Here's What Investors Need to Know About Physicians Realty Trust's Recent Earnings

Real estate investment trust (REIT) Physicians Realty Trust (DOC) may not be a household name, but if it's steady growth and dividends you're looking for, this could be a company to watch. In this segment of Backstage Pass, recorded on Nov. 17, Fool contributors Brian Withers and Jason Hall discuss its third-quarter earnings, which it reported on Nov. 5. 

Brian Withers: Mr. Jason Hall, you are up with Physicians Realty Trust. Let me guess what these guys do. Are they a REIT, and do they help doctors with their offices?

Jason Hall: No, they're a McDonald's franchiser.

Withers: OK. [laughs]

Hall: Yeah, you got it right the first time.

Withers: I love that their ticker symbol is DOC.

Hall: I know, there's all these little subtle hints about what kind of business they're in.

Withers: I like that.

Hall: I was actually typing one more thing on the slide here, because this is one that we wanted to be sure to get in. Now let me hit the magic button, make it full screen, and then I will share it. Physicians Realty Trust, real estate investment trust, and it does actually focus mostly on medical office. They've done other things over time. They've owned some hospitals and different types of healthcare facilities, but they're going through a period of transition to a certain extent where they're refining exactly what they do and focusing on it.

It's an interesting period of time right now, and it's an interesting opportunity, especially for investors that are looking for a good, dependable, high-yield investment. Let's go through the numbers here real quickly. We've got 5% revenue growth, just a small little growth in revenue there, $115 million in revenue in the quarter.

Actually it's a little short of what the expectations were, but it's just a tiny miss. Earnings per share came in at $0.10 a share, the consensus estimate was $0.07 a share, so there's a pretty big pretty big beat. But I've talked about it before, and it's always worth really emphasizing for any of these real estate investment trusts, these REITs.

That FFO, funds from operations, is really the best proxy for actual earnings for these sorts of businesses. The reason why is, like any other business, depreciation and amortization is an expense you take. You're required to take it by GAAP, when you report your financial results.

The thing is, if you own a lot of real estate, you depreciate it as you're required to do. You're depreciating an asset that appreciates in value, so it's not really reflective of future capital investment needs that you're going to need to make, to replace those assets that you're depreciating. What FFO is, it's earnings per share plus depreciation and amortization that was taken out of your earnings before, that's related to real estate added back in. It's like the best earnings-per-share number for REITs, so they came in at $0.26 per share.

It's really hard to find what the analysts are estimating for FFO out there, so we won't even really try to come up with any beat raise metric for that. The company doesn't really give guidance right now because they are transitioning a lot of their real estate and they're making other acquisitions. There's a lot of things going on that could affect where the bottom and the top line finishes.

One good metric to look at, it's kind of like operating comps for these guys, is its same property -- they call it same store. I think that's dumb because they don't have stores. I call it same property, cash, net operating income. What it does is it takes properties they've owned at least a year, compares the cash net operating income of those properties last year to this year, and you see that number is up 2.5%, so it shows that they have been able to command higher prices and rents from customers whose leases have come up, so that's a good thing to see.

Withers: I was just going to say, 2.5% is pretty solid number from that perspective.

Hall: For this sort of industry in particular, it really, really is, so it's good. I'm not going to say that they have pricing power, but it shows that the properties that they have are in high demand, and their tenants want to stay and they are able to increase the rents as appropriate over time, so that's really good.

A lot of acquisitions since the end of the prior quarter through the time they reported, made six acquisitions, they made a couple of disposals as well. Taking advantage of the interest rate environment, they actually got a credit increase in their credit rating by I think S&P, which is a real positive.

But one thing they let them do is raise $500 million at 2.625% over 10 years. That's pretty good. Slow and steady, that's it. Dividend yield's over 4%.

Like I said, this is a business, if you're looking for a super-high rate of growth, it's probably not the best business. But if you're looking for really protected dividend that's secure -- again it's a healthcare play, healthcare spending's only going to go up over the next 20 years -- not a bad company to put on your income portfolio. Brian.

Withers: A quick refresher. This is a REIT. Why would an investor want to own a REIT? What's the advantage?

Hall: The real estate investment trust is kind of a pass-through entity. They own real estate or the majority of the business is based on real estate in some way, they don't pay federal income tax. But they're required to pay out at least 90% of their GAAP net income and dividends, so it's entirely a dividend play. That's it. The good ones have the ability over time to grow their dividend at higher rates.

This is a slow and steady grower because also, they're required to pay out so much of their earnings, they tend to rely on more debt, so they're more leveraged.

But again, real estate leverage in the right industries when management is really good and conservative about managing it, can work out really well. This is an example of how it can be a great income play.