Brad Page - General Counsel John Thomas - CEO Jeff Theiler - CFO Mark Theine - SVP of Asset and Investment Management.

Camille Tan - Bank of America Merrill Lynch Landon Park - Morgan Stanley Aaron Wolf - Stifel Nicolaus Jonathan Hughes - Raymond James Michael Gorman - BTIG John Roberts - Hilliard Lyons Jeff Gaston - KeyBanc Capital Markets.

Greetings and welcome to the Physicians Realty Trust Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Page, Senior Vice President and General Counsel. Thank you sir.

You may begin..

Thank you. Good afternoon and welcome to the Physicians Realty Trust third quarter 2016 earnings release conference call and webcast.

With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Executive Vice President of Investments; John Lucey, Chief Accounting Officer; and 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 third quarter of 2016 and our thoughts for the remainder of 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 some 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 the company’s CEO, John Thomas..

Thank you, Brad. Good afternoon and thank you for joining us for the Physicians Realty Trust third quarter earnings call. We are pleased to be able to report to you another strong quarter of operations.

While we intentionally slowed down new business development during this quarter as we focused on the integration of the Catholic Health Initiatives or CHI portfolio, we still recorded $177 million of new investments, $137.5 million of which was unrelated to CHI.

We’ve also completed $30 million of new investments already in the fourth quarter none of which are affiliated with CHI and added important new hospital system relationships in northern Michigan. We now own more than 10 million square feet of high quality medical office space, that is almost 96% leased for an average lease term of almost nine years.

Our team’s attention to detail and focus on tenant satisfaction has produced a remarkable integration of the CHI medical office facilities and early feedback from physician tenants and the CHI hospitals has been very positive.

These efforts and our executive attention to operational excellence as well as new and renewal leasing is producing far better results than we could have anticipated this early in the relationship.

We are determined to set a new high standard for medical office asset management which starts with sourcing, underwriting, investing and then managing the best medical office portfolio in the United States. We believe that this will produce outstanding total shareholder returns year in and year out.

Year to date we have acquired $1.1 billion in high quality medical office facilities and increased our percentage of assets that are on campus or affiliated with hospital system to 79% from 74% at the beginning of the year. As we look at the balance of 2016, we anticipate closing on one additional CHI facility during the fourth quarter.

After this closing the final building to be acquired in the CHI portfolio is a new medical office building in Omaha, Nebraska which will close upon completion of construction in early 2017. The expected investment will be $33.4 million and will be a 100% leased to CHI’s Creighton University Medical Center upon closing.

We also have a strong pipeline of anticipated closings still to complete as well as a nice start to building 2017 pipeline. 2016 has been transformational year for Physicians Realty Trust and we're not done.

We've crossed several milestones, including two separate long term unsecured investment grade debt private placements, crossing 10 million rentable square feet of medical office space, completing the largest direct monetization of medical office facilities in U.S.

history and rounding out our senior management team with particular attention to asset management and leasing. These accomplishments have further strengthened our foundation of operational excellence.

As long as the capital markets remain open, DOC shares present the opportunity to own a high growth organization that can source, underwrite and acquire the best medical office and outpatient care facilities across the United States, while still being able to focus most importantly on delivering outstanding results from the assets we already own.

We take pride in our relationships and ability to generate repeat business from our clients who trust us with their facilities, trust us with their physicians and work hand in hand with us to serve their patients.

We believe that philosophy and delivering on those promises will serve us and you well as we achieve outsized growth and outsized long term financial results. We're sure many of you’ve seen the news that CHI is exploring discussions with Dignity Health to align their organizations.

Dignity Health, formerly known as Catholic Healthcare West is a Catholic faith based health care system based in San Francisco which is a major inpatient presence in California, Arizona and Nevada with services in over 22 states. CHI operates in 19 states.

The synergy and complementary strengths of each organization appear compelling while there is no geographic overlap at their hospital system acute care facilities.

We have relationships with and a great deal of respect for Dignity Health with our most important relationship being with IMS, the multi-specialty physician group partially owned by Dignity in the Phoenix, Arizona market, where we own over 400,000 square feet of medical office space, we bought from the IMS positions and anchored by Dignity Health IMS positions on long term leases.

At this time and after discussions with CHI senior leadership we do not have any additional information to share but also remain confident in the future of our CHI relationship, the value of our CHI medical officer facilities and potentially an increased opportunity to grow with CHI and Dignity combined entity.

We recently had a stewardship meeting with CHI’s C-suite and are more excited than ever about the opportunity to partner with them, their operational plans, their focus on expenses and supply chain management and strategic plan.

There remains an enormous amount of opportunities for them to strengthen and further their mission and for us to continue to grow our relationship over time. Yesterday, CMS issued hospital outpatient roles specifically addressing Section 603.

As expected, even HOPD moves out of their grandfathered off-campus location to another off-campus address, they will lose their grandfathered higher HOPD rates absent rare extraordinary circumstances, like a destruction of the building or a seismic event. Losing a lease is not an event like that.

The rule also allows hospitals that acquire other hospitals to retain their grandfather status -- grandfather 603 assets. All as expected and all very positive for a nice portion of our assets. Finally, next week our country will have the privilege and duty to elect the next leader of the free world.

Whomever is elected will inherit the US healthcare economy that is growing faster than any other part of the economy, fueled by an aging population and technological leadership and the advancement of care across all disease conditions.

While many have struggled recently, the need for access to care and the pressure to lower costs from consumers, payers and the government alike will only continue to push care out of the hospital and to lower costs to help patient settings that offer higher quality, more convenience and increased access. It's estimated that the U.S.

health care economy will grow from approximately $3 trillion this year to over $5 trillion in 2014, an average annual increase of about 7%. This growth will fuel growth in outpatient care and the demand for outpacing care medical office space.

We are well positioned with our hospital physician relationships and partners to capture this demand for the benefit of our shareholders. With that, I will now turn it over to Jeff to review our financial results. .

Thank you, John. In the third quarter of 2016 the company generated funds from operations of $33.5 million or $0.24 per share. Our normalized funds from operations was $37 million. Normalized funds from operations per share was $0.27 and our normalized funds available for distribution were $32.9 million or $0.24 per share.

In this quarter we closed on $177 million of investments at an average cap rate of 6.8%. Had we acquired all of these assets at the beginning of the quarter they would have contributed an additional $1.9 million of cash NOI.

With the closings of Spring Ridge MOB, Gig Harbor Medical Pavilion and Midlands One Professional Center this quarter we now have just two properties remaining to close in the CHI portfolio.

We are pleased with the volume and quality of investment opportunities our team continues to source and as a result we are comfortable raising and tightening our previous acquisition guidance of $1.0 billion to $1.25 billion for the full year 2016 to a revised guidance of $1.2 billion to $1.3 billion of investments for 2016.

On the operations side, our same-store portfolio which includes every asset that we have owned for a full 15 months period generated year over year NOI growth of 1% with no change in occupancy. Our same-store portfolio currently encompasses 48% of our total portfolio and NOI growth can be volatile from quarter to quarter.

We expect to be able to achieve 2% to 3% year over year same store NOI growth on average. So our third quarter result is below our target range. There were two primary factors that influenced this result.

The first was an operational issue relating to the continuing impact of the early 2016 move-outs we saw at our Peachtree Dunwoody building in Atlanta, which reduced our same store NOI growth by 60 basis points this quarter.

The good news is that of the 18,000 feet of leases that expire this year at Peachtree Dunwoody, about 12,500 feet has already been re-leased at significantly higher rates. Tenants take occupancy in this space at the end of the year. So we should see the positive impacts from that starting in the first quarter of 2017.

The second factor impacting our same store NOI growth specifically this quarter was a one-time accounting related adjustment.

We booked a property tax credit for our Columbus Georgia asset in the third quarter of 2015 which led to a $0.2 million increase in property expense for the comparable period this year, resulting in an 80 basis points negative impact to our same store NOI. Turning to financing.

In August we drew the seven year $250 million term loan from our $1.1 billion credit facility, which based interest at a rate of LIBOR plus 180 basis points. We entered into a swap arrangement with our banks to fix our annual payments at a rate of 2.87% for seven years.

We also issued a $75 million private debt placement that was split into three equal tranches that were 9, 10 and 11 years. The weighted average interest rate on this financing was 4.17%.

From an overall balance sheet perspective we ended the quarter in excellent shape with debt to total capitalization around 20% and net debt to adjusted EBITDA of 4.3 times. We also implemented a $300 million ATM program in August which provides additional flexibility for us with respect to issuing equity.

The program replaced our previous $150 million ATM program that we terminated earlier this year. We have not issued any shares through our new ATM program. Finally our G&A for the quarter was $4.9 million bringing the nine month total to just under $14 million.

We remain on track with our previously announced G&A guidance of $19 million to $21 million for the year. With that, I will turn it back over to John..

Thank you, Jeff. We are now ready to take questions..

[Operator Instructions] Our first question comes from the line of Juan Sanabria with Bank of America Merrill Lynch. .

Hello, this is Camille with Juan. Rule 603 was finalized yesterday.

What are the implications for the real estate landlords?.

The 603 final reg, is that about [ph] Camille?.

Yes, I was just wondering whether the implications for real estate landlords. .

Yes, so the great news is as expected.

This is the final reg which provided some additional detail and clarity to the proposed reg which for an off-campus medical office facility that is leased by a hospital and the hospital uses that space for a hospital outpatient department that was in existence and they were billing as an house allowed patient department [ph] in their space as of November 2, 2016.

And that hospital can continue to bill at higher reimbursement rates under the old Medicare regime for possible out-patient departments are off campus, bringing new facilities going forward, they can't built at that higher rate, in fact in some cases it’s substantially lower, if they open up at a new hospital outpatient apartment off the campus with the hospital.

So the really big deal and what finalized the reg yesterday which is -- those grandfathered locations and we own about we think 53 of our medical office buildings, are what are called grandfather 603 assets.

What the final ruling said yesterday is if the hospital moves out of that building in the future, in other words, they don't renew their lease, unless they move back to the hospital campus they will lose that higher reimbursement rate.

So for us as landlord obviously we’re always working with our hospital partners and expect them to stay in our buildings forever. But this led to an extraordinarily sticky building with the landlord in an important development.

And again if they move out of their location because they don't like the lease, they don't like the rent, they don’t like us, they'll lose those benefits. So again we expect to retain those hospitals regardless but very positive development and the final rule again solidifies the importance of that grandfather status to us..

And can you give us an update on cap rate expectations heading into 2017 and whether your quarterly acquisition pace what is it likely going to be going forward?.

So cap rates have continued to stay for kind of the best in class assets, and general top markets has stayed around 6% for best in class assets, and we're still finding a lot of nice opportunity between 6% and 7% in some of the Boston market or California markets you might go below 6%.

We haven't seen much change in that really this year and in the near term don’t have a real expectation of the change in that range. As far as kind of our pace of growth next year, again very much capital markets dependent. We will issue guidance on acquisition guidance in February in our next earnings call.

But generally we expect to be able to source, underwrite and close $200 million, $250 million a quarter. But again much of that for the future right now as a relative is the capital markets are open and we can source and acquire that that kind of volume..

Our next question comes from the line of the Vikram Malhotra with Morgan Stanley..

Hey guys, this is Landon on for Vikram.

Just wanted to start out, .I was wondering if you could take us through any of your exposure to CYH, I know they are listed as a tenant but I'm not sure how big and any sort of interesting trends you're seeing at any of your other hospital partners either positive or negative?.

Thanks. Great question, we have one building that’s leased a CYH hospital down in the villages in Florida. In fact, it’s an outstanding newer medical office building.

They actually paid rent early and have been pretty routinely early into that facility so we have a very positive relationship with CYH but generally it’s not a very large exposure financially. Now they really are final organization, a great relationships there.

They have great hospitals that perform very well, they've had tough time last year -- in the last year but several of our hospitals. So again like any large national system they've got some hugely successful hospitals and some that are not performing as well.

So this is -- actual size of that building is 28,000 square feet, so we get 10.5 million square feet today, less than one percent – actually less than even half a percent of the portfolio. Okay, again but it performs well, it’s on those great Florida locations, or the parking lot is striped and for golf carts versus cars. .

And then I'm just looking at maybe same store NOI growth this quarter was sort of low single digits right around 1% How should we think about that going forward now that portfolio is obviously a lot bigger and maybe more stabilized? And I guess on that same note in terms of renewals what kind of overall releasing spreads are you seeing in the portfolio around?.

I'll start with the same store and I will turn over to Mark for the releasing spreads. But certainly on the same store we target to 3%, we talked about that a lot. It came in underneath that that level this quarter and so we really we want to make sure we understand why part of it.

We talked about the last two quarters which is the Peachtree Dunwoody move-outs. I mean that problem is solving itself -- I think it's resolving itself very well actually and one of the advantages of having that that great building is that you have a lot of tenant demand for that space.

That was a temporary blip but it takes a little bit of time to lease that space up. By the beginning next year we should be in great shape there. And then the other item was an accounting adjustment and that's going to happen from time to time and agreed our portfolio is getting bigger at 48% of the overall in terms of the same store bucket.

But still it’s surprising and even property tax adjustments on one building can make insignificant difference in NOI. So we feel really good that we'll be back in the 2%, 3% range here shortly and continue on that pace. In terms of renewal spreads, I am going to turn over to Mark..

Thanks, Jeff. We've seen a lot of leasing activity in the third quarter here, 169,000 square feet of leases renewing or new leases in the portfolio which is our fourth quarter and role of positive net absorption.

On re-leasing spreads, about 80% retention rate for the quarter and releasing spreads as Jeff mentioned continue to be positive 2% to 3% as we're working on lease renewal here across the portfolio. .

And just to add, Landon, on that Peachtree Dunwoody space that we have new tenants, those releasing spreads are actually up 14%..

And just sorry quick follow ups on this just.

Are you expecting here that low single digit releasing spreads to continue and then on the same store the expenses, did those changes more or less run through expenses because you're picking up more costs associated with certain assets?.

Yeah, I mean some of the expenses again was that property tax adjustment that showed up the big increase, the same store so that through that off a little bit or a lot I should say. We think expenses will moderate from that 7% level back to something more in line with the rental growth..

Landon, one thing, you asked about any other problems.

We don't see any problems with any of our major tenants that, the all tax as we talk about the ports we have one -- we have three all-tax leased to one provider life care which really does an outstanding job but as we've mentioned before they're going through a change in reimbursement structure this year with criteria going into effect.

So their EBITDAR coverage is down slightly but that was expected and again they’re performing very well. And I also noticed in light of other news the last twenty four hours we don't have any exposure to Adeptus and we don't have any exposure to freestanding emergency departments at all.

So it's been an asset class that we've been monitoring but have not invested in..

Our next question comes from the line of Aaron Wolf with Stifel. .

Hi, just a couple quick questions. So it looks like G&A as a percent NOI ticked down quite a bit in the quarter.

Is this something that we can expect to continue due to operating leverage going forward?.

Yeah, I mean I think just in general our G&A was higher than our desired run rate starting the company -- over three years old. So we always had to build an infrastructure to support a company that we thought could grow and grow significantly over a long period of time.

So as the company matures and as we continue to add more assets and gain more efficiencies I think you will continue to see that G&A ticked down either as a percent of assets or percent of NOI or whichever metric you want to look at. .

And, in terms of the deals you're pursuing, what types of buyers are you encountering -- foreign investors? Private equity? Other REITs?.

And most consistent buyers we bump into these days are private equity -- private buyers, we don't see -- some of them may be getting capital from foreign investment, but we don’t see any direct foreign investment, there is an RFP class at all, I think there's growing interest by sovereign wealth and other foreign pension plans if you will, pension funds.

But that's where the competition is coming from. We've seen a little uptick in activity from other health care needs but again so much of our business off market, we don't bump in anybody in that context. .

Our next question comes from line of Johnson Hughes with Raymond James. .

Hey guys, good morning. Earlier, you had mentioned that West Coast cap rates, some can be below 6%.

Can I take that as an indication you're looking to go west, given you don't have any exposure there now?.

You know, Jonathan, like you once did, every once in a while we look at California because that’s such a big state and big population but then declined to invest there.

So we'll be there at some point, we really like the Seattle market and got a big program there through CHI but we think some assets recently in California just passed kind of our underwriting standards so.

Again big state, big population so we mentioned they're going to help with what's going on with them and potentially with CHI, that may create an opportunity for us with them there. So like I said we're in 30 states today and there's really no state we won't go to in the right underwriting standards..

And then I guess one on underwriting -- when you look at acquisitions, do you underwrite ground-leased assets differently, and if so, what's the spread on a comparable asset, not subject to a ground lease?.

We underwrite the effect of the ground lease, most ground leases are with hospitals, most ground leases are there's about the hospital controlling, kind of use of the building. So again it’s really a case by case scenario. John, we have 50 ground leased there so..

55 – yes, 56 ground leases. The new accounting standards requires to record those I guess differently now and there's more disclosure about the ground leases that in the end we’re going to work at hospitals or you’re going to have deal with ground leases.

We're very comfortable that all of ours is long term and the issues around restrictions are things we get comfortable with the hospital, lot of the CHI controlled ground leases. It’s hard to say we underwrite it differently. Obviously it’s always nice to have a piece of the deal.

But I wouldn’t say that they drive the major cap rate, this is a general rule cap rate differential. .

And then just one more, I've asked about risks to medical office in the past and not much out there besides maybe some macro factors but I've come up with a new angle here. We've heard more commentary about some strip centers, backfilling empty small shop space with medical office tenants.

Does this represent a potential supply threats to the say 20% of your off campus unaffiliated property. .

It’s adept over use of subscription versus than going on for a long period of time. We actually own a few additions, bought kind of in partnership with physicians and then rehab for them and it's really a nice cost effective way to access points at existing locations.

We are working with a hospital system today to acquire a meaningful portion of a Class A kind of retail location that we are acquiring with them the physical building. So I won't say it's a threat. I think supply across our space and in our top ten markets we're just looking at this data.

And I think in any market we have the 2% or more of new supply coming online and in some of that supply we already have our hooks into the developer -- working with the developer, have some long term opportunity to acquire that. So just on seeing real supply risk right now in our markets. .

Our next question comes from line of Michael Gorman with BTIG. .

Thanks. Good morning, guys. John, I just wanted to go back to the 603 assets for a minute, and kind of tie that into the cap rate discussion.

As you've gotten more clarity on the impact of the 603 and the final regulations, have you seen any changes in the cap rates on 603 assets that are in the market?.

Historically off campus assets have attracted less investors, has discovered the bias for kind of the on-campus off-campus bias. I talked a lot about that you know historically, so we haven’t really seen a major impact on cap rates. And in theory it should.

These are very strong as we talk about, and we’re really excited about the 53 we have and the prospects at least from not only renewing the lease but getting kind of top of the market rental rates out of the strength of our position and the hospitals need to stay there.

So over time I think as more and more people find the advantages to the off-campus locations, you’d see something there and 603 would be an important factor..

And then, can you just give a little bit of color on kind of what percentage of the pipeline that you're looking at right now is off-market, and maybe what percentage would also be subject to maybe like an OP Unit deal?.

I think currently in our pipeline and you're looking at it, it’s 55%, 60% is considered off-market or likely market, and – Mike, the other question, sorry, it was what?.

Sorry, just kind of what percentage would potentially be an OP Unit deal?.

Fairly small number right now, we got a couple of deals where the doctors have asked about -- I mean we actually had a seller reach out to us just directly asking us to evaluate purchasing their building in an OP Unit context. So it hasn't been as active as it was early in our life.

Hey, interestingly many of the acquisitions we just completed was actually a 368 reverse triangular corporate merger, this doctor group owned a really nice building in an S-corp and for several reasons in context they wanted OPUs but this worked out even better where we can just use our straight public shares and do a stock for stock merger.

So in fact, the same kind of capital for an OP deal but it's actually using our public shares and doesn’t affect a partnership. .

Our next question comes from line of John Roberts with Hilliard Lyons..

Morning, guys. Sounds like you -- I know you probably don't want to give this out right now, but it sounds like you've got a pretty good indication of early year pipeline into 2017.

Any thoughts on what you're looking at for the full year, similar to this year? Or do you think you might see less due to higher price, competition, et cetera?.

John, great question. So we routinely say and we don't think anything changing this as of today which is we’re going to build and find again and source and underwrite and close 200 million, 250 million a quarter. We don't see anything today that would change that at the same time we're not issuing that as formal guidance for next year.

I think the biggest qualifier to that is whether the capital markets are open and not. So I guess in August we will provide some formal guidance for the year but as we sit here today I wouldn’t think of being consistent with that expectation. .

I know you've got the ATM open, any thoughts on potential use of that?.

John, I think the ATM is a great tool to use in conjunction with follow-on offerings.

So it's something that we evaluate every quarter, we look at where our stock price is both on an absolute basis and where we think it is relative to our competitors and decide whether that's something -- we will also obviously look at our balance sheet and any kind of use of the capital we have coming up.

We put all those factors together and then make a decision as to whether or not to issue equity and then from that we make the decision whether or not we think the ATM is a better use or better means of issuing equity or follow-on offering. So that's kind of what all goes into the mix and we evaluate that quarter to quarter..

Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. .

Good morning guys. This is Jeff Gaston on for Jordan. So a lot of my questions were addressed earlier but I was just hoping you could clarify when you're looking at your investment pipeline.

Are you seeing any -- I guess any year and selling pressure or more deals starting to shake out or become viable with changing interest rate expectations?.

There’s probably been some volume uptick because of the uptick in interest rates and people trying to capture this kind of the current cap rate environment. I think that offset -- the interest rate changes is offset by the kind of more and more capital coming into the space and pressuring supply and demand and dollars looking for assets.

But we haven’t seen anybody rush for capturing tax benefits before the first of the year. Nothing like that. So that may change but don't expect it..

Sure, and then I guess one last, pretty minor thing. Looks like HCN sold an $80 million portfolio during the quarter, and they sold it at like a 7.9% cap rate.

I was just curious if you guys have taken a look at that, and what you thought of the assets?.

As you know, there was 3 to 3.5 years where certain people in the room were involved in creating that portfolio. So if they were assets that we wanted, when we asked about them and exclude others. End of Q&A.

Thank you. It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments. .

Again thank you for joining the call this morning. It was an outstanding quarter and as we look to closing out an outstanding year and going into next year, we look forward to seeing everybody at NAREIT and give us a call if you haven’t gotten on our schedule yet. Thank you again..

Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..