Good morning, welcome to the Omega Healthcare Q1 2018 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I'd now like to turn the conference over to Michele Reber. Ms. Reber, please go ahead.
Thank you, good morning. With me today are Omega's CEO, Taylor Pickett, CFO, Bob Stephenson, 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-K, 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, Michele. Good morning, thank you for joining our first quarter 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 first quarter of 2018, we disposed of $98 million in assets, including assets held for sale, we're evaluating over $250 million in additional asset sales in 2018. The revenue reduction related to our $98 million in first quarter assets disposed is $10 million, while the trailing 12-month cash flow on these assets was $4 million. 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 rent 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 FFO guidance 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-$3.06 per share, while our FAD guidance remains $2.64-$2.74 per share.
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 second quarter adjusted FFO and FAD results will dip from the first quarter results and then rebound in the back half of 2018. 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. Second, labor costs continue to put near-term pressure on operator cash flows and coverage. We expect that this trend will continue throughout 2018. Third, CMS's proposed rulemaking should be favorable over the next several years. Jeff will provide more detail, but we believe the proposed October 1st Medicare rate increase and the new proposed patient-driven payment model are both positive for our operators. Fourth, Omega facility occupancy has remained steady during the first two 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 best benefit 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 million, or $0.71 per share for the quarter, as compared to $181 million or $0.88 per share for the first quarter of 2017. Our adjusted FFO was $161 million or $0.78 per share for the quarter and excludes the impact of approximately $7.8 million in provisions for uncollectible accounts, a $2 million purchase option buyout, $581,000 related to unrealized gains on Genesis common stock warrants, and $4.1 million of non-cash stock-based compensation expense. Operating revenue for the quarter was approximately $220 million versus $232 million for the first quarter of 2017.
The decrease was primarily a result of $16 million of reduced revenue as we placed Orianna on a cash basis effective July 1st, 2017, and did not record any lease revenue in Q1 2018, and $4 million 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 a combination of over $450 million of new investments completed and capital improvements made to our facilities since the first quarter of 2017, as well as lease amendments made during that same time period. The $220 million of revenue for the quarter includes $17 million of non-cash revenue, $16 million of Signature revenue, $4.1 million of Daybreak revenue, $1.5 million of Preferred Care revenue, and as I mentioned earlier, no revenue related to the Orianna leased facilities.
Our G&A expense was $12.4 million for the quarter, which is $3.6 million above our first quarter 2017 G&A expense. The increase was primarily a result of a $2 million buyout of an in-the-money purchase option and $1.5 million in increased legal expenses related to operator workouts and restructurings. When eliminating the $2 million purchase option buyout, our G&A expense was $10.4 million and aligned with our 2018 first quarter projected G&A expense of approximately $9.5 million-$10.5 million. For modeling purposes, we project our 2018 second quarter G&A run rate to be approximately $9.5 million-$10.5 million, resulting from legal expenses related to operator workouts, transitions, and divestitures before returning to the traditional $8 million-$9 million quarterly run rate sometime in the fourth quarter. In addition, we expect our 2018 quarterly non-cash stock-based compensation expense to be approximately $4 million, consistent with the first quarter of 2018.
Interest expense for the quarter, when excluding non-cash deferred financing costs, was $48 million versus $45 million for the same period in 2017. The $3 million increase in interest expense resulted from higher debt balances associated with the financings related to our investments completed since the first quarter of 2017 and a higher blended cost of debt, primarily a result of issuing $700 million of new bonds in the second quarter of 2017, and in general, overall higher LIBOR rates. In the first quarter, we sold 14 facilities for approximately $75 million in net cash proceeds, recognizing a gain of approximately $18 million. We also received $24 million for final payment on three mortgage notes. In the first quarter, we recorded slightly over $1.8 million in revenue related to these dispositions.
During the quarter, we recorded approximately $5 million in real estate impairments to reduce the net book value on 17 facilities to their estimated fair values or expected selling prices. We recorded approximately $8 million 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 31st, we had approximately $25 million in contractual receivables outstanding, which is partially offset by a $9.3 million 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. Therefore, we will continue to record revenue on an accrual basis of accounting. At March 31st, we had 33 facilities valued at approximately $143 million classified as assets held for sale. We are evaluating over $125 million in potential asset disposition opportunities which could occur over the next several quarters. Our balance sheet remains strong. For the three months ended March 31st, our net debt to annualized EBITDA was 5.49 times. Our fixed charge coverage ratio was 4.2 times. It's important to note, EBITDA in these calculations has no annual revenue related to Orianna and approximately one 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 sale, our pro forma leverage would be roughly five times. I will now turn the call over to Jeff.
Thanks, Bob, and good morning, everyone. Since the February ninth 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 27th, CMS issued its annual proposed SNF payment rule, which included three significant components. The annual market basket Medicare rate increase, effective October one, 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 one, 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 a final rule expected by August one.
As part of the Bipartisan Budget Act, Congress fixed the October one, 2018, SNF market basket rate increase at 2.4%, representing an increase of $850 million to the industry. Without this legislation, the rate increase would have been only 1.9% under the market basket methodology, or about $180 million 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 one. 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 one, 2018, an across-the-board 2% rate decrease will be applied to the market basket-inflated rates, 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 million cut to the industry. The market basket rate increase, net of the VBP discount, is expected to be 1.8%, representing an increase of $639 million 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 one year ago its intent to pursue a 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 one, 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, 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 the October one, 2019, transition date should maximize the 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 first 20 days of a patient's 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 31st, 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 U.K. Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio was effectively flat during the fourth quarter 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 30th, 2017. Turning to portfolio matters. As noted on previous calls, Omega is currently in ongoing restructuring efforts with three of our larger operators, Orianna, Signature, and Preferred Care. As noted in Omega's press release issued on March 7th, 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 Orianna's restructuring. While subject to bankruptcy court approval, the RSA provides for the orderly transition to new operators of 23 of the 42 facilities Orianna 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 plan 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 million in debtor-in-possession financing. On day one 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 million-$38 million. Moving on to Signature HealthCARE. Omega is pleased to report that effective May 7th, 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 $6.4 million of rent per annum for three 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 $4.5 million per year for three years, and a seven-year working capital term loan at 7% for an amount up to $25 million. 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 two 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 enhanced 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 long-standing 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 as a result of a $28 million 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 EBITDA coverage, with trailing 12 months 12/31/2017 results at close to zero coverage. It is currently expected that all 16 facilities will be re-leased 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 fourth quarter of 2018. Turning to new investments.
During the first quarter of 2018, Omega completed $30 million of new investments for four purchase lease transactions, including two U.K. care homes, one skilled nursing facility in Pennsylvania, and one skilled nursing facility in Virginia. In addition, Omega provided $38 million in CapEx fundings. During the first quarter of 2018, Omega disposed of 14 facilities and three mortgages for approximately $98 million in net proceeds. Subsequently, in the second quarter of 2018, Omega disposed of an additional seven facilities for approximately $20 million in net proceeds. The majority of these sales were driven by either poor historical operating performance, obsolete or poor physical plans, 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 Steven.
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 sq ft ALF memory care high rise at 2nd Avenue and 93rd Street in Manhattan. The project is expected to cost approximately $250 million and is scheduled to open in the second half of 2019. In addition, in the first quarter of 2018, we bought out, in part, for $50 million, the in-the-money purchase 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 million buyout investment in a manner to not only minimize the tax leakage to Maplewood and its principals, 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 fourth quarter, Omega's senior housing portfolio totaled $1.5 billion 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 U.K., our overall senior housing investment now comprises 127 assisted living, independent living, and memory care assets in the U.S. and U.K. On a standalone basis, this portfolio not only covers its lease obligations at 1.22 times, but also represents one of the larger senior housing portfolios amongst the publicly listed healthcare REITs.
Our ability to successfully continue to grow this important component of our portfolio is 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 this same capability, we invested $38 million in the first quarter in new construction and strategic reinvestment. $19.5 million of this investment is predominantly related to 13 active new construction projects with a total budget of approximately $500 million, inclusive of Manhattan. The remaining $18.5 million of this investment was related to our ongoing portfolio CapEx reinvestment program. This concludes our prepared comments, we will now open the call for questions.
Yes. Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble the roster. This morning's first question comes from Chad Vanacore with Stifel.
Hi, good morning, all.
Chad.
Just touching on Signature restructuring plan details, am I right that rent concessions are about 11% of what the prior rent was? That seems better to me, especially considering that they were only paying about 75% of contractual rents leading up to this. How does that compare with your expectations? How would you expect coverage to improve over time, given the funding and CapEx involved?
Chad, your numbers are right. It was about 11% discount. It is better and improved over what they had been paying for the last 12 months, which was more of a 25% discount. The coverage out the gate is about a 1.3 times, obviously if Signature meets its budgets on a go-forward basis, we'd expect that to slowly go up over time.
Dan, was that 1.3 times, is that cash EBITDA, or what is that based off?
That's after the deferred rent, taking into account the deferred rent. Correct.
Okay. Also on Orianna, you mentioned receiving some rent in the first quarter, and that was ahead of schedule. We weren't thinking you'd get anything till the fourth quarter. Does that in any way change your perceptions?
No. Chad, that's part of the restructuring support agreement. It's $1 million of rent a month, but it's not being recorded in income. It's being offset against the balance sheet item. 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. 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. Yep. 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. The next question comes from Juan Sanabria with Bank of America.
Hi, this is Kevin on for Juan.
Morning.
Morning. I just had a question on Preferred Care. On the repositioning of those communities, what is the coverage that the new operators will be operating those assets at?
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's about $11 million. Our expectation is we'll end up at $5 million-$7 million with the transition properties. The coverages on a nominal basis based on historical cash flow are very low. 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. Today, based on historical results, it's very less, essentially zero on a consolidated basis.
Secondly, on Maplewood, you paid out the $50 million on the in the money purchase options, I guess to buy out 13 of the 16. I guess, what is the potential remaining amount that could be paid out as those purchase options hit?
The in the money value of Maplewood's purchase option, based on marketing effort we did, is approximately $150 million. 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, the development in Southport, Connecticut, and the development that just opened on Cape Cod. It's 13 of the 16 projects.
Okay, thanks. That's all I have.
Thank you. The next question comes from Nick Holowko with UBS.
Thanks. I just wanted to go back to Signature and make sure I understood a couple of things here. 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 first quarter. Then did you actually then book 100% of the rent as GAAP revenue?
We did. We booked $16 million of revenue in the first quarter, even though they paid 75% of that in cash.
Okay. I guess, why are you comfortable that, I think you said there's a $25 million 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 agreeing to lend them up to $25 million. How is that situation where that receivable is recoverable?
I think, Nick, as Bob mentioned, we look to some of the credit support that exists, which includes nearly a $10 million letter of credit, which is undrawn. Personal guarantees, which are very substantial, and our view that at 1-3 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. It's going to take a period of time, we'll have to monitor their operating results as we go forward. Based on the credit support and their current coverage, and the fact that they'll deal with the liabilities that otherwise would've 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.
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.
I guess I don't quite understand this. You're agreeing to lend them $25 million, 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 one, 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. The thing we didn't want to do is have them go off without enough liquidity to manage a very, very large enterprise.
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 the back rent. How does that work from an accounting standpoint?
Well, as Taylor Pickett said, we'll monitor every quarter, Nick Holowko, but you're getting into the real details of that, and we'll call you offline on that. Big picture, every quarter, we'll look at the future collectability based on what Daniel J. Booth has already talked about for coverage, what Taylor Pickett talked about for anticipated coverage. Again, we go through and look at the collectability of Signature HealthCARE in its entirety.
Okay. I guess I'm just trying to understand what's the risk here of some sort of future write-off to accounts receivable, some sort of earnings charge related to Signature HealthCARE and as well the scenario of, I understand everyone's working on a prepackaged bankruptcy solution. Does this totally avoid them going into bankruptcy? 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?
Absolutely avoids an in-court restructuring. That's the whole purpose of this restructuring agreement to begin with. The whole thing was centered around restructures with not only just their two primary landlords, but also with a number of 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 med mal claimants, a number of discussions with some of their vendors. This took care of a whole host of different issues that Signature HealthCARE faced. We think at this point in time, yeah, that takes care of any bankruptcy risk that hung over Signature HealthCARE.
Nick Holowko, 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. If I look at your operating cash flow versus your FAD, F-A-D, that you report, pretty big variance. Even if you add back the lease inducements, in the first quarter with, I guess that was with Maplewood Senior Living, still looks like your operating cash flow was $85 million, your FAD was $144 million. There's almost a $60 million difference there. What else is the difference there besides what's going on with Signature HealthCARE and a couple other operators? How should we think about, you talked about earlier, Taylor, I think you said your FAD or FFO is going to be going down in the second quarter. How does your operating cash flow, does it eventually improve? 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 first quarter.
Well, let me start and I'll let Taylor jump in, Nick. We had roughly $53 million of cash flow from operations. If you add back the $50 million that runs through that number on the Maplewood Senior Living section, and then we have about $22 million-$23 million of interest payment timing. January and July, we pay the majority of our senior unsecured note interest. The other quarters is an accrual base. When you add those factors, plus the $2 million purchase option we paid out, all these other timing-related items, I think you get back to where Taylor said the 96% payout.
Yeah, maybe the only comment I'd add is FAD, when you're doing it on a per share basis, about $0.69, and that's a solid cash number. Bob can walk you through all the intricacies of the cash flow, there's no accounting item in there. That's just timing and lease inducement, as Bob mentioned. I think when we look at it, again, it's all timing driven, Nick. Sales versus redeployment of capital and timing of Orianna Health Systems. We know that Orianna Health Systems's very valuable in terms of cash flow, even at the low end of our projected range of rent or rent equivalents of $32 million. That's significant. That's $0.04 a share per quarter, which provides a lot more cushion in our payout. We're comfortable with where we are. We want to be clear that timing will affect us quarter to quarter.
That's just part of what we have to go through this year as we reposition.
Okay. Yeah, I just want to just be clear, though, that the $0.69 that you report on FAD 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?
FAD 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. The next question comes from Tayo Okusanya with Jefferies.
Yes. Good morning. First of all, the increased provisioning expense in the quarter, the $7.8 million, 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 receivables.
Oh, that's just a straight-line receivable write-off. Okay. That's helpful. Write-off. Then second of all, during the quarter, when I took 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 the interest income was PIK'd?
Yeah. There's roughly $1.9 million of paid in kind, and that's related to those Genesis loan out there where a piece is cash and a piece is paid in kind.
Okay. Yeah. That was that. Okay. I know what that is now. That's helpful. Genesis. Then Orianna, again, I think there's 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 the resolution of that bankruptcy?
Yeah. Actually, Tayo, they're not challenging the bankruptcy at all. It's a good question. What they went into court for was the fact that at one point there was a motion where the properties would be transitioned literally without CMS's approval, which is unusual. All CMS is doing is protecting the government's right to ensure that if there are any clawback obligations that the government has PIK. 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's nothing that anyone's aware of today. It was a little bit of noise that was created procedurally that's been resolved, and we don't think that'll impact us on a forward basis.
Like, 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's working through, we have to go to the government and make sure there are no obligations that need to be resolved. Frankly, those numbers typically are small. The government was absolutely correct, and we've corrected the motions to conform with their position.
Okay. All right. That's it from me. Thank you.
Thank you. The next question comes from Daniel Bernstein with Capital One.
Hey, good morning.
Great.
Hey, I just wanted to go back over and make sure I understood with Signature, when you're resetting the rent to one three coverage, that's one three 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-
Yeah, that's-
-is going to be.
That's 331 actual results.
Is there some kind of rent reset mechanism for you guys to get any of that deferred rent back? Or some kind of a, if they meet certain hurdles, they start paying back some of that AR that's on the books?
There's both. There is a rent reset in three years. There's also a waterfall provision whereby we're entitled to a majority of the excess cash flow.
Okay. Are there certain hurdle that you have to hit, like 1.5x coverage, or how does that hurdle work?
No, there's certain things that are sort of taken out, reserved, if you will. No, it's a pure cash flow with certain reserves built in. 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?
There shouldn't be.
Just trying to understand. Is somebody going to get some of that rent back in an 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 risks there.
Yeah. We didn't change the escalators. They remain at 2.5% and they continue on a go forward basis.
Okay. One of your peers is pretty well aware of buying HCR and real estate, alongside a hospital system. 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? 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 models.
Yeah, I think this is the first big entree of a hospital system into the facility-based business. We've seen them, 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, we may see more of it. We pay attention to it. Our board's engaged in discussions about it. 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?
Yeah. I'm not sure this transaction makes it.
Okay. All right. I'll hop off. Thanks a lot, guys.
Thank you.
Thank you. Those are all our 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 is now concluded. Thank you for attending today's presentation. You may disconnect.