Bradley Page - SVP & General Counsel John Thomas - CEO Jeffrey Theiler - CFO Deeni Taylor - CIO John Lucey - CAO Mark Theine - SVP, Asset & Investment Management Daniel Klein - SVP & Deputy CIO.

Juan Sanabria - Bank of America Jordan Sadler - KeyBanc Capital Markets John Kim - BMO Capital Markets Omotayo Okusanya - Jefferies Vikram Malhotra - Morgan Stanley Chad Vanacore - Stifel. Michael Carroll - RBC Capital Markets Daniel Bernstein - Capital One Drew Babin - Robert W. Baird.

Greetings, and welcome to the Physicians Realty Trust Third Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host Bradley Page, SVP, General Counsel. Thank you. Mr. Page, you may begin..

Thank you. Good afternoon and welcome to the Physicians Realty Trust third quarter 2017 earnings conference call and webcast.

With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; John Lucey, Chief Accounting Officer; Mark Theine, Senior Vice President, Asset & Investment Management; and Daniel Klein, Senior Vice President and Deputy Chief Investment Officer.

During this call, John Thomas will provide a company update an, overview of recent transactions and our strategic focus. Jeff Theiler will review the financial results for the third quarter of 2017 and our thoughts for the remainder of the year. Mark Theine will provide a summary of our operations for the third quarter of 2017.

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 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, and thank you for joining us this morning. The third quarter of 2017 was phenomenal. We had another successful quarter of new investments and operating results and our land was sharp and well addressed by our favorite shareholder.

During this quarter we invested $190 million in an average first year cash yield of 6.4% in very high quality medical office facilities. Mark Theine will address our asset performance delivered by his high quality DOC's team in a few moments.

In addition to those transaction previously announced, we are excited about our new client Midland Health and Midland Texas and Aa3 investment grade hospital that leases along with our longstanding multi side client United Surgical Partners at a very high quality medical office facility in that market.

We invested $30 million in our 64,000 square foot medical office building anchored by Midland Health and United Surgical Partners which had 23% of the building and Midland Health occupies 77% of the building at a total first year cash yield of 6%. This building is less than 2 years old.

Midland Texas is the heart of the Permian basin that has oil and gas reserves expected to last long beyond our items.

With 11 USPI anchored facility and we added a 12th building anchored by USPI with their partner Ascension Health earlier in this quarter and Franklin, Tennessee which includes an ambulatory charges in our owned and managed by that partnership between USPI in St. Thomas, as well as local physicians.

This 26,800 square foot facility is a 100% leased with half contained with surgery center and half with some occupied by physicians [indiscernible] surgery center. Our first year cash yield in that investment is 6.7% with building three years old. DOC has always been focused on high quality that is also accretive.

The market has been trying to define quality and we would humbly suggest recent efforts to define quality have adopted DOC's definition.

So how do we define quality? We believe the most important factor in accessing the quality of a medical office building our health system affiliation, credit quality to tenant, age of the building, occupancy, market share as a tenant, average remaining lease term, size of the building, and the client services and mix of services in the facility.

There are other factors that came in important of course that may or may not be relevant to the quality of the facilities depending upon the circumstance.

For example, a medical office full of physicians and services that not require close proximity to an inpatient hospital to be successful may be far higher quality than an on campus building especially at the locations proximity to the patients that is the customers that will make the providers that is our tenant successful.

Medical office facilities anchored by an orthopedic group of surgeons which includes chronicle space, imaging space, outpatient surgery and physical therapy space in a location convenient to ensure [indiscernible] is not only relevant real estate but high quality medical office space regardless of health system affiliation.

Peachtree Dunwoody Medical Center in Atlanta's Pill Hill is at this building. It just happens also to be anchored by an adjacent hospital system as well our client notes that hospital which has its own ambulatory surgery center in the building at 603 assets.

Barriers or convenient to access for patients, barriers to entry for competition and payer mix of the patients can all have an material impact on the quality of building, as well as the economic condition and supply of the host market.

EBITDA coverage and quality of management of the tender are also material to this analysis and measures of quality especially of single tenant facilities. The goal of course is to deliver the highest and most reliable total shareholder returns year in and year out with both earnings growth and net asset value that is share price appreciation.

As we have built DOC from the beginning, we have sourced primarily off market and through direct working relationships with health systems C suite and physicians over 250 facilities including almost 14 million rentable square feet.

In 2013, 81% of our acquisitions were on campus or affiliated with the health system at an average per share yield of 8.6%. With no credit rated health system included in our top 10.

2014 and 2015 saw a similar focus on facilities that were on campus or affiliated with the health system with per share yield continue to compress 7.6% in 2014, 2015 were 6.9% on average.

Due to the focus on higher quality as our cost of capital allowed us to be more competitive for these higher quality facilities in larger markets, as well as the increase flow of capital seeking medical office facilities. 2016 was transformative in both the size and quality of our portfolio.

Highlighted of course by the largest single modernization directly with the health system. The $700 million invested by DOC in nine markets with Catholic Health Initiatives, a BBB positive rate of health system.

Not only are these facilities mission critical to the CHI hospitals, CHI hospital credit leases more than 90% of the rentable square feet with a mission lease term of 10 years and annual rent increases of 2.5%.

As we are coming on the anniversary date of that acquisition, we are proud that our per share yield has grown from 6.2% analysis to the date of the acquisition to approximately 6.4% in hindsight, picking a 20% basis points of yield through leasing and better assets management and we expect more in the near term.

Our tenant satisfaction scores across this portfolio and the health system leadership is off the chart. In fact, CHI was so pleased by our integration and management of these facilities. CHI presented 50 more facilities to consider for modernization in 2017.

Working directly with CHI C suite, we selected 13 more facilities 99% occupied located in several new and existing markets and invested another 157 million at an average per share yield of 6.8% completing the purchase of the last five facilities and the most recent third quarter. CHI credit hospital lease and occupy 93% of these facilities.

We now lease more than 3.1 million square feet to hospital affiliate with and control by CHI which is approximately 24% of our portfolio and 19% of our ABR. In 2017 year-to-date we’ve invested approximately $1.1 billion at an average per share yield of 5.6%.

The compression in cap rates has heavily influenced by the capital flow from around the globe seeking to invest in medical office buildings and in particular the Duke Realty portfolio that was auctioned and sold this summer.

We of course were handpicked by three credit rated health systems to step in to their rights to purchase what we believe is a five best buildings from the Duke portfolio including the Baylor Scott and White 468,000 foot Baylor cancer center at the heart of Baylor's flagship hospital in Downtown Dallas Texas.

As a result, Baylor Scott and White with an A3 investment grade rating is now our third largest tenant and McKesson with a Baa2 credit rating which own U.S. Oncology that leases a large portion to Baylor Scott & WhiteCancer Center and two other facilities we own in the DSW market is our fourth largest tenant.

We also added two additional Ascension Ascencion Health affiliated facilities rated AA2. Those buildings on the campus of St. Vincent Carmel and St. Vincent Fishers in the Indianapolis market are very high-end suburbs. And we are now own eight facilities with more than 628,000 rentable square feet on Ascension Health campuses.

With more than 50% actually leased directly to the Ascension Health owned hospitals in three different markets.

Because we count tenants in our top market by market, no single Ascension Health market has cracked our top 10 but at least one market Indianapolis is close and we expect based on our contracted pipeline, will join our top 10 tenant list in the fourth quarter. We also acquired the Duke, hospitals preferred DOC process.

Two more facilities anchored by and leased the North South Hospital, which does not have a credit agency rating but its balance sheet and operating performance support provides what we believe would earn an investment grade rating.

During the third quarter we announced the Gwinnett Health System, an A3 rated health system in Atlanta and exercised its rights under rights of first refusal to purchase three medical office facilities from the original developer owner [indiscernible] who had agreed to sell those buildings to another REIT.

Gwinnett agreed to new leases and expanded their total direct occupancy such that when we purchase these three buildings in cooperation with Gwinnett Health System, our first year contracted yield was expected to be approximately 5.5%.

Northside Hospital and Gwinnett have agreed to merge and are working through the Attorney General of Georgia for the regulatory approval which we both expect to receive.

On a combined basis we have six facilities in the Northside Gwinnett Health System with more than 735,000 square feet with more than 400,000 feet leased directly by the hospitals themselves. That would be approximately little over $8 million in first year ABR which makes them of our top four tenants.

During the third quarter we added yet another out market medical office facility leased entirely to HonorHealth and A2 credit rated health system. We now have more than 240,000 feet leased directly down HonorHealth and we expect more.

Also during the third quarter our partner Mark Davis sold to us another two great medical offices facilities, well leased and anchored strategically by Hospital Systems in the Vikings market in connection with our pending purchase of a 148,000 square foot Hazelwood Medical Office building on the campus of Fairview Health, an A2 rated health system, St John's campus that Mr.

Davis developed. He will be contributing this new facility to DOC's LP in January 2018 in exchange for DOC LP preferred OPUs. Quality is health system affiliation. DOC has more than 30 credit rated health systems leasing space from us. Quality is more than 95% leased occupancy, far more than any other publicly traded medical office building on earth.

Quality is more than 8 years average lease term remaining. If you are a hotel or apartment owner of student housing owner, perhaps short term leases are good but lease commissions still in improvement and lease concessions on typical medical office buildings renewals and new leases is a material impact on funds available for distribution.

Not to mention a hedge on reliable rising dividends. Quality is actual health system credit on the lease, not just a building on or adjacent to a hospital campus but actual credit quality health system that desires to lease this space. Quality is high margin services in your facility.

Orthopedic and neuro-spine surgeons are the single largest division specialty in our facilities. Our largest non-health system specialty across the board is orthopedic surgeons. Our products lease space across the country from us.

Quality is a health system calling you to exercise or write a first refusal when anyone other than DOC has the opportunity to buy the real estate in an auction. Quality is actual same store in a wardrobe. By our own transparent metrics we have approximately 80% of our total portfolio on campus or affiliated with the health system.

We want that number to be 90%. We believe this level of health system affiliation will deliver optimal and reliable and growing shareholder returns. To have you achieve optimal portfolio our quality.

One can think about high quality assets from a developer and we have great redevelopers feeding us newer, larger health system lease facilities like Mark Davis, Jim Bremner and Cornerstone Health with more to come from each of them.

More importantly when C suite executives at that largest health systems in the United States invite us to meet them to partner with them, we get excited about the future and our continued opportunistic grow and grow with very high quality medical outsourcing. Deeni Taylor now had three such meetings in the last week.

As DOC enters its fifth year, we will continue to execute our strategies that we have since day one to buy the highest quality medical office facilities that are accretive short term that and that will deliver the liable rising dividend overtime. After yesterday’s release the tax from the U.S.

house, happy with tax rate on the dividends paid that reached to 25% consistent and growing cash flow translate into higher dividends overtime should be even more valuable.

Briefly, since we first shared the challenges with Foundation Health facilities at El Paso and San Antonio Texas, the physicians in particularly we practice each of those locations have worked hard to restore those facilities with a historical success and each has paid their rent every month since April and each continues to work hard to reduce their bankrupt balance this due to us.

Lastly, our Medical Office Building in Kennewick, Washington has occupied by Physicians and Services and treating patients even today, that are important to their community.

While the hospital, the leases the building premise has been challenged, the real estate at hospital is owned by a member of Dow Jones industrial index and we are working with them to find solutions for future that facility.

We cannot tell you when we will be again collecting rent on that building but we remain confident that the building is now on viable but will be continue to be valuable assets for years to come. I will now turn the call over to Jeff and look forward to your questions and answers. Thank you..

Thank you, John. In the third quarter of 2017, the company generated funds from operations of $45.2 million or $0.25 per share. Our normalized funds from operation were $47.4 million. Normalized funds from operations per share were $0.26 and our normalized funds available for distribution were $42.8 million or $0.23 per share.

Year-to-date our normalized FFO per share of $0.77 represents an 8.5% increase over the comparable period last year. In the third quarter of this year our relationship acquisition strategy resulted in $190 million of additional investments.

Our big partner acquisition volume involved after market repeat deals with health systems like HonorHealth and CHI at attractive valuation, a testament to the focus and intention we have devoted to these tenants in our previous transactions.

We have able to watch everything we’re able to pick-and-choose acquisitions as our senior management healthcare experience and our existing relationships with healthcare system executives make us a preferred owner of medical office real estate.

But we have seen several medical office building trades at very low cap rates over the past few months, we have purposely stayed away from the high prices portfolio deals. Instead we've increased our focus on off market acquisitions such as the brand new 148,000 foot development that we entered into a contract to acquire in Hazelwood Minnesota.

The building is anchored by Fairview health which has raised A2 Moody's we will be closing on the building in early 2018. We are also distinguished by our ability to work cooperatively with health systems as we did during our transaction with Gwinnett healthcare system that is merging in Northside.

That system decided to exercise the right to first refuse on a portfolio deal and then modify their lease terms to attract DOC as their landlords. Gwinnett/Northside with the DOC would be the best partner for them as they continue to expand their presence in the Georgia market.

Our reputations are true partner continues to provide more and more opportunities to acquire mission critical assets for healthcare systems that are looking for trusted landlords and bringing these strategic assets into our portfolio provides a tangible benefits to our shareholders.

In general our asset acquisitions were concentrated in the latter half of the quarter. For modeling purposes, had we acquired all the third quarter acquisitions at the beginning of the quarter they would have contributed an additional $1.8 million of cash NOI.

Turning to operations, our same-store portfolio which represents 66% of our total portfolio generated year-over-year cash NOI growth of 2.3% driven by contractual rent growth. We continue to have the most highly utilized MOB portfolio with 96.6% of our space current released.

These four buildings allow us to generate strong renewals spreads from out tenants with minimal concessions as Mark will discuss in more detail. Additionally, the drag from our recurring CapEx including tenant improvements and leasing commissions are the lowest in the sector at about 5% of NOI.

These all translates into generation of more cash flow that we are able to return to our investors and re-deploy and accretive acquisitions.

As usual our balance sheet is strong with net debt to adjusted EBITDA of 4.8 times and debt to total capitalization of 27% we closed our 20 million share offering that we announced in late June in the beginning of the third quarter which is provided funding for third quarter acquisitions and beyond.

We had no issuance on the ATM in the third quarter and retain roughly 215 million of capacity on that program. In summary we are in excellent position to continue to build out and enhancement of our portfolio in accordance with our previous guidance.

Finally just briefly touch on G&A our G&A for the quarter was $5.9 million which puts us at $16.8 million for the year and on pace to meet previously discussed guidance range of $22 million to $24 million for 2017. With that I’ll turn it over to Mark who will walk you some of our operations statistics in more detail..

Thanks Jeff. We are pleased to report another strong quarter of operating performance for our existing portfolio as we continue to operate our properties efficiently and profitably. As Jeff mentioned our portfolio in the industry leading 96.6% lease and delivered a solid 2.3% growth in NOI in our same-store portfolio.

This growth includes a 3% increase in rental revenues and a 4.8% increase in operating expenses in our same-store portfolio that is 95.5% leased.

For the first time this quarter 45 facilities of the initial Catholic Health Initiatives portfolio entered same-store and as a result the same-store portfolio now represents 66% of our overall portfolio up from 55% of the portfolio in the previous quarter.

The performance of this creates on our portfolio continues to outperform our initial underwriting on a trialing 12-month basis the portfolio yield is 6.4% compared to our underwriting of 6.2% and we expect improvements in these number at the Springwood and Woodland medical office buildings in Houston Texas have several leases commencing shortly.

Over the last 12 months, our team has worked with CHI in a global hospital leadership team to these markets to exceed expectations in the transition of these facilities to our ownership.

This structured relationship have left us becoming one of their preferred real estate partners and recently resulted in the opportunity to complete a direct off market follow up transaction of 13 facilities its only 157 million at a 6.8% first year unlevered yield of which five of these buildings is holding $33.7 million closed this quarter end of August.

Over the last year and half our relationship with CHI has only strengthened producing far better results than we could have anticipated this early and we look forward to continuing to demonstrate why the preferred partner for hospital modernization.

During the quarter we also saw strong leasing momentum and our team continues to accelerate producing result by using a responsiveness and quick approval process as a competitive advantage. In the quarter we leases 130,000 square feet including 97,000 square feet of lease renewals and 33,000 square feet of new leases.

We’re leasing spreads on the 97,000 square feet were positive 6.5% primarily driven by our ability to push rent in certain buildings that nearly or completed leased. Our retention rate for the quarter was 72% as a result of 38,000 square feet that did not renew but was offset by 33,000 square feet of new leasing in the period.

Notably the rate per square foot on the space which was not renewed was $17.81 compared to a rate of $20.79 for new leases completed in the quarter representing an improvement of roughly $3 per square foot.

Nearly half the space that was not renewed in the quarter is located in one building in Phoenix Arizona and we already in discussion with a urology practice and analogy practice to take approximately 10,000 of the 21,000 square feet that was vacated in that building.

Rent concessions in the quarter remains very low with no free rent and approximately $1 per square foot per year for lease renewals and $5 per square foot per year for new leases. Looking forward to the remainder of the year we have about 20 leases totaling only 60,500 square feet scheduled to renewal.

Beyond 2017 we have no more than 6% of the portfolio scheduled to renew in any one year for the next seven years to 2024. Our lease expirations scheduled is deliberately laggered to stag lease expiration days ultimately driving very predictable growing cash flow to support reliable rising dividend for years to come.

Looking ahead in 2018 we will continue to growth our integrated management leasing platform and are well positioned to drive operational excellence consistent same-store in our NLD portfolio and support outside growth of new acquisitions.

Our management structure is scalable and we’ll continue to benefit from concentration as we invest in tough quality properties and portfolio in the future..

Thank you, Mark. We now look forward to your questions..

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

I was just hoping you could speak to the same-store NOI growth you're excluding 11 assets, I think there was a bit last quarter and just the impact of those assets now excluded in held for sale and what drove that change in those assets now that are not part of that non-core appoval?.

We have been talking about for a couple quarters now that the desire proven very bottom of our portfolio. So what we did as we come through and we look for assets, we felt were really non-core assets and these are really smaller assets and most often the secondary markets may be we’re talking a lot of a couple million dollars.

So we did as we want to provide a picture of what the go-forward portfolio is on a same-store basis and exclude the assets that we think we’re going to get rid of in the next quarter.

So that was the thinking behind it, it's very similar to every other REIT that does with that way and so just want to provide visibility on what we think the go forward portfolio is..

Were there any bad debt or collection issues at those assets that would have skewed the same-store NOI results other than like trio's and foundation stuff that we know?.

Yes, they’re so small it’s not material..

And then on just the balance sheet, I guess pro forma for the announcement pending acquisitions where it's leveraging and kind of how much that capacity do you have kind of above and beyond that relative to your leverage targets?.

So we feel really good about our financial position Juan. Obviously we did that big share offering at the close of the beginning of this quarter. So that put us in a really good spot to acquire our assets this quarter and really kind of prefund the pipeline that we have going into fourth quarter.

So going through our announced pending acquisitions, will probably put us right at about 35% debt to assets which I would say is kind of right in the middle of our target range. We've got some ability to go up from there on a short-term basis if we want but really keeps us in a comfortable leverage position..

And then as we start to think about the pipeline and for 2018 latest thoughts on kind of where we should expect the average cap rates for transactions to be with the seemingly less of a focused on kind of the price your portfolio transaction just for the prepared remarks?.

We continue to find - as I mentioned several acquisitions in the 6% range but again the highest quality assets health system anchored new or bigger long-term stronger buildings in the mid-five today and one building in a time kind of acquisition market. So 5.5% to 6% is really kind of what we see.

So far today we’re about 5.6% on 1.1 billion invested so far this year and kind of see the end of the year closing at that kind of range..

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

So I wanted to touch base just on the expenses they spiked up a little bit more than I anticipated on a same-store basis and threw up a little bit higher than trend.

What sort of drove that in the quarter?.

So the couple of things that drove the increase in expenses in our same store. As you know that the expenses were up 4.5%. That's primarily driven by increase real estate taxes, especially at the CHI buildings where the buildings have been reappraised in this first year since we acquired them.

And it’s also result of some operating increase expenses at those buildings, as we have executed on our plans to improve some differed maintenance items. Now that where we owners of these buildings..

Will the growth rate subside or that will sort of continue through for the next few quarters or so?.

I think it will subside a little bit in the quarters to come..

And then I guess Jeff, on the balance sheet.

Just curious where you stand on longer term financing, bond deals so what are your thoughts here?.

So, certainly as we look out into the quarter, the fourth quarter. And we've got, we've announced the bunch of pending acquisitions. That will put our line up over $300 million. And I think that’s a good point, where we start looking at longer term financing options. So I think that’s something we definitely consider this quarter or early next quarter.

And right now, when we talk to the Banks, it seems like the rate is probably just over 4% on a 10 basis. .

Okay..

Public bond offerings..

And is it 10 year?.

Yes..

And the loan investments in the quarter, if I might.

Was that anything specific? Was it multiple or one single larger deal, any color you could share there?.

Yes. So, the loan investments there were kind of two. That the primarily loan investment was in a deal that’s portfolio of assets, where we put in a loan for the opportunity to acquire four of those assets out of that portfolio at cap rates that we think would be fairly attractive before to exercise that option.

Like we always do, we made it optional of such that we have the opportunity but not the responsibility to exercise that option. And so we'll evaluate that at the time along with our cost of capital, whether it makes sense to go ahead and acquire those buildings in full..

Our next question is coming from John Kim of BMO Capital Markets. Please go ahead..

Over the last few months you've been adeptly acquiring assets that refers the heavily marketed transactions.

Do you think this is strategy that could be replicated on future transactions? So what do you think buyers will be trying to preemptively address this?.

I don't think its strategy for say, I think our strategy is to align ourselves and have fantastic peaceful relationships that have. My cellphone number and Deeni's cell phone number, Dan Klien's cell phone number.

And when they see those opportunities, and want to pick the owner their real estate or have the opportunity to pick the owner of the real estate, we're getting those phone calls. So, I think we're very excited about how it's worked out this year. And I think our strategy is to align ourselves for the best health systems in the country.

And then in each case the health system they called us and invited us to participate with them to buy those buildings back. And as Jeff mentioned, sometimes they have to extend the leases or expand and improved the leases to make it attractable real estate trust as well and they may did.

As is more and more health systems consider monetization the real estate or developers, there build most mostly for health systems seek to sell that. I think we'll have more and more opportunity to do so but, in our strategy is to align ourselves best health systems.

And then fortunately we get the phone call and they have opting to buy the real estate back..

Can you just elaborate on that, besides the relationships that you have? Is there anything as far as more favorable lease terms or rights or anything else that you provide in healthcare systems?.

It’s about too much favorably. Certainly that we provide is the relationship and then frankly Mark Theine and his team have developed in a very short period of time.

A very high quality level of service and performance of the health systems want to have managing their buildings and keeping the billings attractive to their physicians and for their patients, and expanding their services. So that’s what it's about.

And it's also actually keeping the buildings lease to physicians and identifying physicians and services to come to the building. Again that make the health system more profitable if you will and providing more services overtime.

So that's the reputation we have and the reputation is growing and while more and more health systems are making those phone calls to us..

And then this quarter your off-campus exposure declined by 2%. I think John in your prepared remarks, you said you wanted to reduce your off-campus exposure in your portfolio. But earlier in your commentary, I thought that you were kind of suggesting that you were more open to invest in off-campus moving to real estate looks good.

Given the location where people live I'm not…..

Yeah to be clear, we don’t want to necessarily reduce our exposure to off-campus. We want to increase our exposure to off-campus, to help facilities lease to physicians. I think we have more, what we call 603 assets than anybody as far as we know.

And those are off-campus assets leased up to health systems that have a reimbursement advantage under the current system. We look at the real estate, each building on a case-by-case basis, is anchored by health systems, that anchored by high quality physician group.

And it did in the best location to make it that building itself and then providers and that building successful. So again, on-campus is some of the biggest and the best, the newest buildings we bought particularly this year are on-campus. But they’re on-campus leased high quality health systems. Again many of these would do the rental process.

And I think most of you all know, we’re going to may read in Dallas in a couple of weeks, we’re going to host investors to visits the Baylor Cancer Center, which we believe maybe the best medical ops facility. Certainly not in the country maybe in the world itself.

So it’s not about reducing exposure of off-campus, it's but increasing our exposure to high quality health system, anchored facilities in locations that make them most valuable that they can be..

Our next question comes from Tayo Okusanya. Please proceed with your question..

Yes, good morning everyone. A quick question, it’s not a big part of your portfolio, but with your hospital and your LTACH exposure the coverage's came down a little bit this quarter.

Just kind of curious how you’re kind of thinking about those assets in regards to longer term? Whether they’re going to continue to be the part of the portfolio? And how do you kind of thinking on dealing with that?.

Yes Tayo, that’s a great question, good morning. So the LTACH themselves life care itself has responded very well to the changes in reimbursement in the LTACH reimbursement scheme in Washington, or coming up at Washington. That's the coverage at those levels, at those facilities which is the appropriate way to report it.

We do have the entire life care balance sheet and P&L as credit behind those leases. So we’re very comfortable with the future of the rent coming in on those facilities. But those and surgical hospitals themselves as well, which we have about six in the portfolio continue to be less interesting to us going on long term.

We have the right opportunity to sell those, we probably would. And again we can focus and increase the exposure, as John was asking earlier about to outpatient care services period. The LTACH’s doing fine, we had the bumps with the two foundation facilities which you know about.

But they have recovered very well because of the alignment the economic alignment that positions most facilities and teams going forward. But those are things that are probably we would sell them at the right price, but at the same time don’t expect to grow in those types of deals..

And then second of all, any update with the Dignity Catholic Health Merger.

And what that may mean for some of the Louisville Kentucky assets?.

So there’s kind of two separate things going on. One is the continuation of the Dignity Health and CHI merger discussions. We don’t have any kind of new update other than their continued work.

It’s very complicated and particular with the Church involved and the necessity of working through all the various catholic the religious sister that sponsor those facilities. But as far as we know that those discussions continue and move forward in a positive way. And we’re excited about that.

We don’t think there is any market overlap between Dignity and CHI that would call some rationalization of closing or moving in different directions on hospitals and particularly that medical office buildings that leased to CHI.

We also has some dignity health relationships and facilities and we’re excited about the opportunity to work together with those. The Lobo hospital, the Lobo Kentucky part of CHI in Kentucky is going through a process. And to sell those facilities is going to separate apart from the Dignity.

And to our knowledge, kind of the three leading candidates to purchase those hospitals with all the at least one of which is in existing client. I'd say but it's two of three are existing clients. And we are really excited about the opportunity to grow our relationship with them and if they move forward and purchase those facilities.

Again our buildings in the Lobo CHI market are mission critical to each of those hospitals. And so we are very confident about the future of that. The Lexington market within CHI is not for sale. And we've been working, I recently met with the CEO of that hospital, which is kind of several hospitals, kind of Lexington and staff of theirs.

And we continue to see great opportunities in that market working with CHI and with that hospital leadership in particular. .

And then lastly from my end on the acquisition front. Couple of these larger moving portfolios out in the market. I wondering whether these assets that are attractive to you guys and kind of what you kind a think about them. .

Yeah there is some attractive portfolio is out there. I think we are really focus right now on our in our existing hospital relationship and growing those relationships in the kind off-market growth of our portfolio primarily.

We started to look at everything that goes to market or comes to market and evaluate those and consider appropriate for us or not and obviously price matters. So I think we'll see continued high quality assets trading at very strong parts particularly in the portfolios that are floating around.

And then if we can pick off assets one or two at a time having those portfolios or otherwise we’ll continue to do that. .

Now our next question comes from Vikram Malhotra with Morgan Stanley. .

Hi, thanks for taking the questions. Sorry I dialed in late, maybe I missed this.

Is there any update on the situation that Trios?.

Yeah I mentioned Vikram and good morning. So, Trios the hospital since continuing work through the Chapter 9 process. Our building's full of physicians.

Our building that’s on the campus of that hospital system is certainly important to the hospital, but our building is actually extremely valuable and strong as an outpatients care facility in and of itself. So we've been working with some potential buyers of the hospital, looking at a way to recapitalize that facility the hospital facility itself.

And working with our medical office building, which is full of physicians or seen patients today and very busy. There really is no other [indiscernible] building in community for those physicians to move through.

So and that’s kind of we’re looking at on a long-term basis, as a very strong buyable facility that should perform well, with or without a hospital next door. We're working with potential buyers to recapitalize the hospital and continue the mission of Trios.

But there is another great health system in town that we wouldn't mind working with as well and under the right circumstances. .

So just to clarify but on the last income.

What are you expecting over the next, is it over the next few months and then next year?.

Yeah it's hard to know. I think our best guess is we won't collect any rent through the balance of this year from that facility. We are collecting a small amount from independent physicians who lease some space in the building, but the primary tenant in that building are physician's employee but the hospital.

And again if some happened at the hospital that went away, we expect those physicians to obviously stay in practice and continue to provide cares in different ownership structures. So, 2018 as we have been messaging, as soon as we can expect the rent to restart.

When and what term we don’t know, but we are working again but both tenants of the building themselves and potential buyers of the hospital to do that as quickly as possible..

And then just a clarification. You've talked about quality quite a bit early on. Just on same-store NOI growth, given sort of the mix of the portfolio geography wise and lease structure wise.

Do you see a view sort of the 3% level as a sustainable number or is there something unique about the portfolio, that might sustainably keep you under or over that?.

We think 2.5% to 3% is what we and you should expect. But the potential opportunities in some quarter for outside is there are numbers but 2.5% to 3%. If you look at CHI hospitals themselves lease about 25% of our portfolio and it's 19% of our ABR. I mean those leases are fixed at 2.5% for the next 10 years.

So that gives you a pretty good run rate Vikram, of kind of what’s market and what we can expect. Again we're 96% lease, so we don’t spend a lot of money and time leasing small amount of space. We focused on the health system and leasing larger space to them for the long term. And then getting their expectations market is come to 100%..

Got it and just last clarification on the additional assets marked for sale of held for sale.

Are there any CHI assets in that?.

There is one small CHI asset is in that right, Mark?.

Yes, we had local buyer, 1031 buyer approached us proactively. What mainly we're considering selling but the price was attractive, so there is just one CHI building in that..

Yes, interestingly, and we have the right to do that appear that appeared. And then B, CHI themselves we approach them about that opportunity in this building that they're in or leasing, but long term are committed to either so to get opportunity to fund..

Our next question comes from Chad Vanacore with Stifel..

So I wanted to certain back on that couple of trouble occurred in portfolio of Trios and Foundation.

Are they both excluded from same store NOI?.

Yes..

All right and then did you recognize any rent on either in the quarter? And where were that compared to international rent on each?.

Yes, we did. So, we didn’t recognize rents on Trios as we have talked about this quarter and last quarter as well. Foundation we recognize the same rent that we've recognized last quarter of $1.6 million. They continue to pay their existing rent and also make a back rent that they all have. So that's been consistent..

And just thinking about in 2018,as Trios works its way through bankruptcies you start getting turn around rent again.

Was that about $0.03 a share impact?.

Well, it depends. It depends what kind of rent you are getting from Trios in 2018.So we were getting roughly $4 million of revenue from Trios prior to the Bankruptcy. So, it will be somewhere around there we think..

All right and then just talking about acquisitions in the quarter.

And going forward do you expect something mid-5% to 6% and this quarter, all the yields for the most part were up above 6%.Are there any other opportunities in the pipeline like that? Or it just be conservative going forward?.

So, we have got some 6% plus. Look our high quality health system opportunities. Again these off market transactions. We're still continuing to get those higher yields, but 5.5% to 6% is probably range for the foreseeable future. Again if your backlog..

Our next question comes from Michael Carroll with RBC Capital Markets..

I have a quick follow up off of a Tayo's question related to the L-type portfolio. I know John, you previously mentioned that you expect the profitability to improve at those assets with the addition of a burn unit.

Is that’s still the case and should we expect those coverage ratios to stabilize because of that?.

Yes. We have three buildings in a master lease, Mike. And one does extremely well, one does okay, it can better than average, and one just kind of float to long. Between the three of them it's a wide spectrum of how profitable they are, but they're all in our mass release.

They are a, comfortably able to pay the rent, but the possibility is like in general is improving as they kind of rebalance, restructure their clinical service lines. And then comply with the LTACH rules themselves to take advantage about their opportunities.

On the STACH basis short term to keep your hospital outpatient services like wound care as you mentioned. So, like I said. There are long term assets and we expect the profitability improved. And it's a great management team that we work with there. .

So the mitigation from the LTACH patient criteria that could still be a benefit as we go in the 2018?.

Yes I think so. That's what we expect. As I mention before though, we're not going to expand in LTACH business. And we think there are some good opportunities to sale those assets favorably. .

And then Jeff, can you provide us more details on your prepared remarks about pruning the portfolio.

Should we assume at DOC going to be more aggressively selling assets in 2018 and 2019?.

No, again I think it’s a something that is the natural evolution of the company.

When we talk about pruning, so we added 11 assets to or we have 11 I should say total assets in and slated for disposition .And so, every quarter we're just kind a going through a portfolio and making sure that we're concentrating on the right markets, the right buildings, the right healthcare system affiliations and disposing of asset that don’t meet those criteria.

So, it will be more, and it used to be almost zero. So it will be more than that, but I wouldn’t expect it's going to be massive amounts of the portfolio at any one time. They will just be a kind of slow continuous process. .

So more on these one last two type properties that at $4 million apiece?.

Yes that’s probably right Michael. .

Your next question comes from Daniel Bernstein with Capital One..

Thanks for taking my call.

So, I just want to try to understand some of the risk in the portfolio and lease expiration see in the next year or two? Are there any single tenant leases that are expiring, and are there are any purchase options there? Just trying to get where there is can be any potential for leakage of earnings there?.

Yes Dan, thanks for the question. Mark can respond..

Sure, Dan. There is a one single tenant property next year just coming up from our expiration. We actually have leased out for signature on a nice lease renewal there. So that hospital committed to five additional years there. So, that’s the only single tenant property in the near term role there.

And like I said on the call, there’s no more than 6% of our portfolio renewing in any one given year of the next seven years. No purchase option. .

We don’t have any purchase option at all in the portfolio Dan?.

Now I appreciate that. And then the other question has on development. You've obviously created some development relationships out there and others.

And are you thinking about funding development directly yourselves or is it mainly you're going use your relationships to buy those assets when they're stabilized? Just trying to understand how you're going to utilize those relationships and what kind gives you market on the assets relative to straight up purchasing assets.

And whether it's betting of otherwise?.

Yes Dan, that's great question. We have consistently, as I said from the beginning of DOC that we're not going to create a development engine, Deeni, and I, Mark and others on the teams have all the capability to do that.

So we're sourcing good development opportunities, but we like to work with our the development firms that, that’s what they do day in and day out. They have hospital system relationships in these regions and a long track record experience that can deliver this buildings. Developments [technical difficulty] heavily preleased buildings.

We like to focus and attention to those development firms. And people at Mark Davis and Jim Bremner, Ted Burge, all have done a great job, medicating the risk and then bringing us new high quality buildings lease to those health systems.

So what we have done to-date is capture a little bit of that kind of wholesale versus retail spread through some Mezzanine financing, without taking any developed risk and without taking incurring or both being responsible for any debt incur to build the buildings. We like this strategy it could change overtime.

Hospitals are getting smarter and smarter, but what they pay third parties to develop buildings and then they are leasing a 100% of it. So in the end we just want to own the building once it's once it open and occupied and the rent commences.

Don’t expect any changes in our strategy, we continue to and we continue to put up Mezzanine capital to get an option to buy those buildings off-market once that finished. .

Do you typically have any kind of rights to first look or is that again they just prefer you to be the buyer. .

It varies kind of developer-by-developer and in some cases hospital-by-hospital. Because sometimes hospitals are self-developing themselves and then looking the sale to them as once this completed. So it's really case-by-case basis. What we like to do is to keep the optionality and not have the obligation about the building.

Year from now or 18 months from now. On the other hand we can get some yield there in the construction cycle in the structure of our Mezzanine loan. So, it’s a good win win. And in any of that we believe we're getting the building, the few weeks executed on like Hazelwood with Mark Davis we believe, we're getting off-market pricing on those.

But also got some yield during the construction cycle. .

Your next question comes from Drew Babin with Robert W. Baird. .

Looking forward and I apologize is I missed this.

Was there anything onetime in terms of catch up payments in foundation or otherwise that was booked in the third quarter?.

The San Antonio facility used to make kind of scheduled catchup payments. So Antonio got it's essentially a quarter behind the fourth quarter of 2016.So they've been making additional payments essentially if each month backing up those rent payments.

So we've got a schedule worked out with them and expected to get caught up I think early in '18 is the current schedule. El Paso is a little different with the doctors there and kind of capitalize the facility. So they acknowledge and are working hard to try to get on a schedule to make catchup payments, but they were two quarters behind.

So the hole is a little bit deeper. The good news is that they've consistent with our scheduled run every months since April 1. And we continue to be patiently work with them, but acknowledge and they have committed to. And we expect to hopefully to catch up that rent. It may be in the process of sale of the building that we get caught up.

But we don’t book that income. And it will be on a cash basis when it comes in. .

And just for a couple numbers around the catch up for San Antonio. So they were behind by about $1.2 million. They've caught up about $750,000 of that and they have another $400,000 or so to finish up..

And then just quickly on the expense growth run rate. Obviously it was a little high his quarter. It sounds like property taxes were part of that.

Do you expect the property pretends pressures to kind a continue next year? I assume the operating expenses of are we back down, but as the tax so that was kind a catch up towards valuations of new [indiscernible].

Is there a pressure that you think might kind of road that 2.5% to 3% revenue growth somewhat is a full suite of NOI?.

Sure, Drew this is Mark. I can jump in. As we've just mentioned, every time we acquire a building, buildings are reappraised and by the local municipalities and often times we see operating expenses jump up because of that. Most of that is pass through in triple net leases. 98% of our portfolio is triple net leased so it passes through to the tenants.

But there is a little bit of exposure that we have through, at last very little vacancy we have or the very few growth leases we have. So that is resulted in operating expenses ticking up just a little bit. And we use a firm nationally on behalf of all of our clients to challenge those property taxes right from the get go. .

Your last question comes from Tayo Okusanya with Jefferies..

Thanks for indulging me again. Just a quick question when I take a look at the total portfolio percentage leased is higher than your same-store portfolio today. And I know you've kind of been buying a higher quality asset for the past year or two.

As more of those assets move into the same-store pool, is it fair to assume you start to show better same-store NOI numbers?.

Tayo, I'm Jeff and Mark also responded, we’re happy to let you double do it today. As the CHI portfolio only part of that has rolled in. So there’s a heavy influence [technical difficulty] By the hospital in those terms. So that’s going to continue to add influence and consistency at that 2.5% number.

But Mark, do have any other color?.

Yeah, I think as Jeff said about, our portfolio overall is 96.6% leased in many of those properties have the 2.5% ,same-store portfolio of 95.5% leased. So I don’t think that just because there’s more occupancy. There is still a lot of the same locked in contractual ramp ups in the properties that we’ve recently acquired. .

So thank you everyone for joining us today. I hope you appreciate, we continue to build a very high quality of portfolio. That's going to provide consistent returns. Look forward to seeing you in Dallas in a couple of weeks. If you have not received an invitation, we look to our Baylor Cancer Center and discussion.

Where a lot of there have some Baylor executives there. Speak with executives there to give you their impressions about that building and the future of the Baylor Healthcare System which is very bright, as well as their experience working with us in contrast and comparison to other REITs that they work with.

So let Jeff know if you not got an invitation. And love to see you and look forward to see you all at Nareit. Thank you for spending the time with us today. As we focus on our portfolio and leasing up our buildings and meeting with our C suite executives, we think that’s the best use of our time.

And don’t spend a lot of time touring others buildings and trying to measure how close they are to the hospital. We focus in our occupancy and our rent growth and the quality of our portfolio is best serve by spending time with our C suite relationships and growing and improving that for shareholders. Thank you for the time..

Thank you ladies and gentlemen. This concludes today’s conference. You may disconnect your lines at this time. Thank you all for your participation..