The U.S. healthcare industry is expected to experience tremendous growth over the coming decades as the nation's population ages. Instead of investing in this trend with a pharmaceutical company, medical device manufacturer, or hospital operator, it could be a smart idea to take a look at a company that invests in the properties healthcare providers use.
Specifically, real estate investment trust Physicians Realty Trust (NYSE:DOC) could be an excellent long-term play on the healthcare industry. Not only does it pay a generous 4.3% dividend yield, but it has massive potential for growth, and high returns, going forward. Here's a little bit about this REIT and why it could pay off handsomely for long-term investors.
Physicians Realty Trust's investment portfolio
As of the first quarter of 2017, Physicians Realty Trust owned 253 properties in 30 states, consisting of 11.4 million square feet of leasable space. Its portfolio is focused on medical offices (multi- and single-tenant), and none of the company's 690 tenants accounts for more than 5.5% of its rental income.
Generally, the company's tenants sign long-term leases with initial terms of a decade or more and with subsequent five-year renewal terms. In fact, more than 60% of the company's active leases expire in 2025 or later.
About 90% of the properties are leased on a "net lease" basis, which means that the tenants cover the variable costs of property ownership. In addition to the stability this provides for its revenue stream, the majority of its tenants' revenue comes from private-pay sources, which is generally more consistent than revenue dependent on government reimbursement programs.
Why healthcare real estate?
There are a few good reasons to invest in healthcare real estate. The demographic trends that affect the industry are very promising, healthcare real estate has excellent tenant retention, and the industry is naturally recession-resistant. So, let's take these one at a time.
First, the demographic trends. According to projections from the U.S. Census Bureau, the U.S. Centers for Disease Control and Prevention, and the Centers for Medicare & Medicare Services, the 65-and-over population in the United States is expected to more than double by 2060.
The older segments of the population utilize medical services much more than younger Americans do, which is a primary healthcare expenditure in the U.S. and is expected to increase dramatically. In fact, over the next seven years, total U.S. healthcare spending is projected to rise from roughly $3.5 trillion to more than $5.2 trillion.
Next, the excellent tenant retention. Many medical facilities are built to suit their tenants or are highly customized with equipment, etc. This makes moving a difficult and expensive undertaking in many cases. Medical offices in particular have an advantage, as many physician reimbursement models are tied to the tenant's address, which can create a cash flow issue if a tenant decides to relocate, on top of the other hassles of doing so.
Finally, healthcare is a naturally recession-resistant, if not recession-proof, industry. Think about it this way: If you need to cut back on expenses during tough times, you can stop going to the movies, taking vacations, or eating out at restaurants. Generally speaking, healthcare needs are among the last expenses people are willing to cut back on.
What sets the company apart?
In a nutshell, Physicians Realty Trust leverages its relationship with physicians and healthcare systems in order to find compelling opportunities. The company's leadership team has extensive backgrounds in the healthcare industry, and not just on the real estate side.
Just to name a couple of examples, President and CEO John Thomas was senior vice president for Baylor Healthcare System and president and chief development officer of Cirrus Health before joining the REIT world. Physicians Realty Trust's Executive Vice President and Chief Investment Officer Deeni Taylor was a former executive VP and chief strategy officer for St. Vincent Health.
The results so far have been promising
Since its 2013 IPO, Physicians Realty Trust has grown rapidly, and the growth has really accelerated recently. Since starting out with about $100 million in assets, the company has invested more than $3 billion in acquisitions, with $1.3 billion of that figure completed in 2016 alone. And according to the management team, annual investment activity in the $1 billion range is a reasonable figure to expect going forward.
The company's responsible growth strategy has been quite effective in producing value for shareholders. Throughout its roughly four-year history, Physicians Realty Trust has generated a total return of about 118%, more than twice the return of the S&P 500.
As far as the dividend goes, the current payout rate of $0.90 per year is about 92% of the company's normalized FFO (the REIT version of earnings) from last year, which is reasonable for a REIT. So, I don't anticipate any issues with the safety of the dividend going forward.
The bottom line is that Physicians Realty Trust could be an excellent, low-volatility way to invest in the healthcare sector that can generate strong income as well as growth in your portfolio for years to come.