Healthcare REIT Experiment – How Does DOC Make Me Money?

Sexy building. But does it have enough personality for a long term relationship?

One thing Max OOP has picked up over the years is that buying stocks based on sex appeal usually isn’t a good idea. If you are investing your hard-earned dollars into a company, it is a really good idea to go on a date or two to get an understanding of how that company uses your dollars to put even more dollars back in your pocket. Take the building above; it’s nice to look at, but would you buy it if it was located in the middle of the Nevada desert with no one renting it? Probably not.

Now, historically, Max OOP would only buy the entire stock market so I didn’t have to worry about little details like this. A boring index fund strategy that will likely remain the core of my portfolio forever. It also isn’t very entertaining and there isn’t much more for me to learn there. That said, it is a pretty solid strategy for the wealth accumulation phase.

In fact, when I was front-loading my entire salary into my 403(b) earlier this year, I was dropping the entire 403(b) contribution into a fund (VIIIX) that tracks the S&P 500. In other words, I was taking an ownership in 500 of the best companies on the planet. This is the closest I could get to buying the total (entire) stock market in that particular account. Oh, and my paychecks came out to about $12.00.

But I also knew that the S&P 500 looked pretty expensive compared to historical averages. Even now, the Shiller price to earning ratio for the S&P 500 is sitting at 29.10 at the time of writing this. The historical average is 16.63 and the median is 15.72. In other words, the price I paid for the entire S&P 500 was about double the historical average. Does that make Max 00P a sucker? Not necessarily, there is a lot that goes into the price to earnings ratio. But it is definitely something to think about.

Even though those three red dots make Max OOP nervous, I stay the course.

I also have no idea what the underlying investment criteria/strategy is for the entire stock market. I only know all the companies in the stock market are trying to get rich, and that is probably all Max OOP really needs to worry about.

But Physicians Realty Trust (DOC) on the other hand, has clear direction when it comes to their investment criteria and strategy. We already learned that DOC is a REIT that generates revenue by renting medical office buildings to tenants. But here at Max Out of Pocket, we always want to learn more.

DOC’s Investment Criteria

Max OOP likes to consider these guiding principals for DOC’s future real estate investments. If we start to see investments deviate from these principals, we need to make sure we understand why.

Physicians Realty Trust’s (DOC) investment criteria is short, sweet, and even Max OOP can understand it. This is one of the reason’s Max OOP selected this particular REIT. We aren’t talking about the recipe for Coca-Cola here; it is outlined right on their public webpage dated 8/27/2018.

Physician Realty Trust Investment Criteria

This is how it opens:

At DOC, we invest in stabilized high-quality healthcare properties leased to physicians, hospitals, and healthcare delivery systems across the continuum of care and necessary for the direct delivery of clinical care. We invest in properties where we can develop strategic alliances with financially strong healthcare delivery systems and providers that offer need-based healthcare services in sustainable and growing markets.”

Max OOP likes high quality healthcare properties leased to financially strong healthcare delivery systems in growing markets. I think their strategic alliance and relationship approach got us out of trouble when we had tenant issues earlier this year.

I also like healthcare delivery systems that need my property for the direct delivery of clinical care. Calling out direct delivery of care in this opening tells me DOC is incorporating recent competition from the telehealth industry into their strategy. Telehealth is all the buzz these days, but you can’t set a broken arm through a computer screen; it needs to be directly delivered to a patient in a medical office.

They go onto to say that they prioritize their investments into medical offices, outpatient treatment & diagnostics, physician group practices (i.e. more medical offices), and ambulatory surgical centers. Max OOP’s career has been spent mostly working for hospitals, and I happen to know payers (including Medicare) are doing everything they can to keep patients out of the expensive inpatient hospital setting. They want healthcare handled in a lower cost outpatient setting.

But What Kind Of Buildings Do We Buy?

The investment criteria further defines what criteria the actual healthcare facility needs to meet before they invest my hard-earned money into it. In short, the buildings are young, healthy, and live in energetic areas.

This comes directly from Physicians Realty Trust’s Investment Criteria:

  • Tenancy
    • Stabilized occupancy greater than 90%
    • Affiliated with a market-leading health system or a large multi-specialty physician group
    • Financially strong; credit tenancy
    • Average remaining lease term of 8+ years
    • Preference towards specialized uses (e.g. ASC, HOPD, CON)
  • Physical Asset
    • Larger than 50,000 square feet
    • Less than 15 years old
    • Class A
  • Market
    • Top 100 MSA
    • Market with population and income growth
    • Located in a medical micro-market; close proximity to other MOBs, hospitals
    • Growing outpatient market; particularly if off-campus

From Max OOP’s seat on my comfortable couch, these are high-quality physical assets, with higher quality tenants, in high-quality markets. They prefer buildings with specialized uses which is in line with the direct delivery of clinical care. Our buildings are younger. I have worked in dated hospitals with dated buildings around them and I will tell you, the patients notice. They want to see their provider in newer facilities, presumably less than 15 years old. Perception matters when it comes to food and health.

Development – Knowing What You Don’t Do

Lastly, DOC outlines that they will not perform the actual development of a property. That said, they do reserve the right to invest in development opportunities that are sponsored by healthcare delivery systems, are 75% pre-leased, and meet their general criteria above.

I am glad DOC knows what they do well and do not stray too far from their core business model. Interestingly enough, Max OOP is straying from what he does well (total market indexing) and dabbling a bit in Healthcare REITS. Oh well.

Northside Medical Midtown

Now, let’s take a quick look at the Northside Medical Midtown building pictured above which is located in the heart of Atlanta’s midtown area. This building is over 160,000 square feet, brand new, and a Class A development. It was completed through a strategic partnership between Physicians Realty Trust and Northside Hospital. This building is used for perinatal medicine, colon and rectal care, primary care, physical therapy, imaging, oncology, urgent care, OBGYN, plastic surgery, gastroenterology, and ophthalmology. I’m not sure we can get more diversified than that and these are all specialties that require the direct delivery of care. The building is located in one of the fastest growing sub markets of the region with 15,000 residents and 65,000 daytime workers. Max OOP thinks this is very much in line with the investment criteria outlined above.

Max OOP’s Take

Not only are these assets sexy, they have a solid personality that will survive a long-term relationship.

Having guiding investment principals established keeps things grounded. We will easily be able to see if DOC starts to deviate from these principals as they secure additional properties. That said, strategy and business can change overtime, we just need to make sure we understand why.

I think we all know by now Max OOP is trying to build some meaningful passive income with this investment experiment. Passive income that will be around for several years that will even follow me into early retirement. It may even come in handy as I battle rising healthcare expenses. The qualitative investment criteria I see above leads me to believe the 5% yield is sustainable and hopefully we will also see some capital appreciation over the next few years.

Since Mrs. Max OOP teaches AP statistics, I verified yesterday when we were hiking that I was using “qualitative” correctly here. She agreed, but she said “categorical” would also work. Max OOP needs to be careful when he busts out big words like this.

Since Friday was payday, Max OOP punched a few keys on my ten-key, clicked a mouse, and added another 50 shares to our DOC empire. And speaking of capital appreciation, my readers must be driving up the stock price because it was a bit more expensive this week. Hence, I only bought 50 shares, but let’s keep the good times rolling.

$19.00 a share! Getting expensive.

This puts my total ownership in DOC up to 1,137 shares valued at $21,614 at the time of writing this. I am projected to net over a $1,000 in annual ‘rental’ dividends (as I like to call them) over the next year.

Just as you wouldn’t marry someone because Max OOP told you to, I wouldn’t invest in a company just because Max OOP is doing it. You need to do your own research and this is NOT a recomendation to buy DOC. You are responsible for your own investing decisions.

Max Out of Pocket = $4.95 Fidelity transaction fee to grow the portfolio by 50 shares.

Do you struggle to stay the course in total market index fund investing?

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