Hit The Buy Button And Put This REIT On Snooze Control
- On November 1st, I reported on Omega Healthcare Investors and the angst of the skilled nursing REIT’s tenant, Orianna.
- Then, on November 3rd, Rubicon and I wrote, “The lipstick is beginning to fade, and the silk purse has become a dog treat”.
- I’m sure some of you are saying to yourself, “enough already".
- I consider the pullback a buying opportunity, as Physicians Realty Trust continues to have a robust pipeline of attractive MOB acquisitions that should drive above-average growth.
Last week, REIT investors witnessed another week of volatility in both the skilled nursing and retail sectors. On November 1st, I reported on Omega Healthcare Investors (OHI) and the angst of the skilled nursing REIT’s tenant, Orianna (formerly Ark), as I wrote:
“Orianna has stopped paying rent, and the company is transitioning its assets. This means it is negotiating with Omega, and it could be either a “friendly” resolution or “not-so-friendly” resolution.
The friendly alternative means the landlord and tenant will be able to work out a new master lease, which includes a rent reduction to $32-38 million (an $8-14 million hair cut). Using my back-of-the-napkin math, and using $11 million as the rent reduction, the new “friendly” deal means Omega’s portfolio leased to Orianna is worth around $120 million less now (using a 9% Cap Rate).”
Then, on November 3rd, Rubicon Associates and I wrote:
“The lipstick is beginning to fade and the silk purse has become a dog treat.”
Of course, we were referring to CBL Properties' (CBL) dividend cut that caught most everyone off guard - shares were pounded, down over 25% at market close on Friday.
I’m sure some of you are saying to yourself, “enough already”, as shares of two popular REITs were whacked hard last week.
Nobody was expecting to see the sudden shift in sentiment, but when Mr. Market speaks, he usually carries a bull horn.
Today, I wanted to provide some calm to the storm, in hopes of providing REIT investors with an extremely safe alternative that won’t keep you up at night. Better said, just put this REIT on snooze control...
Just What The Doctor Ordered
I first began covering Physicians Realty Trust (NYSE:DOC) back in December 2013, just a few months after the Wisconsin-based REIT completed its IPO (issued around 9.5 million shares at $11.50/share). Like most IPOs, I did not initiate a Buy recommendation on DOC until 2014, but I have been pleased with the overall performance of the stock since the IPO.
However, a few recent events have caused shares to slide, making it more attractive for investors to get a piece of the action. Scroll down for my Buy recommendation.
Before taking a deeper dive into the pullback, let’s examine some of the underlying fundamentals that make DOC such a compelling opportunity.
Remember that the U.S. healthcare industry is boosted by an increasing number of insured and aging people. Between 2015 and 2060, the US population over 65 years is projected to more than double, from 47.8 million to nearly 98.2 million. The represents a dramatic increase in doctor visits with the older population.
Consumer choice and government policy is driving healthcare providers to purpose-built clinically efficient real estate solutions. Consumers are seeking convenience, and payers are maximizing efficiency and reimbursement.
Job growth in the healthcare space is expected to rapidly outpace the broader economy, and this outsized job growth should drive increasing demand in the healthcare real estate space with Medical Office Building (or MOB)-focused REITs as likely beneficiaries. The projected healthcare employment growth rate is 2.5x greater than the national average for all occupations.
MOB REITs are considered one of the most predictable property sectors, based in large part on the strong fundamentals centered on the growing demand in healthcare. As illustrated below, DOC shares have declined considerably over the last 5 months.
As seen below, Healthcare Trust of America (HTA) has outperformed DOC during the same time frame:
As a public company, DOC exploded out of the gate, having completed its IPO, and more recently closing on the $700 million Catholic Health Initiatives portfolio acquisition, and new investments in 2016 over around $1.3 billion. Its management team has maintained a conservative balance sheet, while investing nearly $4 billion in real estate assets since IPO in 2013.
During Q3-17, the REIT invested $190 million in an average first-year cash yield of 6.4% in very high-quality medical office facilities.
What defines “quality”?
Company CEO John Thomas provided this definition on the recent earnings call:
“We believe the most important factor in accessing the quality of a medical office building is our health system affiliation, credit quality to tenant, age of the building, occupancy, market share as a tenant, average remaining lease term, size of the building, and the client services and mix of services in the facility.
There are other factors that came in important of course that may or may not be relevant to the quality of the facilities depending upon the circumstance.
For example, a medical office full of physicians and services that not require close proximity to an inpatient hospital to be successful may be far higher quality than an on campus building especially at the locations proximity to the patients that is the customers that will make the providers that is our tenant successful.
Medical office facilities anchored by an orthopedic group of surgeons which includes chronicle space, imaging space, outpatient surgery and physical therapy space in a location convenient to ensure [indiscernible] is not only relevant real estate but high quality medical office space regardless of health system affiliation.”
“... barriers to entry for competition and payer mix of the patients can all have a material impact on the quality of building, as well as the economic condition and supply of the host market.
EBITDA coverage and quality of management of the tender are also material to this analysis and measures of quality especially of single tenant facilities. The goal of course is to deliver the highest and most reliable total shareholder returns year in and year out with both earnings growth and net asset value that is share price appreciation.
As we have built DOC from the beginning, we have sourced primarily off market and through direct working relationships with health systems C-suite and physicians over 250 facilities including almost 14 million rentable square feet.”
Quality of the Balance Sheet
DOC’s balance sheet is strong with net debt-to-adjusted EBITDA of 4.8x and debt-to-total capitalization of 27%. The company closed its 20 million share offering that was announced in late June in the beginning of the third quarter, which provides funding for third-quarter acquisitions and beyond.
The REIT had no issuance on the ATM in the third quarter, and retains roughly $215 million of capacity on that program. Here’s a snapshot of DOC’s debt maturity profile:
It is in an excellent position to continue to build out and enhance its portfolio. Here’s a snapshot of the company’s capitalization:
Steady Earnings Performance
DOC has industry-leading occupancy of 96.6% lease and delivered a solid 2.3% growth in NOI in its same-store portfolio. This growth includes a 3% increase in rental revenues and a 4.8% increase in operating expenses in the same-store portfolio that is 95.5% leased.
For the first time this quarter, 45 facilities of the initial Catholic Health Initiatives portfolio entered same-store, and as a result, the same-store portfolio now represents 66% of DOC’s overall portfolio, up from 55% of the portfolio in the previous quarter.
Also in the quarter, the company leased 130,000 square feet, including 97,000 square feet of lease renewals and 33,000 square feet of new leases. DOC’s leasing spreads on the 97,000 square feet were positive 6.5%, primarily driven by the ability to push rent in certain buildings that it nearly or completed leased.
Rent concessions in the quarter remains very low, with no free rent and approximately $1 per square foot per year for lease renewals and $5 per square foot per year for new leases.
Beyond 2017, DOC has no more than 6% of the portfolio scheduled to renew in any one year for the next seven years to 2024. The company’s lease expirations scheduled is deliberately laddered to stagger lease expiration days, ultimately driving very predictable growing cash flow to support reliable rising dividend for years to come.
In Q3-17, DOC generated FFO of $45.2 million, or $0.25 per share, and normalized funds from operation were $47.4 million. Normalized funds from operations per share were $0.26, and the normalized funds available for distribution were $42.8 million, or $0.23 per share. Year to date, DOC’s normalized FFO per share of $0.77 represents an 8.5% increase over the comparable period last year.
As you can see below, DOC is our #3 ranked healthcare REIT (out of 15) based on FFO/share growth (powered by F.A.S.T. Graphs):
Put This REIT On Snooze Control
As viewed below, on a valuation basis, DOC looks undervalued compared to its peers, trading at a couple of turns cheaper on a FFO multiple basis.
In terms of dividend yield too, it is attractive.
In addition to the strong FFO/share growth, I am pleased with DOC’s ability to reduce its dividend payout ratio, suggesting continued dividend growth in 2018.
The Bottom Line
I consider the pullback a buying opportunity, as DOC continues to have a robust pipeline of attractive MOB acquisitions that should drive above-average growth. I continue to maintain a positive outlook for MOB REITs, and I view DOC as having faster-than-average growth prospects through accretive acquisitions. DOC and HTA will continue to battle out for acquisitions, and I consider the friendly competition to be good for me (as an investor in both REITs).
As any portfolio manager recognizes, the key to building a successful portfolio is to maintain adequate diversification across property types. REITs have consistently outperformed many more widely known investments. Over the past 15-year period, for example, REITs returned an average of 11% per year, better than all other asset classes.
By maintaining a tactical exposure in the brick-and-mortar asset class, investors should benefit from my REIT research. After all, I am the #1 ranked analyst (1+ million page views every 90 days) on Seeking Alpha with an exceptional 5+ year track REIT record.
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Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors, if they are overlooked
Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).
Sources: F.A.S.T. Graphs and DOC Investor Presentation.
REITs mentioned: LTC Properties (LTC), Ventas, Inc. (VTR), Welltower Inc. (HCN), CareTrust REIT (CTRE), National Health Investors (NHI), Universal Health Realty Income Trust (UHT), HCP, Inc. (HCP), Senior Housing Properties Trust (SNH), Global Medical REIT (GMRE), Medical Properties Trust (MPW), HTA, Healthcare Realty Trust (HR), DOC, New Senior Investment Group (SNR), Sabra Healthcare REIT (SBRA), OHI, Community Healthcare Trust (CHCT), and Quality Care Properties (QCP).
This article was written by
Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 100,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.
The WMR brands include: (1) iREIT on Alpha (Seeking Alpha), and (2) The Dividend Kings (Seeking Alpha), and (3) Wide Moat Research. He is also the editor of The Forbes Real Estate Investor.
Thomas has also been featured in Barron's, Forbes Magazine, Kiplinger’s, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox.
He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, and 2022 (based on page views) and has over 108,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley) and is writing a new book, REITs For Dummies.Thomas received a Bachelor of Science degree in Business/Economics from Presbyterian College and he is married with 5 wonderful kids. He has over 30 years of real estate investing experience and is one of the most prolific writers on Seeking Alpha. To learn more about Brad visit HERE.
Analyst’s Disclosure: I am/we are long APTS, ARI, BRX, BXMT, CCI, CHCT, CIO, CLDT, CONE, CORR, CUBE, DLR, DOC, EPR, EXR, FPI, GMRE, GPT, HASI, HTA, IRM, JCAP, KIM, LADR, LAND, LMRK, LTC, MNR, NXRT, O, OHI, OUT, PEB, PEI, PK, QTS, RHP, ROIC, SKT, SPG, STAG, STOR, STWD, TCO, UBA, UNIT, VER, VTR, WPC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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