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Max OOP considers himself a triple AAA+ Platinum investment grade tenant. This is not a technical term, but a valid one. It’s because I have a 820+ credit score, I regularly pay my rent weeks early, and in over two years of renting I have never called my landlord for any minor issues with the house. I even rake the snow off the roof in the winter, no questions asked. I enjoy a little hard work from time to time. When the time comes for us to leave and move on with life, we will clean up the place and leave it better than when we found it. I am even known to stick my December rent check in with a Christmas card. In other words, I am not your Average Joe Max when it comes to my tenant profile or my ability to consistently pay rent.
Now just like everything else in Max OOP’s life, there is some strategy to all of this. We are currently living in a beautiful mountain town where the housing rental market is greatly distorted by vacation rentals. From our spot, we can walk to amazing mountain hiking trails and take a 3 minute drive down to the ski slopes. Live where you play, right? I used to have concerns there was risk our rental house could be pulled into the Airbnb machine and rented out weekly for the same price I pay monthly. But work comes with Airbnb rentals, and my theory is if my landlord sees us as solid passive monthly income stream with practically no risk, then they won’t boot us out. Also, I haven’t seen a rent increase in over two years of renting. Take that inflation.
When you own rental property it is usually a good idea to have at least some idea of who you are renting your assets to. If I owned a traditional rental property, I would want to know a little bit about my tenants to help me manage my risk and expectations of investment performance. Since we have seen a few tenant issues pop up with Physicians Realty Trust (DOC), I thought it would be a good time to take a peek at some of our tenants.
How Do We Rank Tenants Living In My REIT?
Since Physicians Realty Trust (DOC) has over 250 buildings in our portfolio, there is no way we could know everything there is to know about each tenant. But looking to our largest tenants is a great place to start.
Unfortunately, companies renting property from a REIT don’t have a credit score. Their creditworthiness is evaluated by credit rating agencies like Moody’s, Standard & Poor (S&P), and Fitch group. Max OOP will loosely compare these companies to Experian, Equifax, and Transunion. They basically look at a company’s risk profile and rate them accordingly. These profiles are primarily used for bond credit ratings as a measure of the likelihood a company will be able to repay a debt. A few quick internet searches suggest anything BBB (S&P) and above is investment grade, and anything below that is junk. There is a spectrum of quality just like a credit score, but BBB is the general cut off. The southern health system I worked at prior to this one had a solid bond rating of Aa3 and a stable outlook when I was working there. Moody’s downgraded them to A1 a year after Max OOP left. Yes, I move the bar that much. Not really.
So Who Lives In My Medical Office Buildings?
Here are the top ten tenants by average base rent hanging out in our Physician Realty Trust (DOC) buildings:
Seven of Physicians Realty Trust’s (DOC) top ten renters are considered investment grade tenants. The other three aren’t necessarily junk tenants, they just aren’t rated. So this is a pretty solid snapshot of the DOC tenant profile and represents about 30% of DOC’s average base rent. We even have a couple AA-rated tenants mixed in with the top ten. Not triple platinum like Max OOP, but they will do. This is a good sign that these top tenants should be able to maintain rental payments.
Let’s take a quick look at our largest tenant, CommonSpirit. With a name like CommonSpirit, I can’t imagine they would ever skip out on paying us rent. They might even help rake snow off the roof like Max OOP does. But since they have the first, second, and seventh spots on our top ten tenant listing for a total of 12.6% of our average base rent, it’s worth a quick look. CommonSpirit has a BBB+ ranking by S&P. The company recently went through an alignment between Catholic Health Initiatives and Dignity Health on January 31st, 2019. The result was one CommonSpirit. Alignment is pretty common these days in healthcare and usually means standardization and more efficient use of resources; particularly on the administrative side of things. The new company makes up a network of over 150,000 physicians, nurses, caregivers, and other staff members who are all employed by one CommonSpirit. Consistent with the heritage of the two companies, the new ministry will be Catholic. Their website suggests they partner with other faiths as well, and that will continue. I guess that’s why they went with CommonSpirit instead of CatholicSpirit. I actually don’t really care what kind of spirit it is as long as they pay us rent. As part owner of a few of their buildings, I probably shouldn’t poke fun at one of my tenant’s names, so let’s move on. They have a solid footprint throughout the United States (700 care centers in 21 states) and given DOC’s relationship approach, I would think there could be future additions to our portfolio from this triple BBB+ (S&P) tenant. That said, 12.6% of our average base rent (ABR) is a little high and risks come when we get too dependent on revenue from one company. They occupy buildings in Kentucky and Nebraska. This tenant gets the Max OOP seal of approval, but would like future growth to be with another company if possible.
Now I could go through this exercise for all the tenants on this list, but I also need to have a little trust in my management team.
What About The Rest Of The Buildings?
This is where Max OOP will let Physicians Realty Trust (DOC) do some of the heavy lifting and have them report this information back to me. After all, I’m just an investor. I’m not running the company so I need to let my management team take care of that. According to their presentation to institutional investors at the NAREIT conference earlier in June, DOC reported that over half of their Gross Leasable Area (GLA) is leased out to investment grade tenants. This is a metric they have been continuously improving since 2016. This seems like another good indicator of tenant quality, but we will eventually need to compare this to some other REITS in the space to make sure it is competitive. Max OOP doesn’t have the capacity to dig too much into other Healthcare REITs at this point, mostly because I am still working in the corporate grind and haven’t been able to pull the trigger on early retirement. Maybe my passive income from DOC will help with that someday.
Here is a look at that information they shared earlier in June.
Wall Of Shame
I also like that DOC is reporting back tenants with potential issues. They put this “watch list” together on slide eleven of their presentation and it includes the El Paso issue we referenced earlier this year. DOC isn’t hiding anything from Max OOP.
While we all want triple AAA+ platinum investment grade tenants like Max OOP living in our REITS, that just isn’t always going to happen. REITS manage risk just like traditional landlords manage risk, and we need to take on some risk if we want a return on investment. Over half of the Physician Realty Trust portfolio’s Gross Leasable Area is leased out to investment grade tenants. Seven of the top ten tenants are investment grade tenants that make up about 22.4% of the Average Base Rent (ABR).
Since we have seen a few tenant issues come up down in Texas, I figured it was time to take a closer look at our tenant quality. We didn’t dig too deep, but I got enough information for Max OOP to stay the course.
The Predictable Purchase
June 21st happened to be pay-day (and the first day of summer) and Max OOP was feeling pretty good. So I bought up a few more medical office buildings on my lunch break with a rather large purchase of Physicians Realty Trust (DOC). After all, when you are loosely applying dollar-cost averaging principals to an investment strategy, you can act when the price looks low.
DOC was trading down on Friday, and I didn’t see anything in the news other than some rumbling about interest rates that could really explain it. Other REITs were down too. In response, I allocated my entire paycheck into Physicians Realty Trust (DOC) on Friday. Don’t tell Mrs. Max OOP, but I actually needed to borrow a few dollars from her paycheck as well to make the full allocation I wanted. You can do these kinds of things when you live a reasonable standard of living and don’t live paycheck to paycheck.
Max OOP purchased 170 shares of Physicians Realty Trust (DOC) at a price at $17.95 per share. Total cost for this transaction was $3,056.45 including the $4.95 transaction fee from Fidelity. This will add $156.40 in annual ‘rental’ dividends to the Max Out of Pocket portfolio bringing our total passive income to just over $1,250 annually. Slow and steady wins the race.
Here is an updated look at the Max Out of Pocket medical office building portfolio as of this weekend.
Usual disclaimer. This is not a recommendation to buy DOC or any other REIT, stock, or medical office building. You are responsible for your own investing decisions and the blog and author are not responsible for those decisions.
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