Investing in real estate investment trusts, or REITs, can be a great way to achieve both income and growth in your stock portfolio. Healthcare REITs can also be excellent defensive investments, as healthcare isn't nearly as recession prone as most other industries, and properties tend to be leased on a long-term basis.
One interesting healthcare REIT is Physicians Realty Trust (DOC +0.00%), a relatively small but fast-growing REIT that focuses on medical office properties leased to major health systems. Here's a rundown of why medical offices can be smart investments, as well as Physicians Realty Trust's value as an investment right now.
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Why medical offices?
Physicians Realty Trust owns 250 properties with 13.5 million leasable square feet located in 30 different states. And 93% of the portfolio's income comes from medical office buildings, the majority of which are located on major health campuses or are affiliated with leading health systems.
I mentioned that healthcare real estate is a recession-resistant form of property. Well, this is especially true with medical offices. In short, the businesses that lease these spaces provide services people need, no matter what the economy is doing. What's more, most of Physicians Realty Trust's medical offices are leased on a long-term triple-net basis, meaning that tenants are locked in for long periods and are responsible for costs such as taxes, insurance, and maintenance.
Healthcare real estate is set to be a growing market over the coming decades as the U.S. population ages. Seniors use healthcare more than the general population and spend more when they do. With the U.S. senior citizen population expected to roughly double within the next 40 years, it's fair to say that the demand for medical offices should continue to grow.
Physicians Realty Trust is a rather young REIT (IPO in 2013), but it has grown rapidly. Not only has the property portfolio expanded tremendously, but the company has done a great job of translating its growth into returns for investors. Since 2016, Physicians Realty Trust's FFO per share (the REIT version of earnings) has increased by 27%, well above peer growth rates.
Dividends and valuation
Physicians Realty Trust pays a 5.1% dividend yield based on the current share price, and while the company is too young to speak to its dividend track record, I can say that the current dividend represents an FFO payout ratio of about 82%. This is typical of an REIT, so it's fair to say that the payout is sustainable and that there should be ample room for future growth.
From a valuation perspective, Physicians Realty Trust trades at about 16.3 times FFO. This isn't exactly cheap, but it seems more than fair considering the company's recent growth history and the defensive nature of its assets.
Check out the latest Physicians Realty Trust earnings call transcript.
Is it a buy?
If you couldn't already tell, I'm a fan of Physicians Realty Trust. With a defensive business model, excellent income, an attractive valuation, and lots of room to grow, there's little to dislike.
However, I'll say that Physicians Realty Trust is a buy with the caveat that it only works well as a long-term investment. The company, as well as most other REITs, is designed to deliver excellent total returns over long periods of time (think a minimum of five years). There are simply too many factors that could move REIT prices in the short run that have nothing to do with the business itself. With that in mind, if you have a long time horizon and are looking for reliable income and strong growth potential, you may want to give Physicians Realty Trust a closer look.
