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Edited Transcript of DOC earnings conference call or presentation 24-Feb-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Physicians Realty Trust Earnings Call

Milwaukee Feb 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Physicians Realty Trust earnings conference call or presentation Friday, February 24, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley Page

Physicians Realty Trust - SVP and General Counsel

* John Thomas

Physicians Realty Trust - CEO

* Jeff Theiler

Physicians Realty Trust - CFO

* Mark Theine

Physicians Realty Trust - SVP of Asset and Investment Management

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Conference Call Participants

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* Jordan Sadler

KeyBanc Capital Markets Inc. - Analyst

* Juan Sanabria

Bank of America Merrill Lynch - Analyst

* Michael Carroll

RBC Capital Markets - Analyst

* Jonathan Hughes

Raymond James - Analyst

* John Kim

BMO Capital Markets - Analyst

* Chad Vanacore

Stifel Nicolaus - Analyst

* Craig Kucera

Wunderlich Securities - Analyst

* Tayo Okusanya

Jefferies & Company - Analyst

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Presentation

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Operator [1]

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Greetings and welcome to Physicians Realty Trust fourth-quarter 2016 and year-end earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the comments over to Bradley Page, Senior Vice President and General Counsel. Please go ahead Sir.

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Bradley Page, Physicians Realty Trust - SVP and General Counsel [2]

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Thank you. Good morning, and welcome to the Physicians Realty Trust fourth-quarter and full-year 2016 earnings release 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 of Asset and 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 fourth quarter and full year of 2016 and our thoughts for 2017. Mark Theine will present our CHI integration update. 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're 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 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.

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John Thomas, Physicians Realty Trust - CEO [3]

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Thank you Brad. Good morning and thank you for joining us for the Physicians Realty Trust fourth quarter 2016 earnings call. We are pleased to report a record-setting year for Physicians Realty Trust. We completed almost $1.3 billion in new investments in 2016. And our consistent fast growth in medical office facilities continues on into 2017. Our best in class operating platform delivered 2.6% same store net operating income during the fourth quarter.

We are very pleased with our fourth quarter results. During the fourth quarter, we invested $227 million, including expansions of our relationship with Scottsdale's Honor Health System and United Surgical Partners. We've also invested over $100 million already in 2017 in very high-quality medical office facilities. Including investments leased to credit rated health systems in Dallas, Texas and Hartford, Connecticut and investments in suburban New York City through a sell-lease cycle in outstanding very large multi specialty physician group.

We now own nearly 11 million square feet that is over 96% leased for an average lease term of approximately 8.5 years. We are well on our way toward another strong year of growth.

Mark Theine, our Senior Vice President of Asset Management will provide an update in a few minutes on our fantastic integration of the CHI medical facilities. We're getting very positive feedback from our CHI hospital, physician and other provider tenants on the service provided to them under Mark's leadership.

These efforts and our entire teams' attention to the operational excellence, as well is new and renewal leasing is producing far better results than we could have anticipated this early in the relationship. We're establishing a new high standard for medical office asset management as we help our clients as they meet the clinical needs of their patients.

We are different, and we seek to earn the trust of our hospital and physicians tenant clients and believe over the long-term that not only fuels our growth, but also our ability to earn outstanding same store operating results. In our industry-leading occupancy of 96%, the fourth quarter represents the sixth straight quarter of positive net absorption of space available in our portfolio.

2017 brings us to a new year with a new US presidential administration and Congress focused on healthcare policy and tax policy. We're monitoring these closely. Our Chairman is former US Secretary of Health and Human Services, Tommy Thompson who is actively involved in health policy discussions. While we expect changes, at this time we expect more change to occur through the Secretary's power to make regulatory changes than a wholesale repeal of the Affordable Care Act.

As details are being worked out, we see efforts to retain many of the benefits in the ACA that have helped expand the insured population, including the funding for that expansion with efforts to preserve Medicaid expansion and incent all states to participate in some level of Medicaid expansion by providing those states more flexibility in how they provide that coverage. Whatever happens, it continues to appear that any changes that might affect existing coverage available will not go into effect for several years.

We continue to believe very strongly that the aging demographics and the strength of the US employer-based insurance market will continue to drive strong demand for outpatient medical care delivered in outpatient medical office facilities like ours. The vast majority of our physicians' hospitals continue to perform very well with high volumes.

Unfortunately, we have shared today that one of our hospital management company clients experienced challenges beginning in the third quarter of 2016, which became much more acute in the fourth quarter. Foundation Healthcare, an organization that has a long history of success beginning in 1996 and operating very strongly for almost 20 years, suffered unexpected operating losses in the second half of 2015, due primary to losses and management's focus on a hospital investment in Houston, Texas.

We had no involvement in that Houston asset. Unfortunately Foundations' lawsuits and attention to that hospital impacted their ability to support their physician joint venture hospital in El Paso and San Antonio, Texas that we own. To be specific, Foundations' attention to cash collections declined significantly in the fourth quarter.

We been working with Foundation and the physician co-owners of those hospitals in San Antonio and El Paso to transition management. And eventually Foundations' ownership in each of those hospitals. The physician co-owners in San Antonio and El Paso continue to support the hospitals and ended 2016 and began 2017 with strong volumes in revenue. We continue to believe both can and will recover, as both are open and operating as they have continuously for years. And we expect to work through both situations positively moving forward.

Nevertheless, with our commitment to transparency and appropriate accounting, we took the charges for the fourth quarter we announced today, including the charges against the MOB Foundation leases from us in Oklahoma City. We are pleased report we have entered into a purchase and sale agreement for the sale of that facility, that MOB for $15.3 million, a $1.6 million gain on our current basis in that facility. While we can provide no assurance that sale will be completed. Or there will be a successful transition of Foundations' ownership interest in the El Paso and San Antonio surgical facilities, we are working hard with the local physicians to accomplish a satisfactory result in each location.

Both El Paso and San Antonio have special legal status as grandfathered physician-owned circle hospitals. Which makes it particularly attracted to other hospital management companies, as well as physicians who seek to own such hospitals.

We are excited to share much more positive news. We have shared with you over our three-year history our own examples of healthcare consolidation that we believe benefit the medical office real estate investments we have made. More than ten years ago, we invested in several facilities in Bloomington, Indiana, owned by, and now leased to Premier Health, a leading large multi-specialty provider group located in that community. The group announced last week they have agreed to join Indiana University Health, a Mood's Aa3 rated health system more commonly known as IU Health. IU Health provides care to their own network of hospitals and outpatient facilities across the state of Indiana.

Premier joins IU Health's affiliate Southern Indiana Physicians, which includes 265 employee providers and 19 specialties, including 11 primary care centers in the south-central region of Indiana. We are very happy for Premier and the new partners with IU Health and looking forward to work closely with them. As IU Health assumes our leases as part of the transition with Premier. Mark will share more about discussions with CHI's Dignity about an alignment with their respective organizations.

With that I'd like to turn it over to Jeff Theiler to discuss our financial results.

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Jeff Theiler, Physicians Realty Trust - CFO [4]

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Thank you, John. In the fourth quarter of 2016, the Company generated funds from operations of $34.6 million, or $0.25 per share. Our normalized funds from operations was $38.2 million, normalized funds from operations per share was $0.27 and our normalized funds available for distribution were $34.2 million, or $0.24 per share. For the full-year 2016, the Company generated normalized funds from operations of $128.5 million and normalized FFO per share of $0.98, which is an increase of roughly 7% over 2015.

As John mentioned, in the fourth quarter we reserved $3.7 million for uncollectible rent and prepaid expenses associated with four properties whose tenants were affiliated with Foundation Healthcare, a company that is currently undergoing a restructuring. The fundamentals underlying these assets remain strong and we've had substantial interest from healthcare companies that wish to partner with the physicians in the building. We also believe, however, that a compression in cap rates for these assets and the quality of these facilities and markets, particularly the surgical hospitals, makes it an opportune time to put them in a disposition program and recycle the capital into newer and more strategic buildings.

In the fourth quarter of 2016, we closed on $227 million of investments at an average first-year yield of 6.8%. As we acquired all these assets at the beginning of the fourth quarter, they would have contributed an additional $2.4 million dollars of cash NOI. We're seeing more acquisition opportunities than ever through both our existing healthcare system relationships, as well as the more traditional marketed deals and feel comfortable issuing full year 2017 acquisition guidance of $800 million to $1 billion, assuming stable market capital conditions.

Turning to operations, our same store portfolio, which represents 51% of our total portfolio, generated year-over-year NOI growth of 2.6%. Primary drivers of this growth included a 20-basis point increase in occupancy. And contractual rent increases. We expect to be able to achieve 2% to 3% year-over-year same-store NOI growth on a long-term basis. For this quarter, it's representative of this range.

We had another quarter of net absorption of 23,715 feet on the leasing front as our team continues to make excellent progress leasing the portfolio, now at 96.1% occupancy. We have a modest level of lease expirations in 2017. Amounting to just under 4% of the annualized base rent of our overall portfolio. We have had a strong start for leasing in 2017.

Leasing spreads, so far, have averaged 5.1%. And we expect total leasing spreads for 2017 to average around 2%. We continue to maintain an exceptionally strong balance sheet. We ended the quarter with debt to total capitalization around 27% and net debt to adjusted EBITDA of 5.1 times. We issued $2.6 million dollars through our ATM in the fourth quarter of 2016 and have just over $297 million remaining on the ATM program. Our balance on the revolving line of credit at the end of the year was $401 million. And we expect to convert much of this balance to long-term fixed-rate debt in 2017.

As we have been doing ever since we achieved our investment grade rating. Finally, we continue to make significant progress on scaling down in G&A costs relative to the size of our portfolio. Our total G&A cost for 2017 were $18.4 million, which was below our previously stated guidance range of $19 million to $21 million.

With that, I'll turn it over to Mark to provide a progress update on the CHI transaction. Mark?

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Mark Theine, Physicians Realty Trust - SVP of Asset and Investment Management [5]

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Thanks, Jeff.

As John mentioned, 2016 was a transformational year for DOC with $1.3 billion in real estate investments, including the Catholic Health Initiatives Hospital Monetization. We are honored to have been chosen by CHI to acquire 53 mission-critical medical office buildings leased primarily to CHI's affiliated hospitals in ten markets. This was not only the largest ever hospital monetization of medical office buildings, but also the first step in establishing a long-term partnership with CHI.

In choosing a partner, the healthcare system was focused on selecting a long-term owner, who understands healthcare operations, has first-class property management experience, values relationships, and shares the same commitment to high-quality patient care. We are proud to be that partner to CHI.

To date, we have completed the acquisition of 49 of the properties in the CHI portfolio, representing 3 million square feet. We have two facilities located in Omaha, Nebraska and Fruitland, Idaho respectively yet to acquire in 2017 and we elected not to purchase two facilities during the due diligence process.

The Omaha, Nebraska facility is a newly constructed medical office building, 100% leased by CHI's affiliate Creighton University Medical Center. Upon completion of its construction in the first quarter of 2017, we anticipate purchasing the facility for $33.4 million. Later in 2017, we anticipate closing the Fruitland, Idaho facility, which is 100% leased and under contract for $4.5 million.

Our team has work closely with CHI and its local hospital leadership teams in each market over the last six months to complete the acquisition and exceed expectations in the transition of these facilities to our ownership. We are proud of our teams' unique ability and hard work to underwrite, close, and transition property management and leasing services for the portfolio in such a short amount of time.

In the six months since the majority of our acquisitions were completed, we have outperformed our underwriting expectations and leasing projections. All while executing our business plan and expanding our asset management and leasing platform. On an annualized basis, the CHI portfolio has outperformed our initial underwriting of a 6.3% cap rate by 20 basis points and is yielding a 6.5% unleveraged first-year return. These results are driven primarily by 30,000 square feet of new leasing, which has increased the portfolio's occupancy from 94% at closing to 95% today.

Additionally, through a number of early lease renewals, we have extended the average lease term remaining for the CHI portfolio from 8.37 years at the time of closing to 8.44 years today. We have strong leasing velocity to fill a significant portion of the 156,000 square feet available in 2017. Primarily in the Houston, Texas and Louisville, Kentucky markets.

In fact, in last week, we signed a 26,000 square foot lease with a large physician practice to relocate that group to our newly constructed 101,000 square foot Spring, Texas facility, located near Exxon's world headquarters and located in a large parts of the Houston MSA.

The lease will commence on July 1, 2017 and it is a prime example of our ability to structure unique, creative deals that add significant value to the hospital and its patients. Local hospital executives at CHI previously identified this very important physician group as an ideal component to complete the healthcare ecosystem in the building, but the group still had two years remaining on their existing location.

As CHI's real estate partner, we were able to facilitate an early buyout of the physician group's existing lease in exchange for a long-term mutually beneficial lease commitment in our facility. This lease arrangement would have been difficult for CHI, or any other hospital to complete on its own without a specialized and nimble real estate partner. Looking ahead in 2017, we will continue to grow our integrated management and leasing platform and are well-positioned to drive operational excellence and consistent same store growth in our MOB portfolio.

Our management structure is scalable and will continue to benefit from concentration, as we invest in top-quality properties and portfolios in the future. Ultimately, producing outstanding total shareholder returns year in and year out.

Finally, as reported last quarter, CHI is exploring discussions with Dignity Health to align their organizations. If the organizations were to merge, the joint organization would have $27.8 billion in combined annual revenue and would create the nations' largest not-for-profit hospital company ahead of Ascension with $20.5 billion in annual revenue.

The geography of CHI and Dignity Health locations complement one another with no geographic overlap of acute care facilities. While we remain close with the senior leadership at CHI in Denver, we do not have any additional information to share at this time.

Our relationship with CHI has only strengthened over the first six months of our partnership. Producing far better results than we could have anticipated this early. And we look forward to continuing to demonstrate why we are the preferred partner for hospital monetizations.

With that, Rob, we will be happy to answer any questions at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Jordan Sadler with KeyBanc Capital Markets.

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Jordan Sadler, KeyBanc Capital Markets Inc. - Analyst [2]

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Thank you, and good morning. Wanted to follow up on the acquisition volume guidance, and just given the context of one of your comments, Jeff, regarding more opportunities than ever. Can you maybe give us a sense of where that is coming from? Or where you guys think this transaction volume acceleration has stemmed from?

Does it have anything to do with the CHI/Dignity discussions? Or maybe just as a function of your success with the CHI portfolio, any sense would be helpful.

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John Thomas, Physicians Realty Trust - CEO [3]

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Good morning, Jordan. I think it stems primarily from the success of that transaction, the CHI transaction. It got a lot of trade press, not only in the MOB investment world, but in the hospital world as well.

So we've got a lot of inbound calls from health systems. And that evolved into continued discussions. So, we'll see how much, if there is more monetizations like that.

To be clear, nothing specifically related to the Dignity Health/CHI discussions. And as Mark said, we remain close to the situation. But we don't know if that transaction, that merger is going to happen or not. And really don't have a time schedule from them on a decision there.

So, good volume and as reflected by both the Hartford Medical and the large physician sale-leaseback just outside of New York City. We just see a lot of great opportunities at very attractive, high-quality real estate. And really expect, absent any major capital market changes, that we will be able to hit that acquisition volume again this year.

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Jordan Sadler, KeyBanc Capital Markets Inc. - Analyst [4]

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That's helpful. And then as it relates to this year-to-date activity that you guys discussed, it does look like the overall size, maybe quality have crept up, the cap rate, ergo, has crept down. Looks like an average of a 6% cap on the $100 million-plus you have done to date. Is that more along the lines of what we should be anticipating for the 2017 pipe?

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John Thomas, Physicians Realty Trust - CEO [5]

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You can continue to expect us moving up the quality scale. Again, I am very proud of all of our investments to date over the last 3.5 years. But as our cost of capital has improved, and our name and, frankly, reputation amongst hospital systems and physician groups has continued to spread, we are just seeing more and more attractive opportunities of bigger, newer, bigger markets, health systems, affiliated opportunities.

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Jordan Sadler, KeyBanc Capital Markets Inc. - Analyst [6]

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Okay. Is there a cap rate range that we should be expecting? Is it like in the 6% to 7%?

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John Thomas, Physicians Realty Trust - CEO [7]

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Yes, I think 6% to 7% is probably about right. Last year we were about 6.6%, a little bit higher than 6.6%, heavily influenced by the CHI investment. As Mark pointed out, that was a 6.2% on in-place, and we are always moving it up to 6.5% with Mark's leadership in both leasing and expense management in that portfolio. But 6% to 7% is what we would expect to see this year.

On the 10-year, it spiked a little bit from last year. There's still a lot of capital chasing [assets], there's a lot of foreign capital coming in through various platforms to chase the asset. So the best healthcare in real estate is medical office, and people recognize that.

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Jordan Sadler, KeyBanc Capital Markets Inc. - Analyst [8]

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Okay, and just one clarification on Foundation: Can you break out the $3.7 million for us? What does that represent entirely? You gave a little bit of insight in the release in terms of which buildings it comes from but how many months rent versus pre-paid expenses versus deferred rent? How does this break out?

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John Thomas, Physicians Realty Trust - CEO [9]

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That's a $1.1 million with respect to the Oklahoma City asset, which we also entered into the purchase agreement to sell. That is rent and property taxes. And again, Foundation has essentially withdrawn from that, so their subtenant is in the building and that's who we are working with there to effectuate a sale or at least members of that group.

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Jeff Theiler, Physicians Realty Trust - CFO [10]

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So, Jordan, just to roughly break it out, just under $2 million of that is rent that we determined to be not collectible. And that represents the majority of the fourth quarter [four] of these buildings. We also had some property tax expenses that we had paid and had accrued a reimbursement for that we didn't get. That was, call it, $0.5 million, actually a little bit more, $600,000. And then there is some revenue that we didn't record in December as we realized that this would be uncollectible and that is the balance of it.

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Jordan Sadler, KeyBanc Capital Markets Inc. - Analyst [11]

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Okay, thank you.

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Operator [12]

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Juan Sanabria with Bank of America.

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Juan Sanabria, Bank of America Merrill Lynch - Analyst [13]

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Good morning, guys. Just hoping you could talk briefly, Jeff, about balance sheet plans. I think you referenced a debt issuance to term out the revolver at some point this year. What the options you're looking at and timing, as well as any views on equity at this point.

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Jeff Theiler, Physicians Realty Trust - CFO [14]

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Sure, hi, Juan. We ended the 2016 with just over $400 million on a revolving line of credit. Since we got our investment grade rating, and started terming out debt in the private market with [AIG] at the beginning of last year, that has really been the strategy, to try to fix our debt as quickly as possible into long-term fixed-rate bonds.

The beginning of last year, the private market was far more attractive than the public market in terms of bond opportunity. I would say this year it is much closer. And so, I think we would evaluate the public market very carefully as we think about terming out debt. I think for inaugural issuers, it's actually a really good time right now. So I would expect to see something hopefully early in 2017 on the public bond side.

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Juan Sanabria, Bank of America Merrill Lynch - Analyst [15]

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Any thoughts on equity at this point? How comfortable are you with the current leverage and what should we expect (multiple speakers)?

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John Thomas, Physicians Realty Trust - CEO [16]

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We communicated our target leverage level to be about 30% to 40% debt to assets. We are probably 33% debt to gross assets right now, certainly well within our target leverage range. Certainly, we always look at equity. As we put out an $800 million to a $1 billion pipeline, it would be hard to acquire all that without any equity.

So that is something we always look at. And we can always do the ATM program; we have plenty of capacity on that or the secondary offering market at some point. But it's something we will evaluate. We are under no pressure to do anything near term.

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Juan Sanabria, Bank of America Merrill Lynch - Analyst [17]

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Okay. And second question for me just on Catholic Health: Some of their headline numbers have not been as robust as we would have expected. But any sense of how their turnaround -- I know there has been some management changes there, how that's progressing, and expectations or an update in expectation for rent coverage levels from CHI?

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John Thomas, Physicians Realty Trust - CEO [18]

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Yes, Juan, this is JT. We've had some good success. The COO retired. And they brought in another gentleman who, that's been his primary focus is on strategic operational plan. And they communicate pretty frequently with the bond market about their progress there.

Continue to have book losses, call it systemwide, but the revenue continues to be strong and growing. Kentucky, [large dollars] reflective of their management of care and management of risk, just got a net positive payment from the ACO that they participate in, in the Louisville/Lexington market. So, lots of things going on and there's still lots of opportunity for improvement.

I think we talked about it before, but just on the supply chain in particular, just a very modest improvement in their supply chain as a percentage of revenue more than covers in the aggregate our annual rent, I mean a very modest change. We see a continued very positive improvement and see no concerns in drops in rent coverage that (inaudible) the local markets.

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Juan Sanabria, Bank of America Merrill Lynch - Analyst [19]

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Thank you, guys.

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Operator [20]

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Michael Carroll with RBC Capital Markets.

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Michael Carroll, RBC Capital Markets - Analyst [21]

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Thanks. John, with regards to Foundations, did you indicate how well the three assets in the San Antonio and El Paso are currently performing?

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John Thomas, Physicians Realty Trust - CEO [22]

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They all finished the year well. San Antonio had really a blow-out month in December. And it actually had pretty strong revenue last year. Between its issues or our issues related to our lease payments there have not been revenue or volumes, it's been on the cash collections, which is a function of the management that Foundation did not provide.

El Paso was performing well throughout the first half of 2016. They lost some profitable ancillary business at the beginning of the third quarter. And lost a physician participant that set them back.

El Paso is a little bit more of a revenue and exacerbated by the cash collections issue. San Antonio is performing very well. And El Paso, we continue to believe, is performing strong right now and I am actively engaged with the physician leadership there, week-by-week, day-by-day basis, and continue to see a lot of positive movement there.

Just working with both of them through the transition of both management and Foundation's ownership interest. But we continue to see bright things and bright opportunities there for them.

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Michael Carroll, RBC Capital Markets - Analyst [23]

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Okay, and is the preferred path to sell those assets? And if so can you give us some color on who are the potential buyers of those types of properties?

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John Thomas, Physicians Realty Trust - CEO [24]

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Yes, it's, again, we had the first sale agreement with the Oklahoma City facility. We have been approached by both physicians and institutional investors in both San Antonio and El Paso for those real estate assets. And so as we work through this, again, these are both fine hospitals physically, the physical plans. They're both in good markets; they're both in attractive markets to a lot of players.

So to really help facilitate in working with physicians but help facilitate a smooth transition and a positive outcome for everybody, we just felt it was time to move these to a disposition status and expect to work through a sale in an orderly fashion on both assets. And it could be one buyer but my expectation is two different buyers. And again, the physicians may be involved in one of those situations.

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Michael Carroll, RBC Capital Markets - Analyst [25]

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Okay, great. And sorry if I missed this but did you guys mention the balance of the [LTAC] portfolio and what is the driver there that pushed those coverage ratios lower?

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John Thomas, Physicians Realty Trust - CEO [26]

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Yes, the (inaudible) through patient criteria conversions, the Medicare rules. That is something we knew about when we bought these assets, worked with their management team to evaluate what the impact is going to be there. They've made good changes or evolved to comply with those rules and manage their business to outside of the patient criteria where they can drive additional revenues.

Plano, for example, had a very successful wound care business. It's really ancillary but complementary to their existing service line, and the physicians that they refer patients to them. Unfortunately, they are trying to move that same ancillary service into the Fort Worth facility but that has taken longer than expected. So their drop in our coverage is all attributable to Fort Worth.

It's still doing fine, it's still a good facility in a good location. But, obviously we would like to see, in the aggregate -- and that's a master lease, those three facilities, Pittsburgh, Fort Worth, and Plano. It's all under one master lease, and we would like to see the Fort Worth coverage improve and we expect that it will.

And then Life Care continues to focus on other ancillary opportunities in Pittsburgh. They expanded some of the service lines, again, complementary to their long-term acute care business in that facility. And hopefully we will start seeing the benefit of that in the near term.

This year, don't expect any issues. We think the management team is very focused on improving and increasing EBITDA. They clearly had an impact on EBITDAR and EBITDA across their organization because of the patient criteria, but they are evolving through it in a good way.

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Michael Carroll, RBC Capital Markets - Analyst [27]

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Okay, great, and then just lastly I guess, or two quick ones. Do you expect the 1.7% is the low point in the coverage ratios? And what is the average rental rate bump on those leases?

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Jeff Theiler, Physicians Realty Trust - CFO [28]

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Those have a CPI increaser and also a kicker in the extraordinary revenue year. We haven't been able to get an opportunity to get the kicker, but they increase at a floor of 2.25%. CPI has not moved more than that.

So I think we have a ceiling of 3.75%? Correct, Mark? So 2.25% in those.

You know, Mike, we would not expect coverages to drop there. Plano does extremely well, as I mentioned. And again on a master lease perspective, the coverages continue to be strong. But on a facility-by-facility basis, we monitor it closely. We do not expect it, but we can't say that's a floor.

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Michael Carroll, RBC Capital Markets - Analyst [29]

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Great, thank you.

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Operator [30]

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Jonathan Hughes of Raymond James.

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Jonathan Hughes, Raymond James - Analyst [31]

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Good morning, thanks for taking my questions. Just touching on Foundations some more, you mentioned collections deteriorated pretty rapidly at those assets. Was there a deterioration in admissions as well? And are you seeing any similar trends in any of your assets? If so, have you taken steps to prevent this going forward, like rent release?

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John Thomas, Physicians Realty Trust - CEO [32]

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Yes. So, San Antonio, the volumes have been very strong. The payer mix have been very strong.

One of the good and bad things about payer mix in San Antonio is that they have been doing a lot of what in the industry we call PI work, personal injury work, which is accident victims who come in and ultimately looking to an insurance company, not a health insurance company but insurance company that is involved in settling claims related to that injury. And those usually collect at a very high percentage of net revenue. So they're very profitable. The downside is there is a longer time to collect those receivables. So, San Antonio is investing part of their issue, but the end of the year and had a strong year from a volume perspective.

In any event, again, and El Paso had a drop-off in volume really beginning, mid third quarter, and exacerbated by the fourth quarter and lack of management attention from the Foundation level. The volumes, the end of the year and so far this year, it looks strong in both locations.

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Jonathan Hughes, Raymond James - Analyst [33]

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Okay, thanks for that. Is this year's asset sale pace something we might expect for the years ahead as you maybe prune the portfolio or is this just a one-off year?

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John Thomas, Physicians Realty Trust - CEO [34]

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I think this is the beginning of a long-term practice that we would continue to prune some bottom percentage or be opportunistic. And frankly, we think (inaudible) is the case with the assets that we put in the disposition bucket so far this year. Mark Theine -- four of the assets are that we announced today including in Nevada, four of our legacy assets that were part of the residual portfolio that was public, and there's some really good leases, good tenants in those buildings.

But it is time to start pruning some of those assets out, smaller and older, smaller communities. And Mark Theine has done a nice job, not only with the leasing and continued leasing and management of those facilities, but actually working through the process to when a buyer approaches us about those and move forward very positively.

I think this is the beginning of a trend you will see. But for this year I wouldn't project to be more than $100 million, but that could change.

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Jonathan Hughes, Raymond James - Analyst [35]

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Okay. And then sorry if I missed this, but can you remind us of the amount of MOBs that CHI owns that would fit your investment criteria?

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John Thomas, Physicians Realty Trust - CEO [36]

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They own several hundred more. They range from brand new to old, small little buildings in rural markets. So it's a very large opportunity of additional opportunities there. But we don't know, we haven't cataloged every building, Jonathan, but I would say there is lots of opportunity for Class A assets that are anchored by or leased 100% by CHI.

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Jonathan Hughes, Raymond James - Analyst [37]

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Okay, thanks, and just one more and I will jump off. Touching on the question earlier about debt issuances, has the upcoming change to the Barclays index, where only issuances of $300 million or more will be included, change your assumptions on that front? And could you give us some color on pricing you think you could achieve on expected debt issuances?

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Jeff Theiler, Physicians Realty Trust - CFO [38]

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Yes, hey, Jonathan, it is Jeff. You're exactly right. I think what that change to the index eligibility criteria does is it bumps up the minimum amount of debt that you are going to issue or that you would want to issue to get a great execution. So that used to be a minimum of $250 million, now it's a minimum of $300 million. So I think as we look at the public markets, we are always looking at it with that minimum in mind.

In terms of pricing, I think right now in the public markets, probably anywhere, just above [mid-4%, 4.5% to 4.75%], somewhere in that range I think would probably be a reasonable pricing assumption.

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Jonathan Hughes, Raymond James - Analyst [39]

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Okay, and then what about like if you did private notes and you opted not to go the public route?

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Jeff Theiler, Physicians Realty Trust - CFO [40]

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If you did private notes I think the volume is lower. The amount you can issue is probably lower unless you get a lot of interest in the private market. I think you're probably capping out closer to [$200 million] there on a deal. And the pricing is probably pretty similar right now. It might be a little bit in front of that, but it's not as much as it used to be at the beginning of last year.

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Jonathan Hughes, Raymond James - Analyst [41]

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Okay, that's it for me. Thanks for the color, guys.

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Jeff Theiler, Physicians Realty Trust - CFO [42]

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Thanks, Jonathan.

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John Thomas, Physicians Realty Trust - CEO [43]

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Keep hitting pars, Jonathan.

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Operator [44]

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Thank you. John Kim, BMO Capital Markets.

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John Kim, BMO Capital Markets - Analyst [45]

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Thanks, good morning. John, I was interested in your comments that any changes to the ACA and the impact on existing coverage will not occur for several years. Is that a consensus view among your tenants and partners?

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John Thomas, Physicians Realty Trust - CEO [46]

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I think so. I think the hospital industry has really rallied around a focus on Medicaid expansion, what has occurred and the desire in those states where it didn't expand for some kind of expansion. That's where the hospital provider world is focusing their attention. But as I mentioned, with Tommy's engagement, and we have other Board members close to Capital Hill as well, we stay pretty engaged in real-time discussions that are there.

So, stepping back a minute, there's only so much you can do through the reconciliation process. So the idea of just completely wiping out the Affordable Care Act and completely replacing it in part or all or even repairing it as some would like to say, it's very difficult through the reconciliation process. So absent some -- getting eight Democrats and a few Republicans who would be resistant to major changes without significant alternatives to keep the insured, keep the benefits of what has occurred under the ACA but also address the deficiencies.

As I mentioned, the Secretary has a lot of power under the law, but that is tweaking things through the regulatory process. The SCHIP is up for renewal this year, so that is something that bipartisan ways is a vehicle for potentially some bipartisan changes. But it's not as easy as the sound bites might make it occur.

So I think the hospital industry is focused on Medicaid expansion. We have analyzed our portfolios, ironically, right at 50% is in a state that expanded and 50% in a state that did not expand. We didn't use that as an underwriting or targeting analysis; it's just the way it's worked out. Kentucky being probably the most important where they did expand. And Texas being maybe perhaps most important where Texas did not expand.

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John Kim, BMO Capital Markets - Analyst [47]

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Okay, and then can you comment on competition as you look through for acquisitions? It seems like it's been a renewed focus as far as growing MOB portfolios for the Victory Healthcare REITs. I'm wondering if you can also just comment on whether you are seeing more of those companies or other capital sources as you look through acquisitions?

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John Thomas, Physicians Realty Trust - CEO [48]

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In many respects, our unique approach, and somebody, one of our investors called it a proprietary approach is we don't see a lot of competition in a lot of our transactions because it is mostly one-off direct negotiations with physicians and hospitals and developers. But generally, in the market, private equity-backed is probably by volume is the biggest buyer out there other than us. Amongst the big three, I think probably two of the three, their asset portfolios probably declined in 2016. One has probably got a renewed focus on the MOB, and we are bumping into them a little bit more.

But I think that the big competition right now is private equity-backed. We did the largest transaction directly with a hospital system ever, but it was a very large transaction. It was a new player in the market. And we will see where they go.

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John Kim, BMO Capital Markets - Analyst [49]

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What about pension funds and foreign capital or maybe some new entrants into the market?

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John Thomas, Physicians Realty Trust - CEO [50]

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A lot of interest by both. And again they're primarily trying to JV and come in through one of the operating platforms that today lines up with other private equity firms. We have friendly conversations with players like that all the time. But Jeff keeps us fully loaded with capital, so we haven't seen the advantage to doing a JV today.

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John Kim, BMO Capital Markets - Analyst [51]

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Okay. Jeff, you mentioned the G&A came in for the year at $2 million before your guidance. But have you provided guidance on this for 2017?

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Jeff Theiler, Physicians Realty Trust - CFO [52]

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I think, John, for 2017, as we look at it, we will continue to scale down G&A as a percent of assets. We will probably be somewhere in the $21 million to $23 million range on a full-year basis, which I think equates fairly well with the other MOB peers in the space.

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John Kim, BMO Capital Markets - Analyst [53]

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Okay, so that's an increase. But you are saying that as far as cost initiatives, that there is still some ongoing components of it?

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Jeff Theiler, Physicians Realty Trust - CFO [54]

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Yes, it's an increase. As we build our portfolio, clearly if you are growing $1 billion a year, there is a lot of buildout that you need to do to support that acquisition pace and to make sure you are integrating the properties well, you're accounting for them well, you're taking care of the tenants. There is always a fair amount of infrastructure build with every new acquisition, particularly if you are increasing acquisitions on a multi-tenant side as opposed to a single lease side where there is just a lot more work to do for each building.

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John Kim, BMO Capital Markets - Analyst [55]

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Okay. Thank you. And one last one: For the six assets held for sale with Foundation Health Care and I just wanted to clarify, does that eliminate your exposure to Foundation if you sell these assets?

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John Thomas, Physicians Realty Trust - CEO [56]

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If we sold all of those, we would have no other exposure to Foundation.

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John Kim, BMO Capital Markets - Analyst [57]

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Got it, thank you.

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Operator [58]

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Chad Vanacore with Stifel.

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Chad Vanacore, Stifel Nicolaus - Analyst [59]

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Good morning, all. Just thinking about going back to the operational issues at Foundation, is this related to out-of-network billings? Or is this an issue with third-party contractors collections or anything else? What would you say?

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John Thomas, Physicians Realty Trust - CEO [60]

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Again, different payer mix at each location. San Antonio, you can call the PI work out-of-network, but that's really not the strategy there. It's just doing the payer is a different type of insurance company.

El Paso, fairly traditional payer mix. They have both of these are contracted facilities. So neither one of these are relying on an out-of-network strategy where it is difficult to collect, period.

And then Foundation provided a centralized billing offices to each of their affiliates. And it was at CBO, so, Foundation internally that didn't collect the revenues as fast and efficiently as they should. That is improving, but it's also transitioning to a third party at this point.

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Chad Vanacore, Stifel Nicolaus - Analyst [61]

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Okay. And just thinking about the rent collections, right now you won't be booking any revenues from these properties, or can we expect more write-offs down the line?

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John Thomas, Physicians Realty Trust - CEO [62]

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At this point, we have recognized the fourth quarter. We are still working through both situations. Again, San Antonio -- two different situations. San Antonio has a lot of revenue to collect; El Paso has less.

But, again we are hopeful that this is a one-time event. But we can't make any assurance of that. But that is where we are focused on right now, the transition. And again, if they get collected, the revenue that is already been generated, they should get back on track and move forward positively.

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Chad Vanacore, Stifel Nicolaus - Analyst [63]

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That's good. And your thoughts on additional dispositions that are not related to Foundation. What are you thinking as far as the facilities that you've teed up for sale?

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John Thomas, Physicians Realty Trust - CEO [64]

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I'm sorry, I didn't quite understand your question.

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Chad Vanacore, Stifel Nicolaus - Analyst [65]

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Okay. I am saying what was the thought process behind the dispositions? When you're looking to prune your portfolio, what are you taking into account?

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John Thomas, Physicians Realty Trust - CEO [66]

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Same traditional factors. And the four legacy assets have a nice tenant base. One of them has a Northside lease for over 10 years. It's one of the best core assets we had as part of the IPO. But it's also a one-off in far north suburban Atlanta.

So again, does it make sense in our continuing for synergies and asset management going forward, these are all older buildings. So again we are trying to prune and move the average age of our facilities down, so those are natural criteria. Again, it's a whole lot -- I should not say easier, but more interesting and maximize the value if we are selling buildings with still good lease term and good tenants in them and all of those meet that criteria. And frankly, we were presented a good price.

So we will apply a screen across the entire portfolio and look for opportunities where we've got one-off assets and don't see any opportunity to grow either in that market or with that client. And also average age and size will weigh into those decisions.

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Chad Vanacore, Stifel Nicolaus - Analyst [67]

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All right, thanks for taking the questions.

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Operator [68]

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Craig Kucera with Wunderlich.

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Craig Kucera, Wunderlich Securities - Analyst [69]

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Good morning, guys. You had a pretty solid retention rate this quarter. And I appreciate the color on the lease spreads you've achieved and what you're expecting to see. But how are your discussions going with the 4% or so rolling over next year? And what kind of retention rate you think you'll have?

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Mark Theine, Physicians Realty Trust - SVP of Asset and Investment Management [70]

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Thanks, Craig, this is Mark. In 2017, as Jeff mentioned, we have roughly 4% of the portfolio scheduled to renew. It's about 116 leases in total. And we feel very positive as we sit here today about the retention of those tenants.

We don't know of any at this point that are not planning to renew, but our traditional retention rate has been around that 80% mark. And we will continue to try and achieve that goal in 2017.

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Craig Kucera, Wunderlich Securities - Analyst [71]

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Okay. Going to the dispositions again, I know you mentioned that you thought this was a good time to sell because cap rates have been compressed. What kind of cap rates do you think you will achieve on the assets that you are selling?

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Jeff Theiler, Physicians Realty Trust - CFO [72]

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Craig, it's Jeff. I think the way we modeled it out is we have two purchase and sale agreements that are already in place. As we look at that $100 million to $125 million valuation range, we include those numbers, the $18.3 million on the Georgia portfolio and the $15.3 million on the Oklahoma City portfolio. And for the remainder of the assets, we look at a cap rate range that goes up to low 7% cap rate on an average.

So that's the high end of that range is a low 7% cap rate. We feel pretty good about being able to sell the asset somewhere within that range. Just for clarity, the bottom end of that range is essentially what we paid for the assets, not the net book value but the actual purchase price that we paid.

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Craig Kucera, Wunderlich Securities - Analyst [73]

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Got it. One more for me and I will jump back in queue. Your thoughts on where you have seen cap rates move since the election and the move in the 10-year?

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Jeff Theiler, Physicians Realty Trust - CFO [74]

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At this rate, even with moving the 10-year, there is so much capital on the other side of the supply side of capital investing in medical office to keep cap rates, I'd say, fairly stable. But also best-in-class assets are going to crack below 6%. And top markets or top health systems we've seen things in the mid-5%s. So we are seeing lots of opportunity in the 6% plus range. And that's where we like to be. Like Hartford and the other assets I noted, very attractive long-term opportunities really. And assets like that improve the quality of our portfolio, and over time we will continue to evolve our portfolio to look more like that.

6% to 7% for us; we may crack that at the appropriate time. And if our capital is firm in Jeff's view, but we will expect to see some mid-5%s. And last year the North Star Starwood portfolio traded at something like a 5%, 6% cap rate. There are buyers out there that are moving valuations in that range, to that range.

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Craig Kucera, Wunderlich Securities - Analyst [75]

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Okay, thanks.

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Operator [76]

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Tayo Okusanya with Jefferies.

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Tayo Okusanya, Jefferies & Company - Analyst [77]

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Good morning, everyone. Just a couple from me. First of all, I was trying to reconcile your $0.27 number versus $0.30 consensus with fourth quarter. And it seems like the [big difference] is the big jump in operating expenses. I may have missed any commentary you made earlier on that, but can you talk about the increase in OpEx and how we think about OpEx in 2017?

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Jeff Theiler, Physicians Realty Trust - CFO [78]

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Hi, Tayo, it's Jeff. The big jump was the OpEx in the fourth quarter. And that was $0.025 per share that was related to the Foundation reserves that we took on rent that we considered uncollectible and pre-paid expenses that we considered uncollectible. So we always hope to get some of that back, but that was the difference in the fourth quarter.

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Tayo Okusanya, Jefferies & Company - Analyst [79]

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So this was a charge you actually made it to your OpEx line.

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Jeff Theiler, Physicians Realty Trust - CFO [80]

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We made it to the OpEx line and it rolled through into normalized FFO. We did not exclude it.

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Tayo Okusanya, Jefferies & Company - Analyst [81]

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Excellent. Okay. That's helpful. And then number two, 2017 you talked about cap rates and transactions between 6% to 7% I think when Jordan asked. Just giving you movement towards higher-quality assets, should we be thinking cap rates are closer towards 6% like your January deals? Or can you give us more of a tighter range of what we should be modeling in 2017. That would be helpful. And also what cap rate you are expecting on the $100 million to $125 million of dispositions.

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John Thomas, Physicians Realty Trust - CEO [82]

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I think that's a fair question. I think as we focus more on the higher quality, it's going to be more in the 6% to 6.5% range than the higher end of the range.

But we still see lots of great opportunities in the higher end range that still meet very high quality standards for us. Maybe it's 6.25% to 6.5% for your modeling. But again I think in the end we will be blending out at 6.5% on just our day-to-day core business. And on the dispositions, if you model between a 7% and 8%, you will probably be pretty close.

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Tayo Okusanya, Jefferies & Company - Analyst [83]

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Okay. Great. That's all for me. Thank you.

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John Thomas, Physicians Realty Trust - CEO [84]

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Thank you, Tayo.

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Operator [85]

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I will now turn the floor back to Management for closing remarks.

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John Thomas, Physicians Realty Trust - CEO [86]

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Thanks, everybody, for joining today. Great questions and we appreciate it.

I would like to recognize our Founder, John Sweet, who started this Company many years ago as a private fund working with Mark Theine, retired at the end of the year and hasn't left us completely but left and helped build a great organization that we take forward and look to make it even greater. We just want to recognize John Sweet and his retirement. And look forward to continue to work with them when we have the opportunity.

And then that connection as part of our succession planning for John, Deeni Taylor has been promoted to Chief Investment Officer. Deeni and John both were huge parts of our success last year and our growth. And we just want to recognize Deeni in that promotion.

And lastly, we were thrilled as we announced earlier to supplement John Sweet's opportunities with many relationships around the country, we are excited to add Dan Klein as the Deputy Chief Investment Officer working closely with Deeni and myself. Just want to recognize that. We look forward to seeing you soon, and working hard during this quarter. Thank you.

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Operator [87]

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Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.