Stock-based Compensation

The Trust follows ASC 718, Compensation - Stock Compensation (“ASC 718”), in accounting for its share-based payments. This guidance requires measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock awards. This cost is recognized as compensation expense ratably over the employee’s requisite service period. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized when incurred. Share-based payments classified as liability awards are marked to fair value at each reporting period.

Certain of the Trust’s employee stock awards vest only upon the achievement of performance targets. ASC 718 requires recognition of compensation cost only when achievement of performance conditions is considered probable. Consequently, the Trust’s determination of the amount of stock compensation expense requires a significant level of judgment in estimating the probability of achievement of these performance targets. Additionally, the Trust must make estimates regarding employee forfeitures in determining compensation expense. Subsequent changes in actual experience are monitored and estimates are updated as information is available.

In connection with the IPO, the Trust adopted the 2013 Equity Incentive Plan (“2013 Plan”), which made available 600,000 common shares to be administered by the Compensation and Nominating Governance Committee of the Board of Trustees (the “Committee”). On August 7, 2014, at the Annual Meeting of Shareholders of Physicians Realty Trust, the Trust’s shareholders approved an amendment to the 2013 Plan to increase the number of common shares authorized for issuance under the 2013 Plan by 1,850,000 common shares, for a total of 2,450,000 common shares.

Restricted Common Shares:

The Committee has broad discretion in administering the terms of the 2013 Plan. Restricted common shares granted under the 2013 Plan are eligible for dividends as well as the right to vote. In the nine month period ended September 30, 2016, the Trust granted a total of 155,306 restricted common shares with a total value of $2.8 million to its officers and certain of its employees, which have a one-year vesting period for officer award-recipients and a three-year vesting period for employee award-recipients.

A summary of the status of the Trust’s non-vested restricted common shares as of September 30, 2016 and changes during the nine month period then ended follow:



	Common Shares		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2015	311,839		$	14.17
Granted	155,306		17.96
Vested	(157,878	)	14.09
Forfeited	(326	)	15.36
Non-vested at September 30, 2016	308,941		$	16.11

For all service awards, the Trust records compensation expense for the entire award on a straight-line basis over the requisite service period. For the three month periods ended September 30, 2016 and 2015, the Trust recognized non-cash share compensation of $0.9 million and $0.7 million, respectively. For the nine month periods ended September 30, 2016 and 2015, the Trust recognized non-cash share compensation of $2.8 million and $2.2 million, respectively. Unrecognized compensation expense at September 30, 2016 was $2.1 million. The Trust’s compensation expense recorded in connection with grants of restricted common shares reflects an initial estimated cumulative forfeiture rate of 0% over the requisite service period of the awards. That estimate will be revised if subsequent information indicates that the actual number of awards expected to vest is likely to differ from previous estimates.

Restricted Share Units:

In March 2016, under the 2013 Plan, the Trust granted restricted share units at a target level of 141,337 to its officers and trustees, which are subject to certain performance, timing, and market conditions and a three-year and two-year service period for officers and trustees, respectively. In addition, each restricted share unit contains one dividend equivalent. The recipient will accrue dividend equivalents on awarded share units equal to the cash dividend that would have been paid on the awarded share unit had the awarded share unit been an issued and outstanding common share on the record date for the dividend.

Approximately 80% of the restricted share units issued to officers vest based on certain market conditions. The market conditions were valued with the assistance of independent valuation specialists. The Trust utilized a Monte Carlo simulation to calculate the weighted average grant date fair value of $28.50 per unit for the March 2016 grant using the following assumptions:



Volatility	20.3		%
Dividend assumption	reinvested
Expected term in years	2.8
Risk-free rate	1.07		%
Share price (per share)	$	17.67

The remaining 20% of the restricted share units issued to officers, and 100% of restricted share units issued to trustees, vest based upon certain performance or timing conditions. With respect to the performance conditions of the March 2016 grant, the grant date fair value of $17.67 per unit was based on the share price at the date of grant. The combined weighted average grant date fair value of the March 2016 restricted share units issued to officers is $26.33 per unit.

The following is a summary of the activity in the Trust’s restricted share units during the nine months ended September 30, 2016:



	Restricted Share Units		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2015	171,886		$	18.48
Granted	141,337		24.08
Vested	(20,481	)	15.87
Non-vested at September 30, 2016	292,742		$	21.37

For the three month periods ended September 30, 2016 and 2015, the Trust recognized non-cash share unit compensation expense of $0.6 million and $0.3 million, respectively. For the nine month periods ended September 30, 2016 and 2015, the Trust recognized non-cash share unit compensation expense of $1.5 million and $0.8 million, respectively. Unrecognized compensation expense at September 30, 2016 was $3.4 million.