Physicians Realty Trust (DOC) Q4 2018 Earnings Conference Call Transcript

DOC's on a mission to help medical providers, developers, and shareholders provide better healthcare, better communities, and better returns. We are dedicated to making a difference in the lives of our team members, investors, healthcare partners, and those who visit our properties. We do this by offering broader and deeper healthcare expertise than any other REIT, by crafting solutions that benefit all parties, and by leveraging our long-standing industry connections to source and sustain the highest quality facilities and tenants in the industry.

We articulated our core values with the acronym "CARE." We collaborate and communicate with internal and external stakeholders, we act with integrity, we respect the client relationship, and we execute consistently. By driving our organization to make decisions and manage our investments with care, we will fulfill our mission and achieve our vision.

We'd also like to share more about Physicians Realty Trust's commitment to sustainability and the ESG. We have developed a G2 sustainability philosophy, a practical approach in which being green through our capital initiatives equates to a green cash result with cost savings over time. This outlook ensures the integrity and the economic viability, operational efficiency, natural resource conservation, and social responsibility within our network nationwide portfolio.

In 2018, DOC spend approximately $2.8 million on sustainability-driven capital expenditure projects within the portfolio. These efforts include LED retrofits, building automation system upgrades, and façade replacements, resulting in both immediate and long-term energy savings. The company also consolidated telecommunication bills, which reduced cost and created cash management efficiencies.

In 2018, Physicians Realty Trust was certified by the independent analysts at Great Places to Work. We also earned a spot on the Milwaukee Journal Sentinel's 2018 list of Wisconsin's top workplaces.

The diversity of our employee base remains a top priority for our company. I'm proud to share that women and minorities comprise 23% of our leadership team and 57% of our larger team. On our Board of Trustees, 29% of the independent trustees are a woman or a minority.

Because of our commitment to our CARE core values, the company provided over $180,000.00 in philanthropic support to charitable causes nationwide while participating in meaningful volunteer opportunities with our team.

We are proud of our ESG progress in 2018, but understand that we can always do more. We will continue to invest in initiatives that improve our overall sustainability performance and support our long-term goals.

With this attention to detail and invest-in-better mentality, we ended the year with a high-quality portfolio of medical office facilities. As of December 31, 2018, approximately 96% of our 13.6 million square feet is leased, with 90% of our space on campus or affiliated with a healthcare system and an average lease term of 7.9 years. This focus on quality extends to our tenants, with 57% of our leases being signed by investment-grade quality entities or their affiliates, a metric that leads the medical office space. It's these tenant relationships that are the catalyst for Physicians Realty Trust growth.

By working with the best health systems in the best markets, our opportunity for organic growth is second to none. In the past, we had funded new development conservatively. Moving forward, we believe we can generate higher returns by increasing capital allocations to new developments. This strategy includes backing the best healthcare developers who have projects pre-leased at high rates to high-quality health systems. Projects like Northside Medical Midtown in Atlanta is a prime example of this hospital-driven, self-development model. We support these efforts as well.

Today, we mentioned the closure of the El Paso surgical hospital. In December, we learned that the operator of the hospital announced they were closing at the end of the year. The hospital was very successful for many years and while the facility had challenges in 2018, the ownership, including Physicians, invested millions of dollars to recruit and employ new physicians in the market, open new services, and upgrade the facility over the last few years. The facility never missed a rent payment but, surprisingly, closed with three weeks' notice and has not yet paid its December rent.

Most of the key physicians were both owners of the tenant and employees. Fortunately, the physician tenants were quickly reemployed by a wholly owned subsidiary of Sierra Providence, Tenet Healthcare's wholly owned subsidiary in El Paso, and we executed a new 10-year lease on the facility at terms better than the existing lease.

We have a number of national healthcare systems actively evaluating and interested in either leasing or purchasing the now vacant hospital. We have received and are evaluating offers to purchase and/or lease the facility and are confident we will have a new tenant in the facility in the near-term. While a disappointing surprise, the strength of this location in the healthcare market and the physicians historically aligned with the facility we believe will allow us to quickly address the situation.

Also, as noted in our press release this morning, we are proud to announce three promotions. Our Board of Trustees has promoted Mark Theine to Executive Vice President of Asset Management, recognizing his strong leadership and growth as a leader in the company. Mark's career began when he was hired by our founder, John Sweet, to help build and run the private company that is the predecessor company to DOC and became an original officer of DOC as a senior vice president upon completion of our IPO.

Mark is responsible for managing the daily operations of our portfolio, which has grown from 19 buildings and 500,000 square feet at the time of the IPO to over 250 buildings and almost 14 million square feet today. In the beginning, he managed a handful of internal employees and third-party property managers and, today, due to our growth, directly or indirectly manages over 100 people.

In addition, the Board promoted and expanded the responsibilities of John Lucey, recognizing his contributions as our Chief Accounting and Administrative Officer. John joined our organization immediately following our IPO as our principal accounting officer and his leadership and ability to scale our team as we have experienced significant growth has been critical to our success. John leads our accounting, SEC and public company reporting, human resources, information technology professionals, and oversees other administrative responsibilities as well.

Among many of John's accomplishments was his decision to hire, mentor, and develop Laurie P. Becker, who rose quickly through the organization. We are pleased to announce Laurie has been promoted to Senior Vice President and Controller. Laurie will continue to report to John Lucey across his many responsibilities, with a direct focus on accounting and SEC reporting.

With that, I'll turn it over to Jeff.

Jeff Theiler -- Chief Financial Officer

Thank you, John. In the fourth quarter of 2018, the company generated funds from operations of $49.9 million or $0.27 per share. Our normalized funds from operations were also $49.9 million and $0.27 per share. Our normalized funds available for distribution were $44.7 million or $0.24 per share, representing an increase of $1.2 million after adjusting for last quarter's one-time benefit from the lease termination fee.

For the full year of 2018, the company generated funds from operations of $1.08 per share, an increase of $0.04 over 2017, and funds available for distribution of $0.94 per share, an increase of $0.01 over 2017. This represents the fifth consecutive year of per share FAD growth, a 38% increase, overall, from 2014's $0.