Physicians Realty Trust aims to reduce health care costs

A new Milwaukee-based health care real estate investment trust (REIT) is focusing its efforts on the roles of doctors in reducing health care costs.

Physicians Realty Trust was formed this summer when its initial public offering was completed. Because of its focus, the group chose the ticker symbol DOC on the New York Stock Exchange.

“There’s a handful of health care REITs out there, there’s a lot of private buyers … but we didn’t see a REIT focused on the physician and the physician’s importance in the health care environment,” said John Thomas, chief executive officer and trustee of the company. “You can’t have health care services without physicians. You can’t control costs without physicians being part of that solution.”

The trust acquires, selectively develops, owns and manages health care properties that are leased to physicians, hospitals and health care delivery systems.

Investors appear to be excited about the concept. PRT raised $135 million gross in its IPO, after it exercised an overallotment option to offer an additional 1.3 million shares, for a total of 10.4 million shares, based on high demand.

Thomas

PRT used $38 million to pay off its debt and the remaining proceeds will be used to acquire additional buildings. The trust is currently evaluating 10 to 20 national opportunities for investment.

Physicians Realty Trust was formed primarily to access large amounts of capital so it could grow, said John Sweet, chief investment officer and co-founder.

“The highest and best value we could achieve was highly more likely to be in creating a public company as opposed to just selling the properties off in the marketplace,” Sweet said. “Because of where interest rates are, there’s a lot of people looking to get yield on their investments and REITs are a good place to do it.”

This was an opportune time to make an IPO, because of PRT’s size and health care industry pressures, Thomas said.

Sweet

“There are very few publicly traded investors in health care real estate and we felt that the few that were out there had grown to the size where they couldn’t participate in this market,” he said.

There are just four or five other publicly traded REITS that invest in medical office buildings nationwide and several private investors. Few are the size and scale of PRT, Thomas said.

Former Wisconsin Gov. Tommy Thompson is the chairman of the board of the company, which is a major reason PRT is based in Milwaukee, Thomas said. Thompson also served as secretary of the U.S. Department of Health and Human Services from 2001 to 2005, where Thomas met him while general counsel for Baylor Health Care System in Dallas.

Sweet and Mark Theine, longtime Wisconsin residents, created and managed a predecessor company, Ziegler Healthcare Real Estate Funds, out of Chicago-based B.C. Ziegler and Co. The companies from that fund portfolio were acquired beginning in 2006 and PRT took ownership of them when it completed its IPO. Theine is senior vice president of asset and investment management for Physicians Realty Trust.

“We just think (Milwaukee is) a great community for business and wanted to keep the new business in Milwaukee and grow from here,” Thomas said.

PRT owns 19 facilities, two of which are in Wisconsin. One is a 9,000-square-foot Aurora Health Care medical office building in Shawano.

The other is Firehouse Square, a 17,000-square-foot medical office building at 7220 W. National Ave. in West Allis that is leased to Aurora Health Care through 2018. It’s an ideal investment for PRT because it is a multi-specialty building near Aurora’s West Allis Memorial Hospital and the Milwaukee Regional Medical Center.

Ziegler Health Care Real Estate Funds purchased the building in August 2007 from the developer for $4.4 million and PRT now owns it, Sweet said.

“You can make a lot more money spending it on building your physician group and referrals than you can putting it into bricks and mortar,” he said.

PRT targets acquisitions based on the providers in those buildings. It looks for high quality practice groups that provide services needed in the community. The buildings must be of high quality, appealing, in an ideal location, near a hospital and easily accessible for seniors and families, Thomas said.

Physicians Realty Trust invests in health care real estate because the health care portion of the economy is worth about $3 trillion and, based on the aging and growing population, is expected to reach $4 trillion by 2020.

With a focus from both government and business on controlling and maintaining health care costs, many physician groups and hospitals are expected to consolidate in the near future. Smaller physician groups will be replaced by large hospital systems on its leases, so PRT will get better credit leases.

At the same time, more health care facilities will be needed to serve the aging population, Thomas said.

“As a real estate investor, it’s a very stable business, where it’s demand driven,” he said. “In a bad economy, people still go to the doctor, people still get sick.”

The ownership of health care real estate is fairly fragmented across the country, Thomas said. Physician groups can reduce costs by leasing instead of owning buildings.

“The whole premise of Physicians Realty Trust is to help acquire those properties from physician groups and hospitals who want to sell their buildings to raise capital for investment in other health care services and to otherwise consolidate their businesses,” he said. “The strength of health care real estate investment is the fact that typically physicians and hospitals, once they’re established in a location, the chances are more than for normal real estate that they’re going to stay in that location.”

In the future, the trust also plans to fund developers building facilities for the health care companies it wants to work with, Thomas said.

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