Physicians Realty Trust

Greetings and welcome to Physicians Realty Trust third 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, Brad Page, Senior Vice President, General Counsel. Thank you. You may begin.

Thank you, Doug. Good afternoon and welcome to the Physicians Realty Trust third quarter 2022 earnings conference call and webcast. Joining me today are John Thomas, Chief Executive Officer, Jeff Tyler, Chief Financial Officer, Demi 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 third 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 third quarter, and Mark Fine will provide a summary of our operations for the third quarter. Today's call will contain forward-looking statements made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. They reflect the views of management regarding current expectations and projections about future events and are based on information currently available to us. These forward-looking statements are not guarantees of future performance and involve numerous risks and uncertainties. You should not rely on them as predictions of future events. Our forward-looking statements depend on assumptions, data, and methods that may be incorrect or imprecise, and therefore, we may not be able to realize them. We do not guarantee the transactions and events described will happen as described or that they will happen at all. For more detailed description of 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'd now like to turn the call over to the company's CEO, John Thomas. John?

Thank you, Brad, and good afternoon. Thank you for joining us. The third quarter of 2022 is a quiet and steady-as-you-go quarter for Doc, further demonstrating the stability of medical office as an essential real estate class. This year has been challenging for health systems and physicians alike, as medical cost structures have been impacted by double-digit inflation in both staffing costs and supplies that have been further complicated by lagging government and commercial reimbursement. Despite these headwinds, the United States' demand for healthcare services is at an all-time high as the population ages and patients receive procedures that were deferred during the pandemic. Providers have continued the long-term shift of care to the outpatient setting, where advances in clinical science now allow for many higher-margin services like orthopedic surgery to be performed in a lower-cost environment. CMS has again expanded the list of procedures that can be performed in ASCs going into 2023. This trend is predictable and rational. Outpatient care sites benefit from a more stable staffing model, increased operating efficiency, and improved patient convenience, all while freeing up hospital capacity for higher acuity needs. Our portfolio is built with this dynamic in mind. While capital market volatility continues to produce a mismatch between buyers and sellers, in the pricing of new investments, our entire team is focused on portfolio optimization and working with our health system partners to address their real estate needs for the years ahead. This partnership focus continues to enhance our development pipeline, and we continue to see the potential for a higher volume of development financing opportunities in 2023. Within the existing portfolio, we continue to benefit from the increased market rental rates driven primarily by general inflation and rising construction costs. Renewal spreads exceeded our expectations at 6.2% for the third quarter, bringing our year-to-date spreads to 5.7% across 670,000 square feet of activity within our consolidated portfolio. Importantly, these high spreads have not come at the expense of retention, which remains near 80%. We remain excited about the performance of our portfolio despite a challenging macroeconomic environment. Mark will share more details in a few minutes. In September, Hurricane Ian caused wide scale destruction on the West coast of Florida and our prayers and best wishes go out to the families directly affected by the storm. Our Florida based teams quick response helped to mitigate the storms impact on our healthcare partner providers, their patients and our real estate assets. Fortunately, we experienced only minor wind damage to a couple of our smaller facilities and the properties will be back in operation quickly. We had no material financial impact from the storm, and we're thankful that our team members and their families affected by the storm are safe. We've all seen the difficult expense environment healthcare organizations are experiencing, driven by extraordinarily tight labor markets and medical supply costs, as well as non-cash mark-to-market losses in their investment balances. We've devoted significant resources at DOC to building a professional credit team who assist us in underwriting our investments, but also periodically reviewing the financial results of our tenants. We have visibility through lease reporting requirements into 94% of our tenants by ABR, with the average size of the tenants without this requirement totaling less than 5,000 square feet. We also utilize independent claims data to monitor procedure volumes across our portfolio. Our largest tenant concentration is with Common Spirit across 12 markets. Common Spirit's S&P investment grade A-minus credit rating was reaffirmed in September with a stable outlook. Moody's and Fitch also reaffirmed their respective IG rating for Common Spirit as well. According to S&P, Common Spirit's strong credit rating reflects Common Spirit's exceptionally broad geographic reach, supporting a financially diversified health system across 21 states with a large $34 billion revenue base. Common Spirit has $15 billion of unrestricted reserves and 175 days cash on hand. While Common Spirit's 2022 operating margins were strained at negative 4.5%, S&P believes Common Spirit's labor initiatives and market strategies and performance initiatives should help the system achieve their targeted 5% to 6% EBITDA targets by June of 2023. With 66% of our space leased to similarly strong investment-grade health systems, We see similar resiliency across our tenant base, despite broader market challenges. Across the healthcare delivery industry, volumes and opportunity for revenue growth is there, and CMS, Medicare, and commercial insurers are increasing reimbursement rates for 2023, reflecting higher inflation and labor costs. DOC continues to make progress in our sustainability efforts, creating value for our healthcare provider partners, shareholders, and communities through short and long range business, human capital, and operations planning. As a benchmark of our efforts, DOC earned a score of 75 out of 100 in the recently released 2022 Grasby Real Estate Assessment, outperforming the international average of 74. We also earned a Green Star Designation Award to submitters achieving scores of 50 plus on Grasby's implementation and measurement of the management and policy sections. In addition, the company earned an A rating and a score of 98 out of 100 on the 2022 Grasby public disclosure level, ranking first in its healthcare comparison group. As we look to 2023, it is difficult to project external growth until capital costs become more predictable and we can match our cost of capital to market opportunities, acquisitions, or development financing. That said, the market appears to recognize that asset valuations will need to adjust to complete transactions and construction supply chains seem to be improving in our favor. Our balance sheet's in great shape and our debt metrics are well managed with no near-term maturities so that when the current market conditions settle down, we are well positioned to grow and grow at higher levels. We expect to continue to capture higher leasing spreads And those increases in contractual revenue, along with our 2020 acquisitions and our 2021 development financing, will increase our 2023 NOI, including same-store NOI. We will complete our 10th anniversary in July 23 in a very positive way. We believe medical office as an asset class has proven time and time again to be the safest and most offensive and most predictable real estate for investment and operational success. I will now ask Jeff to present our Q3 financial performance, and then Mark will address the performance of our high-performing, award-winning asset and property management team. Jeff.