Physicians Realty Trust (DOC 0.81%) is a relatively young healthcare real estate investment trust (REIT) focused on a specific niche within the sector. It offers investors a notable 5.2% yield and has been growing rapidly since its 2013 IPO. But there's one thing that it hasn't been doing much of, which means that it may not be a great investment option. Here's what you need to know to decide whether Physicians Realty Trust is a buy.
A selective REIT
Healthcare is a broad sector within the property market, encompassing everything from hospitals to nursing homes. While some healthcare REITs create a diversified portfolio, Physicians Realty focuses only on owning medical office buildings. The vast majority of its portfolio is either located on a medical campus (such as a hospital) or is affiliated with one. These are prime assets because medical providers want to be close to the large facilities that draw patients.
The REIT has been growing quite quickly. It began in late 2013 with around $100 million worth of real estate. By mid-year 2019, the portfolio had grown to around $4.3 billion. Size has increased in more than one way, with the company initially acquiring smaller properties. As Physicians Realty has gained scale, however, it has started to invest in larger and larger assets. It has also been focused on higher-quality tenants, with roughly half of its portfolio leased out to investment-grade customers -- up from just 30% at its IPO.
Its portfolio occupancy, meanwhile, has been in the mid-90% range for the last few years. And it has an average lease term of around 7.7 years with no major renewals until 2026. So tenancy looks strong. The REIT's leverage, meanwhile, is roughly in line with the healthcare REIT sector's bellwether names. All in all, Physicians Realty's business looks pretty solid.
Is it a buy?
So Physicians Realty Trust's business looks strong, but that doesn't mean it is worth investing in at the moment. The REIT's portfolio has grown rapidly, which has translated into impressive funds from operations (FFO) growth since its IPO. (FFO for a REIT is similar to earnings for a regular company.) However, over the past few years, that growth has slowed as the REIT has scaled. With a $3 billion market cap, it is still a relatively small landlord, but growth isn't likely to be as robust going forward as it has been in the past because it takes more to move the needle today. Adding to that issue is the fact that investors have bid up the prices of medical office properties, reducing the top- and bottom-line benefit of acquisitions.
Meanwhile, Physicians Realty's stock price is up roughly 50% since its IPO. That trounces the broader REIT sector, as measured by Vanguard Real Estate ETF, which is up around 26% over the same span. That said, Physicians Realty's current price-to-FFO ratio is around 15, which isn't outlandish. However, it is hardly trading at a bargain price. At best, you could probably say you are paying full rate for a decent REIT.
The real problem, though, comes when you look past the dividend yield. While the 5.2% yield is notable, the dividend backing that yield has only been increased one time since the IPO. (Note that the first dividend was prorated because the IPO date was within a quarter.) That increase at the start of 2018, meanwhile, was just 2.2%. In other words, Physicians Realty isn't a great option for investors seeking dividend growth. In fact, if this trend keeps up, inflation will actually reduce the value of the income you receive over time.
Not today, but maybe at some point
All things considered, Physicians Realty is a decent REIT trading at what is probably a fair valuation. However, FFO growth in recent years hasn't been as robust as it was in the past. That's a big issue since FFO growth is what you're basically looking for here, noting that dividend growth is virtually nonexistent. While the 5.2% yield may be enticing, most investors are probably better off looking at other options in the healthcare REIT space until Physicians Realty's price drops (pushing the yield higher), FFO starts to expand rapidly again, or it begins to regularly increase the dividend.