Q1 2020 Earnings Call

Good day and welcome to the Healthcare Trust of America's first quarter 2020 earnings Conference call.

All participants will be in listen only mode.

So if you need assistance. Please signal a conference specialist by pressing the star keep all it by zero.

After today's presentation, there will be an opportunity to ask question.

It's not to think that is being recorded.

At this time, but to turn the call price separate took Caroline T O <unk> senior Vice President.

Since then development.

Please go ahead.

Thank you and welcome to the Healthcare Trust of America first quarter 2020, Onee call, we filed our earnings release in our financial well that yesterday. After the close these documents can be found on the Investor Relations section of our website or with yes, you see.

Please note. This call is being webcast will be available for replay for the next 90 day.

We will be happy to take your questions at the conclusion of our prepared remarks.

During the course of the call we will make forward looking statements. These forward looking statements are based on the current beliefs of management information currently available to all our actual results will be affected by known and unknown risks trends uncertainties in factors that are beyond our control our ability to predict although we believe that our assumptions are reasonable they are not guarantees of future before.

Therefore, actual future results come up materially differ from our current expectation for detailed description of potential risks. Please refer to our future filings, which can be found on investor relations section of our looks like.

We'll now turn the call over to Scott Petersen, Chairman and CEO Dr. Crossamerica Scott.

Good morning, and thank you for joining us today for Healthcare Trust Americas first quarter 2020 earnings conference call.

Joining me on the call today is Robert and I was in our Chief Financial Officer.

Before we discuss the specific so our business and our outlook I would like to acknowledge the significant impact that the co bad Viking pandemic, it's had on our communities for health care partners and our employees.

Just touch each one of us in different ways.

However, I am proud to be associated with health care provider cabinets, and our employees, who have adapted to the circumstances and rally to meet the challenging events.

From a business perspective, H.T.A. sits in a very strong position.

We have a great leasing and property management team operating in high quality portfolio of medical office buildings in key markets throughout the United States. Our portfolio is broad with over 7 billion invested across almost 25 million square feet. It is also diversified with no one market accounted for more than 10%.

Right and no single tenets accounted for more than 4.1%.

Our tenants consist primarily of leading health care providers in our markets with almost 75% of <unk> coming from health care systems universities, and large national health care providers.

62% of our rent comes from credit rated tenants.

We have a fortress balance sheet leverage or 5.1 times debt to EBITDA.

Over 1 billion of liquidity and almost no debt maturities coming due in the next two years.

This is a direct result of our long term conservative disciplined management philosophy and focused actions that we have taken over the last 12 months.

As we look at today's economic environment Health care services are driven by need based demand and we believe that they will be among the most resilient sectors coming out of this period and as the economy moves forward.

Although our tenants about their operations disrupted over the last too much. There also seeing very strong demand for patients whose issues up quite a much have not gone away well people shelter didn't place.

Further increasing access to physicians is a top priority for many states where they are almost uniformly included as a phase one priority in reopenings and whereas it today over 80% of our tenants are in states that have announced the schedule return of electric surgeries.

As a leader in this unique space, we're confident in our tenants have worked with them to meet the unique demand journey. This unprecedented times.

Recognizing that an ability to assist with short term liquidity can pay many dividends down the road. We're also able do just because the vast majority are tenets can weather the storm with limited disruptions.

Our April collections were 98% or scheduled rents.

The amount of rent deferrals under discussion as of today totals just under 10% of rent for the next 90 days well. This may increase somewhat from here. We believe this level of short term cash flow disruptions currently at approximately 20 million to be very manageable, especially as we see password tennis to return to some level of normal.

Operating capacity over the upcoming much our collections for me are consistent with these expectations.

In addition to deferrals, we're also working with our tenants to achieve scenarios, where we both can achieve our goals by signing extensions for the future while providing free rent today, we anticipate weaker early where do as much as 500000 to a million square feet and the second quarter as a result.

Our property management teams are also working with our tenants to ensure our buildings are ready as every turn to full time scheduling patients at surgeries. In many cases are tenets heavy backlog of patients. They have pushed out and are looking to work overtime to get them. All in we're currently working with them to ensure we extend our building hours and have maintenance inkjet a temporary.

Teams that are prepared for increased traffic.

As a company we have used the market disruption and taking prudent action thats appropriate, especially as it relates to conserving cash and planning for long term stability <unk>.

First we have temporarily step back from the acquisition market to better understand the overall dynamics of the marketplace second we have drawn down on our credit facility preserving cash as we evaluate the financial markets.

Despite the pandemic taking hold in March our first quarter portfolio pool performance was on track led by 2.7% same store NOI growth.

Sorry, 238000 square feet of new leasing.

85% retention, 2.7% releasing spreads.

Occupancy rates were up 10 basis points on a sequential basis.

As we look at our portfolio more moving forward, we expect our occupancy to remain relatively flat. It's health care providers are focused on simply maintaining their practices. This new environment existing tenants have become more more inclined to stay in place at this time, which is good for retention new leasing is still getting done however, there's more challenging and the pace.

Slowed from our expectations earlier in the year as a result of these moving pieces, we're pulling our full year earnings guidance as we assessed the full impact of the short term actions.

I would doubt turn the call over to Robert Who'll go through the numbers in greater detail.

Thanks, Scott touching briefly on our first quarter. Our performance was strong as we had originally laid out in our guidance or normalized AFFO per share increased 5% year over year to 42 sons and our same store growth was up 2.7% driven by revenue growth of one of the Hopper site rental margin growth of almost one point has brought more services onto our in house platform.

Our recurring capital for the quarter was 16 point, Threemillion, which equated to 13% of that NOI as a result, RFP de for the quarter increased to 79.7 million, resulting in the 88% payout ratio.

Our balance sheet is in great shape as we work through this pandemic as of the ended the quarter. We had total liquidity of approximately 1.1 billion, including approximately 278 million of equity raise on a forward basis in the fourth quarter, a pricing about 29 per share.

Including the impact of this equity our leverage was only 5.1 times from a cash obligation perspective, we are very limited near term maturities only $6 million coming to you before revolver matures in June 2022.

We also have only a $133 million a capital required to complete or developments and redevelopments all of which are over 70% pre leased on average.

As we continue to operator business and returned to making investments. We will continue to put the answer business sort of manner that maintains low levered and significant liquidity.

Subsequent to quarter on we drew down on the remainder of our $1 billion revolver to ensure the availability of liquidity, while the financial markets were responding to the pandemic. We did this out an abundance of caution given past experiences. However, given current trends and outlooks, we do anticipate repeat at least a portion of this borrowing by the end of the quarter.

Okay April now we continue to see the results of the normally defensive need based demand in significant rent coverage inherent in applebee's. Our buildings are well tenanted with 73% over 10, right coming from larger tenants, including 60% from health systems, and 13% from large or national tenants, such as Optum health care.

Only 27% of a rents conference smaller local health care providers, who tend to be extremely profitable, but up more limited access to working capital.

Well were 62% for tenants or credit ready with over 47% investment grade for this month, we collected over 90% of our normal monthly contractual rent obligations.

As the impact of lower patient volumes in restrictions on elective surgeries started hitting our tenants practices. We did begin receiving request for tenants for Red Bull's eye first they came primarily from smaller local physician practices. But has also grown include many if not for profit investment grade health systems will focus much of their liquidity and preparing for Tobin treatments.

As of today, we currently have deferral requests totaling approximately 10% of our runs over the next 90 days.

We are confident this amount, especially as we see the return of elective surgeries inpatient volumes toward tenants.

When it county perspective, we anticipate taking a conservative approach and the second quarter and they incur some onetime expenses related to these deferrals. However, we're highly confident in the ability for these rents to be paid back overtime.

And anticipate returning to run rate earnings in the third or fourth quarter I will now turn it back to Scott.

Thank you Robert and we'll open up for questions.

Thank you.

Well now begin the question answer session to ask the question in a press Star then one on your touched handset.

If you are using a speakerphone please pick up your handset before Prosigna kit.

Hey, withdraw your question. Please press Star then to.

At this time, we will pause for a moment to assemble our roster.

Our first question today will come from John Kim of BMO capital markets. Please go ahead.

Thanks. Good afternoon I was wondering if you could just clarify your definition.

How you calculate if the April uncollected.

So for instance that there was 100 million lots of rent that would give you got $98 million that what paid.

Yeah, well go ahead, yeah. John This is this is Robert.

Yeah, you know the way with the way we looked at this is our calculation as we took the total contractual amount.

Do you have in total you know we have about a 100 and little over $180 million revenue.

Quarter, So that's about little over $60 million a month.

We compare that to our total collections for the month, which you know was was in kind of the 59 million dollar area to that so there was a pretty straight forward calculation.

And Robert you mentioned in your prepared remarks, there were some onetime expenses associated with.

With that but collected up I was wondering if you could clarify what that isn't any amount.

No I think what we're talking about onetime expenses, you know because as we're looking at our quarter and things you know going forward. You know I think we anticipate there little bit of elevated expenses that were seeing a family.

In there you know certainly the keep properties are open to Huber or people on site in order to keep the janitorial services certainly be higher anything more the commentary as round, a slightly higher expenses, but that we wouldn't necessarily habits wasn't for certainly the covanta like.

Okay and then final question can you just provide my commentary on.

You know what do you think pent up demand its four patients coming back.

She is their position.

And how you came up with a six to 12 month payback term for the for the tenant there that have less effort.

Sure Yeah, we've talked to most of our Cop 200, 250 tenets and you know if there's any good thing that's come out of this pandemic and that's allowed us being dedicated to the MLP space could focus both senior management time and.

Our leasing folks time to some extent, our senior property management time to contacting a reaching out to our tenants we've done that mostly or with the larger health care systems. It's been senior senior folks, let's see local tenants, it's guaranteed or property managers, who had long term relationships or it's been.

Some of the leasing folks who put people into the space.

Oh, the comments from the health care system target. There there is a backlog of they've been planning when they reengaging start with the elective surgeries that they will need extended hours and that's what are the things that we've focused our engineers on we focused our.

Infrastructure honest assisting.

These health care systems larger physician groups here establish themselves are getting ready for going forward I think one of the things that they talk about which I think is completely understandable and exact will persist for some time as.

We've been told that a lot of the focus from hospitals.

Physician groups as are making patients more.

Comfortable coming back to and receiving elective treatments they put plans together.

They're reaching out a good putting a conscious effort into that aspect of the demand.

The demand is there I think that will recover.

Relatively quickly I, just think be health care systems of physicians, we ourselves are maintaining the assets he could be very.

Cognizant of the fact that patients need that comfort level when they come to the buildings or when they come to that kind of physician groups.

Great. Thank Scott.

Our next question today will come from Nicked Us from Citi. Please go ahead.

Thanks, you mentioned stepping back from the transaction market given the uncertainty, but what would you need to see to actually get back in and do deals assuming that there are assets treated.

Well, our you know we were in a very fortunate position.

We've talked about radar rent commitment or our expectations. Good cash flow well I think we're we're comfortable with what we see now given something that's unforeseen so that puts us in a I think a very strong position. Good good not many others may be experiencing yeah, we have some capital that we could draw upon.

All forward equity position that we put in place. So we have capital that you don't before the pandemic. We were we were moving forward when they're looking to be what we thought was a replicate what we get in the latter half of last year.

I think that transactions right now are still being predicated on.

Information or perception that exist at 45 days ago, or 60 days ago, I think the MLP space is going to hold up very well and so I know there would be the thing that we need to do with the management team and.

Work with our investment committee are he's making sure that we not only by something today.

It is.

Were priced correctly, but also that the performance or that assets going to be consistent with the expectations over the next 357 years.

That's all I think more complicated today than it was 60 days ago.

Not all figures should not all assets are going to perform same not all cash flows are going to be.

Consistent or did the same lithology had been collectible. So we've done a very good job I think of our portfolio a regular see working with our healthcare partners.

Trying to be what I consider to be a business partner time.

Stress and that I think will lead us to some opportunities on the acquisition.

You know down the road. It what is it 60 days is 90 days I think it will depend upon for us making sure that it's a good acquisition, it's in our market it folds into our our leasing team it falls into our property management and is a strong acquisition.

<unk> from a L 357, your prospect not just buying something based upon okay. It's out there and it can be bought so we're actively still evaluating marketed Caroline is talking to folks on a daily basis. So it's just a process here to really figure out where the market itself in the next 30 60 days.

That's very helpful. Not just maybe on development and redevelopment bench in the committed spend projects already underway, but how do you think about any new starts call. It over the next six to 12 months.

Well, we were again unfortunate we I think we're in a place was about a $125 million construction capital that was in place we have three projects that we.

We sat back four weeks ago, we immediately reached out and talk to Christie.

The tenets of health care systems to reconfirm their commitment to take space.

For example, our yeah, one coming due in July.

Hollywood Wake better that's you know that's on schedule on time, so we're going to continue with our development because all four opportunity came back and said that you know what was preleased. They had to the bad they had the conditions. They had the occupancy and therefore, they wanted us to continue and we of course.

That's the good news.

Actually it's it's a positive for us because.

We can continue through this process to get it done a new development I, it's gonna be interesting to see I think redevelopment is going to be probably more focused from health care system.

As we talked about we've got 500000 million square feet that health care system, We Oh.

Talked about extending.

For extended term.

Without commission, which is something that's very beneficial to us in some cases.

With different P.I. dollars. It normally would be talk about so I think we're we're gonna be very.

Strategic.

Look at how best to you utilize capital in this particular time.

A lot over the next I think it's six months I think a lot of health care system, we've talked to as you would expect art overwhelmed they're trying to get through their 30, 60, 90 days, they're trying to figure out how to deal with it you know there next year or two years, it and what we want to be is receptor good working with them.

Business format, and we have the capacity to do that so.

We will be we will be entertaining opportunities, but again, you know we want to make very very disciplined decisions on capital.

Thank you.

Our next question today will come from caught us sebaski of bearing.

Please go ahead.

Good afternoon, everybody. Thank you for having me a quick follow onto next question earlier and just in terms of your markets. I mean, how do you look at your current in target markets. Many different environment, and then are there any and assays that would seem particularly attractive at this stage, perhaps due to lower relative unemployment or higher higher median income.

Any color you could provide as to how you're looking at market positioning in the future would be appreciated.

Well again, we looked at our marketing and as I said, we've gone through it really softer diligent.

Concentrated process, we're looking at our tenants. It you know every particular.

Conversation with pad as far as rent deferment or a term extension is pretty much been a one on one conversation case by case, we like our markets I think the performance that you're seeing from our portfolio.

It's going to indicate that the relationships that we've established at the market size of the depth of where we're at it's gonna do you know a perform extremely well over this period or you know the uncertainty that we have certainly for the rest of this year. So from a market perspective, I'm very happy and I think our our management team.

Very happy with where we're at we'd like that frankly, when we continue to expand it and acquire assets. It will be in those markets that have performed well we would go health care system. It will be credit that gets appropriate because you know there that you never really stress or you never really test a credit and.

<unk> times of difficulty that's certainly I think the earmarked most difficult time for from a credit perspective. It you know.

The numbers, we reported frankly, we've been very.

Very often optimistic about the prospects of the markets where it.

Okay. Thanks for that and then on the development pipeline correct me, if I'm wrong here, but on the surface. It seems like these projects are still in process.

In other binney in any delays in development or any commentary that would suggest your gecs are running into issues sourcing can truck equipment and supplies.

No. We know this is another instant so.

Where over the last four to five weeks Weve in most markets, except two or three we've continued to have our T.I.s. We've continued to have construction we continue to.

I have that development move forward. So we have not yet been notified of any difficulties from us.

Construction perspective, whether it be from us supply perspective war scheduling perspective.

Okay. Thanks for that and last one from me on lease expirations looks like you've covered about 40% of 2020 expiring leasable area in the first quarter I mean, how are the conversations progressing with the with the remainder.

Robert you want to talk about that yeah. You know I think is kind of Scott outlined earlier in some of the commentary I think were seen certainly a lot of interest from tenants to stay where they are.

When we were coming into this year I think you had very high expectations for what we could do from a new leasing perspective, and I think is certainly the cobot pandemic hit I think certainly the focus of most providers in tenants had been how do we stay in place I'm now is not the time, we wanted to be moving around a patients when they come back wouldn't know where they are.

In where they're going to be so I think the conversations we're having right now or have been very.

Very very good and so I think are level, our expectation for attention certainly is for the rest of the of the year to begin the 80% plus type range, probably a little bit more optimistic on that that in the world. We started the year.

And I would add to the fact that we have seen extensions with certain tenants in regards to certain leases that I would say six months ago that we would probably would have said you know there's some uncertainty about this lease extension or that person expired 2021.

Later, 2022 and that conversation hasn't started yet we've reached out to all folks in the next two years, who had a leases.

Coming due and we've been working with them on extensions. It frankly, we're seeing a much more favorable response to a retention than we have had even highly you know the hybrid detrimental piece of how did the path, we're seeing that even better today again based on the uncertainty people just want certainty right now.

The world.

Okay.

Okay, that's all from the old the floor.

Our next question today will come from Lukas Hartwich of Green Street Advisors. Please go ahead.

Thanks.

The language in the press release Kinda makes it sound like that dividend maybe under review can you just provide for your updated thoughts there.

Yes, our given that you know.

Standard answer it an answer of course, that's driven it's always looked at art on a quarter to quarter basis by our board and.

Typically bar investment committee, the move of our dividend to closer to our earnings release things simply moved could make it more compatible so that the visibility for all aspects of our business.

We compared that to evaluate at the time.

You can see that the amounts that we talked about today from my recollection perspective, where we are from a liquidity perspective, we feel very good about that it has it was more group, it's simply getting something more like we kind of been an outlier in the past by announcing our given that a couple of months ahead of time and so this is a good opportunity you could just put something.

Alright line, Oh about consistency bases among most Reits.

Great and then you provide some really helpful disclosure on on rent deferrals I'm just curious if rent abatements are part of the conversation with tenants today.

Well you know this is there there's three types of discussions that you know I would say, 97% at the discussions that we have had has been extremely positive and I, that's something that five weeks ago. What I would have said Oh my goodness, that's my biggest and great. Its fear that you know folks we're gonna be unreasonable.

But there was going to be a complete you know.

I wonder.

Active from both from a tenant and from the landlord.

That is not being the case, we have in fact I as I said 90, 798% of the folks we have talked to you know who vascular who wanted to talk about rent it's been differ.

In most cases it you know what we just need a month, we need to buy back well paid back over the next.

Six to 12 month or there's a couple.

Always a few who just frankly thinks it you know they should be abatement in.

Not going to be paid back.

You know what we want again, we want to work with folks where rational we want to be reasonable we want it could be in a win win situation.

We haven't had discussion that we don't have discussions about simple record base.

The good news is that both the position most in health care system.

Got it have ongoing business is that they want to stay they want to get back in place and they want it.

Recover their business and so the conversation it's more about how do we do that how do we work together right now the conversation has a lot about how do we keep the doors open how do we extend hours. It can you make sure that the janitorial and is working and we want to make sure that the patients who are recurring feel comfortable when they get to the buildings and co.

That is the majority of the conversation now.

Great and then last one for me do you think the the current environment will accelerate their trends a larger health systems consolidating smaller independent practices.

Well, yeah, we've always talked about small practice and I think that.

Conversation that we've had with small position.

One or two or three should offices I mean, they're very frustrated or you can imagine.

Not being able to work and be out of.

Staying at home and not being able to do what they do and I think the couple of things come from that number one I think that you know if this comes back and it's got the country goes through this process for the next 612 18 months.

The position.

Health care system will be much better prepared from a P.A. perspective, I think the governors in the states recognize that health care, that's something that could be put on hold we'll do it because it doesn't stay at home and it's something that continues itself I. That's the good news is that you're looking forward I think we are.

From a physician health care [laughter], they're going to be able to access what they do more productively and have less of an attack regardless, if perhaps how you know how the pandemic plays out.

So we're looking we're happy about that and I could that that's how we're looking at is working with those kinda too.

Having to move forward.

Great. Thank you.

Our next question will come from Rich Anderson of MSNBC. Please go ahead.

Thanks, Hello team and I hope everyone is doing okay over there.

But we are it's very hard and Phoenix.

Harder when you're corn.

[laughter], a dry heat though.

Right so.

So I'm talking about that but 90% question that John F., beginning here it sounds like like a very typical month in a month of April that was anything but typical.

A a month that was you know shroud of concern through through the entirety of the month, So I'm curious.

Maybe just to sort of dig into it was anything of that 98 that kind of includes the presumption of payment for deferral plans that got done in April or and if the answer to that as no or did you kind of approach your tenants and say look just pay your.

April rent and you know would then we'll we'll talk starting in May about a deferral plant. So you kind of want it to you know kind of flip the switch it instead of like a dimmer switch to all this is that kind of the way you approach I'm just I'm just curious 98 kind of read to me is particularly high.

Well no rich I think we were surprised I mean, you know with if you would have said at the beginning of April and you guys. We talked to our Oregon and had calls and currently we really didn't know what to expect I mean, we were of course, hoping for the past, but until we started reaching out to folks until we started seeing a daily receipts, which we track we were.

Really well sure, but we were going to see the 98 is actually 98, it wasn't something that Robert or higher Amanda or any of the management team frankly, we're able to that we didn't contribute to added in much of any other way other that reaching out talking to folks seem where they were at reaching out to the people who are looking for.

For the opportunities for deferment or extend leases.

Going forward I think Barry as we've stated he is on track with our expectations that we track that daily and and so a bad is again something that could you know very.

Very strong positive for us Oh, I don't know that good that weve been trying to make deals in any way whatsoever from a payment perspective, we've had in fact people who have reached out to US and said you know when would you be open to a discussion about at the permit or extension occur and you know they've called back.

Three days later it called Robert said look we don't eat it. We appreciate the conversation and the fact that was something that really set out right, but we don't need. It recorded we've got our are all started to show me the government or from other sources as well.

Were good so that's where we stand right now, but it is a fluid process rich I think you know every day, we wake up its an interesting day, but that's how we've seen it so far and Robert you want to add anything.

Yeah, you know just from a kind of typical in expectations from a note you know just a numbers perspective, I think certainly our outlook with you call. It the 10% a deferral stat that or you know we've either approved or in discussion in total you know I think our outlook is you know will have 90% collection, 88% collection somewhere in that Ray.

And for May June and into July.

No I think one of the the other thing that just from a color perspective is.

The level of local physician payments was certainly much slower to start the month.

And then we actually saw a number of them get funded through the P.P. program and so they they ended up.

Kind of pushing any discussions of deferrals out to Scott's commentary so while it it's certainly than the number looks very typical I think the flow of cash payments throughout the month was little bit different but it really did have a lot to do at the timing of the some of the local physician starting to see PPP funding I am.

Kind of slipping some of those conversations from a deferral too okay I've I've got funding now for the next two months.

And if I have line of sight into elective surgeries and things like that after that we can put these discussions on hold so okay.

All right. So so the equivalent number next month or this month might be 90 or something like in that range.

And see how it goes from that's right.

That's that's our expectation given the deferrals whatnot, okay. So we've gone through it in detail rich and again thinking it you can't predict the future, but sure. This we've taken the time to go through that.

Sure. Okay. So question number two you know you use this language over the next 90 days I think Robert maybe was you Robert that said or maybe as you Scott that said $20 million is is the 10% is that the the dollar value of the 10% over next 90 days.

Yeah. That's right you know again, we have we had about $185 million hundred 80 $185 million revenue on any given quarter and so 10% of that is kind of in that $20 million range.

Okay. Okay. Okay. So that's 20 million per month gotcha.

But not not per month, that's that's a quarterly dollars a little yeah. So when we're looking at it you know a number that you know as we've had discussions.

He was with specific tenants, we say, we'll do this for you for two months and then they feel good about getting back on track and pain. So we're trying to capture the the totality of what Weve granted.

Okay.

Alright.

And.

Now that I'm also a bit surprised maybe I shouldn't be a v. involvement of health systems into the ER. The process of deferrals is that coming off as a bit of a surprise to you I can understand the physician groups, but you know the those tendencies or.

Haven't been part of the discussions you know other other Reits that have reported this quarter sort of a information any comment on on that.

Yeah, we we set back about five weeks so when it started adding that back about three weeks four weeks ago, We talk internally, we talked with our board, we talk with with our investment Committee and.

We haven't Robert pointed out 70, <unk> five of our rent with 61% with investment grade rated tenants and we want to get it could be response.

It's not an issue of of getting paid when we will get paid and we feel very confident and they feel very confident this was the it's basically a discussion if they were short something if they wanted to do a couple of months you take the time to get the feed underneath that and this is something we could help them with it again it was only 5% in it.

Something if we would have demanded that they pay us I think they would've beta.

I don't think that's a good business perspective, no H.P.A. isn't it.

Lagerfeld, there will be for the long term.

And you know this was that an opportunity for us where we could generate you know enhanced enterprise value for shareholders and so I think the good business decision with a win win it was something we did and I think it will pay tremendous dividends in the future and I think shareholders, who will reap the rewards.

And I know that from an infrastructure perspective, it will make it easier for us to deal with those folks they're gonna be he players in health care for health care system, they're going to be the major players.

In health care going forward. So that's sort of the business support philosophy that we took and out when we reach out to FFO.

Okay. Yeah. Good relationship management of course makes total sense and then last question for Robert maybe you how much of your antennas up in terms of been a bad debt. I know you know there was a little little chit chat here and there about rent abatements, but when you think about the Collectability is the thing kind of goes further out whether its a.

You know.

Cash situation or non cash situation I'm curious you know how much bad debt write offs could become a part of the the process.

Well you know I think from a an overall collectability perspective no at this point you know, we certainly anticipate all the deferrals and whatnot are going to be very much collectible, especially given kind of the return of elective surgeries in patients into physician offices and whatnot.

Underlying bad debt scenario.

We we review this on a monthly basis with our tenants and you know certainly there are certain tenants I don't pay also we take bad debt on a quarterly basis. Its edits that's just a normal and regular say.

I think as we shift.

You certainly the second quarter and going forward I think you know from an accounting and on accounting policy perspective, you know, we're always very conservative in our view of of what we reserve in what we have outstanding.

And so I think as you get into an environment, that's a little bit more economically volatile you know I think there's there's gonna be heightened sensitivity about do we take a reserve on this what's the what's the appropriate amount of what we do so just a charge perspective, you know I think we'll we'll certainly take a conservative approach as we look.

Look at it but.

But its you know from an amount or anything like that I think it's it's too early for us to tell but it is certainly something that that we will we will be taking a conservative look out consistently I wouldn't expect everybody else to do that and rich I would say is part of the processes. We've gone through this you know this case by case basis, even on the small publishing side, we've looked at that we.

Tried or dot tried but we've also as part of the deferment. If we've been short on collateral or we've been short on a personal guarantee you know that's a win win for both of the specific two sided equation. So we've also taken the opportunity to what I would consider to be to upgrade or to increase our our collateral where approach.

Opregen and done so we've we've not just arbitrarily deferred or rent and not taking a look at that underlying the ability to collect yeah. Okay. Great. Thanks for the color.

Our next question will come from Todd Stender of Wells Fargo. Please go ahead.

Hi, Thanks, I Hope you guys are okay.

We are and I hope you are too right. Thank you.

So I can see how tenant retention will be high over at least the near term if not longer but I would imagine that doctors don't have a sense right now that there may be their operating expenses are going to look like just with new procedures and protocols as they as they reopened.

They probably have a sense of the backlog with elective surgeries. So maybe the top line looks okay, but operating expenses. So just seeing how confident you guys are.

And physician groups as they determine and you guys determine rental rates and annual escalators at least over the near term.

Right well, let's deal with the last when it first you know we with the extension that we're putting in place or what the new leasing we're fighting, but we're still getting the 3% Oh I don't think there's anything that we've looked at over the last five weeks. It it hasn't been consistent with the escalators and add up the rent expectations that we had prior to the pandemic. So.

As of now I would say that were consistent with from a leasing perspective, both the underwriting both the T I, a free rent or whatever the situation maybe from where we were before after I think it you know there's going to be an evaluation process I think that's just the normal process.

It would be just unrealistic to expect that something this severe that has happened doesn't have everyone kind of look and say, okay. How do I pass to operate is there additional expenses at what kinda space too I mean, I think it's going to be interesting to see with the new spacing requirements with the new you know, making sure that patients are comfortable with.

Coming into the office it might need a little more space situation that the physician need or want to expand to werent I'd be you know I don't need quite as much space.

I do think that that process is going to go forward over the next.

The rest of this year frankly, and you know, we'll just see how it plays out and of course tried to do the best we can do a gap, though however, our assets need to from at least in perspective.

Helpful and a usually I'd just go right to Robert with this but certainly start with Robert and maybe Scott If you have any comments.

You tapped the entire line of credit.

But how long do you think you're going to budget for this and keeping that fully John.

That's one and what signs do you need to see to maybe feel a little more comfortable in taking some of that cautionary move off the table.

Well that's out there for Robert So I'll answer that Scott I'm, probably going that should take the responsibility for that and do you know this is Mike for fourth experience.

Given you know because the.

That's that they're just unusual and completely unexpected and you know we will Oh, we feel much more comfortable now we wanted to see where the financial markets, where we wanted to make sure that our rents and our health care systems were stable that we could get a full grass farm. What we were looking at so we were we were cautious.

Oh, we were very you know we took the action that we felt was going to make our shareholders for long term the.

Put them in the best position going forward you know we've already started to a pay it back down we feel very comfortable with a REIT receipts, so you'll see that.

As we move forward here and get paid pay down to to where it should be.

Thank you.

Our next question will come from Mike Mauler up J.P. Morgan. Please go ahead.

Yeah, Hi, Robert I was curious for fear EFI decals, you put in the South how are you thinking about treatment of deferred rents in that line item will they be stripped out kind of for you closer to cash in the spirit of the definition or do you make it a bit of an exception. This time, because it's a different situation.

Mike I think that's that's going to be a conversation that we certainly worked through as we go over the next quarter. You know I think our standard definition, which we've had in place you know for for since we went public.

Has doesn't incorporate any kind of working capital considerations or anything like that even though we do have some fluctuations quarter by quarter. So I think that's something that we're gonna have can give you a clean answer on that yet it's not an or standard definition, but it's certainly something that we'll have discussions with as their becomes a consensus throughout the three community.

Got it okay. That's it thank you.

Our next question will come from Daniel Bernstein of capital one. Please go ahead.

Hi, can hope everybody as well.

So I guess my question is it you see a difference in performance between on campus and off campus properties and especially in light of.

So I guess, a little bit of a change in your portfolio more towards a off campus and maybe not affiliated.

Property, so just trying to understand the difference in performance between.

On off and maybe affiliated not affiliated with a better well I Yeah, I still think you don't both both assets have a tremendous.

[noise] placed in the health care portfolio, you know I think this is really given off campus or what we call community core I think that's going to be even a stronger format of health care system going forward now the ability to service patients under different situations I know several of the health care system, We've talked came from.

But on campus perspective, they were immediately yeah. They are very concerned that actually had to do you think thought it won't be because you know all the patients were coming on campus to the hospital and so it impacted frankly in some situations.

He's of ours are on campus with more effective than our a community core locations.

But I think that that's going to be part of health care system.

At the access sharing situations like this the access going forward for for health care I think it's going to be served in both location, but I think on campus is going to be something to health care system that evaluate.

And then.

I guess your other question I had.

[laughter] really about you talked about.

Fishing groups or hospitals, asking for extended hours or is that based upon.

Your scheduling already for elective surgeries or just your assumption that there's pent up demand I'm just trying to understand its.

It's a surgery is already being schedule.

Well the few folks that we've talked to they're starting to schedule surgeries can you know in many of the state that we are located in the electronic processes that will.

So there was actually conversations about we need extended hours, because we're actually planning to be open up for an extra four or five hours in the evening for the next two or three month. So it's something that they're focused on I mean, there they weren't as much revenue and to service their patients.

As quickly as they can so that's what they're trying to do and we're certainly been receptor.

I'm interested there's been some chatter concerned about changes in behavior wherever people actually go back and take the surgeries, but it sounds like.

<unk>.

Physicians themselves are thinking that they're going to have some pent up demand that requires the extra are such that that's real interesting yeah. It's a blip we talked before I think they recognize that the fear that you just talked about and they're going about their job of trying to make sure that they try to overcome that fear on the dose elective surgeries.

Those patients come back.

They can.

Okay, I guess my views Tele health isn't that much of a threat to m. abuse or she is complimentary is but again that is a concern I've heard from investors is that.

Something you're looking at as a threat to the Tim Ob demand or <unk> or is that just not the right way to think about July.

Yeah, I think tele health that take a couple of stepped forward I think that you know he kind of getting in a situation like that people have adapted and they utilize the pelichem if that they can't I don't think it replaces demo beads. In fact, I think he said I don't think it's going to be that's significant I hope.

And we've always talked about things is that the more folks it get access to health care in whatever form well that lead to more of them getting to the care. They need which then would go back to thing you know the fishing additions in person because that's the only way they can truly.

Get a sense of what someone condition itself.

Yeah, I think it the progress progress and I think it's just flows into the health care system as we see going forward.

Okay. That's all I have I'll hop off thank you.

Our next question today I will come from <unk> Morgan Stanley. Please go ahead.

Thanks for taking the questions sorry, if I missed this but any particular concentration in the deferrals or by specialty meaning like primary care any specific specialties you can call out.

Oh, Robert you want to ask for that.

Yeah, you know we didn't we haven't really seen any anything specific by by specialty per Se. You know I think is you know as we've looked across the board you know it's been interesting to see the deferrals of you know probably it's been about a 50 50 split actually between health systems and local physician practices for the most part of men.

Even actually investment grade not for profit health systems that you know certainly are focused on treating cobranded patients their spending a lot of capital and things like that and so you know looked at it from a timing perspective, and you know it looks to us as partners, which which we did and I think on the local physician side you know I don't I don't think we saw anything specific certainly certain.

Three centers were one that did stick out that you know asked for us to work with them, but you know we looked at the underlying profitability either again, they're already rescheduling surgeries. So we felt pretty good about the credit worthiness of that but I don't think there's been anything from a specialty perspective that we've we've seen its been a mix of primary care in specialist kind of across the board.

Okay, and then just again, if I missed this apologize but.

On I I know right now, it's sort of maybe dolphin any segment to kind of understand where pricing per foot cook upgrades as well so trending but I'm. Just curious if you know anecdotally you hurt you haven't you heard anything or you've seen anything that you can just give a sense of where you think upgrade so per foot values of shows are shaking out from obese.

Well I, we haven't really seen any data point.

Her and I will say that we haven't substantiated, but yeah. We've heard some friends broken into three that's come up.

Okay, and then we'll be side of equation or fill buying it and cap rates that we're you know pre March Oh, you know and I and my view is that.

There's a lot because then.

That could be appropriate cap rate for an acquisition and at that particular point in time capital needs to be very very.

Disciplined and at Houston, I would expect that there will be opportunities one relationship perspective that will be able to be utilized to get what would be a little better cap rate than what you would normally have gotten a pre March oh.

I think this is a part where patients and prudent decision making.

Comes into long term value and that's what we're going to try to do and as you know our investment committee and each one of our acquisition so.

That's a process that we have from a discipline standpoint, and we're still active looking around and we see something or we evaluate so that's going to get strong a strong returns be accretive for shareholders long term, we're very fortunate where it has to do that but god. It's the right now to evaluate.

Oh point, and we're probably yet.

Okay, great. Thanks.

Ladies and gentlemen at this time, we welcome cleared our question and answer session I'd like to turn conference back over to Scott Peterson for closing remarks.

Well I'd like thank everyone for questions and everyone for being on the call and we look forward to talking to you at the next earnings call. It we will certainly uptake everyone or the market on anything that that rises that tough changes any of our thoughts and processes that we've talked about oh. Thank you.

The conference has now concluded we thank you for attending todays presentation and you may now disconnect your line.