Physicians Realty Trust

Greetings and welcome to the Physicians Realty Trust first quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a 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, Bradley Page, Senior Vice President, General Counsel. Thank you. You may begin.

Thank you, Doug. Good morning and welcome to the Physicians Realty Trust first quarter 2022 earnings conference call and webcast. Joining me today are John Thomas, Chief Executive Officer, Jeff Tyler, Chief Financial Officer, Deanie Taylor, Chief Investment Officer, Mark Thine, Executive Vice President, Asset Management, John Lucey, Chief Accounting and Administrative Officer, Lori Becker, Senior Vice President, Controller, and Amy Hall, Senior Vice President, Leasing and Physician Strategy. During this call, John Thomas will provide a summary of the company's activities and performance for the first quarter of 2022 and year to date, as well as our strategic focus for the remainder of 2022. Jeff Tyler will review our financial results for the first quarter of 2022. Mark Fine will provide a summary of our operations for the first quarter. And finally, Amy Hall will provide a summary of our leasing activity for the first quarter of 2022 and our thoughts about the market for the remainder of the year. 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. Our actual results could differ materially from our current expectations, and those anticipated are 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 turn the call over to the company's CEO, John Thomas. John? Thank you, Brad.

Positions for Realty Trust is off to a strong start to 2022. Our operating platform continues to perform exceptionally well with operating cash flow at peak levels and occupancy near all-time highs at 95.2%. Despite interest rates that have accelerated at an unprecedented pace, Seller expectations on cap rates have barely budged, if at all, limiting quarterly investments to $23 million as we maintain discipline in deploying capital in this volatile capital market. The DOC portfolio was built with a focus on the long term. Our shareholders benefit in the short term from actual cash flow and long term from disciplined accretive growth in both assets and cash flow. And like other sectors, the DOC portfolio remains full, near full occupancy And our headline growth rates are not the result of cash flow lost during the pandemic. Our buildings have remained full and performing, generating authentic growth through a focus on net effective rent, financing accretive development of medical office facilities, and selective external accretive acquisitions. Historically, growth in medical office rental rates have been generally limited to 2% to 3%, both in annual lease rate increasers and renewal spreads. Any growth in excess of this range has typically required excessive incentive packages that have served to increase headline rents at the expense of net effective rent, actually reducing total cash flow. We have and continue to resist the temptation to embrace short-term measures that improve quarterly statistics at the expense of long-term growth and firmly believe that this is the right approach that best benefits our shareholders. That's why I'm excited to share that we see, for the first time in my 20 years of experience in medical office, the opportunity to organically grow lease-level cash flows by more than 3%. Amy Hall, our Senior Vice President of Leasing and Position Strategy, will share more information in a few minutes about our experience here today and our expectations moving forward. DOT's pipeline to finance development is deeper than ever. Our strategy for development has been to align our interests with third-party developers and health systems by financing projects directly at a cost that allows for initial rents that are in line with market while providing our shareholders with accretive returns. These accretive returns come initially in the form of the development yield, but later in the form of an attractive purchase option. It is a deliberate decision that we don't self-perform development, as we don't want to compete with the many great developers that we partner with to serve our health system and position clients. This also benefits our shareholders as we avoid the significant G&A cost of a development team that would be both cyclical and redundant with the skills of our clients. On our last call, we forecasted $250 to $500 million of new investments in 2022, inclusive of stabilized acquisitions and new development. As of today, we estimate we will have the opportunity to finance projects that will cost approximately $160 million to build and will have value in excess of $200 million once online in 2023 and 2024. The pipeline is highlighted by pre-leased health system-anchored medical office facilities and ambulatory surgical suites in fast-growing top 20 MSAs. While construction costs are inflating, our projects are financed on a yield-on-cost basis that is higher than acquisition cap rates with a GMP construction contract in place. Development momentum remains strong in today's rate environment as providers understand that they need more outpatient surgical and diagnostic facilities outside of the four walls of the inpatient hospital. This is appropriate clinically as it moves care to the lowest cost setting while preserving precious hospital resources for the treatment of infectious disease and provision of high-acuity services. Outside of development, our investment philosophy remains focused on best-in-class facilities where we can add value through superior customer service that drives retention and cash flow growth. Cap rates on stabilized properties have compressed each year since 2013, but it's our view that the compression is most seen in older Class C properties. Accordingly, our investments, beginning with the acquisition of the CHI portfolio in 2016, have focused on higher-quality facilities They may be more expensive on a nominal basis, but are expected to provide the best risk-adjusted IRRs over the long term. Each of our investments are made based on the expectation that a property will benefit not from further cap rate compression, but from its long-term strategic value to the healthcare providers. While there's a high volume of Class B and C assets available to acquire in the market, we don't believe that they carry enough yield relative to the Class A assets we're targeting to offset the risk an owner takes in today's environment. Instead, we will remain disciplined and selective, pursuing investments where we can match our long-term objectives with those of the healthcare providers occupying those assets. This focus on high-quality assets includes the environmental impact of our investments. We continue to be excited about the results we have achieved on our environmental three-year goals established in 2019 that matured in 2021. That is just a start, and we'll report those results formally and transparently in our third annual ESG report to be released in June 2022. As we will share then, we are increasing our commitment in all areas to reduce greenhouse emissions, that the environmental impact of our buildings for the improvement of the communities we serve, and remain on target to achieve our goal of reducing greenhouse gas emissions by 40% in 2030. We also believe that evidence shows that investments will generate stronger retention, higher rental rates, lower occupancy costs, while producing better cash flow and long-term value for our shareholders. I'm proud to share that Physicians Realty Trust is honored to once again be recognized by the Milwaukee Journal Sentinel as a top workplace for the fifth consecutive year. Top workplaces are determined through an annual team member survey collecting data on company leadership, compensation, and work environments. Congratulations to the entire DOC team on building and maintaining our unique company culture that continues to be recognized among the best in both Milwaukee and our industry. Study after study shows that companies with a focus on culture deliver superior total shareholder return over the long term. We will not sacrifice our commitment to culture for short-term financial benefit. We're also proud to share that our Senior Vice President of Physician and Leasing Strategy, Amy Hall, has been selected as a 2022 Globe Street woman of influence. This award shines a light on individuals that have personally impacted the market and significantly driven the industry to new heights via their outstanding success across commercial real estate. Thank you, Amy. We completed our annual shareholder meeting yesterday, and I'm proud to report we had 95% or greater approval for each of our trustees and for our executive compensation plan. We work for our shareholders, and while others are distracted in trying to restore the trust of their shareholders, We have the trust and are able to focus on working with our outstanding physician clients, health system partners, and developers delivering long-term returns for our shareholders. We appreciate our loyal shareholders who recognize us for our discipline and strategy for long-term growth, and we welcome new investors as they, too, recognize the strength and stability of our trusted platform. I'll now ask Jeff Tyler to share our financial results. Mark Thine will then share our operating results, and Amy Hall, who will report on the current leasing environment.