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.
