Physicians Realty Trust (DOC): Just What the Doctor Ordered

Side view of medical team and man using staircase in hospital

As the U.S. population continues to age, the rising demand for health care products and services provides a number of investment opportunities. Some are obvious, some not so much.
An often-overlooked area is health care real estate via publicly traded real estate investment trusts (REITs). REITs are companies that own income-producing real estate and offer investors exposure to income from a diversified portfolio of properties. Segments that we think have excellent prospects are senior housing, research labs, and medical office buildings, partly because they are not reliant on (increasingly stringent) government reimbursement. We’re avoiding segments such as skilled nursing properties and hospitals, which rely on government reimbursement and which are heavily regulated.
Physicians Realty Trust (ticker: DOC), based in Milwaukee, Wisconsin, is a health care REIT that specializes in medical office buildings and outpatient surgical centers.
The company is expected to benefit from two big trends. One is rising demand for medical services from an older population. Two, services are increasingly provided in outpatient settings, rather than in hospitals. DOC has most of its properties on or near major health system campuses, with most properties being medical office buildings.
Doctors typically are long-term, reliable tenants. In return, DOC offers long-term leases with modest fixed-rent increases. This arrangement provides steady income that supports a high dividend payout by DOC.
After a decline in the share price of more than 20% over the past year, we considered DOC to be undervalued and have begun buying the stock. We expect moderate capital appreciation and an attractive 6.0% dividend yield (though the dividend is taxed as ordinary income, not as a qualified dividend).
Since the company leases its properties to tenants on a “triple net” basis (the tenant is responsible for all expenses, including property maintenance, insurance, and property taxes), DOC doesn’t have the usual motivation to emphasize green building features. Nonetheless, the company has indicated that approximately one-third of its buildings participate in the EPA’s Energy Star program and that two of its larger facilities have earned LEED certification from the U.S. Green Building Council.
The company has a small workforce of 41 people. There are no women among the named executive officers, but the company did recently add one woman to its board. The company has a stated commitment to considering gender, ethnic, and racial diversity when selecting new directors.
While there is room to develop its environmental and social programs, its efforts around green building and the recent addition of a woman to the board indicate that it is moving in the right direction.
In sum, we think that Physicians Realty is just what the doctor ordered as part of a balanced, healthy portfolio.