In addition, remember that Welltower is very selective about what properties it owns, meaning its UK assets are generally much newer, in higher demand, and command higher rents.
The second specific risk is the relatively high concentration of cash flow Welltower derives from its largest partners, such as Genesis Healthcare. Don’t get me wrong, I’m not saying that getting up to 14.7% of NOI from a single healthcare provider means the dividend is at risk.
However, be aware that the industries in which Welltower’s tenants operate are low margin, and this means that some companies, such as Genesis, can occasionally fall on hard times.
For example, the Department of Justice recently fined the company $52.7 million over improper billing practices. In addition, Genesis’ high debt load means that it faces steep refinancing costs, which, should interest rates rise, might threaten its ability to service its liabilities.
However, Welltower and Omega Healthcare Investors Inc (NYSE:OHI) recently did a joint refinancing of some of Genesis’ debt giving it some breathing room, and buying time to get its financial house in order.
The reason I point out this risk is tied into two additional risks. First, understand that, while most of Welltower’s cash flow base is derived from private payers, 75.3% of the funding to its long-term/post-acute care tenants is from Medicare and Medicaid. This means there is always the risk that changes in government healthcare policy will hit Welltower’s partners hard, as occurred in 2002.
Specifically, in 1997 Congress, in an attempt to control rising medical costs, changed its pay structure for Medicare to a fixed-fee reimbursement system. To give the various medical industries, such as skilled nursing facilities, or SNFs, time to adjust Congress added a five year add on payment.
However, by 2002 when the payment expired, SNF operators had been seeing their margins compressed by years of ongoing cost increases. So when the payment expired it effectively resulted in a massive decrease in reimbursement that brought the SNF industry to the brink of ruin. Many operators declared bankruptcy.
Investors can read more about the events that happened in 2002 in my analysis of Omega Healthcare here (read the dividend safety section).
The government’s changes in healthcare reimbursement decimated the largest SNF chains, and now again the government is trying to head off a tsunami of rising medical costs by changing the way it approaches medical reimbursement.
Now understand that the policies that the Department of Health and Human Services, or HHS, is proposing are not anywhere near as potentially destructive as what occurred in 2002.
However, the government is trying to shift spending away from a fixed-cost model, and more towards one where hospitals and healthcare workers are compensated based on patient outcome.
As seen below, the mix of traditional fee-for-service Medicare enrollment is projected to shrink, and the proportion of value-based purchasing is expected to increase meaningfully through 2020.
Source: Omega Healthcare Investor Presentation
