Physicians Realty's Steadily Improving Payout Ratio Strengthens Dividend Safety

Physicians Realty is a self-managed healthcare REIT with ownership in nearly 300 top-tier medical office buildings (MOB's) across 31 states.

Since its founding in 2011, the REIT's portfolio has become more evenly balanced between properties located on campus with a hospital, an area it was far more concentrated in earlier on, and off-campus properties found closer to where patients live.

Off-campus properties have become increasingly in demand because they tend to be more profitable for health care providers thanks to fewer government regulations and better reimbursement rates.  

With higher profitability, tenants of off-campus properties are typically better able to cover their rent than tenants of other healthcare property types.

Physicians Realty has enhanced its tenant profile while improving its portfolio mix, with over 60% of its tenants now investment-grade caliber. In addition, nearly 90% of its properties are rented by large healthcare systems and their affiliates, which are typically more financially secure and better positioned to attract patients.

The REIT's 96% occupancy rate is further evidence of its tenant strength, in addition to the resiliency tenants showed in 2020 when over 90% of rent was collected despite many non-essential medical providers seeing their business disrupted.

To that end, Physicians Realty's tenants sign long-term leases that bake in annual rent increases of 2% to 3%. Better yet, 93% of leases are absolute or triple net, which puts tenants on the hook for most operating expenses (e.g. maintenance and utilities) and creates greater certainty of future cash flow.

There's further comfort around the REIT's tenants when factoring in no single tenant accounts for more than 6% of the firm's annual base rent. In fact, its ten largest tenants collectively generate less than one-third of overall rent, insulating the firm's overall results from the performance of any single operator.

Furthermore, with its broad geographical diversification across the continental states, no metropolitan area accounts for more than 8% of its leasable square footage. 

As Physicians Realty has aggressively scaled its business over the past decade, these improvements in portfolio mix and tenant quality have resulted in steady cash flow growth and an improving debt profile and payout ratio. S&P even noted the progress by upgrading the REIT's credit rating to BBB earlier this year.

With its reduced leverage and improved investment-grade credit rating, Physicians Realty is better situated to continue covering its dividend while maintaining the financial flexibility to grow its portfolio.

Given this improved financial footing and dividend coverage, we are upgrading Physicians Realty's Dividend Safety Score from Borderline Safe to Safe.

Physicians Realty appears to have a dependable source of rental income for the foreseeable future, buoyed by an aging population that's likely to spur higher healthcare spending for decades to come.  

However, even though we consider the dividend safe over a full economic cycle, there is little room for the dividend to grow with a payout ratio of over 90%. Investors seeking dividend growth that at least keeps pace with inflation may consider looking elsewhere.

Even so, conservative investors looking for a safe dividend with an attractive yield may find Physicians Realty a good option.