Physicians Realty Trust: Steady Yield Backed By Segment-Best Performance (NYSE:DOC)

~ by Snehasish Chaudhuri, MBA (Finance).

I covered Physicians Realty Trust (NYSE:DOC) about 9 months back. At that time, the stock was trading around $17. The price has fallen by almost 15 percent since then. However, the broader market has performed equally badly, if not worse. S&P witnessed a drop of 16.8 percent during this year. This REIT has been paying almost similar quarterly payouts ($0.225 to $0.23) for the last 36 quarters. The yield has ranged between 5 and 6 percent. And the best part is that this yield has consistently been covered by its funds from operations (FFO). Its Price to Book (P/B) ratio stands at 1.17 and 5-year P/B stands at 1.37. Overall, the stock is in a better position as compared to its peers.

Physicians Realty Trust is a Pioneer in Medical Office Buildings Segment

Physicians Realty Trust is a company that acquires, develops, and leases healthcare properties to physicians, hospitals, and healthcare delivery systems. The company owns 290 assets, most of them (97 percent) are medical office buildings (MOB). Besides MOBs, it owns a few outpatient treatment and diagnostic facilities, physician group practice clinics, ambulatory surgery centers, and specialty hospitals. Post-pandemic, MOB is amongst the fastest growing segments among the healthcare real estate investment trusts (“REITs”). There is a risk in concentrating its investments in such a narrow segment, but the kind of growth opportunities MOB segments offer provides an optimistic scenario to its investors.

In my last coverage, I emphasized why this healthcare segment has huge growth potential going forward. I said that:

“buildings are leased out to medical practitioners, which tend to provide lower cost than traditional hospitals, making them popular among patients. The sector is expected to benefit from various macro factors such as increase in older population and preference towards outpatient services. Between 2020 and 2040 the 70 plus age group is predicted to increase over 60 percent and touch a figure of 62 million by 2040 from that of 38 million in 2020. Further, it is expected that this particular population group will also witness an increase in healthcare expenditure due to various provisions of the Affordable Care Act.”

In 2022, the company was successful in renewing 78 percent of its existing lease agreements, with an annual average lease rental of $26.82. Physicians Realty Trust is also expected to capitalize on favorable lease marks-to-market as leasing velocity accelerates, particularly in 2026 when rents are 15 percent below this renewal rate of $26.82. DOC’s concentration of 2026 expirations is important due to the completion of 10 years of its sale-leaseback transaction with CommonSpirit Health, wherein DOC executed original leases at the-market rates across nine major real estate markets in the United States.

Performance of Physicians Realty Trust Instills Optimism

In my last coverage, I found that Physicians Realty Trust had reasonably strong upside potential and concluded that DOC

“is an established REIT with a solid dividend payment history and consistently growing FFO. Investors will not be totally wrong to expect solid capital gains as well since the stock has shown strong moves in the past eight years. This REIT might also become an acquisition target for the larger healthcare REITs, which possibly might be beneficial for its investors. Overall, Physicians Realty Trust offers an attractive investment opportunity for income-oriented investors with above average risk appetite, looking at a medium to long-term horizon.”

Physicians Realty Trust did justice, to my opinion, especially in the FFO font. Despite witnessing high volatility and turbulence over the past 12 quarters, DOC’s quarterly FFO per share remained steady between $0.26 and $0.27, something similar to what the company was generating prior to the Covid-19 pandemic. No wonder that the quarterly revenues and operating margin recorded consistent growth during these three years. This implies that the company is generating steady occupancy and stable rentals. The occupancy rate is quite high – 95 percent as on September 30, 2022. DOC’s MOB portfolio operating margin and investment grade tenancy, both are the highest among its peers.

Portfolio operating margin represents the operating efficiency of the MOB portfolio of all these healthcare REITs. Investment grade tenancy denotes the percentage of tenants having investment grade credit rating, i.e., rated BBB and above. A higher investment grade tenancy implies that there are less chances of defaults in rental payments. Generating an occupancy and investment grade tenancy that is higher than the large-cap healthcare REITs, such as Healthcare Realty Trust Incorporated (HR), Healthpeak Properties, Inc. (PEAK), Welltower Inc. (WELL) and Ventas, Inc. (VTR), no doubt is commendable. These four are among the five large-cap healthcare REITs in the United States. The fifth large-cap REIT, Medical Properties Trust, Inc. (MPW), doesn’t compete in the MOB sub-segment.

Investment Thesis

While these large-cap healthcare REITs have a market capitalization between $8 billion and $32 billion, DOC has a market capitalization of only $3.5 billion. Thus, DOC, being the best-performing REIT in this segment, becomes a potential target for acquisition. Physicians Realty Trust already has an impressive performance, and being a potential acquisition target, makes its stock more attractive. The other attraction of this small-cap healthcare REIT is its steady and sustainable yield and the consistency of its FFO. DOC has consistently generated an annual average yield between 5 and 6 percent, and the payout has remained steady irrespective of the market situation.

In my opinion, these dividends are sustainable, as the payouts are covered by its FFO, and I don’t find any significant reason for which this FFO may decline in the coming future. With a segment-best occupancy rate, MOB portfolio operating margin and investment grade tenancy, the current level of FFO seems sustainable. In fact, Seeking Alpha has forecasted its 2022 and 2023 FFO in the same range of $0.26 to $0.27. The annual revenue forecasts are also in the range of $520 to $550 million, a significant hike from $456 million in 2021. P/B stands relatively low but higher than 1, which is another reason behind it being a potential acquisition target. In addition to all these, as the price has come down by almost 15 percent during the past 9 months, I believe this is the right time to invest in the equity shares of Physicians Realty Trust.

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