Bradley Page - General Counsel John Thomas - Chief Executive Officer Jeff Theiler - Chief Financial Officer John Sweet - Chief Investment Officer Deeni Taylor - Executive Vice President of Investments John Lucey - Principal Accounting and Reporting Officer Mark Theine - Senior Vice President of Asset and Investment Management.

Juan Sanabria - Bank of America Merrill Lynch Chad Vanacore - Stifel Michael Carroll - RBC Capital Markets Craig Kucera - Wunderlich Securities Jordan Sadler - KeyBanc Capital Markets John Kim - BMO Capital Markets Vikram Malhotra - Morgan Stanley Daniel Altscher - FBR Jonathan Hughes - Raymond James.

Greetings and welcome to the Physicians Realty Trust's Year End and Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Bradley Page, Thank you, you may begin..

Thank you, Matt. Good morning and welcome to the Physicians Realty Trust's fourth quarter and full year 2015 earnings release conference call and webcast.

With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; John Sweet, Chief Investment Officer, Deeni Taylor, Executive Vice President of Investments; John Lucey, Principal Accounting and Reporting Officer; Mark Theine, Senior Vice President of Asset and Investment Management.

During this call, John Thomas will provide a Company update and overview of recent transactions and our strategic focus. Then Jeff Theiler will review the financial results for the fourth quarter and full year of 2015 and our thoughts for 2016. Following that, we will open the call for questions.

Today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. They are based on the current beliefs of management and information currently available to us.

Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe our assumptions are reasonable, our forward-looking statements are not guarantees of future performance.

Our actual results could differ materially from our current expectations and those anticipated or implied in such forward-looking statements. For a more detailed description of such potential risks, please refer to our filings with the Securities and Exchange Commission.

With that, I would now like to turn the call over to our Company's CEO, John Thomas..

Thank you, Brad, and good morning. 2015 was a landmark year for Physicians Realty Trust and we finished the year with an excellent fourth quarter.

Just in case you didn’t noticed, we delivered an almost 8% total shareholder return in 2015 including dividends, comparing favorably to the S&P 500 which had a total return of 1.4%, the Dow Jones Industrial with a loss of 2.3% and the Healthcare sector within the SNL US REIT index which lost 7.3%.

It’s a volatile in the capital markets but we are pleased with the relative performance of our stock and dividends as we continue to execute on our business plan and build an excellent long-term company for you. And the other investors have recognized that excellence. Thank you.

During 2015, we added $841 million of investments in excellent medical office facilities, more than doubling our total portfolio during the year with the first year unlevered cash yield on these investments expected to be approximately 6.92%.

These investments included 66 acquisitions, and $22 million of mezzanine loans, all of which we believe to be strategically valuable medical office out-patient medical office facilities. Since we went public, we have averaged just over one acquisition per week and believe, we’ll have the opportunity to continue that pace for the foreseeable future.

Our ability to underwrite, diligence, and close an acquisition per week is due to our highly refined process routine where every facility, tenant and market get the same consistent evaluations while effectively building our relationship with our tenants and clients during the process.

This is the DOC way and leads a great tenant satisfaction and referrals to other hospitals and physicians who would rather work with us due to our professionalism, healthcare knowledge and attention to customer service.

All this hard work led us to enabling – led us to ending 2015 with approximately $1.7 billion in total real estate assets and our annual revenues grew year-over-year by 143%.

During the fourth quarter, we completed $152.8 million of investment activity including 11 property acquisitions in 11 states, totaling $142 million and 494,000 square feet and loan investments of $10.2 million. The average first year unlevered cash yield on these investments is expected to be approximately 6.7%.

Since our January 19, 2016 offering and disclosures, we have completed seven acquisitions of seven healthcare properties containing an aggregate of 323,000 net leasable square feet. These investments total approximately $104.4 million and an average first year unlevered cash yield of 7.35%.

During our offering in January, we announced purchase agreements totaling $99.6 million and $167.4 million of acquisitions under letter of intent.

We have completed $90.5 million of those acquisitions and we continue to believe most, if not all of those pending investments will close, once we complete due diligence and the seller satisfy their continuities.

Medical office and out-patient care facilities are the defensive recession resilient real estate and investors continue to understand that more and more. DOC’s team is the most qualified team for sourcing, underwriting, acquiring and managing this most desirable real estate in any economic cycle, but especially now.

Investors particularly appreciate our industry-leading occupancy of almost 96%, with an average lease of almost nine years and our clients refer other opportunities to us routinely. We continue to enhance the overall quality of our portfolio and are very excited about the opportunities we see in front of us in 2016.

We ended the year with 74% of our space either on the campus of a hospital or anchored by a health system and we are targeting that number to increase to at least 90% in the next two years.

Like the IMS facilities we acquired in Phoenix during 2015, we continue to seek out larger, newer medical office facilities anchored by high-quality health systems and physician groups both on and off-campus.

Our average property size has grown to 38,400 square feet and we expect that average to still grow, but not forsaking our high quality providers who practice in smaller more efficient clinical settings where appropriate. In 2015, Congress in the White House in bipartisan legislation passed the Bipartisan Budget Act of 2015.

Section 603 of that law lowers Medicare reimbursement for future hospital outpatient departments located more than 205 yards from the hospital.

While this legislation certainly benefits our on-campus facilities with vacancy for location of future HOPDs, Congress didn’t pass this law to incentivize hospital to place services on the campus, but rather intended to further Congressional policy to pay for care in the lowest cost setting clinically appropriate to that care.

Congress intends to save $9 billion by this legislation over the next ten years, which means they expect the care to be provided in convenient locations for the physicians and patients away from hospital campuses.

The American Hospital Association and their members recognize this as well as they are fighting hard to repeal this legislation, so that they can place services in locations convenient to their patients and physicians and recognize that it’s not always on the campus of a hospital.

We recently discussed this legislation with a Chief Medical Officer of one of our most important clients, specifically, section 603’s impact on strategic outpatient physician strategy this sophisticated hospital organization has developed. The answer was very revealing.

This hospital system like meaning it’s actively acquiring physician practices and very focused on its off-campus outpatient strategy is the current and future of healthcare service delivery.

This physician executive said, and I quote “we have found that trying move physicians from Medicare Part B physician office REITs to Part A hospital outpatient departments, results from the loss of more than 50% of their patients.

In HOPD clinics, the patients have substantially higher co-pays and deductibles and they seek other options as the service is the same, but they have substantially higher out of pocket cost. The implication of these comments in light – hospital recognize what they may gain in rates then may lose substantially more in volume.

Hospitals are focused on placing physicians and hospital outpatient services in the best possible locations for access and volume.

Similarly, HR2895, a bipartisan bill sponsored call the Medicare Patient Access to cancer treatment act of 2015, seeks to enhance Medicare reimbursement for physician practices providing cancer care in lower cost settings and will pay for the incentive by further lowering the reimbursement to HOPDs. The AHA is also fighting this legislation.

We support all our clinical providers in advancing their efforts for fair and adequate reimbursement for their services.

Our belief is that patients and physicians, that is consumers and consumers will ultimately drive the optimal location for their healthcare services and today that means services that can be provided in the most convenient location will be the ultimate real estate location for investment.

The answer is clear, government commercial payers, patients and even physicians want all care that can’t be provided in all patient settings to be provided in the lowest cost environment that is possible. Physicians Realty Trust’s strategy and focus is to invest where everyone wants the care to be provided including those who pay for that care.

That is outpatient medical office. As US healthcare economy grows from $3 trillion to $5 trillion over the next eight years, the wave in transition of care out of the hospital and into lower cost outpatient medical office facilities is not only inevitable it is imperative.

In the mean time, we have a significant number of 603 assets benefiting from a grandfather reimbursement status and we have more in the pipeline.

These assets have the dual benefit of being in a location that maximizes patient flow and convenience that is customer satisfaction, as well as physician efficiency while also benefiting from higher Medicare reimbursement.

We have a strong belief that the hospital locate at these services and these locations primarily for patient volumes and convenience and we’ll continue to make that a priority and we’ll be reluctant to move out of these locations and jeopardize both patient physician convenience, and the higher Medicare HOPD where reimbursement Congress protected for them.

Before I ask Jeff to review our financial results, I would like to commend our Senior Vice President and Principal Accounting Officer, John Lucey, Laurie Baker and their entire team and our entire team that worked so hard in 2015 to build our internal controls and SOX compliance structures.

The 10-K we filed for 2015 is the first year-over-year subject to SOX 404 D requirements and that is a monumental task. Excellent and transparent reporting is our commitment to you, and we couldn’t do it without DOC eligible team that John has build and leads. Thank you, John.

We believe we are well on our way to continue delivering our strong 2015 performance into 2016 and beyond. We are building a great company in piece-by-piece.

Jeff?.

Thank you, John. We finished the year with a strong quarter of operations. Our fourth quarter 2015 funds from operations or FFO were $19.6 million or $0.22 per diluted share. Our normalized FFO, which added back $3.1 million of acquisition expenses and some other small normalizing adjustments were $22.7 million.

Normalized funds from operations per share was $0.26, which represents a year-over-year increase of 18% from the fourth quarter 2014. For the full year 2015, normalized FFO per share was $0.92 representing growth of 31% over the full year 2014.

Normalized funds available for distribution or FAD for the fourth quarter were approximately $21.2 million or $0.24 per diluted share an increase of 20% over the fourth quarter 2014.

Our funds available for distribution are helped by the fact that our average lease term is nine years, which limits the amount of tenant improvements and leasing commissions required to generate that figure.

We achieved record investment results in 2015 adding $841 million of healthcare investments which was at the higher end of our guidance of $700 million to $900 million of overall investments for the year.

90% of our 2015 investments were in medical office buildings, 7% in specialty hospitals, and 3% were Mezzanine loan investments which are designed to provide future acquisition opportunities.

We are focused and will continue to focus on the medical office building segment of the healthcare asset spectrum which we believe will generate superior risk-adjusted returns. 86% of the cash NOI generated by our portfolio is from medical office buildings and we would expect that percentage to continue to grow in 2016.

The investments this quarter totaled $153 million at an average first year cash yield of 6.7%. If we had acquired all of our fourth quarter acquisitions at the beginning of the quarter, they would have contributed an additional $1.2 million of cash NOI to our portfolio.

As a reminder, the National Medical Office Building which we acquired in the fourth quarter for $45 million is 100% leased but tenants don’t take occupancy until June of 2016. Once occupied, our Nashville MOB will generate cash NOI of $700,000 per quarter.

As John mentioned, we have completed $106 million of investments year-to-date in 2016 and are making good progress toward closing the rest of the new transactions we announced in January. It is an unusual time for medical office building investment.

Non-traded healthcare REITs continue to be negatively impacted by the RP fallout and increased regulatory scrutiny by the SEC. Medical Office Building focus private equity funds have a relatively limited pool of capital and have exhausted much of that in the past year with portfolio purchases.

Finally, many of the larger diversified REITs are reluctant to pursue large-scale investment activity with the recent declines in their share price related to negative perception around the senior housing and skilled nursing sectors.

Our stock price on the other hand has performed relatively well in 2015, and was one of the few healthcare REITs that generated positive total returns for its shareholders.

Based on these factors, and the pipeline of potential acquisition opportunities we see in front of us, we believe the overall investment environment for 2016 is even better than last year and we remain comfortable with our investment guidance of $750 million to $1 billion for the year.

We elected to strengthen our balance sheet with a follow-on equity offering of $321 million in January at favorable pricing in order to reduce our debt outstanding and put us in the best possible position to execute on our investment pipeline.

We had another important financial milestone in January of 2016 as we were able to issue $150 million of long-term debt at investment-grade rates in the private market split into four different tranches, the seven year tranche, a 10-year tranche, a 12 year tranche and a 15 year tranche.

The blended maturity of the debt was just under 12 years with a weighted average interest rate of 4.5%. Both the debt and equity markets were extremely challenging at the beginning of 2016, and we were pleased with the favorable results of those offerings and appreciate the support from our investors.

To summarize the impact of all the capital changes following the quarter end, pro forma for the $321 million equity offering in January, the terming out of a $150 million of debt in the private placement market and the acquisitions announced year-to-date, our current debt-to-gross assets is approximately 15%.

We believe we are starting 2016 in a strong capital position with low debt and $73.5 million remaining on our existing ATM program. Our portfolio continues to perform to our expectations.

At the end of the year, it was 96% leased and the 62 property same-store pool which encompasses 100% of the properties we have owned for over one year generated year-over-year NOI growth of 2.2% driven primarily by contractual rent increases.

Finally, our general and administrative costs for the fourth quarter were $3.5 million, which brought full year G&A expense to $14.9 million within the range we had estimated at the beginning of the year. This met our target of reducing overall G&A to less than 1% of asset value.

As we look into 2016, we estimate our overall G&A expense will stay in that less than 1% of asset value target range for the year, at least scale up the platform for another year of growth. With that, I’ll turn it back over to John. .

Thank you, Jeff. We look forward to responding to your questions. .

[Operator Instructions] Our first question is from Juan Sanabria from Bank of America. Please go ahead..

Good morning guys. .

Hey, Juan. .

Hey, Juan..

I was just hoping if you could give us a little bit more color on the pricing you are expecting on acquisitions for the year in terms of the deal pipeline, you are saying – mentioning less competition from the non-traded REITs and some of the bigger guys, but it seems that you are wanting to bigger assets and move up the quality spectrum.

So just how you are thinking about pricing for the year?.

Yes, it’s a great question. I think the deals we announced in the first part of the year is 7.35%, Juan, as you recall, we always report kind of first year cash yield that we expect.

I think overall though, for the year, it’s for us, it’s going to continue to tie in a little bit for the factors that you mentioned kind of moving up the quality scale and bigger markets, bigger buildings. So, probably 6.5% to 7%, we historically said 6.5% to 7.5%.

We still see some higher yielding opportunities, but I think that overall average is going to move down to that blended number of 6.5% to 7%. .

And are you seeing cap rates stabilize? Any signs if they may head up with some of the big REITs out of the market or what are you seeing overall?.

You know, I mean, call it the big guys, the big three and others is kind of out of the market, but there is still plenty of private equity and plenty of data out there. So, while the players have changed a little bit over the last 18 months, there is still plenty of competition for the building. So, I would say they have stabilized.

There is less competition or less buyers, but there is also plenty of buyers and plenty of liquidity and just the defensive nature people recognizing that had really attracted a lot more capital from many sources. .

Great, and then, maybe for Jeff, on the same-store NOI outlook as we think about 2016.

What kind of range can you give us at all if you can or any pressure on expenses? And if you could remind us what percentage of your portfolio is internally managed?.

Sure, I’ll actually turn it over to Mark to answer this question.

Mark?.

Sure, Juan, heavy into the question. On the same-store for 2016, we projected being in that 2.5% range. As you know, our contractual rent increases are regularly 2% to 3% on average. So I think we’ll be kind of right in the middle of that range there for 2016.

And, as it relates to property management, we are about 96% internally managed on everything we oversee. .

Great, thanks guys. .

Thanks, Juan..

Our next question comes from Chad Vanacore from Stifel. Please go ahead. .

Hey, good morning all. .

Hey, Chad. .

So, John, you mentioned that, that you expect to get to into the 90% of on-campus MOBs in your portfolio.

So what should we expect in terms of off-campus versus on-campus in the pipeline right now?.

I think, again, to be clear, it’s 90% on-campus or anchored by a health system, but we are just very focused on kind of the larger physician groups and the larger health systems and big part of my comments and quote and clear my presentation was, hospitals are looking for the most strategic opportunity and physician groups are looking most strategic locations of their facilities and that’s not always on-campus and reimbursement and payers are recognizing that as well, and frankly trying to incent the care to be provided in lower cost settings whether that be on or off-campus.

So, I think it just continues to be a nice blend of both and the IMS portfolio which I highlighted and we closed on last – third quarter last year, three of those were big on-campus buildings but one was off-campus in a very strategic location but anchored by that health system in a – or excuse me, anchored by the IMS group in a large surgery center that’s tied to be Brazo health system out there, so.

.

Okay, and then, just thinking about the other side of your portfolio, other than MOBs, what’s your appetite for specialty hospitals and surgical centers. .

Pretty limited. We could close on the Great Fall Surgical Center in the first quarter earlier this year. That – as I look at over the year, that maybe the only one we did this year. So you could – you may see one or two, but we are very focused on these pure play medical office buildings. .

All right, and then, just what, can you remind me what the overall pipeline size is and then, I think you had mentioned at some point you had some more small portfolios of - what size are those in the pipeline?.

Yes, so we – with our offering and we announced about less than $215 million of acquisitions on our contract or letters of intent and we tend to kind of maintain that kind of bucket. So, I think we are looking the second and third quarter opportunities right now and we expect to close on just about everything we announced earlier this year.

So, pipeline continues to be robust and last opportunities to pick and choose from. .

Okay, still looking to some $20 million, $30 million small portfolios in there?.

And I’d say $20 million to $30 buildings, but, not a lot of – we tend to grow one building, two buildings at a time and that’s what sellers tend to own. So, that’s where we focus. .

All right. Thanks for taking my questions..

Yes, thanks, John. .

The next question is from Michael Carroll from RBC Capital Markets. Please go ahead..

Yes, thanks.

Hey, John can you give us some color on the competitive landscape in the investment market today and how has it changed over the past few quarters? I know you indicated that the larger guys and the non-traded guys have kind of dropped off a little bit, but those guys won’t remain competition truthfully, right?.

Yes, we always – I know that’s not what you want to hear, but 100% of everything we’ve done this year with off-market. So, we tend to not have a lot of competition, most of the buildings that we are acquiring. But the landscape has changed.

Two years ago, we saw, when we did see somebody with the non-listed REITs more often the non, last year, and I’d say this year, it’s been more private equity-driven investors than anything else.

So, we tend to bump in our other – our pure play peers and try to distinguish ourselves on service and hopefully get a better price than they do, but they win their fair share as well. So, we are not seeing the big three really at all, and frankly, rarely have bumped into them in our life of this company. .

Okay.

And I know this is kind of also – one asked earlier, but, I mean, with the volatility in the capital markets, I mean with your off-market transactions, have you been pushing cap rates a little bit higher just due to the increased volatility or has that not really changed at all?.

No, I think so, I mean, I think, first quarter the deals we’ve announced so far reflects that and again, with – the off-market nature of that, but, I think the things in our near-term pipeline, I think the cap rate is better than it was a year ago.

But, our blended average is coming down kind of our historic norms just because of the ability to access more newer bigger anchored health system buildings, so..

Okay. And then thanks for your comments on – I guess, the changes potentially occurred – could occur with the section 603 assets.

I guess with the passage or the enactment of that, I guess, legislation, has that changed your underwriting and all? Are you looking at anything different right now?.

I think, it’s a factor to consider. So, the on-campus buildings that have vacancy, again, if it’s got vacancy there is some incentive to – for the hospitals to look at that space versus going off-campus.

And as I said, I mean, we are having this conversation with our client, he is the Chief Medical Officer of the hospital system and he said, it’s really not driving their ultimate decision-making, it’s ultimately patient access and convenience and they found that they have lost patients by trying to push them into an HOPD reimbursement model in the past.

So, we tend to listen to our clients and then, kind of follow where they think was the best location for the services..

Okay, great. Thank you. .

Thanks, Mike..

The next question is from Craig Kucera from Wunderlich. Please go ahead..

Hey, good morning guys. Appreciate you taking the call. I know you breakout rent coverage for hospitals and L tax in the 3.5 to 4 times range.

But can you give us a sense of where the overall portfolio would be for rent coverage?.

It would be - in the physician groups, we get financials for the larger groups, but a lot of the smaller onesie twosie physicians, they are not audited or anything like that. The bigger groups tend to be, but, I mean, it would be 5 to 10 kind of on a blended across the platform, Craig.

So it’s very strong – really across, I know, one group we always talk about a lot has almost 50 times coverage.

So that’s kind of – these numbers get a little irrational or a little pricy at times, but and that’s the benefit of these private pay kind of MOB investment model which is – seems to 5% to 6% of their kind of the overhead, the rent and that should get these large drivers of coverage. .

Yes, Craig, so unlike, as skilled nursing or other types of – some other types of healthcare asset classes, the rent is a pretty small part of the overall expense structure for a medical office building tenant. .

Got it.

Can you give us some color on the pipeline as it relates to potential Operator unit issuance and there is a drop in maybe the non-traded and larger REIT competition? Does that necessarily help you there or are they not really as focused on that, on a net seller base?.

Yes, it’s – we had that conversation with most of our seller – particularly with some private physician group or a private developer. The – so, you will continue to see it a handful. It’s been kind of a strategic advantage for us.

Most of the big three don’t use it as a tool very often and the non-listed REITs, to my knowledge, I have always seen it happen once or twice. So it’s been fairly limited. So, you will continue to see some, but right now, we are really trying to add people to our cash purchase. .

Got it. And one more, just wanted to talk about the mezzanine size of the business.

Are you seeing any pick up in opportunity to invest in that segment or is it still just sort of – as things have been going in the past?.

Yes, we see opportunity, but we are pretty stingy about where we do those loans as we are not out shopping for paper.

It’s really a structuring tool and particularly with developers who are either in the process of structuring or kind of post-construction and they are wanting to continue to hold the asset, but we had some kind of hope into it long-term when they do a recap.

So, see some opportunities out there, the hospital anchored development is – I’d say picking up and when they are using private developers for that, most of the national ones we have great relationships with.

We have opportunities to get involved in that on a limited basis, but usually through the mezzanine loan structure and some kind of optionality when there is been a stability if we are interested in buying at that time, so. .

Okay, great. I’ll hop back in the queue. .

Yes. .

Thanks, Craig..

Our next question comes from Jordan Sadler from KeyBanc Capital Markets. Please go ahead..

Thanks, and good morning. A question regarding 603, so you’ve had some time to process it another 90 days or so and I am just curious, vis-à-vis your comments and discussions with tenants.

Is this – has there been any change in terms of target assets for you all as it relates to 603 either as it relates to prospective underwriting or the existing portfolio?.

It’s hard to say it’s been a change, but it’s just certainly a factor that we consider. I mentioned in my comments, we have a number of 603 assets in our pipeline and in a couple of the cases I am referencing there is also CON type of the building.

So, an off-campus where the hospital essentially can’t move, because that are CON and they can’t move or reluctant to move out of that building because they are getting that higher HOPD reimbursement that’s grandfather tends to be pretty attractive us.

It’s a very sticky building, very sticky tenant providing outpatient services which is going to continue to drive the healthcare dollars. So, I would – I’d say it’s a factor we consider, but it’s – I don’t think it’s changed kind of ultimately what we are looking for which is great health system in large physician group anchored building.

That said, if it’s on-campus building and it’s got some vacancy there is certainly an enhancement to kind of more opportunity to lease that vacant space with the hospital now being forced to consider HOPD reimbursement only being available feature on-campus facility, so, helpful, but I wouldn’t say change, it’s just a factor and we are talking to every hospital that we talk to, or a physician group that’s working with hospitals around and trying to get a good handle on who is taking advantage of HOPD and who is not the higher reimbursement.

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Has there been any clarification on the determination of whether or not it’s the classification or grandfathering ties to the tenant versus the size?.

Yes, there has not been. The AHA is working hard to at a minimum, expand the grandfathering to projects that are under development. But, I think if the AHA had it’s brothers that would just repeal the section altogether and – but there hasn’t been any real clarification around them.

The law is pretty clear written, but as you mentioned it’s - it will be up to CMS to define further define what’s eligible to be grandfather and whether or not you can actually move that status. Historically, sometimes you can and sometimes you can’t, again we are taking that into consideration, but and keeping our eye on – out for clarifications. .

Okay, and then, lastly, on 603, I mean, I missed that, have you guys been able to assess what percentage of the portfolio is now 603 or falls within sort of the writing of the law?.

Yes, we’ve got pretty good transparency on that in our investor presentation. If you look at that, it’s probably the best way to answer your question, the one-on-one line..

Okay, and is that in terms of on-campus, will that ultimately refine your definition of an on-campus or proximate to campus asset?.

Well, we joke that Deeni and John Sweet now carry a tape measure around what this see if it’s within 250 yards of the hospital, but, it’s – I applied full ball out here, but pretty good feel for how long 100 yards is and can be able to buy.

[Multiple Speakers] I mean, smart, but I guess, the on-campus buildings that they have vacancy, it’s just creates one more opportunity for leasing the space, so. .

All right, thanks guys. .

Thanks, Jordan..

The next question is from John Kim from BMO Capital Markets. Please go ahead..

Good morning. Just a couple of follow-up questions.

Can you provide us an update on the percentage of your portfolio that on-campus versus off-campus affiliated? And then, maybe also the cap rate differential that’s between the two?.

If you look at just the on-campus it’s a little over 50%. Again, I think the more relevant is – I appreciate the question, but we think the more relevant is what’s health system anchored and that number is in the high 70s moving to 90 and that’s kind of how we focus on that definition.

So, on the cap rate difference, I mean, it’s hard to say, so many things influence cap rate, but just purely being on-campus or off-campus, again, we tend to buy – when we are buying off-campus its health system or physician group anchored and there lot of capital chasing of that, that there maybe fewer buyers, but there is still plenty of capital chasing of benefits.

So, 25 basis points on average, but maybe, but I wouldn’t say there is a big spread from a quality perspective and against the buildings we are buying..

And to get your 90% target within two years, is that’s solely through acquisitions or you also looking to – some of your off-campus assets?.

No, we don’t have any plans to – we don’t have any near-term plans to selling, but I think it’s driving through acquisitions and again we’ve got some great relationships with some developers that are – have some good product coming down the line, we think we have the opportunity to acquire those assets as well and those – the development we have our eyes on are health system anchored tend to be a 100% pre-leased before they are ever built.

So, to be very clear, we are not funding those developments, but we have some expectations that we’ll have good opportunities to acquire those developments. .

Okay, I may have missed this, but, can you provide the releasing spreads during the quarter and maybe the year on a cash and GAAP basis?.

It’s about 2%.

2.1%.

So, during the quarter, we had 43,000 square feet renew – or excuse me held for renewal and 33,000 of those renewed 78% retention and the ones that renewed were up 2.1%. .

And that’s cash?.

Yes, that’s cash. .

And then finally on 603, John, you mentioned that the American Hospital Association is looking to repeal the legislation on this.

Can you maybe provide an handicap of how long you think that may take?.

Not expected to – Congress is actually working 111 days this year. So, there is no expectation of any meaningful legislation. There is nothing they have to do this year after the Bipartisan Budget Act. So, fairly minimal chances this year. Tell me who wins the Presidency and I’ll tell you what the chances are next year, so. .

So, what side would be more adaptable changes?.

I am not going to answer that question. No to be - in all sincerity, I think, no matter who wins the Presidency, I mean, is the healthcare policy gets tweaked, that will be by anybody, that would be the AHA’s chance to kind of claw some of that back if not all of it..

Okay, got it. Thank you..

Thanks, John..

Our next question comes from Vikram Malhotra from Morgan Stanley. Please go ahead..

Thank you for taking the questions.

So, just going back to your acquisitions, I am just trying to – if you can give us some more color on how you are thinking about these larger market as a process that you would probably started a year-and-a-half, two years ago, on the one hand, competition maybe a little lighter, but pricing, cap rates are still stickier, maybe moving a little bit, but given all the volatility in the markets, I am just trying to figure out is this the right time to kind of make that move and what would maybe make you say, hey, we want to pause from going to these larger markets and maybe stick to what we’ve done historically?.

Vikram, that’s a great question. I think it’s an evolution.

So the larger markets, we’ve been fortunate to kind of make a couple of big acquisitions to move into the Minneapolis market than the large transaction on the Phoenix which is already having some – I’ll say some organic growth opportunities coming out of that IMS and the hospital systems relationships we developed out there through that transaction.

So, it’s an evolution, but we are not forsaking some of the smaller markets and high coverage and working with great physician groups as well. So, I think it’s – we looked at opportunities across the spectrum and once we are in a market, we tend to have the opportunity to grow more like in Minneapolis, like in Phoenix, Atlanta and Columbus.

Columbus, Ohio is a market we continue to find lots of great opportunity and that’s a booming market. But, some of those – some of the opportunities, say in Columbus tend to be in the kind of the surrounding communities as well where there is less competition kind of back to your point about kind of staying in the secondary market. .

And then just given that some these could be lumpy, are you targeting every quarter for there to be a mix or could it be one quarter your more secondary market heavy and then, the other quarter to the opposite?.

I wouldn’t say we are targeting at all. I mean, we are targeting great physician groups and hospital systems and evaluating the market where the building is located.

So, as you said it’s lumpy, but we continue to have plenty of opportunity to pick and choose from and some sellers are looking at second and third quarter for some reason and other, we kind of just tend to just manage the deal flow that way. .

Okay, and then just maybe shifting to sort of your watch list of the performance of certain hospitals, given what we have seen in the public markets, any insight maybe given your exposure to community or any of the other hospitals? Any insight from what the hospitals are thinking in terms of expansion or even maybe a closure or I shouldn’t say closures, but maybe just a pause?.

Yes, I mean, the whole post – the world obviously feeling a lot of cost pressures right now, I guess, probably the most specific issue in that world. We have three L tags that’d be great.

The L tag industry is going through a transition – they’ve been going through it for this year in particular it kind of follow-up impact of the patient criteria legislation and in rules which – and the evolution of that business.

So – but, Life Care which is our only tenant in that space is doing fine, but it’s can be a transition year as they move into a new reimbursement scheme. So, I don’t think any of our hospitals, specific hospitals we are working with.

We don’t have any concerns with them specifically and obviously, on the big systems, tenant had announced kind of a big loss for the year, but they also announced, it’s part of the subset of that, their outpatient business was very strong.

That outpatient business was in large part they are USPI which is great client of ours and we are very pleased with the coverage of our USPI which is now tenant facility.

So, Mark, anything else jump out for you? In Atlanta, Northside Hospital that’s one of our bigger client and that market is - continues to grow and expand as that market continues to – or at least they, with a lot of competition, they tend to be aggressively moving into new markets and Northside has several sponsored new developments ongoing right now..

Okay, this is the last one. Jeff, this is maybe for you.

In terms of funding the additional acquisitions, or the future acquisitions, Jeff, you got preference for equity versus debt? I know, you’ve in the past talked about maybe coming out some more debt, but if you could just maybe update us on your plans?.

Yes, absolutely, Vikram. Yes, I mean, I think we are currently 15% at the assets now. We’d expect the majority of acquisitions to be funded primarily with debt going forward at least in the near-term.

I guess, that always depends on the lumpiness of the acquisitions et cetera and we have the ATM program as well that we could utilize if we thought it was necessary. But, I think – over the year, we would expect to increase that leverage – in fact to a more normalized level and certainly a long-term debt issuance this year is another target of ours.

So, we probably would be looking at that, call it mid-year-ish. .

Okay and just – moving the data, would that be more close to 30%?.

Yes, I mean, I think that’s kind of more inline with what we’ve – where we’ve historically been..

Okay, thanks guys. .

The next question is from Dan Altscher with FBR. Please go ahead..

Hey, thanks. Good morning everyone. The thing about where the stock has traveled up to and some of maybe the competition in the space having a step back. Do you think maybe the hurdle rate has changed at all for what you are seeing now on asset bases or maybe on a levered base, I know you talked about 6.5% to 7% being kind of the average.

But has your hurdle rate maybe changed at all the close competition?.

Well, I mean, I think our hurdle rate changes, Dan, to the extent your cost of equity is decreasing with our increasing share price, which it is and along the debt lines, I think we had a pretty good execution there in January of 4.5%. So, as we look at those factors, I mean, certainly, I think our cost to capital is coming down.

I mean, the competition, I guess, I’ll let John speak to it, but my view is, some of the higher quality assets really extremely bid before, as you had a bunch of different players going after them, I think there is a little bit lightening up on that side of it.

So we see value – a little bit more value there perhaps than we did a year ago as well as seeing value in the assets in the secondary markets that we’ve also historically participated in. .

Yes, Dan, the only thing I had to add to that is, two years ago when we started the company, we had $100 million of assets and people tended to be nervous about signing a letter of intent with – in questioning our ability to close, now that we’ve closed an acquisition a week for nearly two years now and we are approaching $2 billion in assets and Jeff’s management of the balance sheet, we don’t have that issue anymore.

So, it’s just gave opening – the reputation and the growth is just opening up more and more doors for us and for sellers to be willing to work with us and then, we tend to find those sellers like the large physician groups where we can to build longer relationships and that’s how our quality, so. .

Okay, and you may have addressed this earlier and I you did, I apologize, but as you start to look at maybe some more primary markets or somewhat that’s maybe a little bit higher quality, I mean, just give us an example of whether it’s maybe a geography or a group that might fit into that category that before may have fallen off the radar screen but it’s maybe on?.

Again it’s hard to answer that question, because, well again, we find opportunities in bigger markets, it’s not like, we draw a line around New York City and say, let’s go spend the next six months there.

I mean, we know kind of all markets reasonably well between – again John Sweet and Deeni Taylor and myself and so when we find to get opportunities in the bigger markets with great hospital systems or physician groups, then we focus our efforts and work through process that opportunity.

So, we got a little bit in the upper northwest, that’s probably we like to have more scale, once we get into a region. So, we still not own anything in California but we haven’t found anything in value, I mean, in my past life, bought and sold and managed a lot of property in California.

We just – if we see things, we just don’t haven’t seen the right kind of value opportunities for us in that market.

So – again, in the future or for the near term you are going to continue to see Minneapolis and Columbus Ohio and Phoenix and Atlanta and some of the bigger markets where we already are and just continuing to expand our scale in those markets. .

Okay, that works. Thanks so much. .

Yes..

Our next question comes from Jonathan Hughes from Raymond James. Please go ahead..

Hey, good morning guys. Thanks for taking my questions. Most of mine have been answered, but just had a few more. Can you give us any more details on the St.

Luke’s MOB acquisition completed last week like lease expirations and apex rents versus the market? And then is that 7% unlevered yield there inclusive of additional lease-up, given it’s only 4% occupied?.

That – I’ll start with the back, that’s on in place. We do have some color on where we see some growth opportunity there and that’s making even more attractive, but it’s nice on-campus building. The seller, the developer and close friend of the company who is somebody else we’ve done some business with.

Deeni, you want to – Deeni Taylor we are asking to address the other question, so..

Well, I think, as it relates to potential lease-up for the vacancy, one of the good things that hospital has affiliated, actually joined the monitory system, so there is real effort to increase the physician side occupancy in that building along with the AFC that’s already in there.

So, we see a real opportunity to fill the remaining space over the next 12 to 18 months. .

Okay, great.

Thanks, and then, just one more, the $100 million that has been acquired – 100 plus million that’s been acquired so far this year, any debt on those deals or were they all unencumbered?.

They were all unencumbered. The one we just talked about – there were some debt on the deal and the lender restructured the debt as part of our transaction. Jeff will give you the numbers, so. .

Yes, it’s $9.5 million of debt on that one deal. .

Okay, that’s helpful. Thanks guys. .

Yes. Thanks, John..

There are no further questions at this time. I’d like to turn the floor back over to management for any closing remarks. .

Well, again we are very excited about the performance of the company in 2015 and very excited about the very nice accretive acquisition pipeline that we have already started capturing this year and have a good feel for another great year in 2016. So we look forward. Thanks for taking your time today and we look forward to the follow-up. .

Thank you. This concludes today's conference. You may disconnect your lines and have a wonderful day..