Healthcare Realty Trust Incorporated

Good morning. Welcome to Healthcare Realty Trust's first quarter financial results. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchstone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Todd Meredith. Please go ahead.

Thank you, Kate. Joining me on the call this morning are Carla Baca, Bethany Mancini, Rob Hall, and Chris Douglas. Ms. Baca, if you would read the disclaimer.

Except for the historical information contained within the matters discussed on this call, may contain forward-looking statements that involve estimates, assumptions, risk, and uncertainties. These risks are more specifically discussed in a Form 10-K filed with the SEC for the year ended December 31, 2019, and in subsequently filed Form 10-Qs. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. The matters discussed in this call may also contain certain non-GAAP financial measures such as fund from operation, FFO, normalized FFO, FFO per share, normalized FFO per share, funds available for distribution, BAD, net operating income, NOI, EBITDA, and adjusted EBITDA. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the first quarter ended March 31, 2020. The company's earnings press release supplemental information forms 10Q and 10K are available on the company's website.

Brad? Thank you, Carla. Before jumping into business, we would first like to acknowledge those who face difficult times due to COVID-19 or maybe even lost someone to the disease. And we offer our sincere gratitude to first responders and healthcare providers. I know many of you on the call this morning are in hot spots such as New York City, And we hope that you and your families are safe and doing well. On a brighter note, we're encouraged by what we've seen recently. Governors and mayors are prioritizing elective medical procedures in phase one of the reopening plans. Timing will vary, but elective procedures are already restarting in most markets. At Healthcare Realty, 88% of our properties are located on or adjacent to campus. During COVID-19, we've been working even more closely with our hospital partners to ensure protocols and facilities are safe for providers and patients. As an example, we've helped hospitals create on campus, so building visitors can be screened for symptoms. We also have 15 COVID-19 testing sites at our properties. Here in Nashville, we're working with hospital administrators to transform our parking lot into a drive-through site for patients to be tested before their scheduled procedures. It's worth noting that 100% of our properties have remained open throughout this crisis. Nine out of ten of our tenants have continued to provide patients with essential care in their offices despite significant declines in patient volume. Many tenants who closed temporarily have reopened or will in the coming weeks. About half of our space is leased to smaller independent physician practices, the lifeblood of our hospital partners. We took an early position to help these practices understand the availability of financial assistance programs, from federal grants and loans to our own rent deferral program. We are reviewing and granting deferrals one month at a time, knowing that circumstances are changing rapidly. April rent collection was successful. with 89% collected, and we've been able to help over 400 smaller tenants with some form of deferral. So far, May collections look to be a bit stronger than April, although it's still too early to know the final outcome. We are confident our deferral program will help our smaller independent practices pull through this pandemic, recover more quickly, and be stronger in the long run. Many of these tenants are already ramping up routine care and procedures and plan to pay back deferred rent in the second half of the year as they address pent up demand. Given the average physician generates $2.4 million in annual hospital revenue, this will greatly benefit our hospital partners who make up the other half of our space. These are mostly large investment grade health systems with deep financial footings and community ties. New leasing was inevitably slower in April, with prospect tours at half of our normal pace. We have been pleased to see tours begin to pick up in the last two weeks. We expect tenant retention to remain high, potentially higher than usual, as providers focus on rebuilding their patient volume. During this time of uncertainty, and even as the recovery begins, we're not asking tenants to make long-term leasing decisions. The intrinsic value of our real estate gives us confidence with short-term renewals. We are encouraged by the increased use and reimbursement of telemedicine during this pandemic, allowing providers to stay connected with their patients. Going forward, we expect providers to incorporate telemedicine into their daily routines in their medical office space. Select providers can boost productivity and revenue by handling a higher portion of their low-acuity care through telemedicine. and increasing their capacity for in-office, higher acuity care. That equates to more revenue per square foot of office space. Looking ahead, outpatient facilities will become increasingly critical as patients and providers seek to shift more care to the safest and lowest cost setting. Even during the pandemic, many of our health system partners have continued to plan for outpatient expansion. Healthcare Realty is well positioned to take advantage of rising demand for outpatient facilities with a strong pipeline of acquisitions and developments. We look forward to sharing progress on this front and the resiliency and strength of our healthcare tenants as the recovery unfolds in the quarters ahead. In closing, we're deeply grateful for the doctors, nurses, hospitals, and patients we serve every day in our facilities. Our property management team, and in particular our 90 maintenance engineers, have been a daily presence, keeping our properties open, clean, and running smoothly throughout this pandemic. Now I'll turn it over to Ms. Mancini for some additional information on our COVID response and healthcare trends. Bethany?

Thank you. Healthcare Realty's longstanding health system relationships have proven invaluable during the COVID-19 pandemic. We have been able to support both hospital and physician tenants, From mid-March to April, our tenants were compelled to limit elective cases and office visits to allow for inpatient bed and ICU capacity. By mid-April, our property managers reported a trough in building foot traffic and maintenance orders, ranging from a third to half of normal activity levels. Signs of improvement, though, over the past few weeks. Nearly 90% of our tenants remained open. across primary and specialty care with their staff in place and have been continuing to meet the essential needs of their patients. Where possible, providers have transitioned lower acuity clinical needs to telehealth and are maintaining communication with patients as they ramp up elective care and office visits. Throughout COVID-19, HHS has issued regulatory updates in an effort to provide sweeping flexibility and support to the U.S. healthcare system. They have lifted constraints and eased federal rules on a variety of Medicare policies affecting providers, and HHS has offered assurance that any healthcare provider will be considered eligible for federal relief who has cared for COVID patients or limited services for COVID capacity, making virtually every provider eligible for assistance. Our tenants began receiving federal relief funds under the CARES Act as early as April 10th. The CARES Act provides grants, loans, and higher Medicare rates to health care providers. In total, HHS has $175 billion in health care stimulus funding. The first $50 billion slated for general hospital and physician relief is estimated to equate to one to two months of lost cash flow from the impact of COVID-19 on the average provider. Another $50 billion will be distributed for COVID-specific relief to hotspots, rural areas, and uninsured care. The remaining $75 billion has yet to be allocated. HHS has distributed more than $100 billion in Medicare loans under the Expanded, Accelerated, and Advanced Payments Program. Analysts have estimated this equates to an additional two to three months of lost cash flow to be repaid by year-end at zero interest. Many of our non-hospital tenants, primarily small independent physician practices, have also qualified for PPP and forgivable SBA loans equivalent to generally two months of payroll rent and utilities. Hospitals critically depend on these physicians to generate revenue even more during this recovery phase. Our health system partners are actively engaged with our medical office tenants to ramp up elective outpatient care as quickly and safely as possible. Elective procedures were closed on average 34 days in HR's top markets and began reopening by the end of April. Different from discretionary services, elective care is essential, just planned in advance. Over time, elective care becomes more urgent the longer the wait. Our tenants are preparing for an increased caseload from delayed elective care, and our property management teams are working with them, to plan for potentially longer workday hours and safety precautions for their most vulnerable patients. The ability to recapture pent-up demand should bolster HR's tenets. In contrast to many non-healthcare businesses that may operate at a limited capacity for a prolonged time, HR's tenets comprise a greater proportion of essential and critical services, which are accelerating their return to more typical operations. Higher acuity outpatient services also require more in-office care. We do not anticipate telemedicine will displace elective or in-office visits and outpatient procedures. Telemedicine has advanced quickly over the past two months and proven it can play an increasingly profitable role for physicians in allowing more efficient time-saving strategies to manage lower acuity services. Providers now have the ability to schedule reimbursable Telemed visits for follow-up to operative care, routine checks, prescription refills, delivering test results. Previously, these were often unreimbursed patient phone calls. We anticipate the cost savings and better revenue generated for lower acuity care to serve an additive role within the physician's office as providers meet greater healthcare demand from an aging population. Healthcare Realty is committed now more than ever to owning outpatient facilities that are integrated with the clinical missions of strong health systems, and we are honored to play a role in our communities as we work together to safely reopen needed healthcare services. Now I'll turn it over to Rob for a review of our investment activity. Rob?

Thank you, Bethany. Thank you. Healthcare Realty's investment activity in the first quarter was strong. Although the transaction market has slowed as it digests COVID-19's impact, our team continues to cultivate a robust pipeline, positioning us for a return to investing as market conditions improve. In the first quarter, we purchased seven buildings for $102 million at a blended cap rate of 5.8%. The properties are located in Los Angeles, Atlanta, Raleigh, Colorado Springs, and Denver. What I really like is that they are associated with leading health systems in dense, attractive growth markets where we have been successfully investing for years. All of these properties were sourced and closed prior to the pandemic. More recently, a number of heavily brokered deals have been delayed indefinitely or pulled from the market. In contrast, we source most of our acquisitions through our internal process, which has created advantages for us as we navigate COVID-19. We are in direct contact with many sellers in our pipeline, which facilitates our ability to extend inspection periods and transaction timelines. This gives us the opportunity to monitor the operational and financial performance of the tenants over multiple rent cycles before proceedings. We've revised our acquisition guidance for the year to reflect not only the delay in timing, but also the potential of our pipeline when market conditions improve. At our two development projects underway, we have remained largely on schedule, even as hospital leadership has shifted its focus to the coronavirus during recent months. In Memphis, the redevelopment of a 111,000 square foot MOB is moving forward. Leasing continues to climb. In April, Baptist Memorial Hospital signed lease amendments for additional space in the building that increased it to 90%. And further commitments, recently made by several other existing tenants, should move leasing to over 95%. In Seattle, we completed our development on UW Medicine's Valley Medical Center campus. More importantly, on February 1st, a lease for a 30,000 square foot surgery center commenced. And on May 1st, the hospital's 61,000 square foot cancer center began paying rent. The hospital continues to evaluate its need for more space and leasing discussions with a third party women's group and a behavioral health provider are active. Several of our prospective developments remain active, such as Nashville, Charlotte, and Memphis. These projects, sourced from our embedded pipeline, are supported by expansion plans at hospitals that are part of strong health systems. Recent discussions with our health system partners indicate that each opportunity remains an integral to their growth plans. And once we are on the other side of the pandemic, we believe these developments will move forward. I am pleased with our team's ability to maintain and expand a quality investment pipeline, despite disruptions in the market. Our direct sourcing channels, along with our longstanding hospital relationships, have positioned us well to benefit from what we see as another push in demand for outpatient services. Now, I will turn it over to Chris to discuss financial and operational performance for the quarter.

Thanks, Rob. First quarter results were positive, highlighted by strong FFO growth and improved liquidity. After briefly commenting on quarterly results, I will focus on COVID-19's impacts on our portfolio and our subsequent response. Normalized FFO in the first quarter was $54.5 million, up 12% over the first quarter of 2019. FFO per share in the quarter was 41 cents, increasing 4.4% over the first quarter of last year. Trailing 12-month NOI was consistent with expectations at 2.6% for multi-tenant and 2.4% for total same store. Multi-tenant results were curbed slightly by higher than average expense growth. This was partially driven by the difficult comparison to first quarter 2019 when operating expense growth was less than 1%. In addition, first quarter was impacted by $600,000 of expense true-ups primarily related to property taxes. Much of the expense true-ups were recouped in operating expense reimbursements, evidenced by the 3.5% growth in revenue per occupied square foot in the first quarter. We expect operating expenses in the second quarter to be more in line with our historical norms of 2% to 2.5%. Trailing 12-month multi-tenant revenue increased 2.6% or 2.8% per square foot, offsetting the above-average expense growth. Solid leasing activity included tenant retention of 84% and average cash leasing spreads of 4.4%. During the quarter, we took several steps to extend our debt maturity schedule and increase liquidity. On March 4th, we issued $300 million of unsecured bonds at a 2.4% coupon. We also extended the delay draw at the end of May for our $150 million 2026 term loan. As a result, at March 31st, we had $738 million of liquidity with less than $50 million of debt maturities through 2022. Shifting to COVID-specific issues. The response was swift and significant from Washington, with numerous programs to support the healthcare system. At the same time, we proactively worked with our tenants to ensure they would weather the impact of shelter-in-place orders and be in a position to thrive as restrictions lift. In March, we rolled out materials to educate our tenants on various COVID-19 financial resources In particular, we highlighted the Payroll Protection Program, given that we have over 2,000 small independent physician practice tenants. The PPP loans through the SBA include forgiveness of funds used for payroll as well as rent and utility expenses. In addition, we create a rent deferral and repayment application reviewed on a case-by-case basis We focused primarily on these small, independent physician practices. We processed over 500 deferral requests for April and provided deferral agreements to over 400 tenants, representing 7% of total rent. Individual deferrals ranged from 50% to 100% of the tenant's April rent, with repayment and monthly installments in the second half of the year. The average deferral tenant size was 3,400 square feet compared to the 4,400 square feet average for our portfolio, highlighting how most requests came from smaller independent groups. It is still early, but May deferral requests are running in line with what we saw for April at this point in the cycle. A critical number I know everyone is focused on is April rent collections of 89%. This is better than what we projected in our April 6th business update. The 89% combined with the 7% of deferral agreements accounts for 96% of April rent. The remaining 4% is in April accounts receivable. For context, our historical current period AR has averaged 4% to 9%, which has typically been collected within the following 30 to 60 days. This strong collectability is evidenced by our bad debt expense, which averaged less than $100,000 annually over the last two years. We analyzed our deferral request to determine if there were any consistent themes. We saw that deferrals were highly correlated to non-hospital tenancy, as well as specialties with more elected procedures, such as dentistry and plastic surgery. After controlling for these two factors, we did not see meaningful correlation between on- versus off-campus buildings or geography. I point you to pages 5 and 6 of our COVID-19 update for more detail on this analysis. Our portfolio, composed of a diversified mix of tenants, associated primarily with the country's highest credit-rated not-for-profit health systems, is especially poised to perform well. The work we have done over the past 10 to 15 years to enhance the quality of our portfolio, combined with our ample liquidity, positions us well to overcome the challenges facing the broader economy and deliver safe and attractive risk-adjusted returns to our investors. Todd?

Thank you, Chris. Before we get to questions, I'll just mention to everyone that we're practicing social distancing here. And we'll do our best to not interrupt each other. Operator, with that, we're prepared to begin the question and answer period.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, press star then 2. At this time, we will momentarily pause to assemble our roster. Our first question is from Jordan Sadler from KeyBank Capital. Go ahead.

Thank you. Good morning, and I hope you're all doing well. Chris, specifically in your prepared remarks, you touched on may, rent, I think you said deferral requests were running in line. I wanted to just clarify and ask if collections were also running in line with April.

Yeah, actually, collections are running slightly above what we saw in April. So we're doing a little bit better than we saw last month on collections. And then on deferrals, as you mentioned, you know, it's pretty close to what we were seeing in April. It's still early in the cycle, but encouraging signs nonetheless.

I suspect that may be a function of some of the openings referenced in your slides. Can you speak to, maybe Todd, what you're sort of seeing sort of early days in terms of maybe utilization, especially in the places that have been open already, you know, a week or two, you know, and how those facilities have come back online.

Sure. Jordan, you're right. A lot of places, especially the elective procedures, you know, are beginning to ramp up. You're right. And really, so we've been really dialoguing with all of our property management folks across the country and monitoring that weekly to sort of see what anecdotally or what they're observing in the buildings. And also we look at maintenance orders. So the number of maintenance orders relative to historical volumes is a pretty strong correlation. So we saw probably in mid-April, volume on average, and this is just on average, but it sort of correlates with the maintenance orders, probably 60% to 70% reduction in activity in the buildings across the board. And we began to see that lift almost two weeks ago now. So we've definitely seen that uptick where you're starting to cross 50% in many cases, even more than that in some others. And then anecdotally, certainly, even locally, I know One of our directors of real estate was talking with some providers in the building, and they were excited, frankly, that they were back to five days a week in their work schedule. So definitely seeing a lot of that. As I mentioned, we're working with some hospitals to figure out the logistics of how we're going to not only screen folks but move to the next recovery phase, which is how do we help them screen for procedures and how do we, you know, as the buildings get more full, how do we create the proper protocols, social distancing cues, just safety measures. So all of that is beginning to feel very real, and we're seeing it, as I said, in the maintenance orders. They're definitely back up for sure.

And I'll just add to that, Todd, just to clarify on utilization. You know, all of our buildings were open, and nine out of ten, at least nine of our ten, tenants remained seeing patients inside of their suites, did not even temporarily shut their doors, but obviously it reduced volumes. And so that's what was driving those work orders, and so we're starting to see those volumes start to ramp back up. But all of our buildings did remain open, and, you know, a super majority of our tenants left. continue to use their space, but obviously just at a lower rate.

I'll just come back to one of the comments there on screening at your facilities. Is it your perception that each of your facilities are screening for COVID patients prior to letting folks into either doctor suites or offices?

We're not necessarily taking a one size fits all approach to it. So, I can't say it's 100%. It's really being driven largely by that heavy coordination with hospitals, but also just the tenants in the building. So, a lot of tenants are proactively looking to do that and whether it's coordinated where it's sort of a central screening for every visitor in the building, or it's specific to a suite, we're allowing that to work case by case. So it's definitely, you know, we're not trying to be healthcare providers, let's put it that way. We are trying to be facilitators of what our tenants want to do. So it's largely, I would say, driven by the hospitals that are key tenants in our buildings, but also obviously half of our buildings are actually occupied by those hospital tenants. But then, you know, two-thirds to even over 80% are on or next to the campus. So we work with the hospital there.

And, Jordan, I would add to that that it really, when you use the word screening, there's a continuum there as well. All of our buildings have signage up that if you have symptoms, fever, et cetera, that you are to contact your health care provider before entering the building. Some of the buildings we're also then going through screening to look for and ask about any symptoms you may have. And then it continues all the way on to actual testing. So you may have testing that is going on in the building or potentially out in the parking lot before someone would be entering the building for a procedure. Typically that testing is actually going to be done a day or two ahead of depending on how rapidly they can get those tests back. So we are certainly putting in place protocols to make sure we are limiting exposure, but the extent of screen to testing, you know, kind of goes across a continuum, as I discussed.

Okay, thanks for all the detail. Thanks, Jordan.

Appreciate your comments.

Our next question is from Nick Joseph from Citi. Go ahead.

Thank you. I hope you guys are doing well. How long do you expect it to take to work through the pent-up demand for these non-essential medical procedures to get back to more of a normal monthly run rate?

Obviously, Nick, it is a little challenging to know that, but I think as everybody would like to do, we make our best educated guesses at that and And based on what we're hearing feedback, we do get a lot of feedback, as you can imagine, through the deferral program. We're asking a lot of questions in those applications, as well as just the conversations we're having with our local staff. And our view is generally that May is clearly going to be a month of transition. That's, you know, really ramping up, but probably not all the way back in a lot of cases. I think it's going to take through June easily to really kind of get back to somewhat more normal levels. Hopefully we'll roll into the beginning of the third quarter in July looking a lot more like normal. Obviously that remains to be seen. So what we're looking at right now then is that, based on the feedback and what we're hearing and seeing, is that it should be a lot of pent-up demand being addressed in the second half of the year. Obviously, it's going to vary a little bit by location, by specialty, and how different providers choose to ramp up and so forth. So it's encouraging right now that it looks like it could be largely in the second half. You know, whether that really spills over into 21 is hard to know at this point. So it's kind of, as we all know, a month-by-month evaluation or even week-by-week. But so far, it looks to be something like that for the majority, vast majority of our tenants. Thank you.

Thanks, thanks.

Our next question is from John Kim from VMO Capital. Go ahead.

Thanks. Good morning. I saw in your prepared remarks you mentioned the increased use of telehealth as one of the near-term impacts of COVID-19. I was wondering if there were any other ramifications that you foresee whether it's increased demand, for instance, for off-campus MOBs as some patients have become more reluctant to go near a hospital?

We certainly don't expect that. I think, as you would imagine, the nature of our on-campus MOBs tends to skew towards higher acuity specialists, which is less optional, if you will. As Bethany described, I think we all think of elective as being optional, but it's really not. And I think the key there is, you know, people, I think people ultimately trust their physician. They may, you know, as human behavior will dictate, you know, people can be hesitant around those things. But I think when you have something serious, cancer, you know, cardiology, whatever that serious issue may be, I think people ultimately trust their physician. And if their physician recommends that it's safe and advises them, I think they will do that. You know, just thinking about deferrals and the use of telemedicine, we have not seen a distinction between the physician aspect of that or component of it on versus off. This has been sort of unfortunately, like the broader economy, this has been, you know, an indiscriminate pandemic and disease and it's hitting everyone. So our view is telemedicine is a very useful tool almost no matter what specialty you're in. to do some of the things Bethany described, these more low-acuity sort of basic tasks, and hopefully they get reimbursed. You know, hopefully that sticks and, frankly, generates more revenue. But we're not seeing or expecting material change in where telemedicine may help or hurt in terms of location.

Okay. And on the increased use of short-term renewals that you're anticipating or offering, Can you provide some color on what the economics of this looks like? Are these more in the terms? Are these more month-to-month or one-year-out? And, you know, flat rents, what they were paying before, and as far as any free rent period offered?

Yeah, on the renewals, you know, we're just, as Todd mentioned in prepared remarks, you know, we're not asking people to make, you know, long-term decisions while they're trying to handle, you know, short-term uncertainty. So as we are looking at renewals, we are comfortable with doing, you know, six-month or maybe even a year renewal, letting people see the rebound, get their feet under them, get comfortable in terms of making that longer-term commitment. In terms of what the rent would be, our expectation is probably more in that 0% to 3% that we've updated in terms of our guidance on cash leasing spreads. not looking to really do a big mark-to-market at that point. We'll just kind of take the current situation or the current growth that's embedded in the lease and then get back to the longer-term discussion. One of the things that will be helpful in that is that it does – we don't anticipate spending any capital that would be associated with those short-term renewals. So there will be some – maintenance, CapEx, second-gen TI, leasing commission improvement associated with those shorter-term renewals, and that was also reflected in the updated guidance that we provided.

Do you think this will have a near-term positive impact on same-store growth or more of a neutral impact?

No, on same store, our guidance, we assume that it would be down slightly, and that really has to do with the expectation for new leasing. We don't know exactly what the impact will be. New leasing, there is a lag. It can be six months between when you start tours to when somebody actually starts commencing their lease. So it will probably be later in the year. but we may start seeing a little bit of slowdown in terms of backfill of space. And so as a result of that, we're looking at occupancy that is flat to maybe slightly down, and that could, as opposed to our previous expectation, which was flat to up in terms of occupancy. And so as a result of that, you could see a bit of a slowdown on same store. But we're still, on multi-tenant, we're looking at a little over 2, kind of 2.4, 2.5 at the midpoint of our range. So still growth, still strong growth. And then on single tenant, we don't anticipate really much, if any, impact there. So we didn't change our expectations on single tenant.

Great. Thanks, Chris.

Thank you, John.

Our next question is from Rich Anderson from SMBC.

Go ahead. Thank you, and good morning, everyone. Hey, and I hope obviously everyone is doing well and you sound healthy, I guess. So, Chris, to you, the 4% in AR that you went through, would that be correctly described as an abatement or forgiveness that you offered or is it, or people that simply didn't sort of communicate an interest in a deferral plan and, and you haven't been able to track down? I'm just curious, you know, if you can give the cadence of those, of those, of that 4% of the April bill.

Yeah, Rich, it's, it's not abatement. It's, it's more of just pieces that have been uncollected as of yet. And as we talked about, we, we, each month, each quarter, you're going to have a piece of that for various reasons. A lot of it ends up being related to operating expense billings, maybe after-hour CAM billings, those types of things. And so it may not even be the full rent. A large portion of this is just a, call it kind of a short pay AR balance that's outstanding. And as those are are kind of cleared up over the next 30 to 60 days. They get paid. And that's been our historical experience is that we do collect that over 30 to 60 days. So we think a lot of it is in that camp. We are certainly reaching out to all of our tenants and trying to understand, hey, should we be looking for that payment coming in or do we need to have a discussion related to a deferral. So nothing at this point that I would say is out of the ordinary, and we'll continue to monitor and work on those collections as we would in the normal course.

Okay, so when was it 9%?

Oh, I have to pull up the – we look back over like three to five years, and it's – It bounces around. I wouldn't say it's anything in particular that we were able to say, all right, it was exactly this. The average ended up, I think we pointed out, was about five.

Okay. I didn't know if there was any relevance to that number. Okay. When you're kind of going through this and thinking about next quarter, I wonder how much of an effort now will be put into really digging in about – sort of coming up with a bad debt reserve to the extent it's needed, whether or not you'll have to move to cash basis versus gap? I mean, are all these sort of the moving parts that you have left to work through as we go through this? Or do you don't think that maybe there'll be much in the way of that kind of accounting process that will be necessary as these months go by?

Yeah, we're still working through determining exactly how we'll do that. Obviously, we will be watching collectability as it relates to bad debt. But there is, you know, FASB has provided some relief related to the lease accounting, lease modifications in terms of how you account for these deferrals, which actually could create different methods of accounting for this across different companies depending on which method that you choose to use, whether you take it more as AR and you review your collectability over time as those deferrals are scheduled to be repaid, or if you go, as you pointed out, more to a cash basis accounting. And we're analyzing both of those and trying to determine which direction. But ultimately, at this point, as we mentioned, our expectation is that these these deferral amounts will be repaid and will be repaid by the end of the year. So regardless of which method that you use on a full year basis, the results should be pretty similar. If things extended and you started looking at deferrals that started wrapping the year, then you could end up with potentially some differences in results over the years.

Okay. Bethany went through some interesting stuff about all the different stimulus programs and how that equates to X number of months of, you know, of business activity or, you know, or rent or whatever the case may be. I'm curious if you have a sense of, you know, within your world, the sort of the average, you know, let's call it within maybe the smaller physician practices groups that make up half of your business, you know, how much they have received and what that equates to in terms of months. Have you done that math at all?

We certainly have, Rich.

I would say that all providers, for the most part, that receive Medicare receive some of this allocation. And so I think that one to two months that Bethany referred to of that general relief allocation really pertains to most providers, including physicians. The PPP would be the other piece that I think would apply to not all, but a good portion of our physician group or physician tenants. So, I would say a lot of that applies, and as Bethany described, that equates to about two months of payroll and rent utilities as it's defined. You know, it's a little hard to put all that together perfectly, but I do think, as we generally describe in our remarks, there's been a great amount of relief provided. It's certainly not business as usual, and things are tight for a lot of physicians, clearly, and our deferrals will help that. But I do think there's a huge amount of help that's been provided, and obviously now we'll begin all the lobbying to help. you know, to provide more and forgive, you know, some of the – and they also – the accelerated payments was another piece that a lot of providers got. And, you know, who knows whether some of that gets forgiven. So all in all, it's a little hard to quantify perfectly, but I think one to two months seems to be the prescribed design for a lot of the programs, and that seems to be fitting so far with the pattern, you know, with procedures down an average of 34 days and now starting to recover. You know, maybe there's another slug that will need to be allocated, but generally one to two months has been pretty helpful.

Okay, last for me and maybe to Rob. It was mentioned about, you know, pent-up demand for elective surgeries and whatnot. I wonder how you're monitoring that as it relates to external growth and getting in front of it and perhaps getting assets or deals done in pre that activity and thereby sort of like a nice arbitrage type of scenario? Or is it just too soon and there's just not a market really to know if you could get yourself a decent deal at a higher cap rate than normal?

Yeah, Rich, I think it's too soon to know whether you're going to see any real impact on pricing. I think I think what we're doing is our pipeline, as I mentioned, is largely built through one and two building transactions where we're in direct dialogue with building owners and principals. That's offering us an opportunity to obtain extended inspection periods and closing timelines to allow us to monitor the the tenants operational and financial sort of, you know, health and throughout the process. I think, you know, it's too early to tell. We'll, you know, take the time that we have to monitor that situation and, you know, if we see some clarity on the net operating income at the buildings and then we'll move forward. If we don't, then we'll have the opportunity not to move forward and wait. I think also as market conditions improve and when they improve, that'll dictate some of the timing as well. Great.

Thanks very much, everybody. Thanks, Rich. I'll just add to Rob's comments that just some of the opportunity that comes about in times like this may also be the very things you don't want to get involved with. our view is the stronger operators, the stronger assets in the better markets generally are not going to be distressed to a great degree. It could depend upon the circumstances of the owner. We have seen a couple scenarios where maybe some smaller private owners just feel that liquidity pinch, and this is somewhere where they can get more value relative to pre-crisis levels, and so they'll get that liquidity there if they need to. So we're having some of those conversations, but also I would say you've seen a little bit of the distress things come to market or be talked about by brokers, even some for-profit hospital, smaller hospital groups looking at monetizations, and you kind of go, you know, that doesn't mean we want it. Obviously, we'll see where cap rates go on that. But, frankly, our expectation is cap rates are pretty – going to be pretty stable unless something dramatic changes. I mean, a lot of – cost of capital has got a long way to go to kind of balance out, but we're not seeing a lot of – reason for cap rates to change dramatically, unless there's a distress situation, which you've got to be careful about.

Right. Great. All right. Thanks very much, everybody. Thank you, Rich.

Our next question is from Daniel Bernstein from Capital One.

Good morning. Thank you. Good morning. Again, I reiterate what Rich said here, just to help everybody as well. I really just have one question, and that's really more on the design of the facilities. Do you see any, and maybe this is a little bit early, but do you see any perhaps design changes or trends that might emerge post-COVID and anything that might be even near a term where you have to put CapEx into the facilities?

Dan, I think it is too early, but I certainly think you're right. People are going to be thinking through that, whether it's tenants as they're looking at planning new space or hospitals as they plan their future outpatient programs. We certainly have not seen all of a sudden a dramatic change other than these temporary measures, you know, for testing as we described. We're certainly doing that, but that's all more temporary. The question, you know, we've been contemplating through talks with providers, several of our board members who are health system leaders, consultants and so forth, there may be some scenario where you see a little shift within the suites as to providing more of this telemedicine capability within the suite. You know, the old days in a doctor's office, all the doctors had nice big private offices and were separated. And I think more modern times, you've seen those come to be a little bit more like the rest of the world where there's pods and hoteling going on. well, that could shift a little bit to provide a little more back to private offices with this telemedicine capability. So little things like that certainly may happen. We've even contemplated, do we want to provide some kind of telemedicine capability within our building as an amenity? But all that is early and remains to be seen. We're not seeing just overall a net real significant impact, but certainly interesting things to keep our eye on.

No doubt. delays in the current development pipeline thinking about those kind of design trends. It's something for future developments that you haven't actually turned dirt on.

Correct. It hasn't shown up yet. That's right.

And then in terms of strategy, just seeing what you've seen in COVID so far with there's no potential shift in strategy more towards off-campus assets or non-affiliated assets? You're just going to continue to maintain the current strategy of, I guess, more on-campus affiliated?

Yeah, I think, sure. I don't think at all that we see anything here that tells us we need to be shifting. You know, as Chris described in our deferral patterns, we did see more or, I guess, a better outcome or less deferrals, if you will, on campus, but it's not because they were on campus. It was because we just have a higher mix of hospital tenancy within our MOVs on campus versus the ones that are adjacent or off. So it's, again, you know, we saw about the same rate of deferral among physicians, no matter the location. But all that to say, there is some safety in these bigger, more well financially, you know, backed entities, these not-for-profit investment grade health systems. I mean, they're Rent is just a small piece. They understand. They're often landlords. They have to think about that as well. So there is some safety in that, and we don't see anything that suggests a big shift. You know, we're still interested in off-campus. We're just very selective about it. And so you see our mix of, you know, 80%, 90% on, and I don't see that changing dramatically.

Okay. That's all I had, and I appreciate the comments. Thank you, Dan.

Our next question is from Connor from Barenburg. Go ahead.

Hi, everybody. Thanks for having me on the call and appreciated the color you guys provided in the business update. That was all very helpful. Quick one on lease expiration. Seems like you took out a pretty sizable chunk of 2020 maturities in Q1. I mean, just how are those conversations progressing for the remainder? And, I mean, is there any color you could provide on potential renewal spreads for the end of the year?

Yeah, you know, we did make some good progress in the first quarter, you know, pretty consistent across the year in terms of our expirations, and we'll expect to continue to be able to maintain the strong tenant retention that we've had. We did provide in our updated guidance, on our components of expected FFO that cash leasing spreads we could see coming down some. As we are looking, you know, we may be doing more short-term renewals as opposed to our, you know, three, five-year typical annual renewal. So we've brought down our range more in that zero to 3%. You know, and the ultimate where we'll fall out on that probably depends on how long. You know, if you're talking a month or two, you know, maybe you're willing to go go flat, but if you're doing a one-year, then you would look more to that 3%, which is in line with what our bumps are inside the existing leases. A bit of an impact in the short term, but we're willing to do that because we feel good about the long-term intrinsic value of our buildings and feel like that we'll be able to work out deals that will will benefit us as well as provide long-term certainty for our tenants once everybody has more clarity when hopefully things get back closer to normal with volumes.

Okay, that's helpful. Thanks for that. And then I saw that same store property expenses were up pretty meaningfully in Q1. I mean, is that due to any measures related specifically to COVID or is there something else driving that increase?

Yeah, no, it was nothing related to COVID. Very minimal impact, if anything, in the first quarter on the revenue or expense side, frankly, from COVID. The higher expense growth there was a couple of two main items. One is a difficult comp compared to first quarter of 19 when our expense growth at that point was about zero. So we anticipated that we were going to be, you know, in the upper end, maybe even a little bit above our historical range, just because we're coming off of that comp. We also had about $600,000 of expense true-ups that occurred in the first quarter. Those were primarily related to property taxes. So final bill comes in in the first quarter, and we've been accruing a certain amount through 2019. The bill shows up first quarter 2020, and we've got to make up for that, given the fact that the final bill ended up being slightly different than what the accruals had been estimated to be. But that was primarily what drove that, and we expect moving forward that we'll get back closer to our historical norms.

Okay. Thanks for that. That's all from me.

Our next question is from Lucas Hartwich from Green Street Advisors. Go ahead. Thanks.

Thank you. The occupancy on the L.A. acquisition seems a little bit on the low side. I'm just curious if there's any leasing upside there.

Yeah, those properties were purchased, and there is some leasing opportunity there. There's an active leasing. some active dialogue going on with some tenants right now, potential tenants right now, and so we think that there's a little bit of upside there.

Is that factored into the cap rate, the 5-3 cap rate, or would that be incremental to the 5-3?

That would be incremental.

Great. And I know it's hard to know what exactly has happened to active values because it's still pretty early, but I'm just curious if you – if you all were underwriting acquisitions today, how would you adjust your return expectations given what, you know, the environment we're in?

Yeah, you know, I think our sense is that we're not seeing at this point a change in cap rates. I think what we're doing on the underwriting side is, you know, we're – seeking and obtaining longer inspection periods and closing timelines that allows us to monitor the health of the tenants operationally and financially over multiple rent cycles so that we can see just whether that NOI is holding up or not. And I think as we go through that, we'll determine at that point in time whether we think there needs to be an adjustment in the price.

And I would add, Lucas, that I would say there's been quite a lot of private capital built up over time that wants to, before this pandemic, that wanted to get into MOB, and they've always struggled, you know, how to get in there, how to access it, rather than just, you know, small deals at a time, whether it's partnering up with people or developing their own platform. And, you know, just a few conversations we've had, we've certainly heard that some private capital companies funds and so forth are looking at this as an opportunity to move in. So I really don't see that unless, as Rob said, there's some fundamental issue with a property that requires a change, but that may not even improve the cap rate. It just may lower the price relative to the lower NOI. So there's a lot of forces, I think, that suggest it's not a big move up at this point. Again, it's too early to know, and obviously the longer timeframe we look at, our cost of capital will play into that. But for now, we're not seeing anything that suggests that it's going up on cap rates.

Great. Thank you.

Our next question is from Tayo Ocasana from Mizuho. Go ahead.

Yes. Good afternoon. Also, let me add my thanks to all the additional disclosure and information. As we start to think three to six months out, could you just talk a little bit about how you think about, you know, hospital profitability just kind of given the high unemployment rates we're likely to face, what the implications of that could be for demand of MOBs or even for the ability to kind of pay rent?

Sure. Certainly our history does not suggest and even the month of April does not suggest that rent payments through all kinds of issues, the great financial crisis, the Affordable Care Act, you know, on back.

And I think we may have lost Todd's sound there. I think he's coming back. Todd, you back?

There, can you hear me? Yep. Yeah. Okay. I'm sorry. I was on a roll. Sorry, Taya. Yeah, I guess where I was going with that was that we have not seen historically through a lot of prior cycles, you know, whether it was Great Financial Crisis, the Affordable Care Act, or September 11th or on before that, we've not seen issues of hospital collections through some pretty tough times in the past. So I certainly don't think we expect that to be a problem with rent collection. Now, to your point, certainly there's going to be an impact on housing. Hospitals in general, there will be more uninsured patients, as you suggest, with all the unemployment. So there's going to be an effect. And if you think about a typical health system, certainly the investment grade tranche, if you will, you know, runs EBITDA margins around 8%. You know, certainly you could see that come down a bit over the next six months to a year, however long it might be. And certainly, you know, they're going to be thinking about that and expense savings and things like that. But I think the one thing that's clear is outpatient is certainly where things have moved. You've seen that trend over a long timeframe. It's lower cost. It's lower capital costs for them. It's more profitable. And so I think really what we expect is that, and it's playing out in a lot of the conversations that Rob alluded to and I alluded to, we're still seeing a lot of health systems that we're working with looking at expansion plans. And it got a little quiet, you know, in the first part, you know, later March, first part of April. But frankly, in the last couple weeks, we've seen some of those conversations perk back up already. And I'm talking about future development and expansion. So I think to us, that's very encouraging. I think outpatient becomes really, as I mentioned, a really bright spot within the healthcare space. Notwithstanding, they're going to feel some margin pressure.

Dr. So I guess at this point, when you just kind of think out what, what are you kind of most worried about as it pertains to your business? Is it just the pan? Is there a second wave of the pandemic? Is it, I'm just kind of curious, like what, you know, when you kind of think about the business, what, what kind of concerns you, what would you be most worried about at this point?

Certainly. I think that's true. I mean, I think that's the big unknown that we're all dealing with is, you know, none of us has been through the exact thing before. Um, It's just – it's unprecedented. So it looks fairly favorable right now, and I think we're all aware that, yes, it could be a real issue if we all start getting back too quickly or not taking the appropriate precautions and so forth. So clearly there's some good chance that we take two steps forward and have to take a step back. So, you know, just that tempo is going to be important and pacing, as you said. That certainly weighs on everybody's minds, including ours. I think the good news is, you know, health care is fundamental. It's need-driven. It's going to happen. It's just, you know, our providers have felt that pressure, those doctors especially. The good news is I think people have realized, authorities, whether it's mayors, governors, public health officials, probably realized that shutting down all the elective procedures was a little bit more than necessary because it was really all about trying to preserve resources, you know, to deal with surge on the inpatient side, and that Obviously, it did play out pretty close in New York and some other hotspots. But for the most part, we didn't see that across the country. So I do think that's a positive, that even if we have a second surge, I don't see elective procedures going to zero as much as maybe reducing that level. So that weighs on us. Clearly, you also have just a broader picture of ability to proceed with external growth. That's something we saw play out, public versus private valuations, You know, 17 was more public companies, 18 was more of the private companies, and 19, you know, was back to public. So it's kind of alternated. And I think, you know, that's something that is all we have to deal with is, you know, when can you get back to some external growth? You know, the good news is for us, liquidity, I think, is very strong, and we're not as concerned about that. It's more about just how does this unfold and move back to normal, how quickly.

That's it. And then last one, if you would indulge me, just dividend policy going forward, how does one think about that, especially if you kind of have a decent amount of rent deferrals that does temporarily impact the FFO?

Sure. I think that's another good thing for us that even though these deferrals, as Chris articulated those, we started early on that in April and we think May is looking similar and I think the good news is it's really helping and we hope that helps our tenants recover faster. We don't see anything at this point that would really cause us to certainly think about our dividend any other way than maintaining it. You know, growth is obviously not something that anybody would probably think about at this point. You know, that certainly would get pushed out. But I think our view is there's some, even though growth may be a little slower, I think our cash flow and our coverage of the dividend, we expect to be very solid this year. And I think Chris described that, you know, we may see some capital spend come down a little bit with the – a little bit lower leasing. So, all in all, we don't see any concern with rent coverage – I'm sorry, dividend coverage for 2020.

Great. Thank you.

Thanks, Kyle.

And our last question is from Mike Mueller from J.P. Morgan. Go ahead.

Oh, I didn't realize I was in the queue again, so I don't have a question.

Thanks, though. Good to hear from you, Mike. Take care. Thank you.

Bye-bye.

This concludes our question and answer session. I would now like to turn the conference back over to Todd Meredith for closing remarks.

Thank you, Kate, and thank you, everybody, for listening this morning. We hope everybody stays safe and hopefully can start to do a few more normal things very carefully and social distancing and so forth. But we thank everybody for joining us today, and we will be around if you have any additional questions. Have a great day. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.