Healthcare REITs: A Case For Diversification

Max has gotten a bit reckless with the medical office building REIT portfolio. This hobby of mine has grown from a position of just a few thousand dollars to over $35,000. It is projected to put about $1,823 in dividends back in my pocket over the next 12 months. But the lack of diversification can no longer be ignored. My mom always told me not to put all my medical office buildings eggs into one basket. It’s probably time I start listening to her advice.

The problem is all this growth has been surrounding purchases of one REIT: Physicians Realty Trust (DOC). As much as I like DOC, owning just one healthcare REIT has exposed this little chunk of my portfolio to unnecessary risk. With a few minor tweaks, we can slowly start mitigating some of this risk.

Since I got another $455.86 in dividends yesterday from DOC, perhaps now is a good time to start thinking about how we can use that money to employ a diversification strategy.   

This happens every quarter. Did I mention I love passive income?

In other words, we are finally going to start tightening things up around here at Max Out of Pocket. 

If you need to catch up, you can find all my notes on this project here

Diversification

The technical definition of diversification, according to Vanguard, is:

The strategy of investing in different asset classes and among the securities of many issuers in an attempt to lower overall investment risk.

Per Vanguard

Yikes, I am breaking both ends of the definition. My medical office building portfolio owns one asset class and one security made by one issuer. What a sucker.

On the surface, Physicians Realty Trust is technically pretty diversified. Our portfolio of medical office buildings is spread out over 30 states. No metropolitan statistical area (MSA) represents over 8% of leasable square footage. No single tenant is responsible for more than 6% of the annual base rental revenue coming into DOC. You can review a lot of this information on their September 2019 investor presentation slides.

Here is a nice map showing the location of all the medical office buildings (and a few hospitals) I own through DOC.

Map of all the medical office buildings the showing the geographical diversification of Physicians Realty Trust (DOC) owns.
My collection of medical office buildings. All owned through Physicians Realty Trust (DOC).

But at the end of the day, this is still only one company. By owning just one REIT stock in my medical office building portfolio, I am exposing myself to risks that are unique to this company. This is also known as “specific risk”.  

This is one reason so many people in the FI/RE (Financial Independence / Retire Early) community purchase all the stocks in the stock market using a total stock market index fund. Their strategy eliminates specific risk by diversifying into thousands of companies across the entire stock market. I personally follow the same strategy for the majority of my overall investment portfolio.  

Why I Started With One REIT

There was actually a method to the madness of selecting only one medical office building REIT stock. I wanted to completely break it down into bite-sized chunks. It made everything easier to digest and understand since I was far from an expert in healthcare REITs. I was able to evaluate specifically how Physicians Realty Trust makes me money and also get into quantitative metrics that I could monitor along the way. We learned a bit about conference calls, passive income, and dollar-cost averaging on my lunch break. Finally, we also found out where I am keeping all these medical office buildings to help me plan for taxes.

Pulling in other healthcare REITS into the mix prematurely would have been too much information to digest and could have potentially bogged down the experiment. 

But as this little portfolio has matured and set goals, things change. 

More On Specific Risk

Although DOC’s portfolio is relatively diversified throughout the United States, there is still risk specific and unique to this company. I like to use unexpected erratic behavior by a CEO as an example, but there are plenty of other examples.

Here are just a few of my favorite kinds of risk.

  • Operational risks are the everyday risk of running a company. Think of them as unforeseen events, negligence, or straight-up fraud within the company. Even if I was the CEO of Physicians Realty Trust, I would have no way of knowing everything that is going on in the day-to-day operations. An IT data breach releasing customer information in error or an accounting mistake specific to the company could quickly derail financial performance. We actually saw some operational risk earlier this year when we had a tenant down in Texas stop paying rent.
  • Strategic risks are the possibility of breakdowns in strategy. We already know how DOC makes me money, but what if that strategy was wrong? Let’s say Physicians Realty Trust was buying up malls instead of medical office buildings so they could rent those buildings to retail companies. Since so much is being handled online, there seems to be a correction going on in the mall market. That strategy could be suspect in 2019. We are already seeing some of this in the healthcare space with a push to telehealth. Will Walmart, CVS, or Amazon cut down on the need for medical office buildings? Maybe.      
  • Legal and regulatory risks can come from the government, customers, or even competing firms. If the Texas Medicaid program was to wake up one day and decide to cut reimbursement for services provided in a medical office building, we might have a problem. Physicians Realty Trust owns a lot of buildings in Texas, so this risk might adversely impact our financial performance.

So how do we help manage risk specific to Physicians Realty Trust? We buy another healthcare REIT.   

Global Medical REIT Inc (GMRE)

The goal of this blog is usually educational in nature. Making money is great, but we already have enough money to fund a pretty fancy lifestyle. So when I look to pull another REIT into the equation, the goal is twofold:

  • Give us another company in the industry to compare some of our Physicians Realty Trust metrics (like FFO and Revenue) so we can grow our understanding of healthcare REITs.  
  • Provide some light diversification to protect the Max Out of Pocket Healthcare portfolio from the specific risk associated with Physicians Realty Trust. 

So in an effort to accomplish the goals listed above, I have expanded the Max Out of Pocket healthcare REIT portfolio into another company. On October 11th (payday), I purchased 110 shares of Global Medical REIT (GMRE) for $1,269.40.  These shares will generate about $88 in passive income over the next year.

Healthcare REIT GMRE

We won’t review too much of the company specs on this post, but it is a smaller company that is yielding an annual dividend of about 6.75% at the time of writing this. After sitting in on a few conference calls with the company, I like what I am hearing. We will go into much more detail on this investment in a later post.

As I mentioned above, yesterday I received $455.86 in passive dividend income from Physicians Realty Trust. I will use this income to buy about 40 more shares of GMRE on payday next week. See how that works? I am using the income from one healthcare REIT to buy into another healthcare REIT. Let the compounding growth process begin. These 40 shares alone will generate about $32 in passive income over the next year.   

Final Thoughts

The time has come to start cheating on Physicians Realty Trust (DOC) in the name of diversification.

I’ve said it before, the Max Out of Pocket REIT portfolio is just a subset of my entire investment portfolio. So it isn’t like I have been investing my entire life savings into Physicians Realty Trust. That would be a recipe for disaster and a bit reckless. But at this point, it is worth implementing a diversification strategy. I am still working full time, so I don’t have the bandwidth to follow several stocks, but I think I can manage two. Here is a look at where we are with the portfolio.

GMRE now makes up 4% of the Max Out of Pocket medical office building portfolio.

My current plan is to grow my medical office building REIT portfolio to about $50,000 and have enough passive dividend income to cover the majority of my max out-of-pocket healthcare costs in any given year. But I can no longer justify having only one company in the portfolio. There is just too much specific risk that comes along with that. So at this point, I will plan on holding my position with Physicians Realty Trust (DOC) at 1,982 shares for the rest of 2019 and start to build up the portfolio in other areas. This growth will start with Global Medical REIT Inc (GMRE).  

Do you own any medical office buildings?

Usual disclaimer: I am not an expert in REITs and this is not a recommendation to buy either of these stocks or any other stocks. You are responsible for your own investing decisions.

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