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Physicians Realty Trust (NYSE:DOC) is a real estate investment trust (“REIT”) that we recently got behind and suggested buying in the $10-$11 range. Well, you can forget about it now, because DOC is being bought out by Healthpeak Properties, Inc. (NYSE:PEAK). Folks, we consider this one of the worst deals we have ever seen and DOC shareholders are getting kind of screwed over on this one. Healthpeak is getting a steal and not even paying a premium. While the forward-looking larger combined company is likely a good buy for an outsider, shareholders of DOC really took it on the chin, and this comes on the heels of them just reporting earnings which suggested operations were stabilizing. By the looks of things, with this deal, DOC holders now are getting a bit of a dividend cut and a capital cut. There was no premium built in here at all.
It is peculiar here to see a deal with no premium and with the results that were just put out. The tenant data is still strong here given that physical office space is necessary for DOC’s tenants, and the balance sheet is holding up very well. The newly combined company will have strong geographic diversity, and have an over 95% leased rate on the portfolio, with the bulk of the tenants having investment-grade ratings.
Performance was stabilizing
In the just-reported quarter, we saw stabilization of DOC operations in our opinion. Some mixed results persist, but overall it was strong. Total revenues increased 5.3%, compared to a year ago. Rental and related revenues increased $5.9 million, or 4.6%.
The company earns interest on some of the loans it has made, and saw interest income increase 40% from a year ago. Of course with higher rates, interest expense increased $1.7 million, or 9.2%, from a year ago. Total revenue was $138.5 million in Q3 and total expenses were $125.4 million. Net income was $12.9 million, compared to net income of $66.3 million a year ago, but last year, net income in Q3 included a $53.9 million net gain on the sale of investment properties.
Normalized funds from operations (“FFO”) were $0.25 per share, flat from Q2. 94.7% of properties were leased. It was a very positive quarter all things considered, especially when you look at the value destruction in REITs over the last couple of months. And Healthpeak just came in and got a killer deal in our opinion, while it is a horrific deal for DOC shareholders in our opinion.
Why this is a bad deal
Why is it a bad deal? Feel free to offer up comments as to why this is a good deal for shareholders of DOC, but, under terms of the agreement, if you own DOC you will get 0.674 shares of new issuances of PEAK stock for each DOC share held. That valued DOC shares at about $11.07 per share, equal to the stock’s closing price on Friday. DOC is under $11 at the time of this writing. And because PEAK is the acquirer, as with all things in M&A, the acquirer usually gets hit. It is down about 4% today. This valuation for DOC, it is insulting for shareholders, and really all you need to do is look at the chart:
There you have it. Management sold the company to an acquirer at lifetime lows. There really is not much to sugarcoat it. Oh, well, we will add that you were getting $0.92 per share in dividends annually with DOC. Well guess what?
As part of the deal, the new PEAK dividend looks to be $1.20 annualized. Well that is $0.28 higher than $0.92, right? Well it is, except you are only getting 0.674 shares of PEAK in exchange for your DOC. So, by our math, you not only are getting your shares taken from you at a lifetime bottom, but the dividend is actually a cut for you.
That is right. If you had one share of DOC, you would get $0.92 in dividends. Now you will get 0.674 shares of PEAK for your DOC. So, you are getting 0.674 of the $1.20 dividend. That means your new dividends are 0.81 cents (technically 0.8088 cents). So we will call that a $0.11 dividend cut, or a 12% haircut to your payout.
The flipside might be that the new company will enjoy future growth, and sure, we are open to hearing that argument from readers. However, as far as we are concerned, this is one of the worst deals we have ever seen.
