DOC - Physicians Realty Trust: 8% Yield Oversold Near 52-Week Lows

2023-10-22 09:15:00 ET

Summary

• The graying of America has led to an increasing demand for healthcare services, with 10,000 baby boomers turning 65 every day.
• Physicians Realty Trust, a healthcare REIT specializing in medical office buildings, yields 8.12%, and is less than 1% above its 52-week low.
• It has lower debt than its peers, over $1B in liquidity, and no significant debt due until 2026.

With the graying of America over the past 2 decades, there has been increasing demand for Healthcare services. You may have heard the familiar statistic that 10,000 baby boomers turn 65 every day.

The US Census Bureau estimates that, "In 2018, there were 52 million people age 65 and older, according to the Census Bureau’s Vintage Population Estimates. Their share of the population grew as well, from 12.4% in 2000 to 16.0% in 2018." ( US Census Bureau )

With so many Americans entering their golden years, US health costs have continued to grow. Another factor is that, due to technological advances, there are a lot more procedures which can be done these days, which, of course, costs money.

Another trend is that more and more people are being treated as outpatients, which has strengthened demand for outpatient facilities, such as Medical Office Buildings, MOB's.

With this demographic trend, you'd think that picking a rewarding healthcare dividend stock would have been a cinch over the past few years. However, that hasn't been the case, with some healthcare REIT's and stocks outperforming and others being left behind in the dust.

Such is the case with Physicians Realty ( DOC ), a Healthcare REIT specializing in a Medical Office Buildings, MOB's, which were once thought to be the sweet spot in the Healthcare sector.

Company Profile:

Physicians Realty Trust is a real estate investment trust, which engages in the acquisition, development, owning, and managing of healthcare properties. Its principal investments include medical office buildings, outpatient treatment facilities, acute and post-acute care hospitals, as well as other real estate integral to healthcare providers. The company was founded in 2013 and is headquartered in Milwaukee, WI. (DOC site)

Performance:

With rising interest rates, DOC has greatly underperformed the Healthcare Facilities sub-sector, the broad Healthcare sector, and the S&P 500 over the past month, quarter, year and so far in 2023:

Looking back further, and comparing DOC to peers such as Welltower ( WELL ), Ventas ( VTR ), Healthpeak ( PEAK ), and Healthcare Realty Trust ( HR ), shows DOC dead last on total return level, with Welltower delivering a total return that's over 2X the total return for the other 4 companies combined over the past 10 years:

DOC's biggest decline in 2023 came after its Q2 2023 earnings release in August, when Net Income fell 27% year over year, FFO declined 4.4%, and Normalized Funds Available For Distributions, FAD, was down slightly by 1.33%. Normalized FFO, which adjusts for DOC's proportionate share of unconsolidated joint venture adjustments, was down 4% in Q2 '23.

As with most companies in 2022 and 2023, DOC's interest expense continued to climb, rising 19.7% in Q2 '23. The share count also rose modestly, by 4.2%.

Although a 27% drop in Net Income isn't good news, FFO, NFFO, and FAD are generally more important metrics when analyzing REIT's. DOC had renewal spreads of 7.8% across 244,000 square feet of leasing activity during Q2 '23, with tenant retention remaining high at 78%.

Although it got an initial bump up after Q2 earnings, DOC fell from ~$14.50 to its current 10/20/23 closing price of $11.33, which is less than 1% above its 52-week low of $11.25. As you'd expect, DOC looks very oversold on its stochastic chart.

NOI grew ~1% in Q2 '23, and 2.9% in Q1-2 2023.

Its Outpatient Medical Same-Store portfolio, which includes 269 properties representing 97% of its consolidated leasable square footage, generated year-over-year Outpatient Medical Same-Store Cash Net Operating Income ("Cash NOI") growth of 0.8% in Q2 2023.

Looking back further shows a similar lack of growth in Q1-2 '23, with Net Income down 25.5%, FFO and Normalized FFO both down over 4%, FAD down 2%, and Adjusted EBITDAre down under 1%. Topline revenue growth was also similar, at over 2%.

Full year 2022 was a strong year for DOC, with revenue rising 15%, Net Income up ~27%, FFO up 9.6%, Normalized FFO up 7.6%, FAD up 10.6%, and Adjusted EBITDAre up 12.5%. As with other companies, interest expense was up, in DOC's case it rose 20%. The share count rose 7.4%.

Looking forward, management sees DOC's $300M pipeline of new leasing activity continuing to accelerate, with active proposals extended on over 120,000 square feet of vacant space. It has 34,000 square feet of leases that are executed under construction, which will commence in Q3-4 2023.

Assets:

DOC's assets are mainly in the eastern half of the US, although it does have some properties on the West Coast, and in the Southwest. It has 290 properties, with 97% of its Net Operating Income, NOI, coming from Outpatient Medical Buildings; and 89% of its annual base rental, ABR, income coming from Health System Affiliated Assets.

84% of its Medical Office Building leases are triple net, with its multi-tenant and single tenant buildings dominated by Health systems.

Valuations:

With DOC less than 1% above its 52-week low, you'd think that it might have some extreme under-valuations, but that doesn't appear to be the case across the board.

However, its Price/Book of .99X is much lower than the overall Healthcare Facilities industry average, and is the 2nd lowest in the aforementioned group of peers - Welltower has a P/Book of ~2X, the highest in the group, and Healthcare Realty Trust has the lowest, at .77X.

DOC's 8%-plus dividend yield is a bit higher than average, and its EV/EBITDA is much lower than average, while its P/FFO of 11.54X is just slightly lower than average.

Leverage & Profitability:

DOC's ROA, ROE, and EBITDA Margin were roughly stable so far in 2023. Its Interest coverage was lower - a trend we're seeing with many companies, due to rise in interest rates. However, DOC's Debt/Equity remains well below the industry average, as does its Net Debt/EBITDA leverage.

Debt & Liquidity:

DOC's Net Debt/EBITDA leverage is among the lowest in its peer group, similar to PEAK, and well below VTR's 6.9X, the highest in the group:

In Q2 '23, management closed on a $400M five-year term loan that, with the effect of related swaps, bears interest at a fixed rate of 4.693%. DOC's next major debt maturity isn't until 2026, when $170M comes due.

DOC has a $1B revolving line of credit, which is completely undrawn, and also has cash of ~$246M, giving to $1.25 billion of near-term liquidity, a s of 6/30/23. Management estimates that they have enough dry powder for new acquisitions of ~$300M.

DOC's debt is rated investment grade by 2 ratings agencies: BBB by S&P, and Baa2 by Moody's.

Dividends:

At its 10/20/23 closing price of $11.33, DOC yields 8.12%. It has paid 40 consecutive quarterly dividends, with the payout remaining at $.23/quarter since Q2 2017, hence the low 5-year dividend growth rate.

The FAD/Dividend payout ratio improved in 2022, dropping to 86.5%, vs. 90.6% in 2021, but went back up a bit in Q1-2 '23, reaching 92.23%.

Wrapping It Up:

At $11.33, DOC is very oversold, and under 1% above its 52-week low. It offers an 8%-plus dividend yield, with a stable dividend paying history, although dividend growth has been negligible over the past 5 years.

Although rates may stay higher for longer, DOC has lower leverage than most of its peers, with no significant debt maturities until 2026, and is rated investment grade by 2 rating agencies.

We rate it a BUY, based upon these factors. If you're looking for a stable, attractive dividend from the Healthcare sector, DOC can fill the bill.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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