Physicians Realty Trust, whose NYSE ticker is DOC, has been a breath of fresh air in the equity REIT space, which has challenged some of my beliefs. One of those beliefs is that physicians dedicate their entire lives to healthcare, leaving them with limited financial and stock market knowledge. This is turning out not to be true.
Physicians has invested in medical office buildings, which are in high demand due to the increasing number of outpatient services offered. Let me be clear. Medical office buildings are not hospitals. They include private physician’s offices, laboratories, imaging suites, and outpatient surgical centers. They may standalone or be associated with a hospital, as well as on or off campus.
Physicians has capitalized on the strong healthcare fundamentals in the United States. With the population aging and ObamaCare increasing the number of insured people, consumers are choosing healthcare options that are strategically located.
Here are several beliefs that Physicians has made me question.
For being a small cap, there should be additional risk premium.
Since Physicians went public in mid-2013, the company has grown fourteen fold. Today’s market capitalization is $1.8 billion and its valuation multiples have been in line with bigger peers. Its AFFO multiple is 20x versus their peers 14x. I don’t see Physicians being penalized for being a small cap.
This is not an environment for raising equity.
The current selloffs made new equity offerings harder. However, Physicians was able to raise capital in late January to payoff unsecured revolving credit facility and invest in working capital and real estate.
It is harder for a small cap company to become investment grade.
The company was awarded an investment grade rating by Moody’s in mid-2015.
Due to its relative high valuations, dividend yield sucks.
Based on the universe of healthcare REIT stocks, Physicians has been in the bottom 1/3 in terms of dividend yields. However, compared with the overall REIT universe, its yield of 5.2% has been better than 60%.
Beta must be high.
Small caps usually carry more risks than large caps as the former doesn’t have shock absorbers during unstable periods. Their shares tend to fluctuate more often. As a result, their beta is also high.
However, Physicians performance in the stock market has been relatively stable. They have a beta of 0.39, better than many large caps in the REIT space. As a matter of fact, the average beta for healthcare stocks has averaged around 0.33, which makes it a more stable sector.
On a final note, I haven’t been able to find any actual physicians on Physicians management team. It seems they are physicians in name only.
Source: Physicians Realty Trust(NYSE:DOC), Fast Graphs, Yahoo!Finance
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