DOC - Physicians Realty Trust Offers A Solid Dividend And Exposure To Healthcare

2023-12-29 11:18:14 ET

Summary

• Physicians Realty Trust is a REIT that owns and leases medical properties, with 95% of its properties currently leased.
• The company has experienced significant growth, increasing its portfolio from $124 million to $5.8 billion since its IPO.
• Potential risks include the loss of REIT designation and potential cuts to doctors' reimbursements, but the company is proactive in mitigating these risks.

In the past, I’ve been a big fan of mortgage REITs . It’s a straightforward system, easy to understand, and pays very generous yields. The downside is it's all basically residential real estate, and sometimes you just want a REIT exposed to something else. Fortunately, we have a few options, and today we’ll discuss Physicians Realty Trust (DOC).

Physicians Realty owns hospitals and a bunch of medical offices , which it leases to doctors and other medical companies. As of a recent 10-K, they own 277 properties in 32 states, 15.5 million leasable square feet.

Best of all, the Physicians Realty is really good at renting properties, estimated that they have 95% of all properties currently leased. That brings in a lot of revenue.

Beyond that, Physicians Realty has the growth of the rent revenue built into the leases, annually raises the rent from 1.5% to 4.0% on its assorted tenants. While their growth is mostly focused on acquiring more and more properties, the general rent increases are also a nice bonus, and should help the overall margins going forward.

By the Numbers

From their original IPO, Physicians Realty started at $124 million for a portfolio. As of 2022, they put the portfolio at $5.8 billion, and the current balance sheet shows $4.459 billion in net real estate property.

Physicians Realty just keeps building more and more, and improving what they already have, both increasing its value and justifying the ever-increasing rent levels they expect out of them.

Source: Most recent 10-Q from SEC

The senior notes weigh in at $1.475 billion. That might be concerning to some, but the interest rates are fairly low, and the total assets are generating enough revenue to service it and keep paying the dividends without much trouble. Debt equity is below 1, and should be a fairly safe position.

As far as fresh buildings are concerned, Physicians Realty has a very conservative policy. Per the corporate filings, they insist on pre-leasing at least 80% of the upcoming space in the building before they even start construction. They also carefully screen their would-be tenants to make sure they have good credit and safe revenue streams to pay for it. They’re not going to build without knowing there’s money to be made in doing so in my view.

The Risks

Conservative or no, Physicians Realty is very upfront with the potential risks associated with their business. Two of them stand out as potential deal killers.

First of all, unsurprising from the name, Physicians Realty is a REIT, a real-estate investment trust. This confers certain major tax benefits so long as they keep up with REIT regulations and keep paying dividends as they ought. They concede that if something happens that prevents the dividend payments, they could lose the REIT designation, and would have to pay much higher taxes, while being less capable of getting the designation and the above market-average yield back in place.

The company seems very careful in keeping its revenue stream in place and complying with regulations, so I don’t see this as a serious threat to happen. Still, something crazy and unforeseen could happen, and we need to be aware of it.

The other possible problem hinges on politics, which is tough to predict. They warn that if Congress tries to save some money making major cuts to doctors’ reimbursements through Medicare and Medicaid, it could really risk the revenue stream of their tenants and their ability to keep paying the rent they own. If that happened, it would take a lot of effort to shake out, but the whole business model could break down.

If that happens, and I’m not saying it will, Physicians Realty says they are very open to having to use their cash and equivalents to keep the dividends going and to prevent any questions in the near-term about their REIT status.

Growth though

The company is not exactly old, organized in April 2013. Going from $124 million to $5.8 billion in portfolio in just a hair over 10 years is absolutely masterful, and shows a company with a strong vision of how to make things happen.

Physicians Realty also cited CMS as projecting that the current $4.5 trillion health care industry in America will be $6.8 trillion by 2030. That’s over 5% growth per year, which again suggests all these valuable properties will continue to be in demand in a growing industry going forward. That should really support the rent increase and renewing of leases when they expire.

Source: SEC filings

As you can see, revenues really surged, up 15.1%, from 2021 to 2022. The 9 months we have of 2023 has been respectable as well. The sale of certain investment properties also brings in quite a bit of profit when it happens, and the company mostly uses it to pay off their unsecured debt.

That allows them to continue rotating the properties to make sure they own the best assets in the best markets. They will build new buildings, or upgrade the less expensive buildings to make them all the more valuable for sale. It really is a pure medical real estate property.

Dividend growth isn’t huge, but even at 23?per quarter we’re talking a 6.78% yield, which is a good solid return. They’ve made payments of 42 straight quarters, and per quarter payment only got better over time. The last increase was in 2017, and if revenue keeps going up as the portfolio gets bigger and stronger, another increase could be in the works.

Conclusion

So obviously the residential REITs provide a much higher yield, potentially double in some cases, so Physicians Realty probably is not suited to being a really big part of your portfolio if income generation remains a high priority.

At the same time, the medical properties is a unique exposure, and its status as a growth industry should really provide a measure of safety and the real estate market, even mREITs, are just not the same.

As growth continues, there isn’t just the yield to be looking forward to, there’s a possibility of Physicians Realty per-unit price to increase. They’re well below the 52-week high, and if the company starts considering another dividend bump, it could be high past time to test those levels again, with lucrative results.

Again I wouldn’t go all-in or sell the farm to buy Physicians Realty, but its unique, secure nature does make it quite suitable for a smaller possession in the income generation part of one’s portfolio.

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