Physicians Realty Trust(DOC) - 2022 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For Q3 2022, the company reported FFO as adjusted of $0.43 per share and total portfolio same-store growth of 5.1% [21] - The midpoint of FFO as adjusted guidance was increased by $0.02 to $1.73, with a tightened range of $1.72 to $1.74 [30] - The company declared a dividend of $0.30 per share for the third quarter [26] Business Line Data and Key Metrics Changes - Life Sciences reported same-store growth of 5.4% with an occupancy rate of 99% [21] - Medical Office achieved same-store growth of 4.9% and total occupancy of 90% [23] - Continuing Care Retirement Communities (CCRC) saw same-store growth of 4.1%, driven by a 110 basis point increase in occupancy [25] Market Data and Key Metrics Changes - The company noted strong demand in the Life Science sector, with over $200 billion spent annually on drug research [10] - In South San Francisco, rental rates increased in the mid-single digits year-to-date, with approximately 2 million square feet of active demand [37] - The overall economic backdrop has normalized demand levels, but the Life Science portfolio remains well-positioned for growth [43] Company Strategy and Development Direction - The company will continue to focus on life science and medical office sectors, which are high-margin businesses aligned with modern economic needs [9] - The strategy includes a flexible funding plan, prioritizing public equity at accretive prices while considering third-party capital when appropriate [17] - The company aims to leverage its competitive advantage in capital markets to pursue opportunistic acquisitions when conditions improve [16] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate tough market conditions and emphasized the importance of maintaining a strong balance sheet [14] - The company anticipates a temporary impact on occupancy and sales at CCRC properties due to Hurricane Ian but has factored this into revised guidance [27] - Management highlighted the importance of operational expertise in niche real estate sectors to drive value [13] Other Important Information - The company has a net debt to EBITDA ratio of 5.3x, below the target range, and $2.4 billion in liquidity [28] - The company is advancing entitlements across all three life science markets, with expectations to commence the next wave of development in the second half of 2023 [16] - The company has seen a reduction in construction cost escalations, now expected to be in the 6% to 8% range over the next 12 months [42] Q&A Session Summary Question: Demand pipeline and supply balance in Life Science - Management noted that while demand has normalized, it remains strong compared to historical levels, and supply projects are being put on hold due to rising interest rates [45][47] Question: Market rent growth outlook - Management indicated that market rents are still growing in the low to mid-single digits, with minimal vacancy rates across the board [50] Question: Cap rates and development returns - Management stated that cap rates for life science properties have increased by at least 100 basis points in the last six months, with a current development pipeline yielding approximately 7.5% [55][56] Question: CCRC position and potential exit - Management confirmed that while they are satisfied with the CCRC business, they remain open to opportunistic exits if beneficial for shareholders [59][61] Question: Entitlement priorities for future developments - Management outlined ongoing entitlement efforts in all three core markets, with specific projects in Boston and the Bay Area progressing well [62][64] Question: Intersection of Life Science and Medical Office - Management acknowledged the potential for synergies between life science and medical office businesses, particularly in R&D collaborations with health systems [65][67] Question: Changes in tenant requirements - Management observed that tenants are seeking larger tenant improvements and are willing to pay higher rents while reducing their upfront capital expenditures [83]