Healthcare REIT Experiment – Tenant Issues, FFO, $1000 Passive Income

We live in a pretty amazing world. One where your average Joe Max can punch a few keys on a keyboard and suddenly call himself an owner of medical office buildings. Then, he can listen in on a meeting occurring thousands of miles away on how much income those medical office buildings are producing.

Max OOP has been running an experiment. I have been buying up shares of Physicians Realty Trust (DOC) to drum up some passive income and learn a thing or two about REIT investing. Who knows, this healthcare investment might end up paying down some of my future deductibles, coinsurance, and copays. It might also lose money. This is quite the deviation from my core investment strategy of total market indexing, but it is also a lot more entertaining.

The DOC conference call occurred on May 1st, 2019 to discuss operating performance for Q1 (January 1st – March 31st). As promised, Max OOP was in the background listening carefully as the CEO and Directors provided an update on how my business was running. I can say “my business” because I am part owner. There were also several really smart analysts on the call asking very specific questions. As an amateur, I stay pretty quiet. Don’t want to risk an embarrassing situation for Max OOP.

The format of the call starts with some prepared remarks by Mr. John Thomas (CEO) followed by more granular questions by the analysts.

Got Tenant Issues?

On the call before this one, we found out that a tenant in El Paso, Texas unexpectedly shut down operations of a surgical hospital. Evidently, both the onsite physicians and Physicians Realty Trust (DOC) were not given much notice and it essentially ended the lease (and thus rent payments) on the medical office building and hospital.

This is where, if Max OOP owned a rental house and found himself in similar circumstances, I might become stressed out and scrambling to resolve the matter. Not exactly passive income in my mind. With DOC, I have talented directors and underwriters doing the work on my behalf.

Our El Paso, Texas Real Estate Portfolio

One of the reasons I like Physicians Realty Trust is their relationship approach. They were able to quickly take this bad news and re-tenant the medical office building and hospital with a solid 10 year lease with more favorable terms than before. The lease is with a better, more profitable national healthcare system.

Now, it isn’t all sunshine and rainbows. The lease doesn’t go into effect until June 1st with rental payments to begin on July 1st, 2019. Hopefully DOC will learn from this experience, but things like this are bound to happen when you own about 250 properties. This several month gap in rent nonpayment certainly had an impact on the income statement and funds from operations for Q1 2019.

Funds From Operations (FFO)

As I like to say, since this is a learning experiment, we need to keep learning. Now, we don’t want to scare anyone off, so we will try not to get too technical here.

Funds from Operations is a good indicator to follow in the REIT world. It is basically taking all of your earnings, adding back in depreciation and amortization, and also subtracting any gains on sales. For those of you who follow regular stocks, it is very much like earnings per share. It is a good measure of cash generated by a REIT. I know this sounds complicated, but stay with me. We will just stick with depreciation for today.

Generally Accepted Accounting Principals (GAAP) require REITS to depreciate their medical property investments over time using accepted depreciation schedules. Since a lot of real estate technically doesn’t depreciate (but appreciates over time), it makes a lot of sense to add this back into net income.

I pay my landlord about $1,000 per month for a house she owns outright with no mortgage. On paper, the house I live in technically depreciates (loses value) every month just like a car would. Let’s say that value loss is $200 a month. Let’s also say my refrigerator goes out this month causing a $300 expense to my landlord. My landlord is left with $500 in income. Since my landlord doesn’t technically have to pay the depreciation cost (she owns the home which has actually increased in value since I lived here), we would add that $200 back in to get her funds from operations, $700. Since she is the only share holder of the house, she gets to keep that entire $700 in cash this month.

Phew, we got through that. That example is overly simplified; you can probably find more info on the world wide internet.

Physicians Realty Trust funds from operations (FFO) for Q1 2019 (January – March) was $0.25 per share. This was a drop of $0.02 per share from the last quarter mostly due to the tenant issue above and some increase in property tax expense we saw across the portfolio.

Since I get paid $0.23 per share in ‘rental dividends’ per quarter, the FFO above should still cover Max OOP’s ‘rental dividend’. We also hope to see FFO operations recover later in 2019 once the new tenant lands in our building.

Max OOP Reaction

I love passive income. I am so glad DOC has strong relationships in the marketplace to resolve issues like this quickly. I am also grateful to have some of the best experts in the industry working on my behalf everyday. I was also glad to hear management take the time on the call to congratulate two members of their team on new additions to their family. It sounds like a great culture over at DOC.

So yesterday, being payday and all, average Joe Max OOP punched a few keys on the keyboard and expanded the empire by 87 shares. This will take my projected annual passive income to just over $1000 per year. How is that for conviction and support for the REIT experiment? Total stake in DOC = $19,620.

1,087 Shares X $0.92 Dividends/Year = $1,000 projected annual “rental” dividends

Just a friendly reminder, I am not a financial advisor and this is not a recommendation to buy this or any other stock or REIT. I am just some average Joe Max from the internet; you should do your own research. But please, do enjoy the entertainment.

Here is a link to some nicely organized slides produced by DOC with a lot of very useful financial information to help you on your road to riches.

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