Physicians Realty Trust

Greetings and welcome to the Physicians Realty Trust First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Page, Senior Vice President, General Counsel. Thank you, Brad. You may begin.

Thank you, Paul. Good afternoon and welcome to the Physicians Realty Trust first quarter 2021 earnings conference call and webcast. Joining me today are John Thomas, Chief Executive Officer, Jeff Tyler, Chief Financial Officer, Jeanne Taylor, Chief Investment Officer, Mark Thine, Executive Vice President, Asset Management, John Lucey, Chief Accounting and Administrative Officer, and Lori Becker, Senior Vice President, Controller. During this call, John Thomas will provide a summary of the company's activities and performance for the first quarter of 2021 and year to date, as well as our strategic focus for 2021. Jeff Tyler will review our financial results for the first quarter of 2021. Then Mark Fine will provide a summary of our operations for the first quarter. 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 are 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 or actual results could materially differ from our current expectations and those anticipated or implied in such forward-looking statements. For a more detailed description of potential risks and other important factors that could cause actual results to differ from those contained in any forward-looking statements, please refer to our filings with the Securities and Exchange Commission. With that, I would now like to call over to the company's CEO, John Thomas. John?

Thank you, Brad, and thank you for joining us this afternoon. Physicians Realty Trust is off to a very good start for 2021. This begins with our pure play focus on medical office facilities, which continues to serve us and our shareholders well. While other types of healthcare real estate are just beginning to see signs of a recovery, medical office clinical visits have been and remain at pre-COVID levels and have been for a long time. We credit this operational strength to our nation's healthcare providers who adapted quickly at the onset of the pandemic to manage COVID outbreaks while continuing to provide necessary non-COVID healthcare services. They accomplished this by shifting non-COVID care to the outpatient setting, accelerating a trend that has been apparent for the past 25 years. All indications are that this is a permanent change in the delivery of healthcare that will continue to grow in the years ahead. especially for more acute orthopedics, oncology, and cardiology procedures. Beyond the pandemic, demand for medical office billings continues to grow in line with our nation's continued need for outpatient health care. CMS estimates $4.1 trillion were spent on health care services in 2020, and the national health care spending in the United States is expected to grow at an average annual rate of 5.4%, from 2019 to 2028, outpacing GDP as well. We expect that an outsized portion of this spin will be directed to off-campus facilities in particular, where we continue to see health systems demanding more space. The trends in favor of medical office have proven to be very predictable and reliable, and as a result, we expect our portfolio to produce a consistent and reliable rental income stream with steady growth over time for the benefit of our shareholders. Public investors in healthcare real estate can count on medical office to remain open, occupied, and busy. Medical office does not need to recover. As an asset class, it was only impacted temporarily in spring 2020, and Doc has maintained close to 96% occupancy routinely ever since. We remain focused on growing our funds available for distribution each year and will continue to manage our organization to achieve that result annually. On the acquisitions front, we announced the purchase of a brand new medical office facility with an on-site outpatient surgery center on the campus of Advent Health Hospital in Wesley Chapel, Florida. Several members of our team have long-term relationships with Advent Health, and we hope to find future opportunities for investment with this system across their national footprint. We also finalized commitments to finance three new medical office facilities anchored by leading investment-grade health care systems, with two buildings being off campus and one on campus. We continue to evaluate a number of new development projects and expect a positive uptick in development for the year and going forward. Our investment pipeline continues to grow with visibility on nearly 200 million in prospective opportunities that we expect to close in the coming months, plus a growing number of acquisitions in negotiation that we would expect to execute in the third and fourth quarters. Our growth this year may be slightly weighted to the second half of the year, but we remain very confident in our acquisition guidance of $400 to $600 million in new investments in 2021. In June 2020, we published our inaugural ESG report, sharing our hard work on environmental management of our buildings since 2018 and progress toward ambitious goals to improve the energy utilization and waste management of all of our facilities. We will publish our second annual ESG report in June 2021, and we will be proud to report great progress on all of our environmental, social, and governance goals and the DOT culture. Under Mark Dine's leadership, Physicians Realty Trust earned the EPA's Energy Star Partner of the Year, and we expect this to be the first of many awards recognizing our commitment and success in reducing our carbon footprint and providing a better setting for our physicians and providers through better managed buildings. Jeff will now review our financial results, and Mark Dahn will share our operating results. Jeff?

Thank you, John. In the first quarter of 2021, the company generated normalized funds from operations of $57.7 million. Normalized FFO per share was 27 cents versus 26 cents in the same quarter of last year, an increase of 3.8%. Our normalized funds available for distribution were $54.5 million and an increase of 7.8% over the comparable quarter of last year, and our fad per share was 25 cents. We remain highly focused on this metric, as it is the most direct way to measure our company's performance versus our peers, and we will continue to focus on growing our fad per share at an outsized rate for our shareholders. We continue to see strong operating performance from our $5 billion medical office building portfolio in the first quarter of the year. The same-store NOI growth was right in line with expectations at 2.4%, and we increased the least percentage of our portfolio by 10 basis points to 95.8%. Our portfolio continues to manage the strain of the COVID pandemic, and we collected the usual 99.7% of our billings in the current quarter. The one deferment we granted last year continues to be paid back on time, and the last and final payment will be made in June. Barring an unforeseen intensification of COVID in the future, it now appears that DACA has been able to manage through the worst of the pandemic and emerge with no material negative impacts. This is a direct testament to the strength of the medical office asset class in general, and in particular, the strength of our investment-grade tenant base, as well as the high quality of our buildings, credit team, and property managers. The balance sheet has been an area of focus for us, and is now a positive differentiator between us and the rest of our healthcare REIT peers. With our enterprise leverage of five times debt to EBITDA, including our pro rata JV debt, and our 62% investment grade tenant base, we believe we offer our shareholders the best risk-adjusted investment in healthcare real estate. We raised $52.4 million of net proceeds on the ATM in the first quarter, effectively pre-funding a portion of what we anticipate to be a substantial year of growth for the company. Our revolving credit facility is only 18% drawn with $156 million outstanding, leaving $694 million of availability. We generally expect a target leverage of 5.25 times debt to EBITDA on an enterprise basis going forward. We continue to be confident in the acquisition guidance we laid out several months ago of $400 to $600 million of new investments, despite the relatively slow start in this quarter. We have been admittedly picky. However, we also have high visibility on a number of the types of medical office buildings we are seeking, those with investment-grade rated health system tenants performing specialized medical procedures in strong demographic areas. JT referenced the pipeline value of those deals and those types of deals in negotiations during his prepared remarks. Because these are primarily relationship deals, we feel a higher degree of certainty than if we were trying to acquire them at auction. and we still expect to end the year within the total acquisition amounts we guided to at an average cap rate between 5% to 6%, subject to suitable capital market conditions. Turning to other portfolio metrics, our first quarter G&A, which usually trends higher than the rest of the year, was on track at $9.5 million, and we expect to meet our guidance range of $36 to $38 million for the year. Our recurring capital expenditures were well under budget at $5.6 million as our team managed to create some additional efficiencies and some TIs that were budgeted for new leases turned out better than expected. We now expect to be at the bottom of our recurring CapEx guidance range of $25 to $27 million for 2021. I will now turn the call over to Mark to walk through some of our portfolio statistics in more detail. Mark?

Thanks, Jeff. The first quarter of 2021 represented another solid and consistent quarter for Physicians Realty Trust. I'm once again pleased to highlight the strength of our underlying assets and the value of our asset management, leasing, and property management platform. DOT's best-in-class operations team remains dedicated to enhancing the physician-patient experience, offering healthcare providers the benefits of a national real estate owner would scale, paired with a personal touch of local management. From a performance perspective, our MOB same-store NOI growth in the first quarter was 2.4%. Predictably, NOI growth was driven primarily by a year-over-year 2.4% increase in base rental revenue, in line with our weighted average annual rent escalator. Year-over-year, operating expenses were up $2 million overall, primarily driven by a $0.6 million increase in real estate taxes, and a $0.6 million increase in insurance costs. However, the value of our net lease structure is once again evident in the nearly dollar-for-dollar increase in operating expense recovery revenues. Lastly, lower parking revenue had a 20 basis point impact on Q1 same-store NOI growth. Specifically, paid parking receipts have now returned to 80% of normal levels during the first quarter. which compares favorably to 48% of normal levels experienced nearly one year ago during the height of the pandemic. Turning to leasing activity, we continue to see significant opportunities to add value as we capitalize on increased demand in our larger markets. We completed 197,000 square feet of leasing activity during the period with a 76% retention rate and positive 6,000 square feet of net absorption. While Q1 leasing volume represented 1.4% of the portfolio due to our staggered lease expiration schedule, we have had a significant increase in leasing tours and tenants looking for existing medical office space as construction prices continue to drastically increase. In fact, subsequent to the end of the quarter, we just executed a new 18-year lease for the single largest vacancy in our portfolio. a suite totaling 22,000 square feet at the Meadowview MLB in Kingsport, Tennessee. Having navigated through a year of the challenges posed by the pandemic, I'm proud of our team's uninterrupted focus and continued achievements. Similar to our asset management and leasing teams, our capital project team also had an excellent quarter, efficiently prioritizing recurring CapEx investments totaling $5.6 million, or 7% of cash NOI and ahead of 2021 guidance. Embedded within all capital investments made by DOC is a solid commitment to the materials and practices that enhance the patient experience as well as our G2 sustainability philosophy. This quarter, DOC was nationally recognized as a 2021 Energy Star Partner of the Year from the U.S. Environmental Protection Agency and the U.S. Department of Energy. This prestigious award is the highest level of EPA recognition, as partners must perform at a superior level of energy management, demonstrate best practices across the organization, and prove portfolio-wide energy savings. We're proud to celebrate the recognition from the EPA for our ESG efforts to date, but recognize that this is simply a step forward for DOC as we continue to invest in better as leaders across the real estate industry. With that, I'll now turn the call back over to John Thomas.

Thank you, Mark. We'll now take questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from Juan Sanadria with BMO Capital Markets. Please proceed with your question.

Hi, thank you for the time. I was just hoping, John, you could talk a little bit more about the development funding you referenced in your prepared remarks, the types of yields you're expecting, if mainly that includes rates to purchase the asset upon completion, and if you could remind us what kind of pre-releasing you typically look for before committing that kind of capital.

Yeah, happy to, Juan. So, we've seen a number of new development financing opportunities this year. As I mentioned, we started three. One's an on-campus building that's 75% pre-leased to the health system and with lots of potential demand for the lease up during the construction cycle. And that's mezzanine loan financing. So we're providing much of the non-construction loan equity, if you will, with the developer funding the balance. And then we have options to acquire it on the back end after COO. Then we have another off-campus building that's 100% pre-leased to an investment-grade credit that is more of the, or not more of, is kind of the loan-to-own structure. And in that one, we typically get 6-plus percent yield during construction, and then it converts to ownership. We have a call option, if you will, to convert that to ownership after CO. So the other building mentioned is also more like the mezzanine loan financing structure. with an anchor health system ASC, anchor health system joint venture ASC with a national operator, and then some other pre-leasing with physicians. So that one's, again, closer to 75% pre-leasing. And it's a mezzanine loan with an option to acquire at the end. So, you know, we've been pretty successful with both types of financings. Some we take, you know, a little less risk, and the developer has more, you know, kind of lease-up risk, if you will, than the 100%. least opportunities. You know, we really like that low known structures we featured in our annual shareholder report, the building we built down a sacred heart. So we expect to do more of both types this year and be pretty productive. All of these are buildings that'll CO in 2022, so next year, and be great additions to the portfolio.

And how big is the pipeline of opportunities where you have the right of acquiring assets that you've already committed to? Do you have any sense of that scale?

Yeah, we've got under, I guess, under, you know, various mezzanine loans. We did a large package at the end of the year. So, you know, we're pushing 500, 600 million of, you know, underlying asset value, you know, securing our mezzanine loans. And all of those, we have some, you know, some form of option to acquire and or, you know, rights of first refusal, ROPA rights.

Great. And then just one last question for me, just on cap rates, I recognize you, they're sticking to your five to 6% guidance range, but just curious, you know, we're obviously hearing about increased competition, but how you're feeling about within that range where you're more likely to come out and where things are trending for, for the deals you're looking at or that are under LOIs or what have you, just to give us a sense of, of where the deals are trending and pricing wise.

Yeah, we're in the, you know, we're in the low fives for class a, you know, assets as Jeff mentioned, we, you know, we're really picky and, and, um, on the high quality assets. And again, these are health system anchored and heavily leased buildings, you know, that we've been acquiring. They're all off market. So that, that does help us. The, you know, the auctions that have been, you know, published, you know, cap rates that are coming through the market of deals seem to be compressing, but you know, we're in the, in the low fives to mid fives on, on, you know, class A acquisitions and then stretch, stretch closer to six. on usually smaller assets that are off campus and or the development projects that, again, we're financing this year.

Thank you.

Thank you, Juan.

Thank you. Our next question comes from Jordan Sadler with KeyBank Capital Markets. Please proceed with your question.

Hey, guys. So just a point of clarity on the 500 to 600. You mentioned, JT, you have MES supporting presently 500 to 600 of assets that you have rights on or acquisition rights or options to purchase. Is that what you were saying?

Yeah, that's right. So the underlying value of the buildings that are securing our MES loans is well in excess of 500 million. Okay. Okay.

And in terms of the pipeline of additional MES loans and or development loans that you're underwriting right now in terms of additional capital you put out into work, how much is that of the 200 plus that you flagged?

Yeah, most of the 200, I'm going to say all of the 200, they were kind of an LOI or close or acquisitions. you know, we have additional development financings that we're still underwriting and competing for, if you will. So that would be in addition to the 200 million.

And what's the nature of the 200? Is it sort of, you know, your bread and butter transactions, you know, some anchored deals, affiliated deals, typically?

Yeah, these are newer. It's a mix of on and off campus. Some are just finalizing construction. They're all health system anchored and heavily leased to health systems. But, you know, there are some physician groups, obviously, in some of those buildings. And the pipeline itself is, you know, just bread and butter buildings.

Okay. And then, you know, I heard the word picky. You know, obviously, Jeff mentioned, I just heard you mention it again. So, What sort of are you flagging? I'm kind of interested in maybe the lessons learned, if at all, from the pandemic, if there's something that kind of has informed your underwriting. I know you guys came out on the other side pretty well, but is there anything where you've looked at some assets and this is now filtered in to your new underwriting?

Hey, Jordan. This is Jeff. I'll take a stab at that. So as you said, I mean, we came through the pandemic really well. You know, I think a testament to the underwriting that we did and kind of the continuous monitoring of the credit team of our tenants. So, you know, I don't know that it's really changed anything. You know, for the last number of years, we've had a really strong focus on investment grade tenants, large health system, anchored buildings. And so when we say picky, you know, I think that's really what we're talking about is picky in terms of the tenants and the specialties and where they are. So nothing different than the last, you know, few years that we've been focused on these types of tenants. Just kind of a continuation of the strategy, which really served us well during COVID.

Perfect. Maybe just one from Mark before I get off the clarity on the parking piece. Mark, you said, I think... 20 basis points of the 2.4 rental revenue. Sorry, 2.4% of NOI was related to the parking benefit, but I'm not sure if that was sort of a year-over-year metric because I heard the 80% and the 48%, but I was just trying to clarify what periods we were talking about there.

Yeah, Jordan, happy to clarify. So the same-store impact from lower parking revenue was 20 basis points in the quarter. So our 2.4 would have been a 2.6% same-store NY growth if parking was at pre-pandemic levels. So we've got 100 years.

I'm sorry, Q1 would have been 2.6, right? Yeah, okay. Yeah, yeah, Q1. And then the 80 versus the... What were those two periods?

Yeah, so the first quarter, we returned to 80% of the pre-pandemic levels compared to 48% when we were at our lowest point last year, kind of that March-April time period. So we've got about $130,000 of parking revenue kind of upside to return to normal levels is what the dollar figure is.

Oh, perfect. Thanks very much.

Thanks, Gordon.

Thank you. Our next question comes from Nick Joseph with Citi. Please proceed with your question.

Thanks. We've talked a lot about the acquisition pipeline, but JT, you mentioned kind of beyond what's on their LOI right now and negotiations. Can you try to put a size of that pipeline that's kind of the next step beyond the near term?

Yeah, Nick, it's, like I said, we're very confident in the 400 to 600 number, and I think I think that's probably the best way to say it. I think, you know, the next two quarters, you know, will be, you know, hopefully get more in the third quarter and accelerate the little bit of delay from the first quarter. But, again, 200s in near-term visibility, another 100s, you know, kind of inactive negotiation, if you will. And then, you know, we do have good confidence on the balances.

Thanks. And then you talked about the ATM issuance to pre-fund. How do you think about funding the remainder of this expected acquisition growth kind of going forward over the next few quarters?

Hey, Nick, this is Jeff. Yeah, so certainly we've been using the ATM opportunistically. We'll continue to do that. Like we said, we feel very confident in the overall volume of acquisitions for the year. So we're going to try to use the ATM when it's appropriate. And, you know, if we pre-fund some of that, that's fine. We just want to make sure we're in a good capital position to kind of run through our guidance. So it's likely to be the ATM. You know, if there happens to be a big portfolio deal or something like that, we would look at, you know, maybe a follow-on offering to supplement that as well.

Thank you.

Thank you. Our next question comes from Vikram Malhotra with Morgan Stanley. Please proceed with your question.

Thanks for taking the questions. Good afternoon. Maybe just first one, you alluded to backfilling the largest vacancy in the portfolio. Maybe just give us some more details about that leave and if that were in place, what does that do to total NOI?

Thanks for the question. Really excited about this new lease. As I mentioned, we're seeing a significant increase in our leasing tours and interest in the buildings across the portfolio. And I think this is the perfect example this quarter, or what we just signed after the quarter ended here, of a 22,000 square foot lease at our Meadowview building. The tenant is the existing anchor in that building. They occupy the first two floors of this building and now are expanding to the third floor and and will occupy 100% of the building. Last year, they invested over $3 million of their own money into a surgery center on the second floor, so this group is growing quick, the largest multi-specialty group in the area, and needed this for their future growth. So from a NOI perspective and same-source perspective, it's going to have a nice bump for our future growth and kind of it's got a year of ramping up as they do construction and build out, but once we get to a run rate basis, it should help with a 28 to 25 basis point increase in our same store.

Got it. And then you also referenced, you know, the post-quarter, again, the tour activity picking up quite dramatically and, you know, the governor on supply being construction costs, et cetera. So I'm just wondering, give us a color, maybe some of the larger systems or tenants that you're talking to, how are they thinking about sort of expansion space and maybe more granular, the type of space on off-campus, what are these tenants specifically looking for?

Yeah, well, as you know, our portfolio is 96% LEED, so we're starting from a great position of strength there and working hard to fill up those vacancies, both on-campus and off-campus. We're definitely seeing growth in the off-campus space as groups are looking to expand just existing services. And when we do lose a tenant, it primarily due to the fact that they can't grow within our building. So we do have a little bit of, you know, repurposing to do there. But again, strength, you know, increase in volume and activity and from our hospital partners especially.

And then maybe just last one, any update or anything that's come up on the watch list? I mean, we're still seeing the effects of the pandemic and a lot of different health systems or health operators are still getting funding from from the government. So just wondering if there's anything cropped up from a watch list perspective.

You know, Vikram, not really. Our AR is in better shape than it's ever been. It's just been, again, I think a testament, as Jeff mentioned, our credit team and our asset management team and just the close relationship we have with our tenants. So a lot of the health system, again, 62% of our tenant base is investment-grade health systems, many of those health systems. I think we attract... It quantified, you know, the aggregate of all the health systems that we do business with had pulled in about $9 billion of, you know, the funds to the various structures through the CARES Act funding. But, you know, what we look at primarily and focus on is the activity in our buildings, and that has been, you know, full steam ahead since last May, and, you know, everything's been open and operating and busy, and as I said, you know, volumes are at pre-COVID levels. So the activity in our buildings, well, you know, But before the pandemic and certainly now, you know, well supports the rent being paid in those buildings. And so we don't have any discomfort. And hopefully, you know, at some point, hopefully some of that CARES Act money turns into grants and not a loan and, you know, kind of removes some of that strain on the health system generally.

Fair enough. Thanks so much.

Yep. Thank you.

Thank you. Our next question comes from Amanda Schweitzer with Baird. Please proceed with your question.

Thanks. Following up a bit more on the stronger leasing activity that you're seeing, have you seen an acceleration in rent above your prior expectations, or have you been able to pull back on TIs or other leasing concessions as a result of that strength you're seeing?

Good question, Amanda. This is Mark. The answer is yes to both. As a result of some of the increases in construction pricing, rental rates have been rising around the country, so we've been able to push on rates. as it just gets more expensive for providers to move from building to building or construct new. So we've been pushing on rate quite a bit there. And then on TIs, I mean, just because it is harder to move, our leasing team did a good job this quarter offering less tenant improvement allowances from the landlord. So our capex is actually a little bit lower than we originally projected from some TI savings there.

Yeah, that's great to hear. And then higher level on capital allocation, can you talk more about how you're thinking about your cost of equity today, just relative to the decline in cap rates that you're seeing for medical office broadly? Has that caused you to change your hurdle price for equity issuances at all?

Yeah, so, hey, Amanda, it's Jeff. So as we look at our cost of equity today, you know, clearly the stock's done, you know, better through this year than kind of a lot of last year. So the cost of equity for us has been pretty steady, I would say. I mean, certainly cap rates have gone down and become a little bit more competitive. Luckily, the cost of our debt's gone down as well. So that makes an overall cost of capital hurdle easier to achieve with the acquisitions that we're looking at. So as we look at kind of the stock price where it's been lately, I think it's at levels where we can achieve the full volume of our acquisition guidance and still provide, you know, accretive returns to the shareholders.

That's helpful. Thanks for the time.

Thank you, Matt.

Thank you. Our next question comes from Michael Carroll with RBC Capital Markets. Please proceed with your question.

Yeah, thanks. So I guess I noticed in the press release that you guys trademarked a phrase, invest in better. Can you talk a little bit about that phrase, and I guess how should we think about that?

Yeah, Mike, we've done that, I think, three years ago maybe. Did you? Yeah, no, no. I'm glad you recognize it. You know, it was really a culmination of the culture of our organization, so it really goes across the board. Invest in better people, invest in better health systems, invest in better buildings. Just something that came out of our kind of internal strategy discussions and then, you know, as we try to, you know, message people. you know, to investors, to, you know, prospective clients and health systems and to, you know, people that we recruit. You know, we've had almost no turnover in our organization. We had, you know, we had the team performed extremely well during the work from home and still mostly working from home. And, you know, we just think we take a lot of pride in that. So, you know, everything we do, we try to do it with excellence and, as we say, invest in better.

I know it makes sense. And then I guess, J.D., can you talk a little bit about the type of patients that are flowing to outpatient settings now, I guess, due to the pandemic that were previously going to inpatient settings? And does that change the type of buildings that they're going to? I mean, is it more surgery centers or on or off campus? Or I guess, how is that kind of evolving?

Yeah, so... You know, Jeff spoke to this earlier as well. You know, what we learned from last year was that it just reaffirmed the strategy that we've, you know, seen and believed in for years and think, and again, investing in better looking into the future, which is, you know, where healthcare services are best performed and can be clinically performed. And, you know, the buildings with surgery centers last year away from hospitals that were the busiest, you know, during the, you know, kind of once things settled down last May and people learned how to, you know, kind of isolate COVID patients in the hospital, you know, literally all other care that wasn't trauma, you know, was being directed to outpatient settings. And, you know, we did that consumer survey that we had commissioned in five of our largest markets, which, you know, the survey found if you didn't have COVID, you wanted to go to, you know, healthcare services at least a mile away from a hospital. So we didn't pick the mile. That was just the way the feedback came from the, you know, from the market, from the communities. And so, again, certain buildings we're investing in. We mentioned the Wesley Chapel building, which is on campus, but it has a surgery center. You know, orthopedics, total joints are just moving out of the hospitals, you know, rapidly. You know, and hospitals that didn't have or they were trying to keep, you know, orthopedic surgery in the inpatient setting or in the inpatient facilities, you know, last year lost all that volume to outpatient facilities and other providers. And so that's why we think we see an uptick in new development. We're financing at least one project. We think some others this year where hospitals are moving or investing in surgery centers away from the hospital campus, again, to take care of orthopedics in particular. And then there's going to be a significant move of procedural cardiology, again, out of the four corners of an inpatient facility and into the outpatient setting. Now, those buildings will typically be closer to a hospital, but don't necessarily have to be on the campus. But, you know, again, I think those are things we'll continue to see. And oncology just continues to, you know, sadly, but, you know, continues to grow and grow in our portfolio and, you know, providing linear accelerators or radiation oncology closer to the patients and the consumer, if you will. Again, it's the trend that we've been seeing for years and we're seeing, and that's one of our development projects this year as well.

Okay. And then is there, I guess, what has given this change? I mean, is it just, obviously, it's consumer's preference given the pandemic is staying away from hospitals, but what's going to keep that from kind of reverting back? I mean, has there been any changes to regulations or advancements of technology that's going to help drive that shift to outpatient or maybe accelerate that shift outpatient that we've seen over the past few decades?

Yeah, I think what we saw last year was an acceleration again, just because people didn't want to go to the hospital and people avoided care. Sadly, there was a lot of people that died last year, you know, from not from COVID, but from not getting the care they needed because they were afraid to go to the hospital. Um, But what's going to, you know, I think it's here to stay just from consumers now are more comfortable with it in the outpatient setting. And then CMS is, you know, is phasing out the so-called inpatient-only rule, which is Medicare, you know, for years have put out a list of procedures that they would only pay for if it was done in a hospital. So in the inpatient setting, they've been shifting more and more procedures or paying for more and more procedures to be done in the outpatient setting. That's what helped drive the move of total joint replacements from the inpatient facility to the outpatient facilities over the last couple of years. And that's been a pretty dramatic shift of, you know, procedures and volume. And then two years ago or last year started the shift of cardiology procedures as well. So I think it's about 2023, I believe, is the CMS has declared they won't have an inpatient rule at all at all. They'll just pay for procedures and let the clinicians pick the best clinical setting, which will tend to be more efficient, lower cost, you know, outpatient care facilities convenient to patients and the physicians themselves.

Okay, great. Thank you.

Yep, thank you.

Thank you. Our next question comes from Connor Siversky with Barenburg. Please proceed with your question.

Good afternoon, everybody. Thanks for having me on the call. It's really one for me, quick follow-up to Mike right there. So we've seen this chart from time to time comparing outpatient visits, inpatient procedures, and I'm wondering if you could provide any color as to what inning we're in in that trend. And by that, I mean how much left is there to really take out of the inpatient environment?

There's a lot. I mean, there's a lot of volume. I think last year was maybe in the or maybe 2019 was the first year the number of procedures done in the outpatient setting was greater than the number of admissions, if you will, in the inpatient setting. But that number accelerated in 2020, and it's going to continue to, that shift, as we were just talking about, is going to continue to shift. So you're talking, you know, basis points on basically a trillion dollars a year of healthcare services, you know, so every year. you know, basis points would be billions of dollars, you know, moving out of the hospital and into the outpatient setting. And in cardiology, we're just getting started. So that's a pretty dramatic shift. So you're going to go from 100% two years ago to, you know, 5% moving outpatient, you know, every year. I'm making that number up. It'll be a slow evolution, but then it'll ramp up pretty dramatically about how much cardiology will move out of the hospital.

So that's helpful. I'm wondering then, as these higher acuity procedures are moved out of the hospital, do you expect any change in the design philosophy of medical office buildings in order to facilitate some of these procedures?

Yeah. I mean, when you have outpatient surgery, you usually have to have separate ingress and egress points for surgical patients. Again, we're we're thinking differently about lobbies and, you know, designated, dedicated elevators, you know, really kind of lessons learned from, if you will, from the pandemic or, you know, preventing the next pandemic or anticipating another pandemic in the future. You know, cardiology buildings are, I mean, the whole idea there is moving cardiology into an outpatient surgical facility. And so the types of rooms that are there are going to be, you know, unique for that service. The move of total joints out of the hospital into the outpatient setting, a lot of that's being done with robots. It's really a pretty fascinating procedure to watch. The robots require a little bit more room than a typical OR fits. Again, you're getting a little bit more space. Again, oncology, it continues to move to the outpatient setting. You have a whole different psychological effect of how those buildings were designed, you know, dealing with the patients and their families there.

That's interesting stuff. Thanks for the call. I'll leave it there. You're welcome.

Thank you. Our next question comes from Daniel Bernstein with Capital One. Please proceed with your question.

I'll say I'll occur that was an interesting question and answer just now. So maybe I'm reading too much into the parking volume, but it seems to me the hospital volume has come back a little bit more, like 90% or so, and parking volume here is, you know, you can say 80%. Am I reading too much into this that, you know, maybe telehealth has impacted the amount of car volume that's coming in? I'm just trying to really assess whether you're going to come back to pre-pandemic levels in terms of parking receipts. I know it's not a big portion of your rents.

Yeah, it's one of our elastic revenue sources. Then the issue is valet parking. It's not the volume of patients. It's valet parking. So with COVID and valets are still restricted in a lot of states, and then just people's comfort level getting in and out of a car that's not theirs and vice versa. So that will come back, and again, I think even in many ways stronger than you know, once we get more vaccine out and, you know, more herd immunity.

Okay. Okay. Really, that's all I had. I appreciate it.

Thank you. Thanks. And to conclude on that comment, we do expect it to fully recover and do well in the future.

Thank you. Our next question comes from Joshua Dennerlein with Bank of America. Please proceed with your question.

Yeah. Hey, JT. Well, I'm curious on the inpatient rule. Do you typically see an increase in maybe MOB developments or RFPs once something comes off that inpatient list?

Yeah, you know, there's usually a time lag. So like cardiology's been, I think it was two years ago, there were 13 procedures that were moved off the inpatient only rule. Um, then last year there was another 20. So just, it, it takes some time for the, you know, clinicians to kind of organize around, you know, a different setting. And then, and then that affects design as we talked about before. So total joints took, uh, didn't take, I mean, accelerated pretty quickly. That was true. Forgive me for that computer message. Um, total joints, uh, it took a little bit of time, but it moved rapidly. to the outpatient setting and in pretty dramatic fashion. And then, and then obviously last year as much as they could. So I, I, I think the prediction is on total joints that will be at about 90% will be done in an outpatient setting by 2025. And what, what would be left would be patients with comorbidities that just require, you know, more intensive services other than the orthopedic procedure itself. And cardiology will be a little slower to that move, but it's going to pick up pretty dramatically this year. And, I mean, we're already starting to see, you know, cardiology-dedicated ASCs. And there's a lot of planning going on around that with the physician groups we're talking to.

Okay. And then interesting commentary on the comorbidity is what's kind of going to be left after 2025 for total joints. Is that the kind of way to think about hospitals? Is there going to be, like, the unique patients that require a really high level of acuity and then pretty much anything else could be kind of done off campus?

Yeah, I think that last year, again, showed that we could do it and perform that way. So the hospitals of the future are going to be for, you know, highly intense medical conditions like COVID. Transplants. and trauma. And then you'll have some oncology surgery. You'll have some open heart surgery and then some cancer surgery. But it's really going to be for the high-acuity patient and the high-acuity medical conditions, infections like COVID. Then everything else is going to be outpatient.

Okay. Interesting. Appreciate it.

Thank you. Our next question comes from Omoteo Okasanyo with Mizuho. Please proceed with your question.

Good afternoon, everyone. I just wanted to follow up on that last line of questioning and agree definitely with the model of everything shifting outpatient. How should we be thinking about how that translates into future demand? And I ask that question from the perspective of, you know, we haven't really seen, you know, your development pipelines or development pipelines of any of your peers really ramp up. Occupancy is steady. We haven't seen this huge kind of ramp in occupancy. So I guess it's how do we kind of match that kind of what we're seeing at that level versus how it's going to translate to kind of operating metrics and dollars and cents with DOCs?

That's a lot. That's a big question. I mean, I mentioned in my prepared remarks, again, the CMS actuary predicts medical spending is going to grow 5%, 5 plus 5%, 5.5%, I think, you know, on average every year between now and 2028. And that's the 2028 is kind of the, I guess, the beginning of the back end of the, you know, the baby boom population. So, you know, once we kind of top out on the, you know, the aging part of the population, start catching up on the younger population, but again, the vast majority, like we just talked about, that spin is going to continue to shift to the outpatient setting. I think we talked about the hospital of the future, whether it be existing physical plans or the physical plans of the future, again, those rooms are going to be designed to be able to convert every room into some kind of intensified care so you can take care of a COVID patient and you know, again, have more access to the ventilators and things that you need, you know, for that kind of care. So I think that's just, you know, getting to those metrics is right now we just know what the aging, you know, accurately accurate on the aging of the population, how much demand they're going to have, how much it's going to cost. And then, of course, you know, governments and payers, insurance companies, employers are, you know, trying to shift the cost curve. So it's not just about aggregating costs. populations and dollars. It's also trying to take into account lower cost settings. Again, that would be in the outpatient setting.

Gotcha. All right. Thank you.

Thanks, Tom. Thank you. There are no further questions at this time. I would like to turn the floor back over to John Thomas for any closing comments.

Thanks, everybody, for joining us today. Again, we're off to a great start, and we've got some fantastic things to share with you in the upcoming quarters. And I look forward to seeing many of you during the NAIREAD Zooms and hopefully in person soon. And we just encourage y'all to get vaccinated. If you can't find a vaccine, give us a call. We'll help you find one. Thank you much.

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