Physicians Realty Trust (NYSE: DOC) is a real estate investment trust, or REIT, that owns and operates healthcare properties -- specifically medical offices. As an essential type of property, medical office real estate has been relatively unscathed by the COVID-19 pandemic, and those properties affiliated with major health systems (a focus area of Physicians Realty Trust) have performed particularly well.
Even so, Physicians Realty Trust's growth has stalled in recent years, and the uncertainty that came with the pandemic made management even more cautious. However, this REIT could still have tons of growth ahead of it. Here's why.
Physicians Realty Trust today
Physicians Realty Trust is a relatively young REIT, having completed its initial public offering (IPO) in 2013 with about $125 million worth of properties. Since then, the company has built a portfolio of healthcare real estate worth nearly $5 billion.
The company currently owns 268 properties. Ninety-three percent of its portfolio (by income) is medical offices, and 89% of the tenants are affiliated with major health systems. The company has done an excellent job of growing while increasing its funds available for distribution and keeping a solid balance sheet.
However, most of its growth came within the first five years after the IPO. In a recent interview, CEO John Thomas told me that the last two years (2018 and 2019) had been a bit challenging when it comes to accelerating the company, for a variety of reasons. The company entered 2020 planning to enter growth mode once again, but COVID-19 put a hold on its plans.
A massive market opportunity
While roughly $5 billion in medical office real estate may sound like a lot (and it is), it's just a tiny fraction of the market. As Thomas said, "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."
What's more, less than 10% of the market is REIT-owned. Some medical office real estate is owned by institutional investors. But almost 70% is owned by physicians, hospital systems, or the providers that occupy them. And these are great candidates for REIT consolidation. The company sees a market opportunity in the $100 billion to $150 billion range that could be candidates for acquisitions right now. Not that it will acquire anything close to that, but the point is, there is a lot to choose from.
And that's just the medical office market of today. There's a long-tailed demographic trend -- the aging U.S. population -- that should keep demand for high-quality medical facilities growing for years to come. The 65-and-older population is expected to roughly double in the next 35 years, and the oldest age groups are growing even faster. This segment of the population uses healthcare facilities more than the average American and spends more money when they do.
In short, there's no shortage of investable medical office real estate today, and that's not likely to change anytime soon.
The bottom line
In a decade, Physicians Realty Trust will likely be a much larger REIT than it is today. When it was in "growth mode," the company was acquiring about $1 billion in medical office properties annually, and it's not inconceivable it could get to that rate again.
Conservatively, I see the portfolio growing to twice its present size by the year 2030, but even that could be merely a starting point.