Physicians Realty Trust (DOC) CEO John Thomas on Q2 2014 Results - Earnings Call Transcript

| About: Physicians Realty (DOC)
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Physicians Realty Trust (NYSE:DOC) Q2 2014 Earnings Conference Call August 13, 2014 10:00 AM ET


David Burke – IR

John Thomas – CEO

Jeff Theiler – CFO

John Lucey – SVP, Principal Accounting and Reporting Officer

John Sweet – Chief Investment Officer


Karin Ford – KeyBanc Capital Markets

Craig Kucera – Wunderlich

Wilkes Graham – Compass Point


Greeting. And welcome to the Physicians Realty Trust Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Burke of The Ruth Group. Thank you. You may begin.

David Burke

Good morning and welcome to Physicians Realty Trust’s second quarter 2014 conference call and audio webcast. With me today are John Thomas, Chief Executive Officer; John Sweet, Chief Investment Officer; Jeff Theiler, Chief Financial Officer and John Lucey, Principle Accounting and Reporting Officer.

I’d like to remind you that today’s call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 that can be identified by words such as belief, expect, anticipate, plans, project, seek and similar expressions and involve numerous risks and uncertainties.

Company’s actual results could differ materially from those anticipated or implied in such forward-looking statements as a result of certain factors as set forth in the company’s 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. John?

John Thomas

Thank you, David. And thank you everyone for joining us this morning for our second quarter 2014 earnings conference call. I apologize I’m fighting back a little cold this morning. So, hopefully you’ll be able to understand me.

As David mentioned, we have the entire DOC management team here and I’m very excited that we’ve completed our team this quarter. I’ll begin the call with a brief review of our first full year of operations and second quarter highlights. Jeff Theiler, will present his observations and vision for DOC, then John Lucey will present our second quarter financial results. We will then be pleased to take your questions.

I would like to begin with a summary of the first year of our operations. Since our IPO on July 19, 2013 we have delivered the following results to our shareholders. Total shareholder return from July 19 through July 18 2014 was 36.8%, including dividends paid during the year.

We paid as of August 1, 2014, $0.855 per share. Our predecessor had NOI of $3.8 million through the six months ended June 30, 2013 and our company had NOI of $15.7 million for the comparable period of 2014, an increase of $11.9 million or 310%.

On the date of our IPO, we had 528,000 rentable square feet with 83% occupied and an average lease term of seven years remaining.

On June 30, 2014, we had approximately 1.7 million rentable square feet of which 94.2% was occupied and with an average lease term of 9.65 years. When we made public, the predecessor company led by John Sweet and Mark Theine, contributed real-estate investments valued at $124 million.

During the quarter ended June 30, 2014, John, Mark and our team had added $73.6 million new investments. And in July 2014, we added an additional $45 million in acquisitions and topped $500 million in total healthcare real-estate assets, an increase of 303% from the date of our IPO.

We feel this performance with $123.8 million raised at our IPO $103.1 million in our follow-on offering in December, and $149.9 million in our May 2014 follow-on offering. We also rely primarily on our secure credit line facility provided by Regions, Key and other banks which is now been expanded to $200 million of funded capacity.

Lastly, we have worked hard to manage our organization efficiently and in the best interest of our shareholders. After our first full quarter of operating as a public company which was the quarter ended December 31, 2013, our total G&A was $1.7 million or 2.7% of our gross real-estate assets on an annualized basis.

For the quarter ended June 30, 2014, our total G&A was $2.4 million or 2% of our gross real-estate assets on an annualized basis. We are dedicated to managing this organization to a total G&A level below 1% of our gross real-estate assets and all advances as efficiently as possible.

To that extent, we have outgrown the need for the back-office support from B.C. Ziegler. We appreciate very much their support in the IPO process getting DOC up and running on day-one and extending extraordinary effort from the CEO, Tom Paprocki, and throughout the organization.

But as we have exceeded our growth expectations and as we build out our (inaudible), internal controls and accounting infrastructure, we determined that we could now manage their process more efficiently over the next four years by substantially reducing our reliance upon Ziegler’s back office support.

Ziegler was very supportive of this transition and even allowed us to directly employ one of their accounting managers through a supported DOC from the beginning.

We filed an 8-K last week announcing this contract amendment. We appreciate all that Ziegler has done for us and look forward to a long premier relationship as we both seek to serve the healthcare industry.

Our team has achieved remarkable success over the first year and we are very proud of our accomplishments but this is only the beginning. We have a long-term view of outsized growth opportunities as we expand to become one of the big-four, not by aggregation of secondary assets but by acquiring one high-quality asset leased to high quality healthcare providers, one facility at a time.

We will also acquire high-grade portfolios opportunistically when we believe such assets will provide long-term value for our shareholders.

We are dedicated to a long-term strategic plan to maximize total shareholder return with prudent long-term investments in healthcare facilities that we have underwritten which we anticipate will produce reliable rising rental revenues and thus reliable rising dividends as we move from a start-up REIT to an investment grade balance sheet as quickly as we can.

Our board of trustees and our management team remain committed to managing our investments and property as well as our balance sheet to maintain a conservative capital structure.

Among our many outstanding investments during the second quarter, we are excited to round-out our exceptional senior management team with the addition of Jeff Theiler who joined us officially on July 7, 2014.

Jeff was most recently with Green Street Advisors, a leading real-estate and REIT focused independent research, trading and consulting firm where we served as the lead Equity Research Analyst covering the healthcare and laboratory space. Prior to that, he was a vice president in the real-estate investment banking divisions of Bank of America Securities and Lehman Brothers.

He’s hit the ground running for you and has already made significant contributions that will produce long-term benefits for our shareholders as he brings a wealth of expertise and experience to Physicians Realty Trust and to you.

We’ve asked Jeff to present his short-term findings and observations of why he joined DOC as well as his long-term vision for our organization. Jeff?

Jeff Theiler

Thank you, John. I’m very pleased to be speaking to you today as part of the leadership team for Physicians Realty Trust. I’ve been here just a short time but have already been impressed by the caliber of the people serving the company starting with our distinguished board of trustees on to our Chief Executive Officer John Thomas, our Chief Investment Officer, John Sweet and extending throughout the rest of the company.

I know some of you on this call from my time at Green Street Advisors, where I led the Healthcare REIT research effort for the past four years. During that time, I observed a transformation in the Healthcare REIT sector.

During the first part of my tenure as a REIT Analyst, I watched the already large diversified healthcare REIT more than triple in size as they work to consolidate the industry creating outside shareholder value along the way.

And then later on, the smaller and more focused healthcare REITs began to generate the best performance in the sector. These REITs demonstrated the ability to generate consistent external growth and their relatively small asset bases meant that each acquisition dollar contributed more to the bottom line growth than their larger peers.

So, it was with great interest that I watched Physicians Realty Trust complete its initial public offering just over a year ago. In DOC, I saw a small REIT with a large opportunity ahead of it in the medical office building sector. The sector by the way that I consider to have the best risk adjusted return profile in healthcare.

The biggest question I had as an outside observer was whether the REIT had a fuelling place that could source a significant number of high-quality acquisition opportunities. When I saw the first quarter 2014 investment results of nearly $150 million deployed, it was clear to me that it did.

So, when I spoke with John Thomas and the rest of the group about joining and we discussed the opportunities ahead, it wasn’t a difficult decision for me to make.

So, fast forward to today, in terms of company’s strategy I see no reason at this time to deviate from the winning formula that was laid out by John Thomas and team at the IPO. And that has provided a total return to our shareholders of more than 30% since our initial public offering in July of last year compared to under-10% for the overall REIT index.

We’ll continue to capitalize on our senior executive’s network of healthcare context to source acquisitions primarily in the medical office building sector while maintaining a conservative balance sheet.

In the second quarter of 2014, we acquired $73.6 million of assets along with another $45 million of assets after the quarter end. This brings our total acquisition volume in just over six months to $266 million, more than doubling our real-estate portfolio.

While this progress is exceptional by any measures, we’re just getting started. Based on the existing pipeline of acquisition opportunities that we’re working towards completion, we feel comfortable providing acquisition guidance for the rest of 2014 of $150 million to $300 million. Importantly this guidance is, in addition to any acquisitions announced to date.

The low end of this range will put us comfortably over the prior acquisition guidance we provided of $400 million in total acquisitions for 2014 and we hope that we can do better than that.

As we look out towards 2015, we will continue to be disciplined in our balance sheet management as we strive to achieve an investment grade rating which will reduce our cost of capital and allow us to achieve even better investment returns to pass on to our shareholders.

Finally, a word on FFO guidance for 2014 and why we haven’t provided it this quarter. Our normalized FFO per share has grown from $0.08 per share in the fourth quarter of 2013 to $0.12 per share in the first quarter of 2014 to $0.17 per share in this current quarter so, an average of roughly 50% growth per quarter in 2014.

Almost all of this FFO growth stems from acquisition activity, while our current pipeline provides comfort in the overall volume of acquisitions we can achieve through the remainder of the year. The timing of these acquisitions in any additional capital raising activities are inherently difficult to predict. This minimizes the value of providing FFO guidance for a fast growing company like ours.

What I can assure you is that our acquisition pipeline is stronger than ever and we intend to execute on those opportunities while maintaining a conservative balance sheet as we continue to provide a solid foundation for this company to generate excellent long-term results for its shareholders.

With that, I’ll turn it over to John Lucey, to discuss the financial results for this quarter.

John Lucey

Thank you Jeff, and good morning. As I have stated in previous calls, prior to the completion of our IPO on July 24, 2013, the Trust had no operations. Therefore, results of operations for the second quarter of this year represent results of the Trust while results for the comparable period of 2013 reflect the results of operations of our predecessor.

For the second quarter of 2014, our normalized FFO was approximately $5.2 million or $0.17 per diluted share and normalized FAD was approximately $4.9 million or $0.16 per diluted share.

Second quarter 2014 total revenues increased by 233.1% to $11.4 million from $3.4 million in the second quarter of 2013. The year-over-year in total revenues was attributable to $7.7 million increase in rental revenues which totaled $10.2 million for the quarter ended June 30, 2014.

Expense recoveries and other revenue also increased by $304,000, a 33.7% increase over the comparable period of last year.

The strong growth in rental revenues of over 304% from the second quarter of 2013 is attributable to our portfolio expansion as we add a total of 49 properties contributing to our results during the 2014 quarter which had a combined square footage of approximately 1.7 million square feet and an occupancy rate of 94.2%.

Our predecessor had 19 properties and 500,000 square feet in the comparable period and occupancy of approximately 83%.

As previously announced, we completed $73.6 million in property acquisitions during the second quarter of 2014. On a pro forma basis, had all the acquisitions occurred on the first day of the quarter, we would have reported an additional $1 million of revenue.

General and administrative costs were $2.4 million compared to $102,000 in the comparable period of 2013. The increase in expenses resulted from the build-out of our public company infrastructure which included $1.1 million for salaries and benefits, $700,000 in professional feels, primarily legal and accounting, $400,000 of administrative expenses and $200,000 in public reporting and board of trustee cost.

Second quarter 2014 depreciation and amortization was $3.7 million, an increase of $2.7 million from $1 million in the second quarter of 2013. Again on a pro forma basis, depreciation and amortization would have increased an additional $0.4 million had all the acquisitions occurred at the beginning of the quarter.

Acquisition related expenses were $2 million for the second quarter of 2014. Our predecessor did not incur any acquisition related expenses in the comparable period of 2013.

Interest expense net for the second quarter of 2014 was $1.7 million compared to interest expense of our predecessor of $1.1 million in the year-ago quarter.

Net loss for the second quarter of 2014 was $0.6 million compared to a net loss by our predecessor of $300,000 in the second quarter of 2013. Basic and diluted loss per share was $0.02 for the second quarter of 2014.

Looking at the balance sheet, we finished the second quarter of 2014 with total assets of $469 million, including $6.7 million in cash compared to $293 million in total assets at December 31, 2013.

On the liability side, we have total liabilities of $93 million including $79 million of debt as of June 30, 2014 compared to total liabilities of $52 million including $43 million of debt from our predecessor at the end of last year.

As previously announced, our board of trustees authorized a quarterly cash dividend for the second quarter of $0.22 per share which was paid on August 1, 2014 to shareholders of record as of July 18, 2014.

That concludes our prepared remarks. We would now like to open the call to questions. Operator?

Question-and-Answer Session


(Operator Instructions). Thank you. Our first question is coming from the line of Karin Ford with KeyBanc Capital Markets. Please proceed with your question.

Karin Ford – KeyBanc Capital Markets

Hi, good morning. My first question is just on the pipeline, I wanted to ask about what the composition of the pipeline looks like, is it similar to the recent fill that you’ve done on the past? And also talk about what the trends you’ve been seeing in pricing it seems like cap rates have come in quite a bit in recent months? Just want to get your thoughts on that.

John Thomas

Yes, good morning, Karin. This is John, John Thomas. I’ll speak a little bit about it and let John Sweet to make a couple of comments. But the pipeline as Jeff mentioned is robust, primarily medical office building and with large multi-specialty groups and half the affiliation so typical of what we’ve been buying and good strong healthcare market.

On pricing, generally, in where we’ve seen a big move in the last, since the IPO frankly is in the post Q and surgical hospital space where a pricing on those assets has moved more aggressively toward MOB rates. We believe there should be a pricing differential there, our risk reward, our risk adjusted return that’s better – a better place to put investments.

So, you’ll see less of that from us but still seeing some really good opportunities in the – primarily in the surgical hospital space unless the post Q care world right now. John?

John Sweet

Yes, good morning Karin. We are seeing a little bit of compression in cap rates. The popularity of the asset class continues to be very, very strong. We’ve been fortunate in recent months by virtue of referrals that are coming from folks who are in properties that we have acquired over the past year. That’s kind of kept the market, kept them out of the larger market and we’ve been able to be pretty successful in negotiating some transactions. But there is some compression out there right now.

Karin Ford – KeyBanc Capital Markets

Thanks for the color. My second question is just on G&A, came in at $3.4 million including I think roughly $0.5 million of non-cash comp. Just, I think in the last call you sort of said its $1.7 million you thought was a good run rate, even though higher. I wanted to get your thoughts on what we should be looking at from here? And also what the impact is as the change in the shared services agreement on G&A?

Jeff Theiler

Hi, Karin, it’s Jeff. So, in terms of G&A, one of the great things about being a small company is that you have outsized growth opportunity. One of the disadvantage frankly is you have a higher G&A as a percentage of assets. So, as we look to build a long-term company versus just putting a portfolio together, we’re investing in the people and the systems that are going to make that possible.

So, as we look out into the future for G&A, I think a sustainable run-rate for the foreseeable future in G&A is probably about $7.5 million to $8.5 million of cash G&A going forward on an annualized basis.

Karin Ford – KeyBanc Capital Markets

Okay. And what impact is the change in the shared services agreement going to have versus the savings?

Jeff Theiler

The change in the shared services over the longer term it’s going to be positive for sure. I think in the near term, before we really start scaling up, I think it’s probably about a neutral cost impact.

Karin Ford – KeyBanc Capital Markets

Okay. And then just last question, was there any material leasing done in the quarter say in the Lansing property or the Columbus property that you guys want to share with us?

John Thomas

Yes, I’m sorry Karin, allow us to for a second, color on the Columbus property or the Lansing property, is that what you asked?

Karin Ford – KeyBanc Capital Markets


John Thomas

Okay. The Columbus property, we’ve entered into a sale agreement to sell that to a frankly it’s a retail use. And we’re pretty pleased to move – go and move that asset off of our books. And we expect that or hope that will close this quarter. And we’re working through the time there. But it’s assigned purchased agreement just the seller working through with the buyers, working through their diligence.

On Lansing, we’ve had tremendous amount of traffic flow. I think each quarter we’ve reported lots of tenant activity but we’d continue to have a great deal of expectation that that would be leased to a healthcare provider and we’ll contribute to the core NOI in the future, so.

Karin Ford – KeyBanc Capital Markets

Okay. Thanks very much.

John Thomas



Thank you. The next question is coming from the line of Craig Kucera with Wunderlich Securities. Please proceed with your question.

Craig Kucera – Wunderlich

Hi, good morning guys.

John Thomas

Hi Craig.

Craig Kucera – Wunderlich

Nice quarter by the way. You’ve expanded the line of credit to $200 million, it’s a secured facility. If you were to move to an unsecured facility, you have a feeling for kind of the pricing differential or would it be material?

Jeff Theiler

Hi Craig, this is Jeff. Yes, I think it would – obviously we’re at the stage in our company’s lifecycle, where we’re starting to investigate all types of additional capital avenues, unsecured facilities certainly one of those. We would expect pricing on an unsecured facility to be somewhere slightly over 100 basis points inside of our current pricing on the secured facility.

Craig Kucera – Wunderlich

Got it. And then, when you think about the company moving forward to being investment grade because I know that’s the goal that you guys have clearly made, present to the Street for a while, could it happen next year that’s certainly the goal. What do you think that would mean overall to your change in your cost of financing?

John Thomas

Look, I think that, if we hit investment grade metrics, certainly you get another little bump on any kind of unsecured facility that we would have out. And then I think importantly for us, it provides the opportunity to put long-term financing in place for our assets.

And that’s really the goal of ours. So it’s difficult to say what the cost of capital for an investment grade unsecured debt is going to be in the future. But certainly it’s worth it for us to – because of their answer quickly to kind of wait for that window of opportunity and execute when we can.

Craig Kucera – Wunderlich

Got it. And then finally, there was actually a significant announcement in the space between HC and the Main Street were there setting up a development partnership. Is something like that attractive to you at any point in the near term or are you guys finding plenty of products now, that’s existing, at cap rate so they’re still quite attractive?

John Thomas

Yes, Craig, this is John Thomas again. That’s a great opportunity there. That’s a nice portfolio. But again, it’s mostly in your housing and post skilled care but great assets. Congratulate and help for REIT on that acquisition.

We’re continuing to focus on the medical office and again these specialized hospitals from time to time so we can find attractive yield opportunities. The development world in the MOB space is picking up, but larger health systems sponsoring large, highly leased MOB development opportunities. So we’re keeping an eye on those. But those are things that will come online a year from now.

And so, hopefully we’ll have the opportunity to and have a cost of capital to be competitive for takeout other type of arrangements there. Development for us is something in the future and something we’ll pursue where we can find attractive long-term higher yields in the acquisition market. And right now that’s more of a future opportunity in the near term, plenty of acquisition opportunities for us in the near term for growth.

Craig Kucera – Wunderlich

Okay. Thanks guys.


(Operator Instructions). Our next question is coming from the line of Wilkes Graham with Compass Point. Please proceed with your question.

Wilkes Graham – Compass Point

Hi, good morning everyone.

John Thomas

Good morning, Wilkes.

Wilkes Graham – Compass Point

And Jeff, welcome to the company.

Jeff Theiler

Thank you.

Wilkes Graham – Compass Point

I think most of my questions have been answered. I think the only I might have is your guidance for the second half of the year, $150 million to $300 million. Obviously that’s a pretty good number the mid-point of that is obviously above the $400 million you talked about before.

But can you talk about maybe what goes into such a wide range for the second half of the year, is it just certainty of timing before December 31, or is it a function of the due diligence that maybe after (inaudible) assets?

John Thomas

Wilkes, this is John Thomas. I think it is timing it is the biggest variability there. We’ve got a near-term pipeline that, have fairly good certain color on when it’s going to close. It’s probably the fourth quarter and timing of getting transactions closed, is the only real variability there.

Wilkes Graham – Compass Point

Okay. And I know, Karin asked before about Cap rate compression. But have cap rates moved or are you seeing a continued compression off late that concerns you at all about your ability to continue to grow into next year?

John Thomas

All the high profile large portfolio trades are somewhere in the 5.8% to below 6% range depending upon how you do the math and what year of NOI you’re looking at in the transaction. So and we’re still finding, historically we’ve said, we’ve been finding things in 7% to 10% range.

If we over the past year, some of the higher yielding as I mentioned before assets have been, and the opportunities have been in the post Q care space or the surgical hospital space. And there has been contraction there that we’ve just avoided, which means most of our acquisition for medical office buildings and we’re finding lots of high grade opportunities there in the 7% to 8% range.

And where you see us, but they’re below 7% it’s for quality and size and bulk and you’ll start to see some of that as our cost of capitals come down. So the short answer and sorry to ramble a little bit is 7% to 8% is still a good number for us primarily because it’s mostly medical office buildings, they’re below 6%, they’re below 7% be very clear about that.

They’re below 7% if we see really high quality, larger acquisition that makes sense in a great market with a great healthcare or tenants in the building. We have some opportunities above 8% where there is some risk adjustment premium available so.

Wilkes Graham – Compass Point

Thanks John.


Thank you. It appears there are no further questions at this time. I would now like to turn the floor back over to Mr. Thomas for any additional concluding comments.

John Thomas

I think you can tell we’re very excited and very proud of our first year and accomplishment. We had our Annual Shareholder Meeting last week and actually had several shareholders drive from a long way away from around the country to come. So we’re very excited, very pleased. Thank you for our time this morning. We’ll be happy to have follow-up calls and discussion with you. And we welcome Jeff Theiler and his expertise and track record and a long bright future with DOC. So, thanks everyone.


Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation. And you may disconnect your lines at this time.

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