Physicians Realty Trust

Greetings and welcome to the Physician Realty Trust Earnings 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, SVP General Counsel. Please go ahead.

Thank you. Good morning and welcome to the Physicians Realty Trust first quarter 2023 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, 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 2023, and our year-to-date performance, as well as our strategic focus for the remainder of the year. Jeff Tyler will provide our financial results for the first quarter of 2023, and Mark Thine will provide a summary of our operations for the first 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. Our 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. Forward-looking statements depend on assumptions, data, and methods that may be incorrect or imprecise. Therefore, we do not guarantee that the transactions and events described will happen as described or that they will happen at all. For a 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 would now like to turn the call over to the company's President and CEO, John Thomas. John?

Thank you, Brad. Physicians Realty Trust provides real estate capital to healthcare providers that specialize in outpatient medical services. We provide this capital in a number of ways. We acquire outpatient medical real estate designed to facilitate surgery, oncology, and other specialty services required by patients in high demand and the physician-patient encounters ancillary to these medical services. We finance the development of these types of buildings. And we finance the transformation of buildings that may have become out of date, as is, but provide a low-cost option for transforming to host these medical services and meet the demands of our growing and aging U.S. population. Our facilities and providers we partner with around the country provide access to care for the entire population in the markets where we are located, not just the finite small percentage of seniors that can pay for and want senior housing. For years, the fundamental case for owning outpatient medical facilities has been strong, but is now stronger than ever. First, healthcare providers benefit from undeniable demographic tailwinds currently, and that will dramatically increase demand for services in both the near and long term. Second, due to Medicare's progressive payment system and Part C modernization, providers are incentivized to provide care at the lowest possible cost, consistent with the clinical science available at the time to treat the patient safely and effectively. Third, current expense pressures are temporary and correctable. These pressures are caused by the unique combination of real time inflation and backward looking payer revenue rates that are set based on past costs rather than current or future expected costs. Each of these factors incentivizes health systems to move patients out of the inpatient hospital setting and into newer, lower cost outpatient sites of care as a means of improving their margin on services provided. These trends have been known and visible for years and have only accelerated in the post-COVID world. Time and time again, buildings hosting outpatient medical services have proven to be resilient and an essential class of real estate. When one of our clients chooses to reduce their space at the end of their lease, it is not due to a desire to work from home, the result of slowing demand or a consequence of a rapid rise in interest rates. Rather, our non-renewals are driven by unique and specific situations like physician retirements or a change in practice ownership. These are not structural trends or challenges. Our real estate is necessary for physicians and health systems to deliver their mission to meet ever-increasing demand. Unlike other real estate asset classes faced with declining demand for space, revenue from outpatient medical services grew 8% in 2022. In comparison, inpatient revenues experienced no growth. High construction costs and unlimited supply growth have allowed us to meaningfully increase rental rates in most markets, and we expect to see that trend continue. The opportunity for new acquisition investments remains low for now, as private investors make short-term wagers on medical office cap rates returning to 2020 levels, even at the cost of negative leverage. We believe that patience is a virtue, and we will benefit from outsized growth and acquisition opportunities with our dry powder, when market cap rates and the long-term cost of capital reach equilibrium. We do see a growing number of opportunities to finance new outpatient medical investments, and our active pipeline in discussions now exceeds $300 million. We're proud of the two projects we started this past quarter, including our first on-balance sheet development, and expect to start several new projects later this year. We're excited to share that we've executed contractual commitments related to a $40 million dollar medical office development located in the high growth atlanta suburb of buford georgia the 97 000 square foot outpatient medical facility which includes an ambulatory surgery center is 100 pre-leased on 10-year triple net lease terms with 91 percent lease directly to northside hospital an investment grade quality health system the site also allows for an additional hundred thousand square foot medical facility in the future where we will have the development rights to build. Northside Hospital and affiliated physicians have executed leases based on a 6.2% yield on cost to deliver the project, with 3% risk escalators on all lease agreements. Physicians that will lease space and provide services in the building have contributed 44% of the capital to develop this building. This investment increases our longstanding partnership with Northside Hospital and is a direct reflection of DOCC's strong relationships with health systems who want to work with a long-term partner who knows healthcare first. Before our next earnings call, we will celebrate the 10th anniversary of our initial public offering. We appreciate your support, the support of all the families that work for and with Doc, and the investment grade credit and high-quality providers that partner with us to meet the healthcare needs in the communities we serve. We look forward to the next 10 years and beyond. We believe we have the highest occupancy, the best balance sheet, and the best strategy for outsized growth well into the next 10 years and beyond. Quarter one was uneventful until we lost George Chapman, who passed away unexpectedly and well before his time. George made Health Care Reads the powerhouse that it is today. I can't count the number of senior executives and professionals at public and private reads and otherwise that owe their careers to George's inspiration and mentorship. I can name at least three public read CEOs who are stewards and direct beneficiaries of George's leadership. But more important than all the financial and business success, George was motivated most by his love for his family, Toledo, the arts, Cornell, and the University of Toledo, and taking care of seniors and advancing access to health care services for all, regardless of their ability to pay. I believe George is looking down on all of us, asking us how we are going to work to expand access to care to all, expanding senior housing to more, and providing professional opportunities to the youth of Toledo and everywhere to meet these objectives. George, we miss you. We at Dock are committed to your passion and mission. Jeff will now share comments on our financial results of Q1 2023, and Mark will discuss our operating results. Jeff.