Good morning, and welcome to the Omega Healthcare Q1 2018 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I now would like to turn the conference over to Michelle Reber.
Ms. Reber, please go ahead.
Thank you, and good morning. With me today are Omega's CEO, Taylor Pickett CFO, Bob Stevenson COO, Dan Booth Chief Corporate Development Officer, Steven Insoft and SVP, Operations, Jeff Marshall. Comments made during this conference call that are not historical facts may be forward looking statements, such as statements regarding our financial projections, dividend policy, portfolio restructurings, rent payments, financial condition or prospects of our operators, contemplated acquisitions, transitions or dispositions, and our business and portfolio outlook generally. These forward looking statements involve risks and uncertainties, which may cause actual results to differ materially. Please see our press releases and our filings with the Securities and Exchange Commission, including without limitation, our most recent report on Form 10 ks, which identifies specific factors that may cause actual results or events to differ materially from those described in forward looking statements.
During the call today, we will refer to some non GAAP financial measures, such as FFO, adjusted FFO, FAD and EBITDA. Reconciliations of these non GAAP measures to the most comparable measure under generally accepted accounting principles, as well as an explanation of the usefulness of the non GAAP measures are available under the Financial Information section of our website at www.omegahealthcare.com. And in the case of FFO and adjusted FFO in our press release issued yesterday. I will now turn the call over to Taylor.
Thanks, Michelle. Good morning and thank you for joining our Q1 2018 earnings conference call. Today, I will discuss our strategic asset repositioning and portfolio workouts, our dividend and 2018 guidance, macro industry trends and our data analysis effort. As part of our strategic repositioning in the Q1 of 2018, we disposed of $98,000,000 in assets and including assets held for sale, we're evaluating over $250,000,000 in additional asset sales in 2018. The revenue reduction related to our $98,000,000 in 1st quarter assets disposed is $10,000,000 while the trailing 12 month cash flow on these assets was $4,000,000 The cash flow on these assets did not cover the underlying rent, yet we were able to achieve sale proceeds that equate to rent yields of approximately 10%.
Our strong sales results to date reflect the continued appetite for SNF assets by local market private buyers. We've made great progress addressing troubled operators. Orianna is in the middle of a controlled Chapter 11 bankruptcy process. Signature is being resolved outside of bankruptcy and Daybreak is paying current debt obligations timely. Later in the call, Dan will provide more detail regarding portfolio workouts.
Turning to our dividend and 2018 guidance. Our quarterly dividend of $0.66 per share reflects a payout ratio of 85% of adjusted FFO and 96% of funds available for distribution. As we discussed during our February call, our dividend payout ratio and related will be dependent on the timing of asset sales versus the redeployment of capital, along with the timing of the Orianna portfolio workout. We have maintained our adjusted FFO guidance range of $2.96 to $3.06 per share, while our FAD guidance remains $2.64 to $2.74 per share. Again, timing will play a big role in our guidance as asset sales reduce AFFO and the longer it takes to redeploy capital, the longer it takes to restore this AFFO in our quarterly run rate.
Due to the impact of capital deployment timing, it is likely that our 2nd quarter adjusted FFO and FAD results will dip from the Q1 results and then rebound in the back half of twenty eighteen. Moving to macro industry trends, I would like to highlight the following. First, we are already experiencing the impact of aging demographics with respect to Medicare days. These demographics are offsetting the impact of reduced lengths of stay and the reduction of inpatient hospital admissions. We believe that the reduced length of stay efficiencies and reduced inpatient hospital admissions are slowing.
And as a result, the unabated growth in the over 75 population will be reflected in stable and eventually improving industry occupancy. 2nd, labor costs continue to put near term pressure on operator cash flows and coverage. We expect that this trend will continue throughout 2018. 3rd, CMS's proposed rulemaking should be favorable over the next several years. Jeff will provide more detail, but we believe the proposed October 1 Medicare rate increase and the new proposed patient driven payment model are both positive for our operators.
4th, Omega facility occupancy has remained steady during the 1st 2 months of 2018. Turning to our data analysis effort. During the quarter, we rolled out some initial information around our data analytics project, specifically around improving demographics, which we believe will provide our operators a pronounced and pervasive sense of tailwind for many years. For over a year now, we've been working with a healthcare data partner to analyze a variety of factors around our business. We're using the results of this analysis in our internal capital allocation decisions as well as externally in our communication with investors.
As investors know, all real estate is local and having granular regional information provides us an opportunity to allocate capital optimally, so we can from the growing population of seniors. In the coming quarters, we will be providing additional information around our findings. We believe that this will provide additional clarity around the timing and extent of the demographic tailwinds, allowing investors to allocate capital to the skilled nursing space with more conviction. I will now turn the call over to Bob.
Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $148,000,000 or $0.71 per share for the quarter as compared to $181,000,000 or $0.88 per share for the Q1 of 2017. Our adjusted FFO was $161,000,000 or $0.78 per share for the quarter and excludes the impact of approximately $7,800,000 in provisions for uncollectible accounts, a $2,000,000 purchase option buyout, $581,000 related to unrealized gains on Genesis common stock warrants and $4,100,000 of non cash stock based compensation expense. Operating revenue for the quarter was approximately $220,000,000 versus $232,000,000 for the Q1 of 2017. The decrease was primarily a result of $16,000,000 of reduced revenue as we placed Orianna on a cash basis effective July 1, 2017, and did not record any lease revenue in Q1 2018 and $4,000,000 of reduced revenue related to Daybreak and Preferred Care that were also placed on a cash basis in 2017.
The decrease in revenue was partially offset by incremental revenue from of over $450,000,000 of new investments completed and capital improvements made to our facilities since the Q1 of 2017 as well as lease amendments made during that same time period. The $220,000,000 of revenue for the quarter includes $17,000,000 of non cash revenue, dollars 16,000,000 of Signature revenue, dollars 4,100,000 of Daybreak revenue, $1,500,000 of preferred care revenue and as I mentioned earlier, no revenue related to the Orianna lease facilities. Our G and A expense was $12,400,000 for the quarter, which was $3,600,000 above our Q1 2017 G and A expense. The increase was primarily a result of a $2,000,000 buyout of an in the money purchase option and 1,500,000 in increased legal expenses related to operator workouts and restructurings. When eliminating the $2,000,000 purchase option buyout, our G and A expense was $10,400,000 in line with our 2018 Q1 projected G and A expense of approximately $9,500,000 to $10,500,000 For modeling purposes, we project our 2018 Q2 G and A run rate to be approximately 9,500,000 dollars to $10,500,000 resulting from legal expenses related to operator workouts, transitions and divestitures returning to the traditional $8,000,000 to $9,000,000 quarterly run rate sometime in the Q4.
In addition, we expect our 2018 quarterly non cash stock based compensation expense to be approximately $4,000,000 consistent with the Q1 of 2018. Interest expense for the quarter when excluding non cash deferred financing costs was $48,000,000 versus $45,000,000 for the same period in 2017. The $3,000,000 increase in interest expense resulted from higher debt balances associated with the financings related to our investments completed since the Q1 of 2017 and a higher blended cost of debt, primarily a result of issuing $700,000,000 of new bonds in the Q2 of 2017 and in general overall higher LIBOR rates. In the Q1, we sold 14 facilities for approximately $75,000,000 in net cash proceeds, recognizing a gain of approximately $18,000,000 We also received $24,000,000 for final payment on 3 mortgage notes. In the Q1, we recorded slightly over $1,800,000 in revenue related to these dispositions.
During the quarter, we recorded approximately $5,000,000 in real estate impairments to reduce the net book value on 17 facilities due to our estimated fair values or expected selling prices. We recorded approximately $8,000,000 in provisions for uncollectible accounts related to the write off of straight line receivables resulting from the transfer of 15 facilities to new operators within Omega's portfolio. Dan will provide an update on Signature in his prepared remarks. In Q1, Signature paid approximately 75% of its monthly contractual rent. As a result, the receivable balance continued to grow.
As of March 31, we had approximately $25,000,000 in contractual receivables outstanding, which is partially offset by a $9,300,000 letter of credit as well as significant personal guarantees. Based on the resolution Dan will be discussing, we believe at this time Signature's outstanding AR and future rental payments are collectible, and therefore, we will continue to record revenue on an accrual basis of accounting. At March 31, we had 33 facilities valued at approximately $143,000,000 classified as assets held for sale, and we are evaluating over $125,000,000 in potential asset disposition opportunities, which could occur over the next several quarters. Our balance sheet remains strong. For the 3 months ended March 31, our net debt to annualized EBITDA was 5.49 times and our fixed charge coverage ratio was 4.2x.
It's important to note EBITDA in these calculations has no annual revenue related to Orianna and approximately 1 month of revenue related to Daybreak. When adjusting for the likely range of expected rental outcomes for Orianna, including expected cash received from Daybreak in addition to removing revenue related to our Q1 asset sales, our pro form a leverage would be roughly 5 times. I will now turn the call over to Jeff.
Thanks, Bob, and good morning, everyone. Since the February 9 Bipartisan Budget Act, which permanently repealed outpatient therapy caps, Congress has not engaged in any significant legislative activity impacting SNFs. On the regulatory front, on April 27, CMS issued its annual proposed SNF payment rule, which included 3 significant components: the annual market basket Medicare rate increase effective October 1, 2018 the commencement of the value based purchasing discount to those Medicare rates effective the same date, and the announcement of a new Medicare Patient Driven Payment Model or PDPM effective October 1, 2019 to replace the current RUG based system and the previously proposed resident classification system or RCS. Both the proposed rate increase and the proposed PDPM are subject to a 60 day comment period with the final rule expected by August 1. As part of the Bipartisan Budget Act, Congress fixed the October 1, 2018 SNF market basket rate increase at 2.4%, representing an increase of $850,000,000 to the industry.
Without this legislation, the rate increase would have been only 1.9% under the market basket methodology or about $180,000,000 less. As such, this 2.4% rate increase is viewed as a significant positive development for SNFs, especially considering the legislatively mandated increase of only 1% last October 1. Offsetting this rate increase is the value based purchasing or VBP discount that was initiated by the 2014 Protecting Access to Medicare Act. The VBP program was designed to incentivize SNFs to reduce their rates of patient rehospitalization to reduce overall Medicare costs. Effective October 1, 2018, and across the board, 2% rate decrease will be applied to the market basket inflated rates, but each facility will realize a positive adjustment against that decrease based on its comparative performance on rehospitalization metrics.
CMS estimates an average net decrease of 0.6% in Medicare rates from this VBP program, representing a $211,000,000 cut to the industry. So the market basket rate increase, net of the VBP discount, is expected to be 1.8%, representing an increase of $639,000,000 in total or about $45,000 per facility. In its effort to move away from the rug based therapy driven Medicare fee for service payment model, CMS announced 1 year ago its intent to payment system based on patient characteristics or conditions called the RCS. Following an extended comment period and analysis, CMS developed significant revisions to the proposed RCS and changed the name to PDPM with an effective date of October 1, 2019. Although PDPM retains a per diem platform, the current payment scheme dependence on volume of treatments has been changed to a scheme that pays for patient conditions and effectively shifts funding emphasis from therapy services to complex nursing services.
PDPM is generally viewed as a positive development for the SNF industry as payments will be allocated based on treatment of all patient conditions, regulatory pressure against therapy driven payments should be eliminated and total payments to the industry will remain the same as under the current RUG system. In addition, a lengthy period for training and implementation prior to industry's effectiveness in adapting to the change in payment systems. Per diem rates for physical and occupational therapy under PDPM are expected to exceed or match current RUG payments for the 1st 20 days of a patient stay and very gradually taper down thereafter, providing an incentive for SNFs to keep therapy lengths of stay at moderate levels. SNFs will have the opportunity to improve margins by reducing any excessive therapy lengths of stay, serving a broader disease cohort of patients and realizing expense savings estimated by CMS at about $12,000 per facility from processing a significantly reduced number of MDS patient assessments. Also, the ability to use cost effective group and concurrent therapy protocols for up to 25% of therapy treatments will yield additional cost savings.
Finally, CMS is assisting providers with free software both to crosswalk their current RUG payment levels to PDPM payment levels and to submit new MDS patient diagnostic coding to CMS for payment. I will now turn the call over to Dan.
Thanks, Jeff, and good morning, everyone. As of March 31, 2018, Omega had an operating asset portfolio of 963 facilities with approximately 96,000 operating beds. These facilities were spread across 70 third party operators and located within 40 states and the United Kingdom. Trailing 12 month operator EBITDARM and EBITDAR coverage for our core portfolio was effectively flat during the Q4 of 2017 at 1.71 and 1.34 times respectively versus 1.72 and 1.35 times respectively for the trailing 12 month period ended September 30, 2017. Turning to portfolio matters.
As noted on previous calls, Omega is currently in ongoing restructuring efforts with 3 of our larger operators: Orianna, Signature and Preferred Care. As noted in Omega's press release issued on March 7, 2018, Orianna, also known as 4 West Holdings, voluntarily filed Chapter 11 in the U. S. Bankruptcy Court in Dallas, Texas. At that time, Omega entered into a restructuring support agreement or RSA that will form the basis for our Orionis restructuring.
While subject to bankruptcy court approval, the RSA provides for the orderly transition to new operators of 23 of the 42 facilities Oriotta currently leases from Omega. The RSA also provides for the sale of the remaining 19 facilities pursuant to a plan of reorganization to be confirmed by the bankruptcy court. The RSA contemplates that the planned confirmation will occur within 110 days and that such sale will be concluded by the end of 2018. In addition to the RSA and in order to provide liquidity to Orianna during their Chapter 11 proceedings, Omega has provided a commitment for up to $30,000,000 in debtor in possession financing. On day 1 of the bankruptcy, the DIP facility was used to pay in full Orianna's current working capital lender.
Subject to bankruptcy court approval, the DIP facility will also be used to provide Orianna with additional liquidity to fund ongoing business operations. Omega remains confident that our post transition restructuring rent or rent equivalent in the event of asset sales for the Orianna portfolio will be in our previously stated range of $32,000,000 to $38,000,000 Moving on to Signature Healthcare. Omega is pleased to report that effective May 7, 2018, Omega and Signature entered into a restructuring agreement or RA. The RA has a number of material provisions, which include the following noteworthy changes to our current agreement. These provisions include the bifurcation of all Omega facilities into a separate lease silo, which separates virtually all legal obligations on a go forward basis, the deferment of up to $6,400,000 of rent per annum for 3 years, the commitment by Omega to provide capital expenditure funds to be used for general maintenance and capital improvements of our 59 facilities in the amount of approximately $4,500,000 per year for 3 years and a 7 year working capital term loan at 7% for an amount up to $25,000,000 We believe these modifications taken as a whole will provide Signature with the necessary liquidity and cash flow to effectively manage ongoing operations, give management the ability to effectuate their business plan and ensure continued investments in our physical plants.
Simultaneously with the effectiveness of the RA, Signature has effectuated agreements with their other 2 primary landlords, which are similar in principle. Additionally, Signature has also closed on multiple new working capital loans, which bifurcate the loans by lease silo, provide additional liquidity and enhance flexibility and replace its former working capital lender. Finally, Signature has reached settlement agreements with the vast majority of its existing medical malpractice claimants. On a side note, Omega and Signature have enjoyed an excellent longstanding relationship dating back nearly 20 years. While this restructuring is certainly not optimal, it was successful in providing for an out of court resolution while maintaining and incentivizing the existing and well respected management team.
In addition to Orianna and Signature and as discussed on our previous call, one of our other non top 10 operators Preferred Care, a Texas based operator, filed for Chapter 11 bankruptcy and as a result of a $28,000,000 jury award in the state of Kentucky. While Omega has no exposure to preferred care in Kentucky, we currently lease 16 facilities to preferred care in New Mexico, Texas, Arizona and Oklahoma. In November of 2017, Omega and Preferred Care entered into a transition agreement related to all 16 facilities. We have identified operators for each state and separate transition processes are currently underway. Historically, this portfolio has operated at less than one times EBITDAR coverage with trailing 12 month twelvethirty oneseventeen results at close to 0 coverage.
It is currently expected that all 16 facilities will be released to current Omega operators under longer term leases with enhanced credit profiles. These transitions remain subject to bankruptcy court approval and should realistically be concluded by the Q4 of 2018. Turning to new investments. During the Q1 of 2018, Omega completed $30,000,000 of new investments for 4 purchase lease transactions, including 2 UK care homes, 1 skilled nursing facility in Pennsylvania and 1 skilled nurse facility in Virginia. In addition, Omega provided $38,000,000 in CapEx fundings.
During the Q1 of 2018, Omega disposed of 14 facilities and 3 mortgages for approximately $98,000,000 in net proceeds. Subsequently in the Q2 of 2018, Omega disposed of an additional seven facilities for approximately $20,000,000 in net proceeds. The majority of these sales were driven by either poor historical operating performance, obsolete or poor physical plants, deteriorating market conditions and or a weak operator relationship, which Omega sought to exit. We are currently evaluating approximately 51 additional facilities to sell in the coming quarters. While we believe we have identified the majority of dispositions for the near future, Omega will continue to review our portfolio and discuss strategic repositioning with our operators.
Based upon our pending dispositions, we believe dispositions will likely outpace acquisitions for most, if not all, of 2018. I will now turn the call over to Stephen.
Thanks, Dan, and thanks to everyone on the line for joining today. In conjunction with Maplewood Senior Living, we continue work on our planned 215,000 Square Foot ALF Memory Care High Rise at Second Avenue and 93rd Street in Manhattan. The project is expected to cost approximately $250,000,000 and is scheduled to open in the second half of twenty nineteen. In addition, in the Q1 of 2018, we bought out in part for $50,000,000 options on 13 of the 16 Maplewood Senior Living properties. In conjunction with the partial purchase option buyout, we extended the leases on all of the Maplewood properties in addition to pushing out and staggering the dates of the remainder of the purchase options.
We structured the $50,000,000 buyout investment in a manner to not only minimize the tax leakage to Maplewood and its principles, but also to maximize the amount of operator capital to fund future growth. Including the land and CIP of our New York City project at the end of the 4th quarter, Omega Senior Housing Portfolio Totaled $1,500,000,000 of investment in our balance sheet. Anchored by our growing relationship with Maplewood Senior Living and their best in class properties as well as healthcare homes and Gold Care in the United Kingdom. Our overall senior housing investment now comprises 127 assisted living, independent living and memory care assets in the U. S.
And UK. On a standalone basis, this portfolio not only covers its lease obligations at 1.2 two times, but also represents 1 of the larger senior housing portfolios amongst the publicly listed health care REITs. Our ability to successfully continue to grow this important component of our portfolio, as highlighted by our 13 Maplewood facilities and the related pipeline, is predicated on coupling our tenants' operating capabilities with our commitment to having in house design and construction expertise. Through the same capability, we invested $38,000,000 in the Q1 in new construction and strategic reinvestment. $19,500,000 of this investment is predominantly related to 13 active new construction projects with a total budget of approximately $500,000,000 inclusive of Manhattan.
The remaining $18,500,000 of this investment was related to our ongoing portfolio CapEx reinvestment program. This concludes our prepared comments, and we will now open the call for questions.
Yes. Thank you. We will now begin the question and answer session. And this morning's first question comes from Chad Vanacore with Stifel.
Hi, good morning all.
Hi, Chad.
So just touching on Signature Restructuring Plan details, am I right that rent concessions are about 11% of what the prior rent was? And that seems better to me, especially considering that they were only paying about 75% of contractual rents leading up to this. So how does that compare with your expectations? And then how would you expect coverage to improve over time given the funding and CapEx involved?
Chad, your numbers are right. It was about 11 percent discount. It is better and improved over what they have been paying for the last 12 months, which was more of a 25% discount. And then the coverage out the gate is about 1.3x and obviously if Signature meets its budgets on a go forward basis, we'd expect that to slowly go up over time.
And was that 1.3 times, is that cash EBITDA or what is that based on?
That's after the deferred rent, taken into account the deferred rent, correct.
Okay. And then also on Orianna, you mentioned receiving some rent in the Q1 and that was ahead of schedule. We weren't thinking you could get anything until Q4. So does that in any way change your perceptions?
No, it's part Chad, that's part of the restructuring support agreement. It's $1,000,000 of rent a month, but it's not being recorded in income. It's being offset against the balance sheet item. But we're happy to have the cash and we're hoping to accelerate the process with Orianna. We'll know more this week.
We have bankruptcy hearings towards the end of the week.
All right. Thanks,
Taylor. And
then let's see, you mentioned in your prepared remarks, occupancy seems pretty stable. Would you say that that would be, I want to say, throughout your portfolio what you're seeing? Or is that just more on the top end of the portfolio?
It's pretty consistent. We haven't seen occupancy moves in any particular geography. It's been fairly steady across the portfolio. Yes, so and we feel great about that because we know as an industry there's still some pressure on the occupancy side.
All right. Thanks for taking the questions.
Thank you. And the next question comes from Juan Sanabrio with Bank of America.
Hi, this is Kevin on for Juan.
Good morning.
I just had a question on preferred care. On the just setting of those communities, what is the coverage that the new operators will be, I guess, operating those assets at?
Well, so as Dan mentioned, that portfolio continues to struggle with very little cash flow on a consolidated basis, but each state is a little bit different. As an example, Arizona continues to perform well. So we'll achieve a decent rent return there. As we've mentioned in the past, the current preferred care rent is about $11,000,000 Our expectation is we'll end up at $5,000,000 to $7,000,000 with the transition properties. The coverages on a nominal basis based on historical cash flow are very low, but each one of these assets is going to go into a bigger master lease relationship with the expectation of significantly improved cash flow where we think post transition once the operator has stabilized the assets, we'll be looking at 1.3 times plus.
But today based on historical results, it's very less, essentially 0 on a consolidated basis.
Okay. And then secondly on Maplewood, you paid out the $50,000,000 on the end of money purchase options, I guess, to buy out $13,000,000 of the $16,000,000 I guess, what is the potential remaining amount that can be paid out at those purchase options hit?
So the in the money value of Maplewood's purchase option based on marketing effort we did is approximately $150,000,000 So we effectively bought out what was the equivalent of a third of their in the money value. That purchase option value does not include the New York City project, a development in Southport, Connecticut and a development that just opened on Cape Cod. So it's 13 to 16 projects.
Okay, thanks. That's all I have.
Thank you. And the next question comes from Nick Yulico with UBS.
Thanks. I just wanted to go back to Signature and make sure I understood a couple of things here. So you said that you were booking I think you said you were booking 75% of the rent or sorry, they paid 75% of the rent in the Q1. And then did you actually then book 100% of the rent as GAAP revenue?
We did. We booked $16,000,000 of revenue in the Q1 even though they paid 75% of that in cash.
Okay. And I guess, why are you comfortable that I think you said there's a $25,000,000 receivable outstanding for them. Why are you comfortable that you're going to collect that since the ultimate rent here is going down? And on top of that, you're also lending them agreeing to lend them up to $25,000,000 So I mean, how is that situation where that receivable is recoverable?
Yes. I think, Nick, we as Bob mentioned, we look to some of the credit support that exists, which includes nearly a $10,000,000 letter of credit, which is undrawn, personal guarantees, which are very substantial. And our view that at onethree coverage with the prospects for further improvement of that coverage from our perspective, that they're going to put themselves in a position to be able to repay. Now it's going to take a period of time and we'll have to monitor their operating results as we go forward. But based on the credit support and their current coverage and the fact that they'll deal with the liabilities that otherwise would have been hanging against this balance sheet, we feel comfortable today.
That's not to say we won't be monitoring Signature on a go forward basis. And our expectation is they'll continue to perform and we'll continue to record, but that's something that Bob will look at every quarter.
Yes. But I guess I don't quite understand this. I mean you're lending you're agreeing to lend them $25,000,000 which helps them pay off their working capital lenders. How does that help you in terms of your ability to get the rent back?
Well, the lending is against collateral. It's fully collateralized lending that provides them with liquidity. It's not being drawn day 1, but it gives them the flexibility to deal with liquidity issues, which is their problem. It's liquidity to pay the government, to pay the Med Mal claims that have been settled and some other vendor issues that are part of the restructure. So the thing we didn't want to do is have them go off without enough liquidity to manage a very, very large enterprise.
And then how I mean how long are you able to under the accounting rules, I guess book 100% of the rent if you're not collecting all the rent? And you have this judgment of whether or not you think you can collect back rent. How does that work from an accounting standpoint?
Well, we do at Tailorshare. We'll monitor every quarter, Nick, but you're getting into the real details of that, and we'll call you offline on that. But big picture, every quarter, we'll look at the future collectability based on what Dan had already talked about the coverage, what Taylor talked about the anticipated coverage. And again, we go through and look at the flexibility of Signature in its entirety. Okay.
I guess I'm just trying to understand like what's the risk here of some sort of future write off to accounts receivable, some sort of earnings charge related to Signature and as well the scenario of I understand everyone's working on a prepackaged bankruptcy solution. Does this totally avoid them going into bankruptcy? And if they were to go into bankruptcy, does that then trigger an issue with regards to the accounting for revenue similar to how you had to shut off revenue at Orianna?
Well, this
absolutely avoids in court restructuring.
I mean, that's the whole purpose of this restructuring agreement to begin with. We the whole thing was centered around restructures with not only just their 2 primary landlords, but also with none for other constituents. There was a new working capital lender came in and took out the old working capital lender. There was an enormous amount of settlements with MedNow claimants and a number of discussions with some of their vendors. So this took care of a whole host of different issues that Signature faced.
And we think at this point in time, yes, that takes care of any bankruptcy risk that hung over Signature.
And Nick, the second part of your question, absolutely, with any vendor, if there's a bankruptcy that impacts what we can record, absolutely.
Okay, thanks. Just one last question. I mean, if I look at your operating cash flow versus your FAD FAD that you report, pretty big variance, even if you add back the lease inducements in the Q1 with, I guess, that was with Maplewood. It looks like your operating cash flow was $85,000,000 Your FAD was $144,000,000 So there's almost a $60,000,000 difference there. I mean, what else is the difference there besides, what's going on with Signature and a couple of other operators?
And how should we think about you talked about earlier, Taylor, that your I think you said your FAD or FFO was going to be going down in the second quarter. How does your operating cash flow, does it eventually approve? Because right now, it doesn't look like you're covering your dividend with operating cash flow. Instead, it looks like you covered it by borrowing on the line of credit in the Q1.
Well, let me start and
I'll let Taylor jump in, Nick. So we had roughly $53,000,000 of cash flow from operations, but if you add back the 50,000,000 dollars that runs through that number on the Maplewood section. And then we have about $22,000,000 to $23,000,000 of interest payment timing. January July, we paid the majority of our senior unsecured note interest. So the other quarters, it's an accrual base.
When you add those factors plus the $2,000,000 purchase option, we pay down all these other timing related items. I think you get back to that where Bert Keller said the 96% payout.
Yes. I mean the only comment I'd add is, FAD when you're doing on a per share basis, that's $0.69 And that's a solid cash number. Bob can walk you through all the intricacies of the cash flow, but there is no accounting item in there. That's just timing and lease inducement, as Bob mentioned. And I think when we look at it, we're again, it's all timing driven, Nick.
Sales versus redeployment of capital and timing of Orianna. And we know that Orianna is very valuable in terms of cash flow even at the low end of our projected range of rent and rent equivalents of $32,000,000 that's significant. It's $0.04 a share per quarter, which provides a lot more cushion in our payout. So we're comfortable with where we are. But we want to be clear, the timing will affect us quarter to quarter.
And that's just part of what we have to go through this year as we reposition.
Okay. Yes, I
just wanted to go just to be clear though that the $0.69 that you report on Fed is not a totally a cash number, right, because it doesn't include the fact that Signature hasn't paid all their rent and you're booking 100% of that as revenue, right?
FAT is also not a cash flow measure as well, just to be clear.
Okay. I just wanted to be clear on that. Thank you.
Thank you. And the next question comes from Tayo Okusanya with Jefferies.
Hi, yes. Good morning. First of all, the increased provisioning expense in the quarter, the $7,800,000 Could you just talk a little bit about what that was, whether that relates to a particular tenant or a host of tenants?
It was some properties that were transitioned and we had to write off the straight line
receivable write off. Okay.
Okay.
That's helpful.
And then second of all, in your during the quarter, when I take a look at your statement of cash flows, there was some portion of your interest income that was paid in kind. Could you just talk a little bit about that rather than getting payment in cash, why you were were why the interest income was picked?
Yes. So there's roughly $1,900,000 of paid in kind and that's related to the Genesis those Genesis loan out there were a piece of cash and a piece of paid in kind.
Okay. That was that. I don't know what that is now. That's helpful, Genesis. And then, Orion, again, I think there have been some kind of media reports out there about CMS challenging that bankruptcy and the restructuring.
Can you just kind of talk a little bit about what CMS is challenging there, whether it kind of changes, how you kind of think about that, the resolution of that bankruptcy?
Yes. Actually Tayo, what CMS, they're not challenging the bankruptcy at all. It's a good question. What CMS is what
they went into court for was the fact
that at one point there was a motion where the properties would be transitioned without literally without CMS's approval, which is unusual. And all CMS is doing is protecting the government's right to ensure that if there are any clawback obligations that the government has picked. Since the objection that the government made, the motions were modified to make it clear that the government in fact has the right to look back and make sure that there are no obligations owed to the government. The expectation is if there are any, they're modest. There is no there's nothing that anyone's aware of today.
So, it was a little bit of noise that was created procedurally that's been resolved and we don't think that will impact us on a forward basis.
But if you don't think that changes the mind of any potential bidders for those assets?
No, not at all. This is normal in any transition that we engage in, forget about bankruptcy, any transition that Dan is working through, we have to go to the government and make sure there are no obligations that need to be resolved. And frankly, those numbers typically are small. But procedural to government was absolutely correct and we've corrected the motions to conform with their position.
Got you. All right. That's it for me. Thank you.
Thank you. And the next question comes from Daniel Bernstein with Capital One.
Hey, good morning.
Good morning.
I just wanted to go back over and make sure I understood with Signature, when you're resaying the rent to 1.3 coverage, that's 1.3 coverage immediately after the restructuring of the new lease or is that at some stabilized point like 12, 24 months down the road? I just want to understand precisely what that coverage is going to be?
That's threethirty one actual results.
Okay. And is there some kind of rent reset mechanism for you guys to get any of that deferred rent back or some kind of if they meet certain hurdles, they should start paying back some of that AR that's on the books?
So there's both. There is a rent reset in 3 years. There's also a waterfall provision whereby
we're entitled
to a majority of the excess cash flow.
Okay.
Is that like a certain are there certain hurdle that you have to hit like 1.5 coverage or how does that hurdle work?
No, there's certain things that
are sort of taken out as reserved, if you will. But no, it's not it's a pure cash flow with certain reserves built in. And the first thing that really comes out in the excess cash flow waterfall is deferred rent.
Okay. What are the lease bumps that are there, if there are any? Just trying to understand it. How do they some of the rent is somebody going to get some of that rent back in excess bumps or do higher than normal bumps kind of maybe put them at risk to become distressed again? And just trying to understand the risk there.
Yes. So we didn't change the escalators. They remain at 2.5% and
they continue on a go forward basis.
Okay. And then one of your peers is pretty well aware of buying HCR and real estate along with side of hospital system. Have you what are your thoughts about hospital systems, managed care systems owning operating assets? Have you approached any hospital systems to take over assets? Have they approached you?
Just it seems like it changes the dynamic. Certainly from the credit side, it's an improved credit if a hospital system or managed care system is owning operating skilled nursing and assisted living versus the current operator levels?
Yes. I think this
is the first big entree of a hospital system into the facility based business. We've seen them in hospice and home care, kind of the nurse level delivery part of the system. It's interesting. Look, you're asking the right question in terms of monitoring where things head over the next decade, and we may see more of it. We pay attention to it.
Our Board is engaged in discussions about it. So we think it's interesting. It'll be interesting to see how it plays out.
You're not sure it's a trend yet? Not quite a trend yet?
Yes. I'm not sure the street fraction makes
it. Okay. All right. I'll hop off. Thanks a
lot, guys.
Thank you.
Thank you. And as there are no more questions at the present time, I would like to return the call to Taylor Pickett for any closing comments.
Thank you everybody for joining our call today. Bob and the team will be available for any follow ups that you may have.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.