Tuesday, February 20, 2018

A current AIM Program Small Cap Equity Holding: Physicians Realty Trust, Inc. (DOC) by: Gregory Anderson. "A Fresh Look at Physicians Realty Trust"

Physicians Realty Trust, Inc. (DOC, $15.25): “A Fresh Look at Physicians Realty Trust
By: Gregory Anderson, AIM student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary

Physicians Realty Trust, Inc. (NYSE:DOC) is a real estate investment trust (REIT) that acquires, develops, manages, and leases healthcare properties to hospitals, physicians, and healthcare delivery systems. Physician’s portfolio includes healthcare office buildings, post-surgery treatments centers, and outpatient facilities. Physicians operates in the United States and is headquartered in Milwaukee, Wisconsin.  

• The end of the first quarter, 2017 marked $1.4 Billion in year-to-date investment activities. 

• The demand for healthcare assets (hospitals, offices, and outpatient facilities) should remain constant, even during times of economic downturn.

• With the Federal Reserve’s gradual rise in short-term interest rates, borrowing will become more expensive, raising the overall cost to acquire and develop properties.

• The healthcare sector is rife with problems, but future budgetary and structural changes could help Physicians Realty Trust.

• DOC has the ability to weather downturns in the market due to the highly leveraged real estate market.

Key points: 2018 has marked a troublesome period for Physicians Realty Trust, with a 17.1% decrease in stock price between December 31, 2017 and February 1, 2018. While this drastic drop could be seen as troublesome, Physicians has seen exponential growth over the last 3 years. DOC saw a 162% increase in net income between 2015 and 2016, as well as a 77.1% 5 year sales CAGR. The company’s historical rapid growth is a sign of its ability to operate efficiently and make sound investment decisions, one of which was a $725 million investment in Catholic Health in 2016, which effectively added 55 high-quality properties to DOC’s portfolio.

Prior to the rocky start in 2018, Physicians took some positive steps towards the tail end of 2017. One of these steps was adding Pamela Kessler to the board of trustees. Kessler is an experienced figure in the healthcare real estate market and is the Executive Vice President, CFO, and Secretary of LTC Properties, a publically traded senior housing REIT based out of California. Kessler is expected help DOC’s board of trustees by overseeing the board and advise in investment decisions. DOC also recently announced a 3.95% Senior undisclosed note priced at $350 million due in 2028. The proceeds from the sale are expected to be approximately $347 million after fees and expenses. This announcement is a sign that DOC is looking to increase capital for future acquisitions and developments.

The largest risk facing Physicians Realty Trust is the gradual increase in interest rates over time. A rise in interest rates makes borrowing more expensive, and as a result, acquiring properties more expensive. While the Trump administration is advocating a lower interest rate, the Federal Reserve increased the interest rate by 0.25 interest points in 2017.

What has the stock done lately?

As mentioned above, Physician’s stock has dropped by 17.1% in 2018 alone. The stock has seen the largest drop in February, with a 4.7% decrease between February 1 and now. The stocks drop is most probably due to the severe downturn the market, and its benchmarks (Russell 2000, S&P 500, etc.), saw in February alone. The question regarding DOC’s stock is whether or not it can rebound. The low price offers a potential upside and once the market levels out, it could prove to be a great long-term hold.

Past Year Performance: DOC has decreased 23.2% in value over the past year but remains a bargain for a long-term hold. DOC missed earnings in both Q1 and Q2, but rebounded in Q3 and Q4 by beating earnings. The question is whether or not DOC can remain consistent and continue to grow Net Income (higher net income results in a higher dividend payout). Over the past year, DOC has maintained an average dividend yield of 5.91%, with a current dividend at $0.92. With the bearish tendency of the stock, the drop in price points to the volatility of the market, rather than a flaw in the operations of Physicians Realty Trust.  

Source: FactSet

My Takeaway

Even though 2018 has been plagued with a decrease in stock price, Physicians is here to stay. An investment in a healthcare REIT like DOC seems like a safe bet considering the need for healthcare properties. Even with the current issues that plague the healthcare industry, such as high medical costs and epidemics related to big-pharma companies, there is a renaissance of restructuring by major companies. One such example is the merger between Amazon, Berkshire Hathaway, and J.P. Morgan, which aims to decrease costs and implement a value over volume platform. If DOC positions itself correctly, they could capitalize and gain major market share by providing the physical assets to these emerging mergers. Additionally, the introduction of Pamela Kessler as an oversight of the board of trustees and a recent announcement of a 3.95% Senior undisclosed noted priced at $350 million reveals DOCs intention to grow and thrive. Physicians has the potential to gain traction and recover from the losses sustained in 2018.

No comments:

Post a Comment