained, and Landlord agrees to reasonably cooperate with Tenant in connection therewith. Landlord hereby acknowledges that funds deposited by Tenant in any Facility Mortgage Repair Reserve Account are the property of Tenant and, provided that no Event of Default shall have occurred and be continuing hereunder, Landlord is obligated to return the portion of such funds not previously released to Tenant within sixty (60) days following the earlier of (I) the expiration or earlier termination of this Lease with respect to the applicable Facilities or (II) the maturity or earlier prepayment of the applicable Facility Mortgage. In the event any Agency Lender or other Facility Mortgagee requires, as a condition to making a Facility Mortgage, an intercreditor agreement with any receivables lender of Tenant, Tenant shall enter into any such intercreditor agreement and shall take all commercially reasonable efforts to cause said receivables lender to enter into such intercreditor agreement with said Agency Lender or other Facility Mortgagee on terms reasonably acceptable to said Agency Lender or other Facility Mortgagee and such receivables lender of Tenant.

16.4 Compliance with Facility Mortgage Documents . Tenant acknowledges that any Facility Mortgage Documents executed by Landlord or any Affiliate of Landlord may impose certain obligations on the “borrower” or other counterparty thereunder to comply with or cause the operator and/or lessee of any Facility to comply with all representations, covenants and warranties contained therein relating to such Facility and the operator and/or lessee of such Facility, including, covenants relating to (a) the maintenance and repair of such Facility; (b) maintenance and submission of financial records and accounts of the operation of such Facility and related financial and other information regarding the operator and/or lessee of such Facility and such Facility itself; (c) the procurement of insurance policies with respect to such Facility; (d) periodic inspection and access rights in favor of the Facility Mortgagee; and (e) without limiting the foregoing, compliance with all applicable Legal Requirements relating to such Facility and the operations thereof. For so long as any Facility Mortgages encumber any Facility or interest therein, Tenant covenants and agrees, at its sole cost and expense and for the express benefit of Landlord, to operate such Facility in strict compliance with the terms and conditions of the Facility Mortgage Documents (other than payment of any indebtedness evidenced or secured thereby) and to timely perform all of the obligations of Landlord relating thereto, or to the extent that any of such duties and obligations may not properly be performed by Tenant, Tenant shall cooperate with and assist Landlord in the performance thereof (other than payment of any indebtedness evidenced or secured thereby); provided, however, that (i) if the time for performance of any act required of Tenant by the terms of a Facility Mortgage is shorter than the time allowed by this Lease for performance of such act by Tenant, then Tenant shall perform such act within the time limits specified in this Lease and (ii) Tenant shall not be required to comply with the terms, covenants and conditions of any Facility Mortgage that (a) increase Tenant’s monetary obligations under this Lease, (b) materially increase Tenant’s non-monetary obligations under this Lease, or (c) materially diminish the rights of Tenant under this Lease. If any new Facility Mortgage Documents to be executed by Landlord or any Affiliate of Landlord would impose on Tenant any obligations under this Section 16.4, Landlord shall provide copies of the same to Tenant for informational purposes (but not for Tenant’s approval) prior to the execution and delivery thereof by Landlord or any Affiliate of Landlord.

Article XVII
ASSIGNMENT AND SUBLETTING

17.1 Prohibition . Without the prior written consent of Landlord, which may be withheld or conditioned in its sole and absolute discretion, Tenant shall not suffer or permit any Transfer (including, without limitation, a Transfer of this Lease or any interest herein) other than a Transfer that is expressly permitted pursuant to the terms of this Lease. Any such purported Transfer without Landlord’s prior written consent (each an “ Unapproved Transfer ”) shall be void and shall, at Landlord’s sole option, constitute an Event of Default giving rise to Landlord’s right, among other things, to terminate this Lease. If Landlord elects to waive its right to terminate this Lease as a result of any such Unapproved Transfer, this Lease shall continue in full force and effect; provided, however, that as of the date of such Unapproved Transfer, the Base Rent shall be increased by five percent (5%). Notwithstanding the foregoing, subject to a subordination agreement in form reasonably acceptable to Landlord, Landlord hereby consents to each Tenant entering into a written management agreement with Diversicare Management Services, Co., an Affiliate of Tenant (“ Manager ”), in form presented to Landlord prior to the Commencement Date, to provide management services to such Tenant with respect to each Facility (the “ Management Agreement ”). The approval by Landlord of the Management Agreement in the form existing prior to the Commencement Date shall not relieve Tenant’s compliance with the terms and provisions of this Lease nor shall said approval be considered a waiver of Tenant’s obligation to obtain Landlord's prior written consent to any amendment, modification or termination of the Management Agreement or any further management arrangements for the Premises as required by this Article XVII.

17.2 Landlord Consent . If Landlord consents to a Transfer, such Transfer shall not be effective and valid unless and until the applicable transferee executes and delivers to Landlord any and all documentation reasonably required by Landlord. Any consent by Landlord to a particular Transfer shall not constitute consent or approval of any subsequent Transfer, and Landlord’s written consent shall be required in all such instances. Except and unless Landlord, in its sole and absolute discretion, specifically agrees to do so in writing when giving its consent, no consent by Landlord to any Transfer shall be deemed to release Tenant from its obligations hereunder and Tenant shall remain fully liable for payment and performance of all obligations under this Lease. Without limiting the generality of the foregoing, in connection with any sublease arrangement that has been approved by Landlord, as a condition precedent to any such approval, any such sublease agreement shall include provisions required by Landlord pertaining to protecting its status as a real estate investment trust.

17.3 Transfers to Affiliates . Notwithstanding Section 17.1 to the contrary, but subject to the rights of any Facility Mortgagee, Tenant may, without Landlord’s prior written consent, assign this Lease or sublease any Facility to a Person wholly owned and Controlled by Tenant or any Guarantor if all of the following are first satisfied: (a) such assignee fully assumes Tenant’s obligations hereunder; (b) Tenant remains fully liable hereunder and Guarantor remains fully liable under the Guaranty; (c) the use of such Facility remains unchanged; (d) Landlord in its reasonable discretion shall have approved the form and content of all documents for such assignment or sublease and received an executed counterpart thereof; (e) Tenant delivers evidence to Landlord that such assignment or subletting is permissible under all applicable Authorizations or that all necessary consents have been obtained to consummate such assignment or subletting; and (f) Tenant and/or such assignee executes and delivers such other documents as may be reasonably required by Landlord to effectuate the assignment and continue the security interests and other rights of Landlord pursuant to this Lease or any other documents executed in connection herewith.

17.4 Permitted Occupancy Agreements . Notwithstanding Section 17.1 to the contrary, Tenant may enter into (i) occupancy agreements with residents of each Facility without the prior written consent of Landlord provided that (a) the agreement does not provide for life care services; (b) the agreement does not contain any type of rate lock provision or rate guaranty for more than one calendar year; (c) the agreement does not provide for any rent reduction or waiver other than for an introductory period not to exceed thirty (30) days; (d) Tenant may not collect rent for more than one month in advance other than one month of rent collected as security for the performance of the resident’s obligations to Tenant, which amount is held in a separate escrow account for the benefit of such resident; and (e) all residents of each Facility are accurately shown in accounting records for such Facility, and (ii) commercial occupancy agreements with any Person for up to an aggregate of five percent (5%) of the square footage of any Facility in the normal course of the Primary Intended Use of the Facility for the provision of customary ancillary services to its residents provided that such Person is duly licensed and possessed of all Authorizations necessary for the conduct of its activities at the Facility in accordance with all Legal Requirements. Without the prior written consent of Landlord, Tenant shall not materially change the form of resident occupancy agreement that was submitted to Landlord prior to the Commencement Date; provided, however, no consent will be required for changes required by applicable law, including applicable licensure laws, but all changes to the form of resident occupancy agreement will be provided to Landlord as and when such changes are made.

17.5 Costs . Tenant shall reimburse Landlord for Landlord’s reasonable costs and expenses incurred in conjunction with the processing and documentation of any assignment, master subletting or management arrangement, including reasonable attorneys’ or other consultants’ fees whether or not such assignment, master sublease or management agreement is ultimately consummated or executed.

17.6 UPL Program Sublease . Notwithstanding Section 17.1 to the contrary, but subject to the rights of any Facility Mortgagee, and subject to the REIT protection provisions of Article XXII, Tenant may, if available under the applicable law of the Situs State in which a Facility is located, with Lessor’s prior written consent, which consent may be granted or withheld in Landlord’s commercially reasonable discretion, sublease a Facility to a qualified state, county or local hospital facility for participation in the Medicaid Upper Payment Limits Program and equivalent or similar programs in the Situs State (a “ UPL Program ”), if all of the following are first satisfied: (a) such hospital has sufficient operating experience and history and sufficient assets and income, in Landlord’s reasonable judgment, to bear the financial responsibilities of Tenant to lease and operate the Facility; (b) such hospital fully assumes Tenant’s obligations hereunder with respect to such Facility; (c) Tenant remains fully liable hereunder and Guarantor remains fully liable under the Guaranty; (d) the use of the Facility remains unchanged; and (e) Landlord in its reasonable discretion shall have approved the form and content of all documents entered into in connection with such sublease and received executed counterparts thereof. For purposes of the foregoing, Landlord shall not be deemed or construed to have unreasonably withheld its consent by virtue of the fact that Landlord’s consent is conditioned upon the requirement that a portion of the excess revenues generated by Tenant in connection with any such UPL Program be (i) shared with Landlord as Additional Rent payable under the terms of this Lease, or (ii) applied to make upgrades and improvements to the applicable Facility that have the effect of maintaining or improving its competitive position in its respective marketplace.

Article XVIII
CERTAIN RIGHTS OF LANDLORD

18.1 Right of Entry . Landlord and its representatives may enter on any Facility at any reasonable time after reasonable notice to Tenant to inspect such Facility for compliance to this Lease, to exhibit such Facility for sale, lease or mortgaging, or for any other reason; provided, however, that no such notice shall be required in the event of an emergency, upon an Event of Default or to post notices of non-responsibility under any mechanic’s or materialman’s lien law. Provided no Event of Default then exists and is continuing, Tenant shall have a right to have a representative present during such entry. No such entry shall unreasonably interfere with residents, patients, patient care or the operations of such Facility.

18.2 Conveyance by Landlord . If Landlord or any successor owner of any Facility shall convey such Facility other than as security for a debt, Landlord or such successor owner, as the case may be, shall thereupon be released from all future liabilities and obligations of the Landlord under this Lease arising or accruing from and after the date of such conveyance or other transfer and, subject to Section 16.2, all such future liabilities and obligations shall thereupon be binding upon the new owner.

18.3 Granting of Easements, etc . Landlord may, from time to time, with respect to each Facility: (a) grant easements, covenants and restrictions, and other rights in the nature of easements, covenants and restrictions, (b) release existing easements, covenants and restrictions, or other rights in the nature of easements, covenants or restrictions, that are for the benefit of such Facility, (c) dedicate or transfer unimproved portions of such Facility for road, highway or other public purposes, (d) execute petitions to have such Facility annexed to any municipal corporation or utility district, (e) execute amendments to any easements, covenants and restrictions affecting such Facility and (f) execute and deliver to any Person any instrument appropriate to confirm or effect such grants, releases, dedications and transfers (to the extent of its interests in such Facility) without the necessity of obtaining Tenant’s consent provided that such easement or other instrument or action contemplated by this Section 18.3 does not unreasonably interfere with or adversely affect Tenant’s operations at such Facility. Prior to the execution, delivery or taking of any such easement, covenant or restriction affecting Tenant’s occupancy or use of any Facility, Landlord shall provide Tenant with a description of the easement, covenant or restriction and a survey or reasonably accurate drawing showing its location or impact on the affected Facility and such other information as Tenant may reasonably request to determine its impact on the affected Facility.

18.4 Excess Beds . For the avoidance of doubt, Tenant hereby acknowledges and agrees that all of the bed rights (whether related to a bed that is in service or not at any given time) associated with the operating licenses and other Authorizations for each Facility are owned by, and are the property of, Landlord and are appurtenant to the applicable Facility where located, notwithstanding that the rights to operate such beds may be held in Tenant’s name under Tenant’s Authorizations to operate a Facility. Throughout the Term (including any Extension Term), Tenant shall maintain and preserve all of the bed rights associated with the Authorizations for each Facility, including without limitation (i) bed rights that are “banked,” suspended or on similar status, and (ii) rights to currently or historically unused, non-operational or excess beds. Tenant shall not commit any act or omission that would reasonably be expected to result in suspension, revocation, decertification or other material limitation, or except in connection with a Transfer permitted pursuant to Article XVII the sale or transfer, of all or any portion of the bed rights associated with the operating licenses and other Authorizations for each Facility.

Article XIX
ENVIRONMENTAL MATTERS

19.1 Hazardous Materials . Tenant shall not allow any Hazardous Materials to be located in, on, under or about any Facility or incorporated in any Facility during the Term; provided, however, that Hazardous Materials may be brought, kept, used or disposed of in, on or about a Facility in quantities and for purposes similar to those brought, kept, used or disposed of in, on or about similar facilities used for purposes similar to such Facility’s Primary Intended Use and which are brought, kept, used and disposed of in strict compliance with all Hazardous Materials Laws. This Section 19.1 shall not apply to any Hazardous Materials in, on, under, about or incorporated in any Facility prior to the Commencement Date.

19.2 Notices . Tenant shall immediately advise Landlord in writing of (a) any Environmental Activities in violation of any Hazardous Materials Laws; (b) any Hazardous Materials Claims against Tenant or any Facility; (c) any remedial action taken by Tenant in response to any Hazardous Materials Claims or any Hazardous Materials on, under or about any Facility in violation of any Hazardous Materials Laws; (d) Tenant’s discovery of any occurrence or condition on or in the vicinity of any Facility that materially increase the risk that such Facility will be exposed to Hazardous Materials; and (e) all communications to or from Tenant, any governmental authority or any other Person relating to Hazardous Materials Laws or Hazardous Materials Claims with respect to any Facility, including copies thereof.

19.3 Remediation . If Tenant becomes aware of a violation of any Hazardous Materials Laws relating to any Hazardous Materials in, on, under or about any Facility, or if Tenant, Landlord or any Facility becomes subject to any order of any federal, state or local agency to repair, close, detoxify, decontaminate or otherwise remediate any Facility, Tenant shall immediately notify Landlord of such event. To the extent that any such violation or order results from a breach of Tenant’s obligations under Section 19.1, Tenant, at its sole cost and expense, shall cure any such violation or effect such repair, closure, detoxification, decontamination or other remediation in accordance with all applicable Legal Requirements and subject to Landlord’s prior approval as to scope, process, content and standard for completion. If Tenant fails to implement and diligently pursue any such cure, repair, closure, detoxification, decontamination or other remediation, Landlord shall have the right, but not the obligation, to carry out such action and to recover from Tenant all of Landlord’s costs and expenses incurred in connection therewith. Tenant shall reasonably cooperate with Landlord, at no out-of-pocket expense to Tenant, to effect any repair, closure, detoxification, decontamination or other remediation that is not the financial obligation of Tenant pursuant to this Section 19.3.

19.4 Indemnity . Tenant shall indemnify, defend, protect, save, hold harmless and reimburse Landlord for, from and against any and all Losses (whether or not arising out of third-party claims and regardless of whether liability without fault is imposed, or sought to be imposed, on Landlord) incurred in connection with, arising out of, resulting from or incident to, directly or indirectly, during (but not before or after) the Term, (a) Environmental Activities, including the effects of such Environmental Activities on any Person or property within or outside the boundaries of the Land of any Facility, (b) the presence of any Hazardous Materials in, on, under or about any Facility, and (c) the violation of any Hazardous Material Laws. For purposes hereof, Losses include interest, costs of response, removal, remedial action, containment, cleanup, investigation, design, engineering and construction, damages (including actual, consequential and punitive damages) for personal injuries and for injury to, destruction of or loss of property or natural resources, relocation or replacement costs, penalties, fines, charges or expenses, attorney’s fees, expert fees, consultation fees and court costs, and all amounts paid in investigating, defending or settling any of the foregoing. This Section 19.4 shall not apply to any Hazardous Materials in, on, under, about or incorporated in any Facility prior to the Commencement Date.

19.5 Environmental Inspections . Landlord shall have the right, from time to time, during normal business hours and upon not less than five (5) days written notice to Tenant, except in the case of an emergency in which event no notice shall be required, to conduct an inspection of any Facility to determine Tenant’s compliance with this Article XIX. Such inspection may include such testing, sampling and analyses as Landlord deems reasonably necessary and may be performed by experts retained by Landlord. All costs and expenses incurred by Landlord under this 19.5 shall be paid on demand by Tenant; provided, however, absent reasonable grounds to suspect Tenant’s breach of its obligations under this Article XIX, Tenant shall not be required to pay for more than one (1) such inspection in any one (1) year period with respect to each Facility. The obligations set forth in this Article XIX shall survive the expiration or earlier termination of this Lease.

Article XX
LANDLORD’S SECURITY INTEREST

20.1 Grant of Security Interest . For the purpose of securing the payment and performance obligations of Tenant hereunder, Tenant, as debtor, hereby grants to Landlord, as secured party, a security interest in and an express contractual lien upon, all of Tenant’s right, title and interest in and to the Property Collateral, Accounts Collateral and Authorization Collateral (collectively, the “ Lease Collateral ”); provided that (i) to the extent the Legal Requirements prohibit the assignment or granting of a security interest or lien in any of the Authorization Collateral, then such Authorization Collateral so restricted by applicable law shall be deemed not to be included as Lease Collateral and (ii) the Lease Collateral shall not include the Excluded Tenant Personal Property. This Lease constitutes a security agreement covering all such Lease Collateral. This security interest and agreement shall survive the termination of this Lease resulting from an Event of Default. Tenant shall pay all filing and reasonable record search fees and other costs for such additional security agreements, financing statements, fixture filings and other documents as Landlord may reasonably require to perfect or continue the perfection of its security interest. Additionally, Tenant shall promptly execute such other separate security agreements with respect to the Lease Collateral as Landlord may request from time to time to further evidence the security interest in the Lease Collateral created by this Lease.

20.2 Accounts Receivable Financing . With Landlord’s prior written consent, which consent shall not be unreasonably withheld, the security interests and liens granted to Landlord in the Accounts Collateral and the Authorization Collateral (solely to the extent necessary for billing and collecting any Accounts Collateral and as provided under the applicable intercreditor agreement) may be subordinated to any first priority security interest granted in connection with accounts receivable financing secured by Tenant so long as: (a) Tenant’s accounts receivable lenders execute an intercreditor agreement with Landlord in form and substance reasonably acceptable to Landlord, and (b) no Event of Default exists hereunder.

20.3 Certain Changes . In no way waiving or modifying the provisions of Article XVII above, Tenant shall give Landlord at least thirty (30) days’ prior written notice of any change in Tenant’s principal place of business, name, identity, jurisdiction of organization or corporate structure.

Article XXI
QUIET ENJOYMENT

So long as Tenant shall pay the Rent as the same becomes due and shall fully comply with all of the terms of this Lease and fully perform its obligations hereunder, Tenant shall peaceably and quietly have, hold and enjoy each Facility for the Term, free of any claim or other action by Landlord or anyone claiming by, through or under Landlord, but subject to all liens and encumbrances of record as of the Commencement Date or thereafter provided for in this Lease or consented to by Tenant.

Article XXII
REIT RESTRICTIONS

22.1 Characterization of Rents . The parties hereto intend that Rent and other amounts paid by Tenant hereunder will qualify as “rents from real property” within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto and this Agreement shall be interpreted consistent with this intent

22.2 General REIT Provisions . Tenant understands that, in order for Landlord, or any Affiliate of Landlord that is a real estate investment trust, to qualify as a real estate investment trust, certain requirements must be satisfied, including the provisions of Section 856 of the Code. Accordingly, Tenant agrees, and agrees to cause its Affiliates, permitted subtenants, if any, and any other parties subject to its control by ownership or contract, to reasonably cooperate with Landlord to ensure that such requirements are satisfied, including providing Landlord or any of its Affiliates with information about the ownership of Tenant and its Affiliates. Tenant agrees, and agrees to cause its Affiliates, upon request by Landlord or any of its Affiliates, to take all action reasonably necessary to ensure compliance with such requirements.

22.3 Prohibited Transactions . Notwithstanding anything to the contrary herein, Tenant shall not (a) sublet, assign or enter into a management arrangement for any Facility on any basis such that the rental or other amounts to be paid by the subtenant, assignee or manager thereunder would be based, in whole or in part, on either (x) the income or profits derived by the business activities of the subtenant, assignee or manager or (y) any other formula such that any portion of any amount received by Landlord would fail to qualify as “rents from real property” within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto; (b) furnish or render any services to the subtenant, assignee or manager or manage or operate any Facility so subleased, assigned or managed; (c) sublet, assign or enter into a management arrangement for any Facility to any Person (other than a taxable REIT subsidiary of Landlord) in which Tenant or Landlord owns an interest, directly or indirectly (by applying constructive ownership rules set forth in Section 856(d)(5) of the Code); or (d) sublet, assign or enter into a management arrangement for any Facility in any other manner which could cause any portion of the amounts received by Landlord pursuant to this Lease or any sublease to fail to qualify as “rents from real property” within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto, or which could cause any other income of Landlord to fail to qualify as income described in Section 856(c)(2) of the Code. The requirements of this Section 22.3 shall likewise apply to any further subleasing by any subtenant.

22.4 Personal Property REIT Requirements . Notwithstanding anything to the contrary herein, upon request of Landlord, Tenant shall cooperate with Landlord in good faith and provide such documentation and/or information as may be in Tenant’s possession or under Tenant’s control and otherwise readily available to Tenant regarding the valuation of the Premises to assist Landlord in its determination that Rent allocable for purposes of Section 856 of the Code to the Landlord Personal Property at the beginning and end of a calendar year does not exceed 15% of the total Rent due hereunder (the “ Personal Property REIT Requirement ”). Tenant shall take such reasonable action as may be requested by Landlord from time to time to ensure compliance with the Personal Property REIT Requirement as long as such compliance does not (a) increase Tenant’s monetary obligations under this Lease, (b) materially and adversely increase Tenant’s non-monetary obligations under this Lease or (c) materially diminish Tenant’s rights under this Lease. Accordingly, if requested by Landlord and at Landlord’s expense, Tenant shall cooperate with Landlord as may be necessary from time to time to more specifically identify and/or value the Landlord Personal Property in connection with the compliance with the Personal Property REIT Requirement.

Article XXIII
NOTICES

All notices and demands, certificates, requests, consents, approvals and other similar instruments under this Lease shall be in writing and sent by personal delivery, U. S. certified or registered mail (return receipt requested, postage prepaid) or FedEx or similar generally recognized overnight carrier regularly providing proof of delivery, addressed as follows:



If to Tenant:	If to Landlord:
c/o Diversicare Leasing Company II, LLC 1621 Galleria Blvd. Brentwood, TN 37027 Facsimile No.: 615-620-7875 Attn: Chief Financial Officer	c/o Golden Living 1000 Fianna Way Fort Smith, Arkansas 72919 Facsimile: 479-201-4801 Attn: Holly Rasmussen-Jones
With a copy to:	With a copy to:
Bass, Berry & Sims PLC 150 Third Avenue South Suite 2800 Nashville, TN 37201 Facsimile No.: 615-742-0466 Attn: Mark Manner	Nicholas R. Finn Four Embarcadero Center, Suite 710 San Francisco, California 94111

A party may designate a different address by notice as provided above. Any notice or other instrument so delivered (whether accepted or refused) shall be deemed to have been given and received on the date of delivery established by U.S. Post Office return receipt or the carrier’s proof of delivery or, if not so delivered, upon its receipt. Delivery to any officer, general partner or principal of a party shall be deemed delivery to such party. Notice to any one co-Tenant shall be deemed notice to all co-Tenants.

Article XXIV
MISCELLANEOUS

24.1 Memorandum of Lease . Landlord and Tenant shall, promptly upon the request of either, enter into a short form memorandum of this Lease, in form suitable for recording under the laws of the applicable Situs State. Tenant shall pay all costs and expenses of recording any such memorandum and shall fully cooperate with Landlord in removing from record any such memorandum upon the expiration or earlier termination of the Term.

24.2 No Merger . There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly, (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate and (b) the fee estate in the Premises.

24.3 No Waiver . No failure by Landlord to insist upon the strict performance of any term hereof or to exercise any right, power or remedy hereunder and no acceptance of full or partial payment of Rent during the continuance of any Event of Default shall constitute a waiver of any such breach or of any such term. No waiver of any breach shall affect or alter this Lease, which shall continue in full force and effect with respect to any other then existing or subsequent breach.

24.4 Acceptance of Surrender . No surrender to Landlord of this Lease or any Facility, or of any interest therein, shall be valid or effective unless agreed to and accepted in writing by Landlord, and no act by Landlord or any representative or agent of Landlord, other than such a written acceptance by Landlord, shall constitute an acceptance of any such surrender.

24.5 Attorneys’ Fees . If Landlord or Tenant brings an action or other proceeding against the other to enforce any of the terms, covenants or conditions hereof or any instrument executed pursuant to this Lease, or by reason of any breach or default hereunder or thereunder, the party prevailing in any such action or proceeding and any appeal thereupon shall be paid all of its costs and reasonable outside attorneys’ fees incurred therein. In addition to any other amount required to be paid by Tenant to Landlord under this Lease, Tenant shall pay, on behalf of Landlord, or reimburse Landlord for, all out-of-pocket costs or expenses paid or incurred by Landlord, including reasonable attorneys’ fees, in connection with administering this Lease and related agreements, including any of the following activities undertaken by, or on behalf of, Landlord under this Lease: (a) the review, execution, negotiation or delivery of any consent, waiver, estoppel, subordination agreement or approval requested of Landlord by Tenant under this Lease, including any request for consent to a Transfer, Alterations, any so-called “landlord’s waiver”, or any other matter over which Landlord has review or approval rights; (b) the review by Landlord or its representatives of any Plans and Specifications; (c) any assistance provided by Landlord in connection with any protest, appeal or other similar action undertaken by Tenant pursuant to this Lease; (d) the review, execution, negotiation or delivery of any intercreditor, subordination or similar agreement (or any amendment or supplement thereto) permitted pursuant to this Lease; (e) any revisions, extensions, renewals, amendments or “workouts” of this Lease, (f) the enforcement or satisfaction by Landlord of any of Tenant’s obligations under this Lease and Guarantor’s obligations under the Guaranty, including preparation of notices of an Event of Default and the collection of past due Rent.

24.6 Brokers . Other than Houlihan Lokey (the commissions, fees, costs and expenses due to shall be paid by Landlord), Landlord and Tenant each warrants to the other that it has not had any contact or dealings with any Person which would give rise to the payment of any fee or brokerage commission in connection with this Lease, and each shall indemnify, protect, hold harmless and defend the other from and against any liability for any fee or brokerage commission arising out of any act or omission of such indemnifying party.

24.7 Severability . If any term or provision of this Lease or any application thereof shall be held invalid or unenforceable, the remainder of this Lease and any other application of such term or provision shall not be affected thereby.

24.8 Non-Recourse . Tenant specifically agrees to look solely to the Premises for recovery of any judgment from Landlord; provided, however, the foregoing is not intended to, and shall not, limit any right that Tenant might otherwise have to obtain injunctive relief against Landlord, or any action not involving the personal liability of Landlord. Furthermore, in no event shall Landlord be liable to Tenant for any indirect or consequential damages suffered by Tenant from whatever cause.

24.9 Successors and Assigns . This Lease shall be binding upon Landlord and its successors and assigns and, subject to the provisions of Article XVII, upon Tenant and its successors and assigns.

24.10 Governing Law; Jury Waiver . This Lease shall be governed by and construed and enforced in accordance with the internal laws of Delaware, without regard to the conflict of laws rules thereof; provided that that the law of the applicable Situs State shall govern procedures for enforcing, in the respective Situs State, provisional and other remedies directly related to such Facility and related personal property as may be required pursuant to the law of such Situs State, including without limitation the appointment of a receiver; and, further provided that the law of the Situs State also applies to the extent, but only to the extent, necessary to create, perfect and foreclose the security interests and liens created under this Lease. This Lease is a commercial rental agreement under Delaware law EACH PARTY HEREBY WAIVES ANY RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY AGAINST THE OTHER IN CONNECTION WITH ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, INCLUDING RELATIONSHIP OF THE PARTIES, TENANT’S USE AND OCCUPANCY OF THE PREMISES, OR ANY CLAIM OF INJURY OR DAMAGE RELATING TO THE FOREGOING OR THE ENFORCEMENT OF ANY REMEDY.

24.11 Entire Agreement . This Lease constitutes the entire agreement of the parties with respect to the subject matter hereof, and may not be changed or modified except by an agreement in writing signed by the parties. Landlord and Tenant hereby agree that all prior or contemporaneous oral understandings, agreements or negotiations relative to the leasing of the Premises are merged into and revoked by this Lease. All exhibits and schedules to this Lease are hereby incorporated herein by this reference.

24.12 Headings . All titles and headings to sections, articles or other subdivisions of this Lease are for convenience of reference only and shall not in any way affect the meaning or construction of any provision.

24.13 Counterparts . This Lease may be executed in any number of counterparts, each of which shall be a valid and binding original, but all of which together shall constitute one and the same instrument. Executed copies hereof may be delivered by telecopier, email or other electronic means and upon receipt will be deemed originals and binding upon the parties hereto, regardless of whether originals are delivered thereafter.

24.14 Joint and Several . If more than one Person is the Tenant under this Lease, the liability of such Persons under this Lease shall be joint and several.

24.15 Interpretation . Both Landlord and Tenant have been represented by counsel and this Lease and every provision hereof has been freely and fairly negotiated. Consequently, all provisions of this Lease shall be interpreted according to their fair meaning and shall not be strictly construed against any party. Whenever the words “including”, “include” or “includes” are used in this Lease, they shall be interpreted in a non-exclusive manner as though the words “without limitation” immediately followed. Whenever the words “herein,” “hereof” and “hereunder” and other words of similar import are used in this Lease, they shall be interpreted to refer to this Lease as a whole and not to any particular article, section or other subdivision. Whenever the words “day” or “days” are used in this Lease, they shall mean “calendar day” or “calendar days” unless expressly provided to the contrary. All references in this Lease to designated “Articles,” “Sections” and other subdivisions are to the designated Articles, Sections and other subdivisions of this Lease.

24.16 Time of Essence . Time is of the essence of this Lease and each provision hereof in which time of performance is established and whenever action must be taken (including the giving of notice or the delivery of documents) hereunder during a certain period of time or by a particular date that ends or occurs on a day that is not a Business Day, then such period or date shall be extended until the immediately following Business Day.

24.17 Further Assurances . The parties agree to promptly sign all documents reasonably requested by the other party to give effect to the provisions of this Lease.

Article XXV
AMENDMENT AND RESTATEMENT

As provided in and subject to those certain operations transfer agreements entered into as of August 14, 2016 among Landlord and/or its Affiliates on the one hand, and Tenant, Guarantor and/or their Affiliates on the other had (collectively, the “ OTAs ”), Landlord, Tenant, Guarantor and the other parties to the OTAs intend that the Premises shall ultimately include the Premises as of the Commencement Date and a further portfolio of properties in Alabama (as further described in the OTAs, the “ Alabama Properties ”). Upon the closing of the transactions under the OTAs for the Alabama Properties, Landlord and Tenant, and the Affiliates of Landlord and Tenant that will be joined to this Lease with respect to the Alabama Properties, shall amend and restate this Lease in the form of this Lease attached as an exhibit to the OTAs (the “ Amended and Restated Lease ”), to include, collectively, the Alabama Properties and the Premises demised hereunder as of the Commencement Date. Annual Base Rent payable under the Amended and Restated Lease for the first (1 ^st ) Lease Year shall be $24,675,000 and the Initial Term under the Amended and Restated Lease shall expire ten (10) years after the “Commencement Date” of the Amended and Restated Lease. In connection therewith, Guarantor shall reaffirm its obligations under the Guaranty with respect to the Lease (as amended and restated by the Amended and Restated Lease).

[Signature page follows]

IN WITNESS WHEREOF , this Lease has been executed under seal by Landlord and Tenant as of the Commencement Date.

TENANT :

DIVERSICARE OF AMORY, LLC,
DIVERSICARE OF BATESVILLE, LLC,
DIVERSICARE OF BROOKHAVEN, LLC,
DIVERSICARE OF EUPORA, LLC,
DIVERSICARE OF RIPLEY, LLC,
DIVERSICARE OF SOUTHAVEN, LLC,
DIVERSICARE OF TUPELO, LLC,
DIVERSICARE OF TYLERTOWN, LLC,
each a Delaware limited liability company


By:	DIVERSICARE LEASING COMPANY III, LLC , a Delaware limited liability company, its sole member

By: /s/Kelly J. Gill                 (SEAL)
Name: Kelly J. Gill
Title:     President & CEO

SEALED AND DELIVERED IN THE PRESENCE OF:

Name:

[Signatures continue on next page]

LANDLORD :

GPH AMORY LLC ,

GPH BATESVILLE LLC ,

GPH BROOKHAVEN LLC ,

GPH EUPORA LLC ,

GPH RIPLEY LLC ,

GPH SOUTHAVEN LLC ,

GPH TUPELO LLC ,

GPH TYLERTOWN LLC ,

each a Delaware limited liability company

By: /s/Holly Rasmussen Jones             (SEAL)
Name:     Holly Rasmussen Jones
Title:     Secretary

SEALED AND DELIVERED IN THE PRESENCE OF:

Name:

EXHIBIT A

DEFINED TERMS

For all purposes of this Lease, except as otherwise expressly provided in the Lease or unless the context otherwise requires, the following terms have the meanings assigned to them in this exhibit and include the plural as well as the singular:

“ Accounts Collateral ” means, collectively, all of the following: (i) all of the accounts, accounts receivable, payment intangibles, health-care-insurance receivables and any other right to the payment of money in whatever form, of any of the Tenant Sublessees, or any other indebtedness of any Person owing to any of the Tenant Sublessees (whether constituting an account, chattel paper, document, instrument or general intangible), whether presently owned or hereafter acquired, arising from the provision of merchandise, goods or services by any Tenant Sublessee, or from the operations of any Tenant Sublessee at each Facility, including, without limitation, the right to payment of any interest or finance charges and other obligations with respect thereto; (ii) all of the rights, titles and interests of any of the Tenant Sublessees in, to and under all supporting obligations and all other liens and property subject thereto from time to time securing or purporting to secure any such accounts, accounts receivable, payment intangibles, health-care insurance receivables or other indebtedness owing to any of the Tenant Sublessees; (iii) all of the rights, titles and interests of any of the Tenant Sublessees in, to and under all guarantees, indemnities and warranties, letter-of-credit rights, supporting obligations, insurance policies, financing statements and other agreements or arrangements of whatever character from time to time supporting or securing payment of any such accounts, accounts receivable, payment intangibles, health-care insurance receivables or other indebtedness owing to any of the Tenant Sublessees; (iv) all of the now owned or hereafter acquired deposits of any of the Tenant Sublessees representing proceeds from accounts and any deposit account into which the same may be deposited, all other cash collections and other proceeds of the foregoing accounts, accounts receivable, payment intangibles, health-care insurance receivables or other indebtedness (including, without limitation, late charges, fees and interest arising thereon, and all recoveries with respect thereto that have been written off as uncollectible), and all deposit accounts into which the same are deposited; (v) all proceeds (whether constituting accounts, chattel paper, documents, instruments or general intangibles) with respect to the foregoing; and (vi) all books and records with respect to any of the foregoing.

“ Actual Capital Expenditures Amount ” has the meaning set forth in Section 7.6.1.

“ Additional Deposit ” has the meaning set forth in Section 6.12.1.

“ Additional Rent ” has the meaning set forth in Section 2.2.

“ Adjusted CPI Increase ” means the actual CPI Increase as of the date of determination, provided that for purposes of this Lease the Adjusted CPI Increase shall be deemed to equal two and no/100 percent (2.00%).

“ Affiliate ” means with respect to any Person, any other Person which Controls, is Controlled by or is under common Control with the first Person.

“ Affiliate Agreements ” has the meaning set forth in Section 6.10.

“ Agency Lender ” means any of: (i) the U.S. Department of Housing and Urban Development, (ii) the Federal National Mortgage Association (Fannie Mae), or (iii) the Federal Home Loan Mortgage Corporation (Freddie Mac), or any designees, agents, originators, or servicers of any of the foregoing.

“ Agreed Rate ” means, on any date, a rate equal to five percent (5%) per annum above the Prime Rate, but in no event greater than the maximum rate then permitted under applicable law. Interest at the aforesaid rates shall be determined for actual days elapsed based upon a 360 day year .

“ Alterations ” means, with respect to each Facility, any alteration, improvement, exchange, replacement, modification or expansion of the Leased Improvements or Fixtures at such Facility.

“ Authorization ” means, with respect to each Facility, any and all licenses, permits, certifications, accreditations, Provider Agreements, CONs, certificates of exemption, approvals, waivers, variances and other governmental or “quasi-governmental” authorizations necessary or advisable for the use of such Facility for its Primary Intended Use and receipt of reimbursement or other payments under any Third Party Payor Program in which such Facility participates.

“ Authorization Collateral ” means any Authorizations issued or licensed to, or leased or held by, Tenant.

“ Bankruptcy Action ” means, with respect to any Person, (i) such Person filing a voluntary petition under the Bankruptcy Code or any other federal or state bankruptcy or insolvency law; (ii) the filing of an involuntary petition against such Person under the Bankruptcy Code or any other federal or state bankruptcy or insolvency law which is not dismissed within sixty (60) days of the filing thereof, or soliciting or causing to be solicited petitioning creditors for any involuntary petition against such Person; (iii) such Person filing an answer consenting to or otherwise acquiescing in or joining in any involuntary petition filed against it, by any other Person under the Bankruptcy Code or any other federal or state bankruptcy or insolvency law, or soliciting or causing to be solicited petitioning creditors for any involuntary petition from any Person; (iv) such Person seeking, consenting to or acquiescing in or joining in an application for the appointment of a custodian, receiver, trustee, or examiner for such Person or any portion of the Facility; (v) such Person making an assignment for the benefit of creditors; or (vi) such Person taking any action in furtherance of any of the foregoing.

“ Bankruptcy Code ” means 11 U.S.C. § 101 et seq ., as the same may be amended from time to time.

“ Base Rent ” has the meaning set forth in Section 2.1.1.

“ Base Upgrade Allowance Amount ” shall have the meaning set forth in Section 7.10.9.

“ Business Day ” means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which national banks in the City of New York, New York, are authorized, or obligated, by law or executive order, to close.

“ Capital Alterations ” means any Alteration to a Facility for which the budgeted cost exceeds $75,000.

“ Capital Expenditures ” mean, with respect to each Facility, repairs, replacements and improvements to such Facility (including repair and replacement of Landlord Personal Property) that (i) constitute capital expenditures in accordance with GAAP and (ii) have been completed in a good, workmanlike and lien-free fashion and in compliance with all Legal Requirements and the terms of Sections 7.4 and 7.5 applicable to any Alterations and the terms of Section 7.9 and Section 7.10, as applicable, with respect to Alterations financed by Landlord. Capital Expenditures shall not include (a) expenses related to routine repairs and maintenance, (b) purchases of office equipment, or (c) any other expenditures reasonably determined by Landlord to be inappropriately characterized as a “capital expenditure” in accordance with GAAP.

“ Capital Expenditures Deposit ” has the meaning set forth in Section 7.6.1.

“ Capital Expenditures Report ” has the meaning set forth in Section 7.6.1.

“ Change in Control ” means, as applied to any Person, a change in the Person that ultimately exerts effective Control over the first Person.

“ Citation ” has the meaning set forth in Section 13.1.3.

“ Closure Notice ” means a written notice delivered by Landlord to Tenant pursuant to which Landlord notifies Tenant that Tenant may commence a Facility Termination as to a particular Facility or Facilities.

“ CMS ” means the United States Department of Health, Centers for Medicare and Medicaid Services or any successor agency thereto.

“ Code ” means the Internal Revenue Code of 1986 and, to the extent applicable, the Treasury Regulations promulgated thereunder, each as amended from time to time.

“ Commencement Date ” shall mean October 1, 2016.

“ Competing Facility ” means a skilled nursing facility or other health care facility providing skilled nursing services similar to those of the Primary Intended Use of any Facility, licensed or unlicensed, existing or to be constructed, that (i) competes in any direct or indirect way with, or is comparable in any way to, any Facility and (ii) is located within a five (5) mile radius of any Facility.

“ Complete Taking ” means the Condemnation of all or substantially all of a Facility or a Condemnation that results in a Facility no longer being capable of being operated for its Primary Intended Use.

“ CON ” means, with respect to each Facility, a certificate of need or similar permit or approval (not including conventional building permits) from a Governmental Authority related to (i) the construction and/or operation of such Facility for the use of a specified number of beds in a nursing facility, assisted living facility, senior independent living facility and/or rehabilitation hospital, or (ii) the alteration of such Facility or (iii) the modification of the services provided at such Facility used as a nursing facility, assisted living facility, senior independent living facility and/or rehabilitation hospital.

“ Condemnation ” means the exercise of any governmental power, whether by legal proceedings or otherwise, by a Condemnor or a voluntary sale or transfer by Landlord to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending.

“ Condemnor ” means any public or quasi-public authority, or private corporation or individual, having the power of condemnation.

“ Construction Consultant ” has the meaning set forth in Section 7.7.

“ Contingent Obligation ” means any direct or indirect liability of Tenant: (i) with respect to any Debt of another Person; (ii) with respect to any undrawn portion of any letter of credit issued for the account of Tenant as to which Tenant is otherwise liable for the reimbursement of any drawing; (iii) to make take-or-pay or similar payments if required regardless of nonperformance by any other party or parties to an agreement; or (iv) for any obligations of another Person pursuant to any guaranty or pursuant to any agreement to purchase, repurchase or otherwise acquire any obligation or any property constituting security therefor, to provide funds for the payment or discharge of such obligation or to preserve the solvency, financial condition or level of income of another Person. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guarantied or otherwise supported or, if not a fixed and determinable amount, the maximum amount so guarantied or otherwise supported.

“ Control ”, together with the correlative terms “ Controlled ” and “ Controls ,” means, as applied to any Person, the possession, directly or indirectly, of the power to direct the management and policies of that Person, whether through ownership, voting control, by contract or otherwise.

“ CPI ” means the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index for All Urban Wage Earners and Clerical Workers, United States Average, Subgroup “All Items” (1982 - 1984 = 100). If the foregoing index is discontinued or revised during the Term, the governmental index or computation with which it is replaced shall be used to obtain substantially the same result as if such index had not been discontinued or revised.

“ CPI Increase ” means the percentage increase (but not decrease) in (i) the CPI published for the beginning of each Lease Year, over (ii) the CPI published for the beginning of the immediately preceding Lease Year.

“ Debt ” means, for any Person, without duplication: (i) all indebtedness of such Person for borrowed money, for amounts drawn under a letter of credit or for the deferred purchase price of property for which such Person or its assets is liable; (ii) all unfunded amounts under a loan agreement, letter of credit or other credit facility for which such Person would be liable if such amounts were advanced thereunder; (iii) all amounts required to be paid by such Person as a guaranteed payment to partners or a preferred or special dividend, including any mandatory redemption of shares or interests; (iv) all indebtedness guaranteed by such Person, directly or indirectly; (v) all obligations under leases that constitute capital leases for which such Person is liable; (vi) all obligations of such Person under interest rate swaps, caps, floors, collars and other interest hedge agreements, in each case whether such Person is liable contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which obligations such Person otherwise assures a creditor against loss; (vii) off-balance sheet liabilities of such Person; and (viii) obligations arising under bonus, deferred compensation, incentive compensation or similar arrangements, other than those arising in the Ordinary Course of Business.

“ EBITDARM ” means, for any period of determination, the aggregate net operating income of Tenant for such period to the extent derived from the operation of the Premises as reflected in financial statements prepared in accordance with GAAP, adjusted to add thereto, to the extent allocable to the Premises for the applicable period of determination, without duplication, (1) interest expense, (2) income tax expense, (3) depreciation and amortization expense, (4) Base Rent, and (5) management fee expenses, in each case determined in accordance with GAAP, to the extent applicable.

“ Environmental Activities ” mean, with respect to each Facility, the use, generation, transportation, handling, discharge, production, treatment, storage, release or disposal of any Hazardous Materials at any time to or from such Facility or located on or present on or under such Facility.

“ Event of Default ” has the meaning set forth in Section 13.1.

“ Excess Beds ” has the meaning set forth in Section 18.4.1.

“ Excess Capital Expenditures Amount ” has the meaning set forth in Section 7.6.

“ Excluded Tenant Personal Property ” means (i) Tenant’s continuous quality improvement program, manuals and materials; management information systems; policy, procedure and educational manuals and materials and similar proprietary property, (ii) computer hardware and related equipment which is integrated with the computer system maintained by Tenant’s Affiliates and related computer software; provided, however, that Tenant shall cause all data that is reasonably necessary for the continuing operation of the Facilities following the termination or expiration of this Lease, and which may be accessed, through such computers or software, to be made available to Landlord in a reasonably accessible form at a reasonable cost to Landlord, (iii) vehicles, and (iv) all rights in and to the name “Diversicare” or any derivative thereof.

“ Expiration Date ” means the Initial Expiration Date, as may be extended pursuant to Section 1.3.

“ Extension Notice ” has the meaning set forth in Section 1.3.

“ Extension Term ” has the meaning set forth in Section 1.3.

“ Facility ” means each healthcare facility located on the Premises, as identified on Schedule 2 attached hereto, including, where the context requires, the Land, Leased Improvements, Intangibles and Landlord Personal Property associated with such healthcare facility.

“ Facility Mortgage ” means any mortgage, deed of trust or other security agreement or lien encumbering any Facility and securing an indebtedness of Landlord or any Affiliate of Landlord or any ground, building or similar lease or other title retention agreement to which any Facility are subject from time to time.

“ Facility Mortgage Documents ” means with respect to each Facility Mortgage and Facility Mortgagee, the applicable Facility Mortgage, loan or credit agreement, lease, note, collateral assignment instruments, guarantees, indemnity agreements and other documents or instruments evidencing, securing or otherwise relating to the loan made, credit extended, lease or other financing vehicle pursuant thereto. Facility Mortgage Documents shall also include, without limitation, any documents typically required by any Agency Lender in connection with a Facility Mortgage, including, but not limited to: (i) tenant regulatory agreements, (ii) intercreditor agreements with any receivables lender of Tenant, and (iii) any subordination, assignment, and security agreements.

“ Facility Mortgagee ” means the holder or beneficiary of a Facility Mortgage and any other rights of the lender, credit party or lessor under the applicable Facility Mortgage Documents, including, without limitation, any Agency Lender.

“ Facility Required Per Bed Annual Capital Expenditures Amount ” means, with respect to any Lease Year, fifty percent (50%) of the Required Per Bed Annual Capital Expenditures amount for such Lease Year.

“ Facility Termination ” has the meaning set forth in Section 14.2.6.

“ Fair Market Rental ” means the fair market rent for the Premises as determined pursuant to Exhibit E .

“ Fixtures ” means all equipment, machinery, fixtures and other items of real and/or personal property, including all components thereof, now and hereafter located in, on, or used in connection with and permanently affixed to or incorporated into the Leased Improvements, including all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems, apparatus, sprinkler systems, fire and theft protection equipment and built-in oxygen and vacuum systems, all of which, to the greatest extent permitted by law, are hereby deemed to constitute real estate, together with all replacements, modifications, alterations and additions thereto.

“ GAAP ” means generally accepted accounting principles, consistently applied.

“ Governmental Authority ” means any court, board, agency, commission, bureau, office or authority or any governmental unit (federal, state, county, district, municipal, city or otherwise) and any regulatory, administrative or other subdivision, department or branch of the foregoing, whether now or hereafter in existence, including, without limitation, CMS, the United States Department of Health and Human Services, any state licensing agency or any accreditation agency or other quasi-governmental authority.

“ Governmental Payor ” means any state or federal health care program providing medical assistance, health care insurance or other coverage of health care items or services for eligible individuals, including but not limited to the Medicare program more fully described in Title XVIII of the Social Security Act (42 U.S.C. §§ 1395 et seq. ) and the Medicaid program more fully described in Title XIX of the Social Security Act (42 U.S.C. §§ 1396 et seq. ) and the regulations promulgated thereunder.

“ Guarantor ” has the meaning set forth in Section 2.5, together with any and all permitted successors and assigns of the Guarantor originally named herein and any additional Person that guaranties the obligations of Tenant hereunder, from time to time.

“ Guaranty ” has the meaning set forth in Section 2.5.

“ Hazardous Materials ” mean (i) any petroleum products and/or by-products (including any fraction thereof), flammable substances, explosives, radioactive materials, hazardous or toxic wastes, substances or materials, known carcinogens or any other materials, contaminants or pollutants which pose a hazard to any Facility or to Persons on or about any Facility or cause any Facility to be in violation of any Hazardous Materials Laws; (ii) asbestos in any form which is friable; (iii) urea formaldehyde in foam insulation or any other form; (iv) transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million or any other more restrictive standard then prevailing; (v) medical wastes and biohazards; (vi) radon gas; and (vii) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or may or could pose a hazard to the health and safety of the occupants of any Facility or the owners and/or occupants of property adjacent to or surrounding any Facility, including, without limitation, any materials or substances that are listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) as amended from time to time.

“ Hazardous Materials Laws ” mean any laws, ordinances, regulations, rules, orders, guidelines or policies relating to the environment, health and safety, Environmental Activities, Hazardous Materials, air and water quality, waste disposal and other environmental matters.

“ Hazardous Materials Claims ” mean any and all enforcement, clean-up, removal or other governmental or regulatory actions or orders threatened, instituted or completed pursuant to any Hazardous Material Laws, together with all claims made or threatened by any third party against any Facility, Landlord or Tenant relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Materials.

“ Impositions ” means any property (real and personal) and other taxes and assessments levied or assessed with respect to this Lease, any portion of the Premises, any Facility, Tenant’s interest therein, or Landlord with respect to any Facility, including, without limitation, any state or county occupation tax, transaction privilege, franchise tax, margin tax, business privilege, sales and/or use tax, rental tax or other excise tax. Notwithstanding the foregoing, Impositions shall not include any local, state or federal income tax based upon the net income of Landlord and any transfer tax or stamps arising from Landlord’s transfer of any interest in any Facility.

“ Initial Expiration Date ” means (a) if the Commencement Date is the first (1 ^st ) day of a month, the tenth (10th) anniversary of the day preceding the Commencement Date, or (b) if the Commencement Date is other than the first (1 ^st ) day of a month, the last day of the calendar month in which the tenth (10 ^th ) anniversary of the Commencement Date occurs.

“ Initial Term ” has the meaning set forth in Section 1.3.

“ Insurance Requirements ” mean all terms of any insurance policy required by this Lease and all requirements of the issuer of any such policy, together with all fire underwriters’ regulations promulgated from time to time.

“ Intangibles ” means the interest, if any, of Landlord in and to any of the following intangible property owned by Landlord in connection with the Land and the Leased Improvements: (i) the identity or business of each Facility as a going concern, including, without limitation, any names or trade names by which each Facility may be known, and all registrations for such names, if any; (ii) to the extent assignable or transferable, the interest, if any, of Landlord in and to each and every guaranty and warranty concerning the Leased Improvements or Fixtures, including, without limitation, any roofing, air conditioning, heating, elevator and other guaranty or warranty relating to the construction, maintenance or repair of the Leased Improvements or Fixtures; and (iii) the interest, if any, of Landlord in and to all Authorizations to the extent the same can be assigned or transferred in accordance with applicable law; provided, however, that the foregoing shall not include any CON issued to or held by Landlord which shall only be licensed to Tenant on a temporary basis, which license shall be revocable at any time by Landlord.

“ Issuer ” means the financial institution that, from time to time, has issued a Letter of Credit.

“ Issuer Revocation ” means that an Issuer shall fail to be in compliance with all of the Issuer Standards, or shall admit in writing its inability to pay its debts generally as they become due, shall file a petition in bankruptcy or a petition to take advantage of any insolvency statute, shall consent to the appointment of a receiver or conservator of itself or the whole or any substantial part of its property, shall file a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws, shall have a receiver, conservator or liquidator appointed for it (including an FDIC receiver, conservator or liquidator), or shall become subject to operational supervision by any federal or state regulatory authority.

“ Issuer Standards ” mean that the Issuer is an FDIC-insured lending institution that is reasonably satisfactory to Landlord (Tenant’s working capital lender as of the Commencement Date being deemed reasonably satisfactory to Landlord), and has a current long-term credit rating from at least two (2) nationally recognized statistical rating organizations (such as Standard & Poor’s, Moody’s Investor Services or Fitch Ratings) equivalent to or greater than A-/A3.

“ Land ” means, individually and collectively, the real property described in Exhibit B attached to this Lease.

“ Landlord ” has the meaning set forth in the opening preamble, together with any and all successors and assigns of the Landlord originally named herein.

“ Landlord Personal Property ” means the machinery, equipment, furniture and other personal property described in Exhibit C attached to this Lease, together with all replacements, modifications, alterations and substitutes thereof (whether or not constituting an upgrade).

“ Landlord Indemnified Parties ” means Landlord’s Affiliates and Landlord’s and its Affiliates’ agents, employees, owners, partners, members, managers, contractors, representatives, consultants, attorneys, auditors, officers and directors.

“ Landlord’s Representatives ” means Landlord’s agents, employees, contractors, consultants, attorneys, auditors, architects and other representatives.

“ LC Amount ” has the meaning set forth in Section 3.2.

“ Lease ” has the meaning set forth in the opening preamble.

“ Lease Year ” means either (a) if the Commencement Date is the first (1 ^st ) day of a month, each successive period of twelve (12) calendar months during the Term, commencing as of the same day and month (but not year, except in the case of the first (1 ^st ) Lease Year) as the Commencement Date, or (b) if the Commencement Date is other than the first (1 ^st ) day of a month, each successive period of twelve (12) calendar months during the Term, ending on the same day and month (but not year, except in the case of the last Lease Year of the Initial Term) as the day and month on which the Initial Expiration Date will occur.

“ Leased Improvements ” means all buildings, structures and other improvements of every kind now or hereafter located on the Land including, alleyways and connecting tunnels, sidewalks, utility pipes, conduits, and lines (on-site and off-site to the extent Landlord has obtained any interest in the same), parking areas and roadways appurtenant to such buildings and structures.

“ Legal Requirements ” means all federal, state, county, municipal and other governmental statutes, laws (including common law and Hazardous Materials Laws), rules, policies, guidance, codes, orders, regulations, ordinances, permits, licenses, covenants, conditions, restrictions, judgments, decrees and injunctions applicable to Tenant or Guarantor or affecting any Facility or the applicable Tenant Personal Property or the maintenance, construction, use, condition, operation or alteration thereof, whether now or hereafter enacted and in force, including, any and all of the foregoing that relate to the use of each Facility for its Primary Intended Use.

“ Letter of Credit ” means an unconditional, irrevocable, standby letter of credit substantially in the form of Exhibit F , naming Landlord as beneficiary, and issued by an Issuer that satisfies the Issuer Standards and is otherwise acceptable to Landlord in its commercially reasonable discretion.

“ Licensing Impairment ” means, with respect to each Facility, (i) the revocation, suspension or non-renewal of any Authorization, (ii) any withholding, non-payment, reduction or other adverse change respecting any Provider Agreement, (iii) any admissions hold under any Provider Agreement, or (iv) any other act or outcome similar to the foregoing that would impact Tenant’s ability to continue to operate such Facility for its Primary Intended Use or to receive any rents or profits therefrom.

“ Losses ” mean all claims, demands, expenses, actions, judgments, damages, penalties, fines, liabilities, losses of every kind and nature, suits, administrative proceedings, costs and fees, including, without limitation, reasonable attorneys’ and reasonable consultants’ fees and expenses.

“ Material Alterations ” mean any Alterations that (i) would materially enlarge or reduce the size of the applicable Facility, (ii) would tie in or connect with any improvements on property adjacent to the applicable Land, or (iii) would affect the structural components of the applicable Facility or the main electrical, mechanical, plumbing, elevator or ventilating and air conditioning systems for such Facility in any material respect.

“ Minimum Rent Coverage Ratio ” shall mean a Portfolio Coverage Ratio of: (i) through the end of the first (1 ^st ) Lease Year, .75 to 1.00; (ii) through the end of the second (2 ^nd ) Lease Year, .85 to 1.00; (iii) through the end of the third (3 ^rd ) Lease Year, 1.05 to 1.00; and (iv) through the end of the fourth (4 ^th ) Lease Year and thereafter during the Term, 1.15 to 1.00.

“ OFAC ” has the meaning set forth in Section 10.2.1.

“ Operational Transfer ” has the meaning set forth in Section 14.2.1.

“ Ordinary Course of Business ” means in respect of any transaction involving Tenant, the ordinary course of business of Tenant, as conducted by Tenant in accordance with past practices. In respect of any transaction involving a Facility or the operations thereof, the ordinary course of operations for such Facility, as conducted by Tenant in accordance with past practices.

“ Partial Taking ” means any Condemnation of a Facility or any portion thereof that is not a Complete Taking.

“ Payment Date ” means any due date for the payment of the installments of Base Rent or any other sums payable under this Lease.

“ Permitted Contingent Obligations ” means each of the following: (i) Contingent Obligations arising in respect of Tenant’s obligations under this Lease; (ii) Contingent Obligations resulting from endorsements for collection or deposit in the Ordinary Course of Business; (iii) Contingent Obligations incurred in the Ordinary Course of Business with respect to surety and appeal bonds, performance bonds and other similar obligations not to exceed, with respect to any particular Tenant, $50,000 in the aggregate at any time outstanding; (iv) Contingent Obligations arising with respect to customary indemnification obligations in favor of purchasers in connection with dispositions of personal property assets permitted under this Lease; (v) Contingent Obligations arising under the Senior Credit Facility, and (vi) other Contingent Obligations not permitted by clauses (i) through (v) above, not to exceed, with respect to each Tenant, $100,000 in the aggregate at any time outstanding.

“ Permitted Debt ” means the following: (i) the obligations of Tenant under this Lease, (ii) subject to Section 20.2, accounts receivable financing, (iii) trade accounts payable arising and paid on a timely basis in the Ordinary Course of Business, and (iv) obligations for equipment leases or financing secured by equipment that is customarily leased or financed by operators of similar properties and is utilized in the operation of the Facilities arising and paid on a timely basis in the Ordinary Course of Business and not to exceed $75,000 for each Facility.

“ Permitted Encumbrances ” means, with respect to each Facility, collectively, (i) all easements, covenants, conditions, restrictions, agreements and other matters with respect to such Facility that (a) are of record as of the Commencement Date, (b) Landlord entered into after the Commencement Date (subject to the terms hereof); or (c) are specifically consented to in writing by Landlord, (ii) any liens for Impositions that are not yet due and payable; (iii) occupancy rights of residents and patients of such Facility; and (iv) liens of mechanics, laborers, materialman, suppliers or vendors for sums not yet due, provided that such reserve or other appropriate provisions as shall be required by law or GAAP or pursuant to prudent commercial practices shall have been made therefor.

“ Person ” means any individual, partnership, association, corporation, limited liability company or other entity.

“ Plans and Specifications ” has the meaning set forth in Section 7.5.1.

“ Portfolio Coverage Ratio ” means, as determined on a Testing Date based on the applicable period of determination or measurement, the ratio of (i) EBITDARM for all of the Facilities for the applicable period to (ii) Base Rent payments relating to such Facilities payable under this Lease for the applicable period.

“ Premises ” means, collectively, the Land, Leased Improvements, Related Rights, Fixtures, Intangibles and Landlord Personal Property.

“ Premises Condition Report ” has the meaning set forth in Section 7.2.

“ Primary Intended Use ” means, as to each Facility, the type of healthcare facility corresponding to such Facility as shown on Schedule 2 attached hereto, with no less than the number of licensed beds as shown on Schedule 2 and in connection therewith the provision of food, recreational, rehabilitative and therapy services and such other ancillary services or incidental services relating thereto.

“ Prime Rate ” means, on any date, a rate equal to the annual rate on such date reported in The Wall Street Journal to be the “prime rate.”

“ Prohibited Persons ” has the meanings set forth in Section 10.2.1.

“ Property Collateral ” means all of Tenant’s right, title and interest in and to the Tenant Personal Property and any and all products, rents, proceeds and profits thereof in which Tenant now owns or hereafter acquires an interest or right.

“ Provider Agreements ” means any agreements issued to or held by Tenant pursuant to which any Facility is licensed, certified, approved or eligible to receive reimbursement under any Third Party Payor Program.

“ Real Property Impositions ” mean any real property Impositions secured by a lien encumbering any Facility or any portion thereof.

“ Reimbursement Period ” has the meaning set forth in Section 14.2.5.

“ Related Lease ” means each lease, sublease or other instrument described on Schedule 4 attached hereto, as may be amended, modified, revised or restated from time to time, but only for so long as the Affiliate of Landlord identified as the tenant/lessee thereunder remains liable for the obligations of the tenant/lessee following the assignment/sublease of such Related Lease to an Affiliate of Tenant in connection with this Lease.

“ Related Lease Landlord ” shall have the meaning set forth in Section 7.10.9.

“ Related Lease Tenant ” shall have the meaning set forth in Section 7.10.9.

“ Related Lease Upgrade Disbursement ” shall have the meaning set forth in Section 7.10.9.

“ Related Rights ” means all easements, rights and appurtenances relating to the Land and the Leased Improvements.

“ Rent ” means, collectively, Base Rent and Additional Rent.

“ Required Capital Expenditures Amount ” has the meaning set forth in Section 7.6.1.

“ Required Per Bed Annual Capital Expenditures Amount ” means an amount equal to Five Hundred Dollars ($500) per licensed bed per Lease Year, as increased annually pursuant to Section 7.6.1, that Tenant is required to expend on Capital Expenditures with respect to each Facility as provided in Section 7.6.

“ Security Deposit ” shall have the meaning set forth in Section 3.1.

“ Senior Credit Facility ” means the Third Amended and Restated Revolving Loan and Security Agreement dated February 26, 2016 between Tenant and certain Affiliates of Tenant parties thereto, as “Borrowers,” with the Guarantor herein as the “Guarantor” thereof, and The Private Bank and Trust Company and other lenders parties thereto, as “Lenders,” as amended, modified, supplemented, replaced or refinanced from time to time.

“ Situs State ” means the state or commonwealth where a Facility is located.

“ Specified Non-Property Insurance ” shall have the meaning set forth in Section 9.9.

“ Temporary Taking ” means any Condemnation of a Facility or any portion thereof, whether the same would constitute a Complete Taking or a Partial Taking, where the Condemnor or its designee uses or occupies such Facility, or any portion thereof, for no more than twelve consecutive (12) months.

“ Tenant ” has the meaning set forth in the opening preamble, together with any and all permitted successors and assigns of the Tenant originally named herein.

“ Tenant Personal Property ” shall have the meaning set forth in Section 6.1.

“ Tenant Sublessees ” mean Tenant, and any direct or indirect subtenants or operator of any Facility, together with their successors and assigns and any additions thereto or replacements thereof.

“ Term ” means the Initial Term, plus any duly authorized Extension Terms.

“ Testing Date ” means the date as of which the Portfolio Coverage Ratio shall be determined for the applicable measurement period, which date shall be the last day of each calendar quarter during the Term. Upon each Testing Date, the Portfolio Coverage Ratio shall be determined based upon the twelve (12) trailing calendar months ending on such Testing Date or, with respect to any Testing Date occurring prior to expiration of the first (1st) Lease Year, the number of full trailing calendar months then elapsed on an annualized basis.

“ Third Party Payor Programs ” shall mean any third party payor programs pursuant to which healthcare facilities qualify for payment or reimbursement for medical or therapeutic care or other goods or services rendered, supplied or administered to any admittee, occupant, resident or patient by or from any Governmental Authority, Governmental Payor, bureau, corporation, agency, commercial insurer, non-public entity, “HMO,” “PPO” or other comparable party.

“ Transfer ” means any of the following, whether effectuated directly or indirectly, through one or more step transactions or tiered transactions, voluntarily or by operation of law, the (i) assigning, selling, pledging, mortgaging, hypothecating or otherwise encumbering, transferring or disposing of all or any part of this Lease or Tenant’s leasehold estate hereunder, or (ii) subletting of all or any part of any Facility, (iii) engaging the services of any Person for the management or operation of all of any part of any Facility (other than the Management Agreement approved by this Lease), or (iv) merger, consolidation or reorganization of Tenant or Manager (except, for Manager only, with or into an Affiliate), or the sale, issuance, or transfer, cumulatively or in one transaction, or the termination, of any ownership interest or voting rights in Tenant or Manager (except, for Manager only, to an Affiliate), which results in a Change in Control of Tenant or Manager (except, for Manager only, to an Affiliate), or (v) sale, issuance or transfer, cumulatively or in one transaction, of any direct ownership interest or voting rights in Tenant or Manager if after such transaction(s), Tenant or Manager, as applicable, ceases to be controlled, directly or indirectly, by Guarantor, or (vi) merger, sale, consolidation, reorganization or other business combination involving Guarantor in which Guarantor is not the surviving entity unless the successor entity of Guarantor executes and delivers to Landlord a Guaranty, in substantially the form of the Guaranty executed by Guarantor, pursuant to which the successor entity guarantees to Landlord the payment and performance by Tenant of its obligations under this Lease. Other than as specifically provided in clause (vi), none of the foregoing provisions shall be deemed to be violated by transactions affecting Guarantor.

“ Transition Notice ” shall have the meaning set forth in Section 14.2.1.

“ UPL Program ” shall have the meaning set forth in Section 17.6.

“ Upgrade Allowance ” shall have the meaning set forth in Section 7.10.

“ Upgrade Expenditure ” shall have the meaning set forth in Section 7.10.

EXHIBIT B

DESCRIPTION OF THE LAND

Golden LivingCenter - Amory, 1215 Earl Frye Drive, Amory, MS 38821

Beginning at the Southwest Quarter of Section 31, Township 12 South, Range 18 West, Monroe County, Mississippi, and run thence East along the South boundary of said Section 31 for 59 feet to an iron pin on the East right of way of existing Boulevard Drive for the point of beginning, run thence East along the said section line 443 feet to an iron pin, run thence North parallel with Boulevard Drive 410 feet to an iron pin; run thence West parallel with South boundary line of said Section 31 for 443 feet to an iron pin on the East right of way of Boulevard; run thence South along the East right of way of said Boulevard Drive 410 feet to the point of beginning, all lying in the Southwest Quarter of Section 31, Township 12 South, Range 18 West, City of Amory, Monroe County, Mississippi.

Also a perpetual easement and right of way for road purposes on, over and across the following described property: Commencing at the Southwest corner of Section 31, Township 12 South, Range 18 West, Monroe County, Mississippi; thence run East for 378 feet to the point of beginning; thence run East for 51.8 to a point; thence run South 12 degrees 25 minutes West for 157.4 feet to a point; thence run North 70 degrees 13 minutes west for 50.4 feet to a point; thence run North 12 degrees 25 minutes East for 137.8 feet to the point of beginning

The above described property is also known as the as-surveyed legal description as shown on the survey of Barge Waggoner Sumner & Cannon, Inc., Job No. 065-22041, as follows:

A tract of land located in the southwest quarter of Section 31, Township 12 South, Range 18 West in Monroe County, Mississippi being the GPH Amory LLC property as recorded in Instrument Number 20062551 in the Chancery Clerk’s Office in Monroe County, Mississippi and being more particularly described as follows:

Commencing at the southwest corner of said Section 31; thence North 88 degrees 42 minutes 10 seconds East along the south line of said Section 31 a distance of 59.00 feet to a found iron pin in the east line of Earl Fry Boulevard (60’ ROW) being the POINT OF BEGINNING; thence North 00 degrees 00 minutes 00 seconds East along said east line a distance of 410.00 feet to a found iron pin being the southwest corner of the Dan West property as recorded in Book 2003, Page 8539 in said Chancery Clerk’s Office; thence North 88 degrees 42 minutes 10 seconds East along the south line of said West property a distance of 443.00 feet to a found iron pin in the west line of the Hollis Family Limited Partnership property as recorded in Book 420, Page 33 in said Chancery Clerk’s Office; thence South 00 degrees 00 minutes 00 seconds East along said west line a distance of 410.00 feet to a found iron pin in the south line of said Section 31 being in the north line of the Charles Kennedy Parchman property as recorded in Book 446, Page 664 in said Chancery Clerk’s Office; thence South 88 degrees 42 minutes 10 seconds West along said north line and along the north line and along the north line of the F.B. Jones et ux property as recorded in Book 451, Page 395 in said Chancery Clerk’s Office a distance of 443.00 fee to the POINT OF BEGINNING and containing 181,583 square feet of 4,169 acres of land, more or less.

Also, a perpetual easement and right-of-way for road purposes on, over and across the following described property: Commencing at the southwest corner of said Section 31; thence North 88 degrees 42 minutes 10 Seconds East along the south line of said Section 31 a distance of 378.00 feet to the POINT OF BEGINNING; thence North 88 degrees 42 minutes 10 seconds East along said south line a distance of 51.20 feet to a point; thence South 11 degrees 07 minutes 10 seconds a distance of 157.40 feet to a point; thence North 71 degrees 39 minutes 26 seconds West a distance of 50.40 feet to a point; thence North 11 degrees 07 minutes 10 seconds East a distance of 140.05 feet to the POINT OF BEGINNING.

Golden LivingCenter - Batesville, 154 Woodland Road, Batesville, MS 38606-7300

Tract I:

Laud lying and being in the City of Batesville; Second Judicial District of Panola County, Mississippi, and :further described as: That fractional part of the Northwest Quarter of Section 15, Township 9 South, Range 7 West, in the City of Batesville, Mississippi. more particularly described as: Beginning at the point that is 609.5 feet South of and 513.6 feet East of the Northwest corner of the said Section 15, running North 89 degrees 53 minutes East for a distance of 420 feet; thence South 0 degrees 07 minutes East for a distance of 210 feet; thence South 89 degrees 53 minutes West fur a distance of 420 feet; thence North 0 degrees 07 minutes West fur a distance of 210 feet to the point of beginning. LESS AND EXCEPT: a strip measuring 20 feet North and South and 150 feet East and West, said strip lying situate in the Southwest corner of the above described premises.

Tract II:

A part of the Northwest Quarter of section 15, Township 9 South, Range 7 West, City of Batesville, in second judicial District of Panola County, Mississippi, and being particularly described as: Beginning at a point in the East right of way line or a public road known as "The Hospital Road'' The said point of beginning being 790.00 feet South from the center line of Mississippi Highway No. 6 and 40.00 feet East from the ceuter line of the Hospital Road; run thence South 0 degrees 17 minutes West along the East right of way line of the said Hospital Road a distance of l20.00 feet; thence North 89 degrees 53 minutes East of a distance 471.46 feet; thence North 0 degrees 07 minutes West a distance of 112.97 feet; thence South 01 degrees 55 minutes East a distance of 31.00 feet; thence South 49 degrees 14 minutes West a distance of 410.60 feet; thence South 89 degrees 53 minutes West a distance of 47.10 feet to the point of beginning.

The above described property is also known as the as-surveyed legal description as shown on the survey of Barge Waggoner Sumner & Cannon, Inc., Job No. 065-22095, as follows:

A tract of &and located in the northwest quarter of Section 15, Township 9 South, Range 7 West in Panola County, Mississippi being the GPH Batesville LLC property as recorded in Book 2006, Page 1169 in the Chancery Clerk's Office in Panola County, Mississippi and being more particularly described as follows:

BEGINNING at a point in the east line of Woodland Road (80' R.O.W.) being 790.00 feet south of the centerline of Mississippi Highway No. 6, said point being the southwest corner of the Dr. Andy Garrott property as recorded in book H-9, Page 560; thence North 89 degrees 53 minutes 07 seconds East along the south line of said Garrott property a distance of 47.10 feet to a point; thence North 49 degrees 14 minutes 00 seconds East along said south line a distance of 410.60 feet to a point; thence North 01 degrees 55 minutes 00 seconds West along said south line a distance of 31.00 feet to a point; thence North 89 degrees 53 minutes 00 seconds East along said south line a distance of 112.97 feet to a point in the west line of the JIJI, Inc. property as recorded in Book 2007, Page 717; thence South 00 degrees 07 minutes 00 seconds East along said west line a distance of 88.57 feet to a point being the southwest corner of said JIJI property; thence North 89 degrees 53 minutes 00 seconds East along the south line of said JIJI property and the south line of the First Security Bank property as recorded in Book E-5, Page 271 a distance of 420.00 feet to a point in the west line of the Frank West property as recorded in Book X-8, Page 5; thence South 00 degrees 07 minutes 00 seconds East along said west line a distance of 210.00 feet to a point in the north line of the John Fowler property as recorded in Book 2007, Page 426; thence South 89 degrees 53 minutes 00 seconds West along the north tine of said Fowler property a distance of 270.00 feet to a point; thence North 00 degrees 07 minutes 00 seconds West a distance of 20.00 feet to a point; thence South 89 degrees 53 minutes 00 seconds West a distance of 150.00 feet to a point; thence South 00 degrees 07 minutes 00 seconds East and along the west line of said Fowler property a distance of 139.89 feet to a point being the corner of the Carol B. Ingram et al property as recorded in Book P-8, Page 617; thence South 89 degrees 53 minutes 00 seconds West along the north line of aid Ingram property a distance of 471.46 feet to a point in the east line of said Woodland Road; thence North 00 degrees 17 minutes 00 seconds East along said east line a distance of 120.00 feet to the POINT OF BEGINNING and containing 216,.828 square feet or 4.978 acres of land, more or less.

Golden LivingCenter - Brook Manor, 519 Brookman Drive, Brookhaven, MS 39601-2326

Five acres, more or less in the Northeast corner of the Northwest Quarter of Southwest Quarter of Section 12, Township 7 North, Range 7 East, more particularly described as beginning at the Northeast corner of said Northwest Quarter of Southwest Quarter and run thence South along the East line of said forty 700 feet; run thence Westwardly at right angles 310 feet; run thence North 700 feet to the North line of the said forty; run thence East 310 feet to the point of the beginning; said property being further described as:

Beginning at the Northeast corner of the Northwest Quarter of Southwest Quarter of said Section 12, and run thence along the East line of said Northwest Quarter of the Southwest Quarter South 00 degrees 26 minutes East 700 feet; thence South 89 degrees 34 minutes West 310 feet; thence North 00 degrees 28 minutes West 700 feet to the North line of said Northwest Quarter of Southwest Quarter; thence North 89 degrees 34 minutes East 310 feet, along said North line of Northwest Quarter of Southwest Quarter to the point of beginning, being situated in Lincoln County, Mississippi.

The above described property is also known as the as-surveyed legal description as shown on the survey of T.E. McDonald, Inc.

Golden LivingCenter - Eupora, 156 E Walnut Avenue, Eupora, MS 39744-2027

The Eupora Health Care Center as located in the City of Eupora, Mississippi, and being further described as being located in a part of the Northeast Quarter of the Northeast Quarter, of Section 8, Township 19 North, Range 10 East, Webster County, Mississippi.

Beginning at the iron pin that is 190.09 feet South and 1274.74 feet West of the Northeast comer of section 8, said point being at the intersection of South right of way of East Walnut Ave and the East right of way of Water Works Road (Deed called Water Well Road); thence from said point of beginning, North 87 degrees 07 minutes 00 seconds East along the South right of way of Walnut Ave, a distance of 134.32 feet to a point; thence North 86 degrees 09 minutes 00 seconds East along the said right of way a distance of 270.68 feet to an iron pin; thence South 27 degrees 45 minutes 01 seconds East a distance of 300.00 feet to an iron pin; thence South a distance of 182.65 feet to an iron pin; thence West a distance of 534.45 feet to an iron pin on the East right of way of Water Works Road; thence along said East said right of way, North 00 degrees 54 minutes 02 seconds West a distance of 102.00 feet to a point; thence along said right of way, North 01 degrees 24 minutes 00 seconds West a distance of 321.32 feet to the POINT OF BEGINNING.

The above described property is also known as the as-surveyed legal description as shown on the survey of Maptech, Inc., Job No. MD-10126.000.

Golden LivingCenter - Ripley, 101 Cunningham Drive, Ripley, MS 38663-1302

Tract 1

Part of the Northeast Quarter of section 14, Township 4 South, Range 3 East, and being more particularly described as follows:

Beginning at the Northwest corner of the Northeast Quarter of section 14, Township 4 South, Range 3 East, Tippah County, Mississippi, and run East along the North boundary of said quarter Section for a distance of 1649 feet, thence run South. for a distance 621 feet to an iron pipe which is the point of beginning for the survey. From the point of beginning run North 89 degrees 20 minutes West for a distance of 428 feet 1o a stake; thence run South for a distance of 407 feet to a stake, thence run South 89 degrees 20 minutes East for a distance of 428 feet to an iron stake; thence run North a distance 407 feet to the point of beginning.

Tract2

Beginning at the Northwest corner of the Northeast Quarter of Section 14, Township 4, South range 3 East, of Tippah County, Mississippi, and nm thence due East along the North boundary of the said Quarter Section for a distance of 1649 feet; thence run due South for a distance of 621 feet to an iron pipe, thence run North 89 degrees 20 minutes West for a distance of 428 feet to a stake which is the point of beginning of this survey. From the point of beginning run North 89 degrees 20 minutes West for a distance of 107 feet to an iron pin in the ground; thence nm due South a distance of 407 feet to an iron pin in the ground; thence run South 89 degrees 20 minutes East a distance of 107 feet; thence run due North a distance of 407 feet to the point of beginning. Said tract being located in the Northeast quarter of section 14, Township 4 South, Range 3 East of Tippah County, Mississippi.

Golden LivingCenter - Southaven, 1730 Dorchester Drive, Southaven, MS 38671-5723

A part of the Cobb Estate located in section 26, Township 1 South, Range 8 West, DeSoto County, Mississippi, and being more specifically described as follows:

Begin at the stake at the Southeast corner of lot 2937, Section "N", Southaven West Subdivision, as recorded in Plat Book 5, Pages 8 & 9, Registers office, Hernando, DeSoto County, Mississippi; thence North 00 degrees 29' West 165.00 feet to a stake; thence South 89 degrees 10' East 337.64 feet to a stake; thence South 03 degrees East 653.24 feet to the stake in the South line of a 200 foot Power Line Easement; thence South 81 degrees 03' West 517 .13 feet to a stake in the East line of Dorchester Drive; thence North 03 degrees 09' West 568. 08 feet to a stake in the South line of the said Southaven West Subdivision; thence North 88 degrees 10' East 171.74 feet to the point of beginning.

Being located in part of the Northwest Quarter of said Section 26.

Golden LivingCenter - Eason Blvd, 2273 South Eason Boulevard, Tupelo, MS 38804-5900

Commencing at the Northeast corner of the Northwest Quarter of Section 9, Township 10 South, Range 6 East, City of Tupelo, Lee County, Mississippi, and run thence South 40 feet to a point of the South right of way line of Eason Boulevard; thence West along the South line of Eason Boulevard 674.5 feet to an iron pin for point of beginning; thence South 524.21 feet to an iron pin, thence West 349.1 feet to iron pin; thence North 524.21 feet to a point on the South line of Eason Boulevard; thence East along the South line of Eason Boulevard 349.1 feet to the point of beginning being in the Northwest Quarter of Section 9, Township 10 South, Range 6 East, City of Tupelo, Lee County, Mississippi.

Indexing Instructions: Part of NW1/4 Section 9, T-10-S, R-6-E, Lee County, MS

Golden LivingCenter - Tylertown, 200 Medical Circle, Tylertown, MS 39667-2069

Parcel I:

From the Southwest corner of Section 24, Township 2 North, Range 10 East. Walthall County, Mississippi, run North along the Section line a distance 1320 feet; thence run East a distance of 942.51 feet; thence run North 31 degrees 03 minutes East a distance of 92.70 feet for a point beginning; thence continue North 31 degrees 03 minutes East a distance of 350.00 feet; thence run South 58 degrees 57 minutes West a distance of 377.00 feet; thence run South 31 degrees 03 minutes West a distance of 350.00 feet; thence run North 58 degrees 57 minutes West a distance of 377.00 feet to the point of beginning, being situated in the Southwest Quarter of Section 24, Township 2 North, Range10 East, Walthall County. Mississippi.

Parcel II:

Starting at the Southwest corner of Section 24, Township 2 North, Range 10 East and run North along section line 1,320 feet; thence East 942.51 feet; thence North 31 03' East 92.70 feet for a place of beginning; thence North 31 03' East 350 feet; thence South 58' 57’ East 377 feet; thence South 31' 03 West 350 feet to North margin of street; thence South 58'57 East 20 feet; thence North 31’ 03 East 396 feet; thence North 58' 57 West 443 feet; thence South 31' 03 West 396 feet to North margin of street; thence South 58' 57 East along North margin of street 46 feet to place of beginning, situated in the Southwest Quarter of Section 24, Township 2 North, Range 10 East, Walthall County, Mississippi.

The above described property is also known as the as-surveyed legal description as shown on the survey of T.E. McDonald, Inc., Job No. 065-22040.

EXHIBIT C

LANDLORD PERSONAL PROPERTY

All machinery, equipment, furniture and other personal property located at or about any Facility and used in connection with the ownership, operation, or maintenance of any Facility, together with all replacements, modifications, alterations and substitutes thereof (whether or not constituting an upgrade) but excluding the following:

(a) all vehicles (including any leasehold interests therein);

(b) all office supplies, medical supplies, food supplies, housekeeping supplies, laundry supplies, and inventories and supplies physically on hand at the Facility;

(c) all customer lists, patient files, and records related to patients (subject to patient confidentiality privileges) and all books and records with respect to the operation of the Facility;

(d) all employee time recording devices, proprietary software and data used in connection with the operation of the Facility by Tenant or any Person who manages the operations of any Facility, all employee communication devices, employee manuals, training materials, policies, procedures, and materials related thereto with respect to the operation of the Facilities; and

(e) all telephone numbers, brochures, pamphlets, flyers, mailers, and other promotional materials related to the marketing and advertising of the Tenant’s business at the Facility.

EXHIBIT D

FINANCIAL, MANAGEMENT AND REGULATORY REPORTS



REPORT	DUE DATE
Monthly financial reports concerning the operations of each Facility and the combined Facilities or such other combination of this and related leases as reasonably requested by Landlord reported using a template provided by Landlord (which template may change from time to time as reasonably required by Landlord). Landlord may require Tenant to provide similar financial reports, utilizing the same or a similar template, for periods prior to the Commencement Date. (Via e-mail to farallonreporting@goldenliving.com , or such other e-mail address as Landlord may designate from time to time)	Thirty (30) days after the end of each calendar month, or, with respect to reports for periods prior to the Commencement Date, within (30) days after Landlord’s demand therefor
Quarterly consolidated or combined financial statements of Tenant and any Guarantor (Via e-mail to farallonreporting@goldenliving.com , or such other e-mail address as Landlord may designate from time to time)	Forty-Five (45) days after the end of each of the first three quarters of the fiscal year of Tenant and such Guarantor
Annual consolidated or combined financial statements of Tenant and any Guarantor audited by a reputable certified public accounting firm (Via e-mail to farallonreporting@goldenliving.com , or such other e-mail address as Landlord may designate from time to time)	Ninety (90) days after the fiscal year end of Tenant and such Guarantor
Quarterly Certified Compliance Certificates , in form reasonably acceptable to Landlord, certified by appropriate officers of Tenant and Guarantor, as applicable, demonstrating (with supporting calculations) compliance with all financial covenants contained in Section 6.12 of this Lease and in the Guaranty	Together and concurrently with each Quarterly and Annual financial statement described above
Regulatory reports with respect to each Facility , as follows: (1) all federal, state and local licensing and reimbursement certification surveys, inspection and other reports received by Tenant as to any Facility and its operations, including state department of health licensing surveys and reports relating to complaint surveys; (2) Medicare and Medicaid certification surveys; and (3) life safety code survey reports and/or fire marshal survey reports. (Via e-mail to farallonreporting@goldenliving.com , or such other e-mail address as Landlord may designate from time to time)	Five (5) Business Days after receipt
Reports of regulatory violations , by written notice of the following: (1) any violation of any federal, state or local licensing or reimbursement certification statute or regulation, including Medicare or Medicaid Level G or above; (2) any suspension, termination or restriction (including immediate jeopardy) placed upon Tenant or any Facility, the operation of any Facility or the ability to admit residents or patients; (3) the inclusion of any Facility on the “Special Focus List” maintained by CMS; or (4) any violation of any other permit, approval or certification in connection with any Facility or the operations thereof, by any federal, state or local authority, including Medicare or Medicaid.	Three (3) Business Days after receipt
Written evidence of payment of all Impositions to be paid by Tenant under the Lease as and when required under the Lease.	Not later than thirty (30) days after the applicable due date under this Lease for each Imposition.
Annual operating and capital budget covering the operations and reasonable estimate of capital repairs, replacements and improvements for each Facility for the forthcoming calendar year (which annual budget shall include month-to-month projections), reported using a template provided by Landlord (which template may change from time to time as reasonably required by Landlord). (Via e-mail to farallonreporting@goldenliving.com or such other e-mail address as Landlord may designate from time to time)	Thirty (30) days prior to beginning of each calendar year for the annual capital budget and prior to the commencement of each calendar year for the annual operating budget.
Updated Schedule 6.10 / Affiliate Agreements as provided in Section 6.10	Not later than ten (10) Business Days after each anniversary of the Commencement Date

EXHIBIT E

FAIR MARKET RENTAL

If it becomes necessary to determine the Fair Market Rental of the Premises or any individual Facility for any purpose under this Lease, Landlord and Tenant shall first attempt to agree on such Fair Market Rental, as the case may be. If Landlord and Tenant are unable to so agree within a reasonable period of time not to exceed thirty (30) days, then Landlord and Tenant shall have twenty (20) days to attempt to agree upon a single Appraiser to make such determination. If the parties so agree upon a single Appraiser, such Appraiser shall, within forty-five (45) days of being engaged, determine the Fair Market Rental, as the case may be, as of the relevant date (giving effect to the impact, if any, of inflation from the date of its decision to the relevant date), and such determination shall be final and binding upon the parties.

If Landlord and Tenant are unable to agree upon a single Appraiser within such twenty (20) days, then each party shall have ten (10) days in which to provide the other with the name of a person selected to act as Appraiser on its behalf. Each such Appraiser shall, within forty-five (45) days of being engaged, determine the Fair Market Rental, as the case may be, as of the relevant date (giving effect to the impact, if any, of inflation from the date of its decision to the relevant date). If the difference between the amounts so determined does not exceed ten percent (10%) of the lesser of such amounts, then the Fair Market Rental, as the case may be, shall be the average of the amounts so determined, and such average shall be final and binding upon the parties. If the difference between the amounts so determined exceeds ten percent (10%) of the lesser of such amounts, then such two Appraisers shall have twenty (20) days to appoint a third Appraiser. If the first Appraisers fail to appoint a third Appraiser within such twenty (20) days, either Landlord or Tenant may apply to any court having jurisdiction to have such appointment made by such court. Such third Appraiser, shall, within forty-five (45) days of being selected or appointed, determine the Fair Market Rental, as the case may be, as of the relevant date (giving effect to the impact, if any, of inflation from the date of its decision to the relevant date). The determination of the Appraiser which differs most in terms of dollar amount from the determinations of the other two Appraisers shall be excluded, and the Fair Market Rental, as the case may be, shall be the average of the amounts of the two remaining determinations, and such average shall be final and binding upon the parties.

If either party fails to select an Appraiser within such ten (10) days or a selected Appraiser fails to make its determination within such forty-five (45) days, the Appraiser selected by the other party or the Appraiser that makes its determination with such forty-five (45) days, as applicable, shall alone determine the Fair Market Rental, as the case may be, as of the relevant date (giving effect to the impact, if any, of inflation from the date of its decision to the relevant date) and such determination shall be final and binding upon the parties.

Landlord and Tenant shall each pay the fees and expenses of the Appraiser appointed by it and each shall pay one-half (½) of the fees and expenses of the third Appraiser.

For purposes of determining the Fair Market Rental, as the case may be, the Premises or the applicable Facility, as applicable, shall be valued at its highest and best use which shall be presumed to be as a fully-permitted facility operated in accordance with the provisions of this Lease. In addition, the following specific matters shall be factored in or out, as appropriate, in determining the Fair Market Rental, as the case may be:

1. The negative value of (a) any deferred maintenance or other items of repair or replacement of the Premises or the applicable Facility, (b) any then current or prior licensure or certification violations and/or admissions holds and (c) any other breach or failure of Tenant to perform or observe its obligations hereunder shall not be taken into account; rather, the Premises or the applicable Facility, and every part thereof shall be deemed to be in the condition required by this Lease (i.e., in good order and repair and fully licensed) and Tenant shall at all times be deemed to have operated the same in compliance with and to have performed all obligations of the Tenant under this Lease.

2. The occupancy level of the Premises shall be deemed to be the average occupancy during the period commencing on that date which is eighteen (18) months prior to the date of the initial request for the determination of the Fair Market Rental, as the case may be, and ending on the date which is six (6) months prior to the date of the initial request for the determination of the Fair Market Rental, as the case may be.

As used herein, “ Appraiser ” means an appraiser licensed or otherwise qualified to do business in the applicable Situs State and who has substantial experience in performing appraisals of facilities similar to the Premises and holds the Appraisal Institute’s MAI designation, or, if such organization no longer exists or certifies appraisers, such successor organization or such other organization as is approved by Landlord.

EXHIBIT F
FORM OF APPROVED LETTER OF CREDIT

[NAME] BANK

IRREVOCABLE LETTER OF CREDIT NO. __________

DATE: __________________

EXPIRATION DATE: __________________

GPH AMORY LLC,

GPH BATESVILLE LLC,

GPH BROOKHAVEN LLC,

GPH EUPORA LLC,

GPH RIPLEY LLC,

GPH SOUTHAVEN LLC,

GPH TUPELO LLC,

GPH TYLERTOWN LLC

c/o Golden Living
1000 Fianna Way
Fort Smith, Arkansas 72919

Ladies and Gentlemen:

We hereby establish our Irrevocable Letter of Credit in your favor for the account of ___________________________________ (“ Customer ”) available by your draft(s) on us payable at sight in an amount not to exceed a total of ______________________ Dollars ($__________) when accompanied by the following documents:

1. A certificate which on its face appears to have been executed by an officer of any of GPH AMORY LLC, GPH BATESVILLE LLC, GPH BROOKHAVEN LLC, GPH EUPORA LLC, GPH RIPLEY LLC, GPH SOUTHAVEN LLC, GPH TUPELO LLC, or GPH TYLERTOWN LLC, each a Delaware limited liability company, or any successor entity by operation of law (“ Beneficiary ”), stating the amount which Beneficiary is drawing and that one or more of the following events has occurred:

(a) an Event of Default has occurred under that certain Master Lease dated as of October 1, 2016 between Beneficiary and DIVERSICARE OF AMORY, LLC, DIVERSICARE OF BATESVILLE, LLC, DIVERSICARE OF BROOKHAVEN, LLC, DIVERSICARE OF EUPORA, LLC, DIVERSICARE OF RIPLEY, LLC, DIVERSICARE OF SOUTHAVEN, LLC, DIVERSICARE OF TUPELO, LLC, and DIVERSICARE OF TYLERTOWN, LLC, each a Delaware limited liability company (the “ Lease ”);

(b) a default under that certain Guaranty of Master Lease dated October 1, 2016, executed by DIVERSICARE HEALTHCARE SERVICES, INC., a Delaware corporation, for the benefit of Beneficiary; or

(c) either (i) an FDIC receiver or conservator has been appointed for the Issuer (as defined in the Lease)) or (ii) the Issuer has become subject to operational supervision by any federal or state regulatory authority.

2. The original Letter of Credit must accompany all drafts unless a partial draw is presented, in which case the original must accompany final draft.

This Letter of Credit will be duly honored by us at sight upon delivery of the statement set forth above without inquiry as to the accuracy of such statement and regardless of whether Customer disputes the content of such statement.

This Letter of Credit may be transferred or assigned by Beneficiary to any successor or assign of Beneficiary’s interests under the Lease or to any lender obtaining a lien or security interest in the property covered by the Lease. Each draft hereunder by any assignee or successor shall be accompanied by a copy of the fully executed documents or judicial orders evidencing such encumbrance, assignment or transfer.

Any draft drawn hereunder shall be in the form attached hereto as Schedule 1 . Partial drawings are permitted with the amount of the Letter of Credit being reduced, without amendment, by the amount(s) drawn hereunder.

This Letter of Credit shall expire at 5:00 p.m., Pacific Time, on the expiration date set forth above. Notwithstanding the foregoing, this Letter of Credit shall be automatically extended for additional periods of one year from the present or each future expiration date unless we have notified you in writing, not less than ninety (90) days before any such expiration date, that we elect not to renew this Letter of Credit. Our notice of any such election shall be sent by express, registered or certified mail to the address shown above.

Except so far as otherwise expressly stated, this Letter of Credit is subject to the “Uniform Customs and Practices for Documentary Credits (2007 Revision), International Chamber of Commerce Publication No. 600.” We hereby agree with you and all persons negotiating such drafts that all drafts drawn and negotiated in compliance with the terms of this Letter of Credit will be duly honored upon presentment and delivery of the documents specified above by express, certified or registered mail, overnight or other delivery by national courier service or personal delivery to , , if negotiated on or before the expiration date shown above.

Very truly yours,

_______________________________

Authorized Signature

_______________________________

Authorized Signature

SCHEDULE 1

SIGHT DRAFT

TO: ______________________________

______________________________

Attention:

PAY TO THE ORDER OF:

[NAME OF BENEFICIARY]

c/o [NAME OF BANK]

[ADDRESS OF BANK]

ABA No. [INSERT ABA NO.]

for the benefit of [NAME OF BENEFICIARY]

Account No. [INSERT ACCOUNT NO.]

THE SUM OF:

____________________________ Dollars ($_____________)

DRAWN ON:

Irrevocable Letter of Credit No. ________

dated ______________, 20___ issued by

________________________ Bank

[BENEFICIARY]

By:
Name:
Title:

SCHEDULE 1A

LANDLORD ENTITIES

“Landlord”:

GPH AMORY LLC , a Delaware limited liability company

GPH BATESVILLE LLC , a Delaware limited liability company

GPH BROOKHAVEN LLC , a Delaware limited liability company

GPH EUPORA LLC , a Delaware limited liability company

GPH RIPLEY LLC , a Delaware limited liability company

GPH SOUTHAVEN LLC , a Delaware limited liability company

GPH TUPELO LLC , a Delaware limited liability company

GPH TYLERTOWN LLC , a Delaware limited liability company

SCHEDULE 1B

TENANT ENTITIES

“Tenant”:

DIVERSICARE OF AMORY, LLC , a Delaware limited liability company

DIVERSICARE OF BATESVILLE, LLC , a Delaware limited liability company

DIVERSICARE OF BROOKHAVEN, LLC , a Delaware limited liability company

DIVERSICARE OF EUPORA, LLC , a Delaware limited liability company

DIVERSICARE OF RIPLEY, LLC , a Delaware limited liability company

DIVERSICARE OF SOUTHAVEN, LLC , a Delaware limited liability company

DIVERSICARE OF TUPELO, LLC , a Delaware limited liability company

DIVERSICARE OF TYLERTOWN, LLC , a Delaware limited liability company

SCHEDULE 2

FACILITY LIST



Facility Name	Facility Address	Primary Intended Use	No. of Beds/Units
Golden LivingCenter - Amory	1215 Earl Frye Drive Amory, MS 38821	SNF	152
Golden LivingCenter - Batesville	154 Woodland Road Batesville, MS 38606-7300	SNF	130
Golden LivingCenter - Brook Manor	519 Brookman Drive Brookhaven, MS 39601-2326	SNF	58
Golden LivingCenter - Eupora	156 E Walnut Avenue Eupora, MS 39744-2027	SNF	119
Golden LivingCenter - Ripley	101 Cunningham Drive Ripley, MS 38663-1302	SNF	140
Golden LivingCenter - Southaven	1730 Dorchester Drive Southaven, MS 38671-5723	SNF	140
Golden LivingCenter - Eason Blvd	2273 South Eason Boulevard Tupelo, MS 38804-5900	SNF	120
Golden LivingCenter - Tylertown	200 Medical Circle Tylertown, MS 39667-2069	SNF	60

Defined Terms



“SNF”	Skilled Nursing Facility

SCHEDULE 3

TENANT OWNERSHIP STRUCTURE

Diversicare Leasing Company III, LLC, a Delaware limited liability company, is the sole member of and owns 100% of the limited liability company interests in each Tenant.

SCHEDULE 4

RELATED LEASES

1. Lease Agreement between Broadmoor Nursing Home Ltd., as Lessor, and Broadmoor Nursing Home, Inc., as Lessee, with respect to the nursing home facility located in Meridian, Mississippi, originally dated October 1, 1977, the leasehold interest of the Lessee thereunder being assigned to Beverly Enterprises-Mississippi, Inc. by Assignment of Lease dated as of July 13, 1982, and further assigned to Diversicare of Meridian, LLC by Assignment and Assumption Agreement dated as of October 1, 2016, and amended by First Amendment to Lease Agreement dated as of October 1, 2016.

2. Lease Agreement between Leake County Nursing Home Ltd., as Lessor, and Carthage Health Care Center, Inc., as Lessee, with respect to the nursing home facility located in Carthage , Mississippi, originally dated October 1, 1977, the leasehold interest of the Lessee thereunder being assigned to Beverly Enterprises-Mississippi, Inc. by Assignment of Lease dated as of July 13, 1982, and further assigned to Diversicare of Carthage , LLC by Assignment and Assumption Agreement dated as of October 1, 2016, and amended by First Amendment to Lease Agreement dated as of October 1, 2016.

SCHEDULE 6.10

AFFILIATE AGREEMENTS

1. Management Agreements each dated as of October 1, 2016 by and between Diversicare Management Services Co., as Manger, and each Tenant with respect to the management of each Facility.

2. Therapy Services Agreements each dated as of October 1, 2016 by and between Diversicare Therapy and each Tenant with respect to each Facility for the provision of physical and occupational therapy and speech-language pathology rehabilitation services and related services at each Facility.

MASTER LEASE

Among

Each entity identified as “Landlord” on Schedule 1A attached hereto,
individually and collectively as “Landlord”

and

Each entity identified as “Tenant” on Schedule 1B attached hereto
individually and collectively as “Tenant”

Dated: October 1, 2016

Article I DEFINITIONS; PREMISES; TERM 2

1.1 Definitions 2

1.2 Lease of Premises; Ownership 2

1.3 Term 2

1.4 Net Lease 2

Article II RENT 3

2.1 Base Rent 3

2.2 Additional Rent 3

2.3 Method of Payment 3

2.4 Late Payment of Rent 3

2.5 Guaranty 4

Article III SECURITY DEPOSIT; LETTER OF CREDIT 4

3.1 Security Deposit 4

3.2 Letter of Credit 5

Article IV IMPOSITIONS AND OTHER CHARGES 7

4.1 Impositions 7

4.2 Utilities; CC&Rs 8

4.3 Insurance 8

4.4 Other Charges 8

4.5 Real Property Imposition Impounds 8

Article V ACCEPTANCE OF PREMISES; NO IMPAIRMENT 9

5.1 Acceptance of Premises 9

5.2 No Impairment 9

Article VI OPERATING COVENANTS 10

6.1 Tenant Personal Property. 10

6.2 Landlord Personal Property 10

6.3 Primary Intended Use 10

6.4 Compliance with Legal Requirements and Authorizations 11

6.5 Preservation of Business 11

6.6 Maintenance of Books and Records 12

6.7 Financial, Management and Regulatory Reports 12

6.8 Estoppel Certificates 13

6.9 Furnish Information 13

6.10 Affiliate Transactions 13

6.11 Waste 13

6.12 Additional Covenants 14

6.13 No Liens 15

6.14 Landlord Trade Names and Marks 15

6.15 Reserved 15

6.16 Reserved 15

Article VII MAINTENANCE AND REPAIR 15

7.1 Tenant’s Maintenance Obligation 15

7.2 Premises Condition Report 16

7.3 Notice of Non-Responsibility 16

7.4 Permitted Alterations 16

7.5 Capital and Material Alterations 17

7.6 Capital Expenditures 17

7.7 Construction Consultant 18

7.8 Encroachments 19

7.9 Capital Alterations Financed by Landlord 19

7.10 Upgrade Allowance 20

Article VIII PERMITTED CONTESTS 21

Article IX INSURANCE 22

9.1 Required Policies 22

9.2 General Insurance Requirements 24

9.3 Replacement Costs 25

9.4 Claims-Made Policies 25

9.5 Non-Renewal 25

9.6 Increase in Limits; Types of Coverages 25

9.7 No Separate Insurance 26

9.8 Alternate Coverages 26

9.9 Captive Insurance Program 27

Article X REPRESENTATIONS AND WARRANTIES 27

10.1 General 27

10.2 Anti-Terrorism Representations 28

10.3 Additional Representations and Warranties 28

Article XI DAMAGE AND DESTRUCTION 29

11.1 Notice of Damage or Destruction 29

11.2 Restoration 29

11.3 Insufficient or Excess Proceeds 29

11.4 Facility Mortgagee 30

11.5 Tenant’s Termination Right 30

Article XII CONDEMNATION 31

12.1 General 31

12.2 Notice of Taking 31

12.3 Complete Taking 31

12.4 Partial Taking 31

12.5 Temporary Taking 32

12.6 Award Distribution 32

12.7 Relationship to Facility Mortgage 32

Article XIII DEFAULT 32

13.1 Events of Default 32

13.2 Remedies 35

Article XIV OBLIGATIONS OF TENANT ON EXPIRATION OR TERMINATION OF LEASE 36

14.1 Surrender 36

14.2 Transition 36

14.3 Tenant Personal Property 38

14.4 Facility Trade Name 39

14.5 Holding Over 39

Article XV INDEMNIFICATION 39

Article XVI LANDLORD’S FINANCING 40

16.1 Grant Lien 40

16.2 Attornment 40

16.3 Cooperation; Modifications 40

16.4 Compliance with Facility Mortgage Documents 41

Article XVII ASSIGNMENT AND SUBLETTING 42

17.1 Prohibition 42

17.2 Landlord Consent 42

17.3 Transfers to Affiliates 43

17.4 Permitted Occupancy Agreements 43

17.5 Costs 43

17.6 UPL Program Sublease 43

Article XVIII CERTAIN RIGHTS OF LANDLORD 44

18.1 Right of Entry 44

18.2 Conveyance by Landlord 44

18.3 Granting of Easements, etc 44

18.4 Excess Beds 44

Article XIX ENVIRONMENTAL MATTERS 45

19.1 Hazardous Materials 45

19.2 Notices 45

19.3 Remediation 45

19.4 Indemnity 45

19.5 Environmental Inspections 46

Article XX LANDLORD’S SECURITY INTEREST 46

20.1 Grant of Security Interest 46

20.2 Accounts Receivable Financing 46

20.3 Certain Changes 46

Article XXI QUIET ENJOYMENT 47

Article XXII REIT RESTRICTIONS 47

22.1 Characterization of Rents 47

22.2 General REIT Provisions 47

22.3 Prohibited Transactions 47

22.4 Personal Property REIT Requirements 47

Article XXIII NOTICES 48

Article XXIV MISCELLANEOUS 48

24.1 Memorandum of Lease 48

24.2 No Merger 48

24.3 No Waiver 49

24.4 Acceptance of Surrender 49

24.5 Attorneys’ Fees 49

24.6 Brokers 49

24.7 Severability 49

24.8 Non-Recourse 49

24.9 Successors and Assigns 50

24.10 Governing Law; Jury Waiver 50

24.11 Entire Agreement 50

24.12 Headings 50

24.13 Counterparts 50

24.14 Joint and Several 50

24.15 Interpretation 50

24.16 Time of Essence 51

24.17 Further Assurances 51

Article XXV AMENDMENT AND RESTATEMENT 51

EXHIBITS/SCHEDULES

EXHIBIT A DEFINED TERMS

EXHIBIT B DESCRIPTION OF THE LAND

EXHIBIT C LANDLORD PERSONAL PROPERTY

EXHIBIT D FINANCIAL, MANAGEMENT AND REGULATORY REPORTS

EXHIBIT E FAIR MARKET RENTAL

EXHIBIT F FORM OF APPROVED LETTER OF CREDIT

SCHEDULE 1A LANDLORD ENTITIES

SCHEDULE 1B TENANT ENTITIES

SCHEDULE 2 FACILITY LIST

SCHEDULE 3 TENANT OWNERSHIP STRUCTURE

SCHEDULE 4 RELATED LEASES

SCHEDULE 6.10 AFFILIATE AGREEMENTS

70312.5 1

AMENDED AND RESTATED MASTER LEASE

THIS AMENDED AND RESTATED MASTER LEASE (this “ Lease ”) is entered into as of November 1, 2016, by and among each entity identified as “Landlord” on Schedule 1A attached hereto (individually and collectively, “ Landlord ”), on the one hand, and each entity identified as “Tenant” on Schedule 1B attached hereto (individually and collectively, “ Tenant ”), on the other hand. This Lease amends and restates that certain Master Lease dated as of October 1, 2016 (the “ Existing Lease ”) by and between certain of the entities comprising Landlord and Tenant, with respect to those Facilities subject to the Existing Lease; provided however that nothing herein shall limit, terminate or otherwise impair Tenant’s liabilities and obligations under the Existing Lease arising on or prior to the Commencement Date under this Lease. Amending and concurrently restating the Existing Lease in this Lease shall in no way constitute a termination or novation of the Existing Lease.

INDIVISIBLE MASTER LEASE;
ACKNOWLEDGEMENT AND WAIVER

(a) Agrees, acknowledges and is forever estopped from asserting to the contrary that the statements set forth in the first sentence of this Section are true, correct and complete;

(c) Agrees, acknowledges and is forever estopped from asserting to the contrary that this Lease is a single lease pursuant to which the collective Premises are demised as a whole to Tenant;

Article I
DEFINITIONS; PREMISES; TERM

1.2 Lease of Premises; Ownership .

Article II
RENT

2.1 Base Rent .

2.1.1 During the Term, commencing as of the Commencement Date, Tenant will pay to Landlord as base rent hereunder (the “ Base Rent ”), an annual amount equal to Twenty-Four Million Six Hundred Seventy-Five Thousand Dollars ($24,675,000). Notwithstanding the foregoing, on the first day of the second (2 ^nd ) Lease Year and the first (1 ^st ) day of each Lease Year thereafter during the Term (including, without limitation, any Extension Term), the Base Rent shall increase to an annual amount equal to the sum of (a) the Base Rent for the immediately preceding Lease Year, and (b) the Base Rent for the immediately preceding Lease Year multiplied by the Adjusted CPI Increase. The Base Rent shall be payable in advance in twelve (12) equal monthly installments on or before the first (1 ^st ) Business Day of each calendar month; provided, however, the Base Rent attributable to the first (1 ^st ) full calendar month of the Term and the calendar month in which the Commencement Date occurs, which may be a partial month, shall be payable on the Commencement Date. Base Rent is also subject to increase from time to time pursuant to Section 7.10.8.

2.5 Guaranty . Tenant’s obligations under this Lease are guarantied under that certain Amended and Restated Guaranty of Master Lease of even date herewith (as amended, modified or revised, the “ Guaranty ”). The guarantor or guarantors that are party to the Guaranty from time to time, together with all successors and assigns, are referred to in this Lease, individually and collectively, as “ Guarantor ”.

Article III
SECURITY DEPOSIT; LETTER OF CREDIT

3.1 Security Deposit . Unless Tenant has made the LC Election pursuant to Section 3.2, Tenant shall pay to and deposit with Landlord an amount, which, when added to the “Security Deposit” currently held by Landlord under the Existing Lease, shall equal to three and (3) monthly payments of Base Rent as of the Commencement Date (subject to increase as described in this Section 3.1) as security (the “ Security Deposit ”) for the full and faithful performance by Tenant of each and every term, provision, covenant and condition of this Lease. The Security Deposit shall be paid by Tenant and deposited with Landlord in three (3) equal monthly installments, with the first (1 ^st ) installment due on or prior to the Commencement Date, the second (2 ^nd ) installment due on or prior to the first (1 ^st ) Business Day of the sixth (6 ^th ) calendar month of the Term, and third (3 ^rd ) installment due on the first (1 ^st ) Business Day of the ninth (9 ^th ) calendar month of the Term.

Article IV
IMPOSITIONS AND OTHER CHARGES

4.1 Impositions .

4.3 Insurance . Tenant shall pay or cause to be paid all premiums for the insurance coverage required to be maintained by Tenant hereunder.

4.5 Real Property Imposition Impounds .

Article V
ACCEPTANCE OF PREMISES; NO IMPAIRMENT

Article VI
OPERATING COVENANTS

6.4 Compliance with Legal Requirements and Authorizations .

6.11 Waste . Tenant shall not commit or suffer to be committed any waste on any of the Premises, nor shall Tenant cause or permit any nuisance thereon.

6.12 Additional Covenants . Tenant shall satisfy and comply with the following performance covenants throughout the Term:

6.15 [*****] Facility . Promptly following the Commencement Date, Landlord and Tenant shall use their respective commercially reasonable efforts and cooperate with each other to locate a buyer or replacement operator, as applicable, for (i) the sale of the [*****] Facility on such terms and for a purchase price acceptable to Landlord in its commercially reasonable discretion or (ii) the lease of the [*****] Facility to a replacement operator acceptable to Landlord in its commercially reasonable discretion (each a “ [*****] Disposition ”) within two (2) calendar years following the Commencement Date (the “ [*****] Disposition Period ”). If a buyer or replacement operator has been identified during the initial two (2)-year period, Landlord shall have the right to extend the [*****] Disposition Period as may be reasonably necessary for the issuance of all required Authorizations and completion of an Operational Transfer and all change of ownership requirements under applicable Legal Requirements to the extent necessary for the continued operation of the [*****] Facility by such buyer or replacement operator. Upon consummation of a [*****] Disposition, or, provided no Event of Default then exists and is continuing, if a buyer or replacement operator has not been identified during the [*****] Disposition Period, the [*****] Facility shall be removed from the Premises. As used in this Section 6.1.5, “ [*****] Allocated Rent ” shall mean the amount of Base Rent payable hereunder that is allocable to the [*****] Facility, which shall be equal to $[*****], as such amount may be increased from time to time pursuant to application of the second (2nd) sentence of Section 2.1.1, or decreased pursuant to the next succeeding sentence. Provided that no Event of Default then exists and is continuing, on the first (1st) anniversary of the Commencement Date (if a [*****] Disposition has not then been consummated), [*****] Allocated Rent (and, without duplication, aggregate Base Rent payable under this Lease) shall be reduced by the sum of $[*****], and such amount shall not be included in the aggregate amount of Base Rent for purposes of determining the increase in Base Rent as of the first (1st) anniversary of the Commencement Date pursuant to second (2nd) sentence of Section 2.1.1. Additionally, upon the earlier to occur of (a) consummation of a [*****] Disposition, or (b) the second (2nd) anniversary of the Commencement Date, provided no Event of Default is then continuing, aggregate Base Rent payable hereunder shall be reduced by the then amount of [*****] Allocated Rent, and no further Base Rent shall be payable hereunder with respect to the [*****] Facility. All net proceeds from any sale of the [*****] Facility shall be paid to, and shall be the property of, Landlord. Anything elsewhere in this Lease to the contrary notwithstanding, (x) Tenant shall not be required to make any Capital Expenditures to the [[*****]] Facility in excess of the Required Per Bed Annual Capital Expenditures Amount, which for the [*****] Facility shall be an amount equal to Three Hundred Fifty Dollars ($350.00) per licensed bed, and (y) Tenant’s repair and maintenance obligations with respect to the [*****] Facility shall be limited to any repair or maintenance necessary to comply with any life safety requirement, routine maintenance and repair necessary to maintain the non-structural components of the Facility and major building systems in their condition as of the Commencement Date, normal wear and tear excepted. The allocation of a portion of aggregate Base Rent for purposes of this Section 6.15 shall not affect or diminish the acknowledgements and waivers made in the Section of this Lease entitled “INDIVISIBLE MASTER LEASE; ACKNOWLEDGMENT AND WAIVER.”

6.16 Pell City Facility . Landlord and Tenant acknowledge that the Land and Leased Improvements constituting the Facility located in Pell City, Alabama (the “ Pell City Premises ”) are partially leased by Landlord from The Medical Clinic Board of the City of Pell, Alabama, pursuant to a Lease Agreement originally dated March 1, 1966, the term of which currently expires February 28, 2026, and the remainder of the Pell City Premises is leased by Landlord from the Second Medical Clinic Board of the City of Pell, Alabama, pursuant to a Lease Agreement originally dated September 1, 1968, the term of which currently expires on August 31, 2028 (individually and collectively, as amended modified or revised, the “ Pell City Lease ”). This Lease constitutes a sublease of the Pell City Premises by Tenant from Landlord, subject and subordinate to the Pell City Lease. Tenant shall not do or suffer or permit anything to be done with respect to the Pell City Premises that would constitute a breach of or default under the Pell City Lease or would cause the Pell City Lease to be canceled, terminated or forfeited by virtue of any rights of cancellation, termination, or forfeiture reserved or vested in the lessor under the Pell City Lease. So long as Tenant performs its obligations under this Lease, Landlord will maintain the Pell City Lease in full force and effect for the remainder of its term and that Landlord will not do or suffer or permit anything to be done with respect to the Pell City Premises which would constitute an event of default under the Pell City Lease or would cause the Pell City Lease to be canceled, terminated or forfeited by virtue of any rights of cancellation, termination, or forfeiture reserved or vested in the lessor under the Pell City Lease, nor shall Landlord exercise any right or remedy so as to cause, or voluntarily agree to or elect, any termination of the Pell City Lease as to the Pell City Premises. If the Initial Term of this Lease is extended as provided in Section 1.3, but the Pell City Lease is not extended beyond its current term such that the Tenant’s right to sublease and occupy the entire Pell City Premises under this Lease expires during the Initial Term or an Extension Term, then the Pell City Premises shall be removed from the Premises and the Base Rent shall be reduced by an amount equal to the amount of Base Rent allocated to the Pell City Premises at the time of determination of Base Rent for the Extension Term as provided in Section 2.1.2, which shall be confirmed by Landlord and Tenant at the time such determination is made. For purposes of making such determination and allocation, if the Base Rent for the applicable Extension Term shall be determined pursuant to clause (b) of Section 2.1.2, Landlord and Tenant confirm that the Base Rent allocated to the Pell City Premises as of the Commencement Date is equal to $900,000.00. The allocation of a portion of aggregate Base Rent for purposes of this Section 6.16 shall not affect or diminish the acknowledgements and waivers made in the Section of this Lease entitled “INDIVISIBLE MASTER LEASE; ACKNOWLEDGMENT AND WAIVER.”

6.17 Montgomery Assisted Living Building . The building, formerly operated as an assisted living facility, situated on the same parcel of Land on which the Montgomery, Alabama Facility is situated (the “ Closed ALF ”) shall not constitute a “Facility” under this Lease, and Tenant shall have no obligation hereunder to operate, insure, maintain or, repair, restore or reconstruct the Closed ALF or to pay any Real Property Impositions applicable to the Closed ALF.

Article VII
MAINTENANCE AND REPAIR

7.6 Capital Expenditures .

7.9.2 an officer’s certificate and, if requested, a certificate from Tenant's architect, setting forth in reasonable detail the projected or actual Capital Alteration costs;

7.10.3 All work that has been funded in whole or in part by the Upgrade Allowance shall be invoiced and completed by July 1, 2018 (without consideration for any extension thereof).

Article VIII
PERMITTED CONTESTS

Article IX
INSURANCE

9.1 Required Policies . During the Term, Tenant shall maintain the following insurance with respect to each Facility at its sole cost and expense:

(d) Deductibles/Self Insured Retentions applicable to Sections 9.1.5 and 9.1.6 shall not be greater than $500,000 per claim; and

9.2 General Insurance Requirements .

9.2.2 All liability type policies (with the exception of Tenant’s workers’ compensation/employer’s liability insurance) must name Landlord, agents and managers, as an “additional insured.” All property policies shall name Landlord as “loss payee.” All business interruption policies shall name Landlord as “loss payee” with respect to Rent only. Losses shall be payable to Landlord and/or Tenant as provided herein. In addition, the policies, as appropriate, shall name as an “additional insured” or “loss payee” any Facility Mortgagee by way of a standard form of mortgagee’s loss payable endorsement. Any loss adjustment shall require the written consent of Landlord, Tenant, and each Facility Mortgagee unless the amount of the loss is less than $100,000 in which event no consent shall be required.

Article X
REPRESENTATIONS AND WARRANTIES

10.2 Anti-Terrorism Representations .

Article XI
DAMAGE AND DESTRUCTION

Article XII
CONDEMNATION

Article XIII
DEFAULT

13.1.1 Tenant shall fail to pay any installment of Rent, or any installment of the Security Deposit due pursuant to Section 3.1, within three (3) Business Days of its Payment Date;

13.1.8 Any of the representations or warranties made by Tenant in this Lease or by Guarantor in the Guaranty proves to be untrue when made in any material respect;

Article XIV
OBLIGATIONS OF TENANT ON EXPIRATION OR TERMINATION OF LEASE

14.2 Transition .

14.2.7 The terms of this Section 14.2 shall survive the expiration or sooner termination of this Lease.

Article XV
INDEMNIFICATION

Article XVI
LANDLORD’S FINANCING

Article XVII
ASSIGNMENT AND SUBLETTING

Article XVIII
CERTAIN RIGHTS OF LANDLORD

Article XIX
ENVIRONMENTAL MATTERS

Article XX
LANDLORD’S SECURITY INTEREST

Article XXI
QUIET ENJOYMENT

Article XXII
REIT RESTRICTIONS

Article XXIII
NOTICES



If to Tenant:	If to Landlord:
c/o Diversicare Leasing Company II, LLC 1621 Galleria Blvd. Brentwood, TN 37027 Facsimile No.: 615-620-7875 Attn: Chief Financial Officer	c/o Golden Living 1000 Fianna Way Fort Smith, Arkansas 72919 Facsimile: 479-201-4801 Attn: Holly Rasmussen-Jones
With a copy to:	With a copy to:
Bass, Berry & Sims PLC 150 Third Avenue South Suite 2800 Nashville, TN 37201 Facsimile No.: 615-742-0466 Attn: Mark Manner	Nicholas R. Finn Four Embarcadero Center, Suite 710 San Francisco, California 94111

Article XXIV
MISCELLANEOUS

24.9 Successors and Assigns . This Lease shall be binding upon Landlord and its successors and assigns and, subject to the provisions of Article XVII, upon Tenant and its successors and assigns.

24.14 Joint and Several . If more than one Person is the Tenant under this Lease, the liability of such Persons under this Lease shall be joint and several.

24.17 Further Assurances . The parties agree to promptly sign all documents reasonably requested by the other party to give effect to the provisions of this Lease.

[Signature page follows]

IN WITNESS WHEREOF , this Lease has been executed under seal by Landlord and Tenant as of the Commencement Date.

TENANT :

DIVERSICARE OF AMORY, LLC,

DIVERSICARE OF ARAB, LLC,

DIVERSICARE OF BATESVILLE, LLC,

DIVERSICARE OF BESSEMER, LLC,

DIVERSICARE OF BOAZ, LLC,

DIVERSICARE OF BROOKHAVEN, LLC,

DIVERSICARE OF EUPORA, LLC,

DIVERSICARE OF FOLEY, LLC,

DIVERSICARE OF HUEYTOWN, LLC,

DIVERSICARE OF LANETT, LLC,

DIVERSICARE OF MONTGOMERY, LLC,

DIVERSICARE OF ONEONTA, LLC,

DIVERSICARE OF OXFORD, LLC,

DIVERSICARE OF PELL CITY, LLC,

DIVERSICARE OF RIPLEY, LLC,

DIVERSICARE OF RIVERCHASE, LLC,

DIVERSICARE OF SOUTHAVEN, LLC,

DIVERSICARE OF TUPELO, LLC,

DIVERSICARE OF TYLERTOWN, LLC, and

DIVERSICARE OF WINFIELD, LLC,

each a Delaware limited liability company


By:	DIVERSICARE LEASING COMPANY III, LLC, a Delaware limited liability company, its sole member

By:     /s/James R. McKnight, Jr.         (SEAL)
Name:     James R. McKnight, Jr.
Title:     EVP & CFO

SEALED AND DELIVERED IN THE PRESENCE OF:

Name:

[Signatures continue on next page]

LANDLORD :

GPH AMORY LLC,

GPH ARAB LLC,

GPH BATESVILLE LLC,

GPH BESSEMER LLC,

GPH BIRMINGHAM LLC,

GPH BOAZ LLC,

GPH BROOKHAVEN LLC,

GPH EUPORA LLC,

GPH FOLEY LLC,

GPH HUEYTOWN LLC,

GPH LANETT LLC,

GPH MONTGOMERY LLC,

GPH ONEONTA LLC,

GPH OXFORD LLC,

GPH RIPLEY LLC,

GPH SOUTHAVEN LLC,

GPH TUPELO LLC,

GPH TYLERTOWN LLC, and

GPH WINFIELD LLC,

each a Delaware limited liability company

By:     /s/Holly Rasmussen Jones         (SEAL)
Name:      Holly Rasmussen Jones
Title:      Secretary

BEVERLY ENTERPRISES – ALABAMA, INC.,

a California corporation