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Physicians Realty Trust: Uninspiring Growth Prospects, Despite Quality Cash Flows
Stock Analysis & Ideas

Physicians Realty Trust: Uninspiring Growth Prospects, Despite Quality Cash Flows

Story Highlights

DOC’s healthcare real estate asset base should be able to maintain solid performance even during periods of increased uncertainty. The company’s vital properties lessen its overall risk profile compared to its commercial, retail, and residential peers. That said, the company lacks any compelling growth drivers and dividend growth prospects.

Incorporated in 2013, Wisconsin-based Physicians Realty Trust (DOC) has grown its healthcare portfolio from about $124 million of gross real estate assets at the time of its IPO to approximately $5.87 billion as of its latest filings.

Specifically, DOC’s portfolio presently comprises 278 health care properties located in 33 states totaling roughly 15.6 million net leasable square feet. Out of these, approximately 95% were leased, with the weighted average remaining lease term standing at 6.2 years. It’s worth noting that about 90% of the portfolio’s net leasable square footage was located either on a hospital campus or other health care facilities, which enables DOC to achieve operating efficiencies.

Due to the critical nature of the company’s healthcare properties, DOC has historically generated robust cash flows. Unlike retail and commercial property trusts, DOC tenants are unaffected by factors such as consumers’ spending and inflation. Therefore, its overall performance can remain resilient even during rough times, similar to those we are currently experiencing.

This quality has historically been illustrated in the company’s strong dividend track record, which has been supported by unwavering funds from operations (FFO) generation. Thus, the stock is often discussed in a cheerful manner amongst income-oriented investors who seek reduced risk. As a result of its lower-risk investment case, the stock price has held up relatively well during the ongoing turbulent environment. In fact, year-to-date, shares have declined by roughly 10% versus the general real estate index’s decline of 21.5%.

While the stock is likely to serve the conservative income-oriented well, I believe that the company lacks noteworthy growth prospects. For this reason, I am neutral on the stock.

On TipRanks, DOC scores a 6 out of 10 on the Smart Score spectrum. This indicates a potential for the stock to perform in-line with the broader market.

Recent Performance

DOC’s Q1 results once again exhibited the company’s ability to generate predictable and low-volatility cash flows. Revenues rose 15% to $130.4 million, while FFO/share came in at $0.27, matching last year’s number.

Revenue growth was driven by same-store cash NOI growth of 2.0% in DOC’s Medical Office Buildings (MOB), which comprise just over 80% of DOC’s gross leasable square footage. While normalized FFO grew 9.9% to $63.4 million as well, the increase was offset by the newly-issued shares by the company, which it employs to fund its future investments.

Particularly, DOC completed an investment valued at around $22 million during the quarter. Subsequent to the quarter-end, DOC also invested $27.7 million to acquire a 59,233 square-foot medical office property located in New Albany, Ohio. This facility is 94.6% leased with a weighted average remaining lease term of 7.8 years. It is primarily leased by OrthoNeuro, a 20-physician orthopedic group. While the DOC’s acquired properties produce further rental revenues, the extra dilution offsets any FFO/share growth prospects. Still, with DOC acquiring assets with extended weighted average leases accommodating high-quality tenants, its strategy of generating robust cash flows is likely being well-served.

Is the 5.3% Dividend Yield Sufficient?

As we mentioned, DOC has produced very consistent FFO/share over the past several years as a result of the nature of both its properties and its rather conservative investment philosophy. Since 2017, the company’s FFO/share has floated between $0.94 and $1.08. Consequently, the trust has paid quite stable dividends per share each year. The dividend per share has remained intact, in fact, at $0.92 during this period.

On the one hand, dividends are likely to remain relatively well-covered, backed by DOC’s durable rental collections. On the other, DOC’s growth prospects appear to be very slim. Due to the company’s multi-year leases, rent escalations are relatively humble, while its property acquisitions are mostly offset by the underlying share issuances. This is the price to pay for “stability” in this case.

However, there is another risk to consider here. A couple of years ago, DOC’s hefty dividend yield would make for a decent capital return. While the current yield of 5.3% continues to appear rather appealing, with interest rates on the rise, this is not really the case considering its next-to-none growth prospects. In other words, investors are likely to require a higher yield in the current environment as a result of the lack of dividend growth, which may have a negative effect on the trajectory of the stock moving forward.

Wall Street’s Take

Turning to Wall Street, Physicians Realty has a Hold consensus rating based on three Buys, four Holds, and one Sell assigned in the past three months. At $19.06, the average Physicians Realty stock projections imply 12.98% upside potential.

Conclusion

DOC’s healthcare real estate asset base should be able to maintain solid performance even during periods of increased uncertainty, as demonstrated by the potent FFO/share generation. The company’s vital properties lessen its overall risk profile compared to its commercial, retail, and residential peers.

For this reason, DOC can be a fertile position in some conservative, income-oriented portfolios. That said, the company lacks any compelling growth drivers, and the apparently hefty dividend yield losses its appeal in a rising-rates environment considering the lack of expansion prospects.

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