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An Interview With J.T. Thomas, CEO of Physicians Realty Trust


Jul 26, 2020 by Matt Frankel, CFP

Real estate has been one of the hardest-hit sectors of the stock market during the COVID-19 pandemic, but healthcare real estate investment trusts (REITs) have held up quite well.

I recently had a chance to speak with John (J.T.) Thomas, CEO of Physicians Realty Trust (NYSE: DOC), as well as Mark Theine, SVP of Asset Management at the medical office REIT. Here's what they had to say about the company's progress so far, how COVID-19 has affected the business, the future opportunity in medical office real estate, and more.

Physicians Realty Trust, unlike a lot of the healthcare real estate investment trusts we follow, you're a relatively young company with your IPO in 2013. Since then you've grown to nearly 270 properties. Can you give us a quick overview of what you invest in, how you've gotten to the point you're at, and what your general strategy is?

J.T. Thomas, CEO of Physicians Realty Trust: Yeah; thanks, Matt. So that was seven years ago; we had about 125 million worth of medical office buildings, 18 individual buildings. And as you just mentioned, we've grown to about 270 buildings worth just about $5 billion, so a tremendous amount of growth. Most of that growth came in the first five years. The last two years have been a little bit more challenging for a variety of reasons, primarily just after the election, then the moving the stock market to more of a risk-on investments thesis, good, stable, defensive reads like medical office were out of favor, even though the underlying business was performing very well.

Going into 2020 we had a pipeline to really generate some good growth this year, and that was our plan and strategy. And then of course March hits and we put a halt to all that growth, although we did hold that pipeline. We think we'll be able to secure most of those assets when we can get back to investing. But, healthcare real estate has performed very well in this market. That's what medical office buildings are all about. It's very resilient real estate.

Because we were planning for growth, we've raised a lot of equity, which we publicly announced in the first quarter, but we haven't deployed that equity, so it's on our balance sheet. Our balance sheet's probably in the best shape it's ever been.

Speaking of what transpired in March, can you give us a quick overview of how COVID-19 has affected your business? Do you have any rent collection figures to share?

Mark Theine, SVP of Asset Management, Physicians Realty Trust: Yeah; happy to. We formed a task force in early January to already start tracking the news and what was happening on COVID and then put in place a lot of protocols and procedures with our asset management team. And then on the rent collections is what a lot of the REITs and the real estate owners are talking about now. We collected about 95% of rent through April and May. We'll be posting some June numbers here shortly, tracking along that. But we've done really well, and as J.T. said, it's really proven our investment thesis about the resilience of medical office buildings.

So those are definitely impressive statistics, 95% rent collection. And I remember reading in April, initially you reported something to the effect of 93%, and then by the May update it was up to 97%. So do you generally see the uncollected rent problem as a nonissue for you guys, as in, you'll get the money eventually?

Thomas: Yeah, we really do think so. With the update in April and the update in May that we've already publicized, we were pushing 97%, 98% rent collection in both those months. We don't have any material tenant who's threatening not to pay, or that we don't think can pay, with a little patience, for lack of a better word. And we're working with those tenants right now trying to figure that out.

So does that mean that you think the worst effects of the pandemic are behind you? Specifically, how worried are you about the recent spike in case numbers in states like mine (South Carolina), for example?

Thomas: I mean that's the unknown. One big factor that gives us some comfort is the April shutdown of most practices was really driven by the lack of PPE, so personal protective equipment -- mask, gowns, shields. So, when you had to ration PPE, care that could be deferred is where it got rationed away from. The good news is since then, and since most of the states have reopened, is the ability to stockpile PPE has returned, the ability to buy PPE.

So, we don't anticipate having to shut down scheduled deferred care, regularly scheduled non-COVID care. Certainly the spikes in Phoenix where we have a large presence are concerning. Texas, same thing. But even as Texas has started to retrench a little bit with the spike that they're having. The restriction is about doing care that can be deferred, but actually performing it in a hospital. That restriction does not apply to outpatient care facilities. And so again, care is shifting toward our buildings and our providers in those buildings, not away from them.

And so a big difference between the restrictions that were in place in April, where providers couldn't do scheduled care, period. In any setting. So today it's both the system and I think the government's being focused on, what we need to do is preserve hospital beds, we need to keep doing the care that can be done otherwise in outpatient care facilities. And we've the PPE to do both. All of our facilities are open, hours have been expanded, we've got surgery centers doing care on Saturdays that they used to just work five days a week. So the volume of care has come back pretty strong.

Looking a little bit beyond COVID, you mentioned earlier your balance sheet strength. I saw you have $390 million in liquidity right now and a pretty low leverage. And you mentioned that you pumped the brakes, just like everybody else did, on acquisitions earlier this year. Do you foresee the rest of 2020 to be a wait and see year, or do you think you're going to get back into growth mode fairly soon?

Thomas: As I mentioned earlier, we had built up a pretty nice pipeline of new investment opportunities and just put that on hold. So we expect to start making some investments here relatively soon. Again, we've got to see how this spike plays out and confirm my earlier comments about providers still being able to get the work done in the outpatient health campus care facilities in particular. But it'll be a slow growth year, unless there's significant changes and we don't see a second wave.

Because I think what we're seeing now, the scientists, the doctors, are telling us, really, that just is the evolution of the first wave and people congregating in air conditioning, because the hotspots are in hot spots. And so people are congregating in air conditioning where the virus can live, and unfortunately not wearing a mask and not social distancing enough. And hopefully people are getting the message and will be a little more careful so we don't have to shut down the economy again.

Aside from the focus on medical offices, which is clearly a differentiator, you don't have exposure to things like senior housing or the really troubled types of properties. What makes your business model different than other healthcare REITs that people might look at, like what is the X factor?

Thomas: Our business from the very beginning was built on relationships we have within the healthcare industry. I mean, Mark, his whole career's been in healthcare real estate. My career and some of our other executives really started it all. I mean, I was a lawyer by training, but I've been in the healthcare industry for a long time as have several of our senior executives.

John Sweet, our founder, has been in healthcare finance his whole career, so we had relationships with healthcare systems and with physician groups around the country. And the chairman of our board was the secretary of health and obviously had great relationships around the country as well. So that's always been the driving force for our strategy. And then working directly with those healthcare providers to secure assets, develop assets, and grow the platform, that really accelerated our growth.

Today, 60% of our space is leased directly to an investment-grade healthcare system tenant, if you will, a quality credit tenant. And the balance are great tenants as well, they just are large multispecialty groups that don't get credit ratings but have good cash flow. But our X-factor is really the ability to understand the providers’ needs and understand the trends going forward. To be there for the providers when they need us, help them grow, help them serve their mission, and frankly, we're going to see a lot of evolution of that mission coming out of this, and there'll be a lot of growth opportunities, investment opportunities, for us there as well. But I think that's always been the big X factor for us. Mark?

Theine: J.T. is of course being humble as he always does. He's general council for the Baylor Healthcare System in Dallas, Texas, worked for another system in Saint Louis prior to that, so he's coming from the seat of a hospital operator and really knows what they’re going through. He was on the opposite side of the table when Baylor sold some of their medical office buildings.

And then same for our chief investment officer. He was 25 years with Ascension, one of the largest hospital systems across the country, as their chief strategy officer. So, from the very top, it’s a team of guys who were in hospital operations before real estate, which I think is a big differentiator than being in real estate and then trying to understand hospitals after that. So, the relationships have really paid dividends for us.

And, I mean, we saw that in the acquisition of our CHI (Catholic Health Initiatives) portfolio about four years ago. That was a $700 million portfolio where we bought 51 buildings. And the hospital system told us that we were not the highest bidder, but they picked us because of the relationship, the long-term commitment, our reputation for excellence in operations. We put a lot of time and effort into the day-to-day operations, and we've got a really talented team that's committed to running these buildings in a very top-notch, professional way for the physicians and the patients that they serve.

Thomas: Mark said something there that I wanted to lay into as well, which is anybody can just go buy buildings in an auction and pay the highest price. It just really requires capital; it doesn't really require any thought or any strategy or any plan other than just, we're going to be the high bidder on everything.

But really, for us, the focus is on, how can we engage the providers who are going to be in those buildings if they own them, to sell them to us, help them improve them, help them be more efficient, and again, serve their patients better? We focus a lot of attention to maintaining the building, serving the patients that are coming in, patient families.

That's been critical during COVID. We never really had to control access to buildings, but as our providers were locking down and trying to at least get COVID testing patients to the right place and get our cancer center patients in, too, for their care, that's not a service you can disrupt; that's not a service that can be deferred. So, getting hand sanitizer, getting the buildings cleaned, and visibly cleaned, has been extremely important. It's that service after the fact that's an incredible part of our, again, both our X factor but our long-term growth strategy.

You mentioned briefly that the trends are favorable. Many healthcare REIT investors are familiar with the trends, especially as they pertain to senior housing. For example, the 85 and up population is expected to double over the next 20 years. Is the aging population the main thesis for buying medical offices over the long run? Or are there other favorable growth trends as well that investors should know about?

Thomas: The simple answer's yes. Spending healthcare dollars in the United States before COVID was going to grow 18% this year no matter what. We'll have to see how that plays out this year with the expense of providing COVID care offset by a slowdown in scheduled care and care that can be deferred.

But I think in the end that all catches up quarter after quarter, and if not, year over year. So, the aging population's driving that ultimate healthcare spending in the United States, and it's going to continue. Our own direct strategy is about, well, where is that care going to be provided? And again, the vast majority of care can be provided in an outpatient setting today in a medical office building.

What we've seen during the pandemic is hospitals, again, needed to push out patients where their care could be deferred or they don't need to be in a hospital for that care, to make room for the COVID patients, so where is that care going? It's going to the buildings that we own off campus away from the hospital.

We had a consumer survey done evaluating patients' comfort level with going to see the doctor today and having surgery today. And what that study shows, and you can see this in the report we published, is that patients are concerned about COVID and don't want to get it by going to get knee surgery. They want to go to a building that's away from the hospital campus. They don't want to go to the hospital and get mixed up with the COVID patients.

We'll get through the coronavirus and COVID, but it really just shows you that care can be provided in newer, cleaner, outpatient care facilities, and we think that reaffirms our investment strategy, and we think more care will be provided in those settings in the future.

Generally speaking, medical offices are smaller assets than hospitals or other healthcare facilities. And you've generally been focused on the smaller assets. How scalable is this, or could you give us some idea of what the market size might be?

Thomas: These are pre-COVID numbers, but pre-COVID, there were somewhere between $250 and $300 billion worth of medical office facilities. The kind of facilities that we would want to own and lease. Less than 10% of those are owned by public REITs like us. Another 10% are owned by some kind of institutional capital. But the vast majority, about 70% of them, are not owned by REITs -- they're owned by physicians, they're owned by hospitals, they're owned by providers and developers in local communities working with physicians and providers.

We easily have $100 to $150 billion of medical office buildings out there that are institutional quality and the things we would be interested in investing in at the right price. We're only $5 billion today. The growth opportunity's tremendous. And that's all in the United States, so we don't have to jump on a plane to Europe to do that. And long-term, there's opportunities around the world.

Finally, is there anything you would want investors to know about your business? Would you consider yourselves very healthy right now? Are you excited for the future? Where do you see yourself in five, 10 years?

Thomas: Five years from now, I hope we're multiples of our size and having helped to facilitate really an evolution in healthcare, particularly to outpatient care to where we can take care of medical patients like we did during the COVID crisis, while at the same time serving the needs of a vast majority of a population that doesn't have COVID or whatever the disease is of the time.

So, we're really in this for the long-term; it's always been a long-term strategy. Our goal is to be the partner of choice for the healthcare systems in the country, the major medical groups.

I mean, I'm very excited about the future. Right now it's day to day watching rent collections. We've partnered with the right physician groups. Even those that had to shut down temporarily in April, they're paying their rent, they want to get back to work, they're back to work stronger than ever.

Telehealth is something that's proven to be very effective. We don't have a concern about telehealth or waiting room disruption changing the need for medical real estate. But I think the real estate of the future will be different and be responsive to what we've learned from this period of time.

The growth in demand in healthcare, as we talked about before, is higher than ever and going to be as strong as ever going forward. Just how it's paid for and where it's provided are the things we need to keep in front of us in investing.

Theine: Yeah, I think you said it well. But at the end of the day, we're just seven years old and we're just getting started. I mean, we've built an incredible portfolio already; we've built an incredible team to really propel us into the future. We've got a portfolio that's industry-leading 96% occupied with virtually very little roll for the next five years, offering investors true stability and cash flow from our dividend.

I think it's just a really exciting time to be in healthcare real estate, and I think we got a great team and really exciting future ahead.

Thomas: Even though we've had a strong rebound from the lows in March, which were irrational, we're still cheap; we're still a great upside opportunity even in a short-term slow-growth mode. Balance sheet's great; dividend's in great shape. Hopefully, we get this pandemic behind us, get the vaccine behind us, create a little bit more stability. But I think investors can be confident in our long-term process.

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Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Physicians Realty Trust. The Motley Fool has a disclosure policy.

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