Medical office real estate might not sound like the most exciting type of investment to you, and to be fair, it isn't. Medical offices are rented on a long-term basis and are designed to produce steady income, year after year.
However, you might be surprised at the long-term return potential of well-run healthcare real estate investment trusts, or healthcare REITs. One of the newer and most promising in the space is Physicians Realty Trust (NYSE: DOC), which has done a great job of delivering for investors so far and is just getting warmed up.
Physicians Realty Trust in a nutshell
Physicians Realty Trust is a real estate investment trust focused on healthcare properties, specifically medical office buildings. At the end of 2020, the company owned 275 properties, 94% of which are medical offices (by income), and 89% of the properties are affiliated with major health systems.
The company's general strategy is to leverage its medical expertise and relationships with physicians and health systems to find properties to acquire at favorable terms. Its team has several notable ex-hospital executives: Chief Investment Officer Deeni Taylor is former EVP of St. Vincent Health, CEO JT Thomas is former President and CDO of Cirrus Health, and former U.S. Health and Human Services Secretary Tommy Thompson is the Chairman of Physicians Realty Trust's board, just to name a few examples.
The next few years could be very interesting
Physicians Realty Trust grew rapidly for the first few years of its publicly traded life, but the growth has slowed down a bit in recent years. However, management seems ready to take advantage of low interest rates and a massive addressable market opportunity to step on the gas once again. In fact, at the midpoint, Physicians Realty Trust expects to make about $500 million in investments this year -- that's almost double its 2020 investment activity (and most of that happened in December 2020).
In all, Physicians Realty Trust's CEO estimates there is about $250 billion worth of medical office real estate in its investable universe, so we could see an elevated level of growth for some time.
The economics are quite favorable for strong long-term returns. In 2020, Physicians Realty Trust completed acquisitions at an average initial yield (cap rate) of 6.4%. Meanwhile, the average interest rate it pays to borrow money is just 3.5% and given the current low-rate environment and recent credit rating upgrades the company has received, its cost of capital would likely be even lower now.
Can a healthcare REIT really produce market-beating returns?
Obviously, we don't have a crystal ball that tells us what Physicians Realty Trust will do over the coming years. However, judging by some of the now long-established healthcare REITs that have been around for decades, the potential for fantastic returns is certainly there. For example, I recently wrote that investors who got into leading healthcare REIT Welltower in its early days would have seen a $1,000 investment in its mid-1970s IPO grow to more than $180,000 today. The two next-largest healthcare REITs, Healthpeak Properties (NYSE: PEAK) and Ventas (NYSE: VTR), which have both been public for more than 25 years, have also handily beaten the S&P 500 over time. Here's how both companies have done against the benchmark stock market index over the past quarter century.