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What's Up DOC

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Physicians Realty Trust (DOC) is a healthcare real estate investment trust (REIT) focused on the acquisition and management of high quality medical office facilities leased to health systems in the U.S., explains Doug Gerlach, editor of SmallCap Informer.

The REIT currently owns 250 properties in 30 states valued at $4.41 billion. At year-end 2018, 95.4% of its properties were leased, with a weighted average lease term of 7.7 years.

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No more than 7% of its portfolio is scheduled to renew in any one year through 2025. Tenant specialties include oncology, orthopedics, internal medicine, surgery, and ophthalmology, but multi-specialty health system properties make up the lion’s share at 45.6% of gross leasable area.

Management points to its relationships with physicians, hospitals, and health systems as a distinct strategic advantage. In fact, 88% of the REIT’s net operating income is generated in “on campus” facilities of larger healthcare systems.

It’s no surprise that the U.S. population will age considerably in the coming decades, with per-capita healthcare spending by individuals aged 65 and over nearly three times higher than of other groups on an annual basis.

The Centers for Medicare and Medicaid Services projects a 64% increase in healthcare expenditures during the next 10 years, driven largely by these demographic shifts, and generating demand for services delivered in properties owned by Physicians Realty Trust.

Since 2011, Physicians Realty Trust has grown total revenues at an average annual rate of 78.7%, slowing to 22.6% from 2017 to 2018 to reach $411.0 million.

Funds from Operations per share (FFO/S) have grown at an annual rate of 27.3% since 2011, slowing to a 13.6% growth rate from 2017 to 2018.

In the first quarter ended March 31, 2019, revenues were flat while FFO/S declined slightly from $0.27 to $0.26. Much of the softness was due to the unexpected closing in late 2018 of a facility in El Paso, Texas.

In its quarterly announcement, however, President and CEO John T. Thomas announced that the company had agreed in principal to a tenyear lease with a new tenant, at better terms than it had earned with the prior tenant.

After the close of the quarter, Physicians Realty completed the acquisition of a $14.8 million surgery center in Pasadena, Texas, a newly constructed 27,035 square foot medical office building that is 100% leased through 2034.

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The company plans to dispose of or reposition several properties this year that don’t fit with their portfolio objectives, and has several acquisitions in the pipeline. Our analysis indicates that FFO/S could grow in the 10-12% annual range through 2023. In our study, we project growth at 10% to provide a margin of safety.

As a capital-intensive real estate business, Physicians Realty funds its growth with a mix of debt (both private and public), unsecured term loans and credit facilities, and public equity offerings.

It is rated investment grade by Moody’s (Baa3) and S&P (BBB-). The trust’s long-term debt-to-equity and debt-to-capital are low relative to similar REITs, and its leverage ratios are comfortably in compliance with all covenant thresholds as determined in its debt notes.

With a present yield of around 5%, Physicians Realty is an attractive income candidate on its own. But the addition of some significant capital appreciation provides a total return that could exceed 16% annually over the next few years.

The current P/FFO ratio is 16.9, and we believe it could reach 18 if FFO/S growth of 10% is achieved, causing the high price to reach $31.70. On the downside, a slide to a low P/FFO ratio of 13 indicates a price of $14.30. The upside/downside ratio from the current price is 3.2 to 1, with a maximum buy price of $18.70.

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