Q1 2021 Physicians Realty Trust Earnings Call
Greetings and welcome to the physicians Realty Trust first quarter 2021 earnings conference call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation and if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
The reminder of this conference is being recorded and it is now my pleasure to introduce your host Brad Page Senior Vice President General Counsel. Thank you Brad you may begin.
Thanks, Paul Good afternoon, and welcome to the Physicians Realty Trust first quarter 2021 earnings conference call and webcast.
Joining me today are John Thomas Chief Executive Officer, Jeff Theiler, Chief Financial Officer, Jeff.
Taylor Chief Investment Officer, Mark the time Executive Vice President asset management.
John Lucey, Chief accounting and administrative officer, Laurie Becker Senior Vice President controller.
During this call John Thomas will provide a summary of the company's activities and performance for the first quarter of 2021 and year to date as well as our strategic focus for 2021, Jeff Theiler.
Tyler will review our financial results for the first quarter of 2021 and.
Mark <unk> will provide a summary of our operations for the first quarter. Following that we will open the call for questions.
Today's call will contain forward looking statements as defined by the private Securities Litigation Reform Act of $19 95 that are based on the current beliefs of management and information currently available to us our actual results will be affected by known and unknown risks trends uncertainties and factors that are.
Beyond our control or ability to predict although we believe our assumptions are reasonable.
And our forward looking statements are not guarantees of future performance, our actual results could materially differ from our current expectations and those anticipated or implied and such forward looking statements.
For a more detailed description of potential risks and other important factors that could cause actual results to differ from those contained and any forward looking statements. Please refer to our filings with the Securities and Exchange Commission.
With that I would now like to turn the company out of the call over to the company's CEO John Thomas John.
Thank you Brad and thank you for joining us this afternoon.
Physicians Realty Trust is off to a very good start 2021 the spa.
Begins with our pure play focus on medical office facilities, which continues to serve us and our shareholders well.
While the other types of health care real estate are just beginning to see signs of a recovery medical office clinical visits have been and remain at pre COVID-19 levels and had been for a long time.
We created this operational strength of our nation's health care providers, who have adapted quickly at the onset of the pandemic to manage COVID-19 outbreaks, while continuing to provide necessary non COVID-19 health care services.
And they accomplish this by shifting non COVID-19 care to the outpatient setting accelerating of trend that has been the parent for the past 25 years.
All indications are that this is a permanent change and the delivery of health care that will continue to grow in the years ahead, especially for more acute orthopedics oncology and cardiology procedures.
Beyond the pandemic demand for medical office Billings continues to grow in line with our nation's continued need for outpatient health care.
The M S estimates.
4.1 trillion dollars were spent on health care services in 'twenty, and 'twenty and the National Health care spending and the in the United States is expected to grow and an average annual rate of five 4% from 2019 to 2028 outpacing GDP as well.
We expect and an outsized portion of this spend will be directed to off campus facilities in particular, where we continue to see health systems demanding more space.
The trends in favor of medical office have proven to be very predictable and reliable and as a result, we expect our portfolio and produce a consistent and reliable rental income stream with steady growth over time for the benefit of our shareholders.
Public investors and health care real estate can count on medical office to remain open and occupied and busy.
Medical office does not need to recover as an asset class. It was only impacted temporarily and spring 2020.
And Doc has maintained close to 96% of occupancy routinely ever since.
We remain focused on growing our funds available for distribution each year and we will continue to manage our organization to achieve that result annually.
On the acquisitions front, we announced the purchase of a brand new medical office facility, and then onside outpatient surgery Center and the campus of Admin Health Hospital in Wesley Chapel, Florida.
Several members of our team have long term relationships, where they had been help and.
And we hope to find and future opportunities for investment and this system across their national footprint.
We also finalized the commitments to finance three new medical office facilities anchored by leading investment grade health care systems with two buildings being off campus and one on campus.
We continue to evaluate a number of new development projects and expect a positive uptick and development for the year and going forward.
Our investment pipeline continues to grow with visibility on nearly 200 million of prospective opportunities that we expect to close in the coming months plus.
Plus a growing number of acquisitions and negotiation that we would expect to execute and the third and fourth quarters.
Our growth this year may be slightly weighted to the second half of the year, but we remain very confident and our acquisition guidance of 400 to 600 million and new investments in 2020 one.
In June 2020, we published our inaugural ESG report sharing our hard work on environmental management of our building since 2018 and progress toward ambitious goals to improve the energy utilization and waste management of all of our facilities.
We will publish our second annual ESG report and June 2020 one.
And we will be proud to report great progress on all of our environmental social and governance goals and the Doc culture.
And your Mark Downs leadership Physicians Realty Trust earn the Epa's energy star partner of the year and.
And we expect to be this to be the first of many awards, recognizing our commitment and success and reducing our carbon footprint and providing a better setting for our physicians and providers through better manage buildings.
Jeff will now review, our financial results and Mark down and we'll share our operating results Jeff.
Thank you John and the first quarter of 2020, one the company generated normalized funds from operations of $57 $7 million normalized of a vote per share was 27 versus <unk> 26 cents and the same quarter of last year and increase of three eight per cent, our normalized funds available for distribution.
And were $54 $5 million and increase of seven 8% over the comparable quarter of last year and our fad per share was <unk> 25 cents.
We remain highly focused on this metric as it is the most direct way to measure our company's performance versus our peers and we will continue to focus on growing our fad per share at an outsized rate for our shareholders.
We continue to see strong operating performance from our 5 billion dollar of medical office building portfolio in the first quarter of the year.
The same store NOI growth was right in line with expectations and two 4% and we increased the lease percentage of our portfolio by 10 basis points to 95, 8%.
Our portfolio continues to be able the Canadian continues to manage the strength of the COVID-19 pandemic and we collected the usual 99 seven per cent of our billings and the current quarter.
The one deferment, we granted last year continues to be paid back on time and the last and final payment will be made and June barring.
Barring an unforeseen intensification of COVID-19 and the future and now appears the Doc has been able to manage through the worst of the pandemic and emerge with no material negative impacts this.
This is the direct testament to the strength of the medical office asset class and general and in particular, the strength of our investment grade tenant base as well as the high quality of our buildings credit team and property managers.
The balance sheet and it's been an area of focus for US and is now of positive differentiator between us and the rest of our health care REIT peers with our enterprise leverage of five times debt to EBITDA, including our pro rata JV debt and our 62% investment grade tenant base. We believe we offer our shareholders the best risk adjust.
<unk> investment and health care real estate.
We raised $52 4 million of net proceeds on the ATM and the first quarter effectively pre funding a portion of what we anticipate to be of substantial year of growth for the company are revolving.
And credit facility is only 18% drawn with $156 million outstanding, leaving $694 million of availability.
We generally expect to target leverage of five to five times debt to EBITDA on an enterprise basis going forward.
We continue to be confident and the acquisition guidance, we laid out several months ago of $400 million to $600 million of new investments. Despite the relatively slow start in this quarter, we have been admittedly picky.
However, we also have high visibility on a number of the types of medical office buildings. We are seeking those with investment grade rated health system tenants performing specialized medical procedures and strong demographic areas.
J T referenced the pipeline value of those deals and those and those types of deals and negotiations during his prepared remarks.
Because these are primarily relationship deals we feel a higher degree of certainty than if we were trying to acquire them at auction and we still expect to end the year within the total acquisition amounts we guided to at an average cap rate between 5% to 6% subject of suitable capital market conditions.
Turning to other portfolio metrics are first quarter, G&A, which usually trends higher than the rest of the year was on track at $9 $5 million and we expect to meet our guidance range of 36 $38 million for the year of.
Our recurring capital expenditures were well under budget at $5 $6 million as our team managed to create some additional efficiencies and some T is that were budgeted for new leases turned out better than expected.
We now expect to be at the bottom of our recurring capex guidance range of $25 million to $27 million for 2020 one.
I'll now turn the call over to Mark to walk through some of our portfolio statistics in more detail Mark.
Thanks, Jeff the.
First quarter of 2021 represented another solid and consistent quarter for physicians Realty Trust.
And once again for us to highlight the strength of our underlying assets and the value of our asset management leasing and property management platform.
The best in class operations team remains dedicated to enhancing the position and patient experience operating health care providers the benefits of the national real estate owner would scale paired with the personal touch of local management.
From a performance perspective are MLB and same store NOI growth and the first quarter was $2 four per cent predictably NOI growth was driven primarily by a year over year $2 four per cent increase and base rental revenue in line with our weighted average annual rent escalator.
Year over year operating expenses were up $2 million overall, primarily driven by a zero point $6 million increase and real estate taxes, and the zero point $6 million increase and insurance costs.
However, the value of our net lease structure is once again evident and the nearly dollar per dollar increase in operating expense recovery revenue.
And lastly, lower parking revenue had a 20 basis point impact on Q1 same store NOI growth.
And specifically paid parking receipts have now returned to 80 per cent of normal levels. During the first quarter, which compares favorably to <unk> 48 per cent of normal levels experienced nearly one year ago during the height of the pandemic.
Turning to the leasing activity, we continue the sees significant opportunities to add value as we capitalize on increased demand and our larger markets.
We completed 197000 square feet of leasing activity during the period with a 76% retention rate and positive 6000 square feet of net absorption.
While Q1 leasing volume represented one four per cent of the portfolio due to our staggered lease exploration schedule and we have had a significant increase and leasing tours and tenants looking for existing medical office space as construction prices continue to drastically increase.
In fact subsequent to the end of the quarter, we just executed a new 18 year lease for the single largest vacancy and our portfolio of three totaling 22000 square feet at the Meadow view of MLD and Kingsport, Tennessee.
Having navigated.
Through a year of the challenges posed by the pandemic I'm proud of our team's uninterrupted focus and continued achievements.
Similar to our asset management and leasing teams our capital projects team also had an excellent quarter.
Gently prioritizing recurring capex investments totaling $5 6 million or seven per cent of cash NOI and the head of 2020 one guidance.
Embedded within all capital investments made by Doc is a solid commitment to the materials and practices that enhance the patient experience as well as our G to sustainability philosophy.
This quarter and dock was nationally recognized as a 2021 energy star partner of the year from the U S. Environmental Protection Agency and the U S Department of energy.
This prestigious award is the highest level of EPA recognition as partners must perform and a superior level of energy management and demonstrate best practices across the organization and prove portfolio wide energy savings.
We're proud to celebrate the recognition from the EPA for our ESG efforts to date, but recognize that this is simply a step forward for Doc as we continued to invest and better as leaders across the real estate industry with that I'll now turn the call back over to John Thomas.
Yeah.
Thank you Mark and Paul will now take questions.
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One moment, please while we poll for questions.
Okay.
Thank you. Our first question comes from Juan Sanabria with BMO capital markets. Please proceed with your question.
Hi, Thank you for the time.
I was just hoping John you could talk a little bit more about the development funding you referenced in your prepared remarks.
Types of yields you're expecting if mainly that includes the rights to purchase of the asset upon completion and and.
And so you could remind us what kind of pre leasing and typically looks for before committing that kind of capital.
Yeah happy to one so we've seen a number of new development financing opportunities. This year as I mentioned, we started three.
One day non campus building that 75% pre leased to the health system and with lots of potential demand for them the lease up during the construction cycle and.
And that's a mezzanine loan the financing so were providing you know much of the non construction loan equity if you will with the developer funding the balance and then we have options to acquire it on the back and.
After CEO.
And then in the we have another off campus building, that's the 100% pre leased to an investment grade credit that is more of the or not more of is the kind of the loan to own structured and in that when you know.
And we typically get six plus percent yield there and construction and then it converts to ownership of a call option and if you will to convert that day ownership. After after Seo. So the other the other building mentioned is also more like the mezzanine loan financing with the and anchor health system ASC anchored health system joint venture a S.
See what the national operator, and then some of their pre leasing with physicians, so that ones again closer to 75 per cent pre leasing and it's the mezzanine loan with an option to acquire at the end so and.
And we've been pretty successful with both both types of financings.
And so and we take a little less risk and the developer has more you know kind of lease up risk if you will and the 100 per cent.
Leased opportunities, we really liked that low known structures. We featured in our annual shareholder reported the building we built on the Sacred heart. So we expect to do more of both types this year and and be pretty productive. All of these are buildings that'll C O and 2020.
To some next year and be great additions to the portfolio.
And how big is the pipeline of opportunities, where you have the rate of of acquiring the assets that you've already committed to do you have any senses of the.
That scale.
Yeah, we've got and under I guess, similar you know them.
Various mezzanine loans, we did of large package at the end of the year. So.
You know, we're pushing 500 and 600 million of of.
And the underlying asset value securing our mezzanine loans and all of those we have some some form of option to acquire <unk> ER and our rights of first refusal of Roper rights.
Great and then just the one last question from me just.
On cap rates and I recognize you are sticking to your 5% to 6% guidance range, but just curious you know, we're obviously hearing about increased competition and about how you're feeling about within that range of where you're more likely to come out and where things are trending for the.
The deals you're looking at or that are under LOI or what have you just.
And just to give us a sense of of where the deals are trending and price it was yeah.
Yeah. We're in the we're in the low fives for class a assets as Jeff mentioned, we you know, we're really picky and and on.
And the high quality assets and again these are health system anchored and heavily leased buildings and.
We've been acquiring.
They're all of market. So that does help us. The you know the auctions that have been published you know of.
Cap rates that are coming.
Coming through the marketed deals seem to be compressing, but.
And we're in the in the low fives to mid fives on class a acquisitions and then.
Stretch stretch closer to six on you know usually smaller assets that are off campus.
And or the the development projects. The again, we're financing this year.
Thank you.
Thank you Juan.
Thank you. Our next question comes from Jordan.
Saddler with Keybanc capital markets. Please proceed with your question.
Hey, guys.
So this is the point of clarity on the five to 600, you mentioned J T D.
You add the Mezz supporting.
Currently five to 600 of assets that you have right, John or acquisition rights or options to purchase is that what you were saying.
Yeah, that's right so the underlying value of the buildings that are securing our mezz loans.
And of well in excess of 500 million.
Okay.
And in terms of the pipeline of additional mezz loans and ore development of loans that you're.
Underwriting right now in terms of additional capital you put out the door how much of it is that of the 200 plus that you flagged.
Yeah, most of the most of the 200 and our system.
I must say all of the 200 there were.
You know kind of the LOI or close our acquisitions.
And we have additional development financings that we're still underwriting and yeah.
Competing for a few of them.
And so that's that would be in addition to the tune of me.
So the two okay and what's the the nature of the of the 200 is the sort of your bread and butter transactions and you know some anchor deals of affiliated deals.
Typically.
And these are the.
These are new or the mix of on and off campus.
Some are just being just finalizing construction, they're all health system anchored.
And heavily leased to health systems, but there are some physician groups, obviously and some of those buildings and and the pipeline itself is.
And just bread and butter.
Buildings.
And.
Okay and.
And then I heard the word picky, obviously, Jeff mentioned, just sort of you mentioned again, so we're sort of in flagging and I'm kind of I'm kind of interested in maybe the lessons learned and used that.
At all from the pandemic, if theres something that kind of.
So it has informed your underwriting I know you guys came out of the other side pretty well, but is there anything of that where you've looked at you know.
And some assets and and.
This is low you know filtered in here of new underwriting.
Hey, Jordan this is Jeff I'll take a stab at that so as you said I mean, we came through the pandemic really well.
A testament to the underwriting that we did and kind of the continuous monitoring of the credit team of our tenants.
So you know I don't know that's really changed anything you know for the last number of years, we've had a really strong focus on investment grade tenants, a large health system anchored buildings and so when we say picky.
I think that's really what we're talking about is picky in terms of the tenants and the specialties and where they are so and.
Nothing nothing different than the last.
A few years that we've that we've been focused on these types of tenants just kind of a continuation of the strategy, which really serves us well during COVID-19.
Perfect and then maybe if there's one from Mark where I get off the clarity on the on the parking piece like you said I think 20 basis points of the two four rental revenue.
I'm, sorry to point and 4% of NOI was related to the.
And the Parker benefit, but I'm not sure if that was sort of the year over year metric.
Because I heard the 80% the 48 per cent, but I was just trying to clarify what periods, we were talking about there.
Yeah, Jordan happy to clarify so the same store impact from lower parking revenue was 20 basis points and the quarter SAR. Two four would have been a two 6% same store NOI growth and parking was the Q1 and prepay.
Pre pandemic level.
So we can do.
Sure.
I'm, sorry, Q1, and would've been two sets right yes, okay.
Yes Q1.
And then the 80 versus the 48 was what one of those two periods.
Yesterday the.
The first quarter was the well we've returned to 80% of the pre pandemic levels compared to 48% and we were at our lowest point last year kind.
The net March April time period.
So we've got about 130000 of.
Parking revenue and kind of upside of the return to normal levels is what the dollar figures.
Oh perfect. Thank you very much.
Thanks Mark.
Thank you. Our next question comes from Nick Joseph with Citi. Please proceed with your question.
Thanks, and we've talked a lot about the acquisition pipeline, but the JK you mentioned kind of beyond what's on the car LOI right now of negotiations can you try to put a size of of that pipeline and that's kind of of the next step.
Beyond the near term.
Yeah, Nick it's like I said, we're very confident and the and the 406 hundred number and I think I think that's probably the best way to say, let's say and I think the and the next two quarters will be.
You know hopefully hopefully getting more and the third quarter and and accelerate the little bit of delay from the first quarter, but.
Again, two hundreds and near term visibility of another hundreds kind of inactive and.
Negotiation, if you will and then and then you know we do have good confidence from the balance.
And then.
You talk about the ATM issuance to pre fund and how do you think about funding and the remainder of this expected acquisition growth and.
Kind of going forward over the next few quarters.
Hey, Nick this is Jeff.
So certainly we've been using the ATM opportunistically we.
We will continue to do that like like we said, we feel very confident and the overall volume of acquisitions for the year.
So we're going to try to use the ATM when its appropriate and.
If we pre funds some of that debt that's fine.
Want to make sure we're in a good capital position to kind of run through our guidance. So it's likely to be the ATM. You know if there happens to be of big portfolio deal or something like that we would look at maybe a follow on offering the supplement that as well.
Thank you.
Yeah.
Thank you. Our next question comes from Vikram Malhotra with Morgan Stanley. Please proceed with your question.
Thanks for taking the questions good afternoon and.
Maybe just first one you alluded to a back filling the largest vacancy and the portfolio.
Maybe just give us some more details about kind of that debt.
And that leaves us.
You know and and what that if that were in place sort of what does that do to total NOI.
Yeah Vikram. Thanks for the question really excited about the new lease as I mentioned, we're seeing a significant.
The increase and our leasing tours and and interest and the buildings across the portfolio and I think this is the perfect example of this this quarter or well, we just signed after the quarter ended here of a <unk>.
22000 square foot lease and our middle of the building the.
And the tenant has the existing anchor in that building. They occupy the first two floors of this building and now we're expanding to the third floor and will occupy 100% building last year. They they invested over $3 million of their own money into a surgery center on the second floor. So this group is growing quick the largest multi specialty group and the area.
And I needed this for their future growth so from a NOI perspective, and the same store perspective, it's going to have a nice bump for our future growth and kind of it's got a year of ramping up as they do construction and build out but once we get to a run rate basis and should help with the 28, the 25 basis point increase and our same store.
Got it and then you also reference you know the fourth quarter again, the tour activity picking up quite dramatically and you know the of the governor on supply being construction costs et cetera. So I'm just wondering if you could give the color and maybe some of the larger systems are tenants that you're talking to.
How are they thinking about instead of expansion space and maybe more granular that the the type of space on off campus and what are these tenants are supposed to be looking for.
Yeah, well and you know our portfolio of 96% leased and we're starting from a great position of strength, there and working hard to fill up those vacancies both on campus and off campus, where we're definitely seeing growth and the off campus space. Those groups are looking to expand.
And just existing services and you know when we do lose the tenant.
Primarily due to the fact that they can't grow within our building. So we do have a little bit of a you know.
Repurposing to do there.
But again strength the.
And an increase in volume and activity and from our hospital partners, especially.
And then maybe just last one of the and <unk> any update or anything that's come up on the watch list I mean, we're still seeing the effects of the the pandemic and a lot of different health systems of health operators are still getting funding from the government and so just wondering if there's anything cropped up from a watch list perspective.
You know vectren and not really the and.
And our a ars and better shape than it's ever been suspend.
Again, I think of Testament, as Jeff mentioned, and our credit team and our asset management team and just the close relationship we have with or where their tenants. So.
And a lot of the health system and again, our 62% of our tenant base is investment grade health systems. Many of those health systems I think I think we attract and quantify the you know the aggregate of all of the health systems, and we do business with it and pulled in about 9 billion of the funds.
Funds from the various structures through the through the cares Act funding, but you know well we look at primarily and focus on is the activity in our buildings and that has been full steam ahead since last may and and everything has been open and operating and and busy and as I said kind of volumes are the pre COVID-19 level. So the activity of our buildings.
The.
But before the pandemic and certainly now well supports of the rent being paid and those buildings and so we don't.
We don't have any discomfort and hopefully.
And at some point hopefully some of the cares act money turns into grants and not alone and kind of remove some of that strain on the the health system generally.
Fair enough. Thanks, so much.
Yes. Thank you.
Okay.
Thank you. Our next question comes from Amanda Sweitzer with Baird. Please proceed with your question.
Thanks, John.
From a bit more on the stronger leasing activity that youre seeing have you seen an acceleration and ran out of your prior expectations or have you been able to pull back on the EIS. Our other leads and conversion as a result of about strength of your theme.
The good question Amanda this is mark the.
Answer is yes, the both as a result of some of the.
Creases and construction pricing.
The rental rates have been rising around the country. So we've been able to push on rates.
Is it just gets more expensive for providers to move from building the building or construct new so we've been pushing.
Pushing on rate quite a bit there.
And then on T I and so I mean, just because it is harder to move our leasing team did a good job this quarter of offering last tenant improvement allowances from the landlords are capex was actually a little bit lower than we originally projected from some ti savings there.
Yes, that's great to hear and then higher level on capital allocation can you talk more about how youre thinking about your cost of equity and a day just relative to the decline and cap rates that you're seeing from medical office broadly is that.
Cause you to change your hurdle price for equity issuances at all.
Yeah, So hey, Matt it's Jeff So as we look at our cost of equity today.
Clearly the the stock's done better and through this year than kind of a lot of last year.
So the cost of equity for US has been pretty steady I would say I mean, certainly cap rates have gone down and become a little bit more competitive.
Luckily and the cost of our debt has gone down as well so that that makes a you know and.
Overall cost of capital hurdle easier to achieve with the acquisitions that we're looking at and so as we look at you know kind of the stock price, where it where it has been lately and I think it's at levels, where we can achieve.
Achieved the full volume of our acquisition guidance and still provide accretive returns to the shareholders.
That's helpful. Thanks for the time.
Thank you man.
Thank you. Our next question comes from Michael Carroll with RBC Capital markets. Please proceed with your question.
Yeah. Thanks, So I guess I noticed in the press release that you guys trademark day.
The phrase and best and better can you talk a little bit about that phrase and and I guess, how should we think about that.
[laughter] Yeah, Mike It's a we've done that I think three years ago, maybe but [laughter]. We've been taught that yeah, no no and I'm glad I'm glad you recognized the.
You know it was a really to come of a culmination of the culture of our organization. So it's it really goes across the board invest and better people mess and better health system, and the best and better buildings. Its just something that came out of our kind of internal strategy discussions and then and as we tried to message.
You know to investors to perspective clients and the health systems and the people.
People that we recruit.
We've had almost no turnover and our organization and we had and <unk>.
The team performed extremely well during the.
And the work from home and and still mostly working from home and.
We just think we take a lot of pride and that so you know everything we do we try to do and with excellence and and and and and as we say invest and better soon.
And it makes sense and then I guess J D. Can you talk a little bit of bounce the type of patients that are flowing to outpatient settings. Now I guess I guess due to the pandemic that reprise the going to inpatient settings, and does that change and the type of buildings that they're going to I mean is it more of surgery centers are on or off campus or our guests.
How is that kind of evolving.
Yeah. So you know.
As Jeff spoke to this earlier as well you know what we learned from from last year with the debt just reaffirmed the strategy that we've seen and and believed and for years, and and think and again and investing and better looking into the into the into the future, which as you know where health care services are best performed and can be clinically performed and you know get them as the <unk>.
<unk> for the surgery centers last year and away from hospitals that were the busiest you know during the.
You know kind of once the once things settle down last may and people learn how to.
It kind of isolate COVID-19 patients and the hospital.
Literally all of the care they it wasn't drama and it was being directed to outpatient settings and.
And we did that.
Consumer survey anyway, we had commissioned and five of our largest markets, which.
And the survey found if you didn't have COVID-19 you've wanted to go to the health care services at least a mile away from our hospitals. So we didn't pick the mile that was just that was just the weight and the feedback came from the.
From the from the market from the communities and so.
Again, certain buildings, where we're investing and we mentioned the Wesley chapel building, which is on campus, but it has the surgery center or.
Orthopedics total joints or just moving out of the hospitals and a rapidly internet and hospitals that didn't have or there were trying to keep you know of orthopedic surgery and in the inpatient setting or in the inpatient facilities.
Last year lost all of that volume to outpatient facilities and the other providers and.
And so that's why we say we think we see an uptick in new development, we're financing at least one project and we think some others this year where hospitals are moving.
Our investing and surgery centers of away from the hospital campus again to take care.
One of the PD ex in particular, and then there's going to be a ex he make a significant.
The significant move of procedural of cardiology again out of the four corners of the inpatient facility and into the outpatient setting and those buildings will typically be closer to a hospital, but don't necessarily have to be on the campus but.
And again I think those are the things, we'll continue to see and.
Oncology, just continues to and have sadly, but and Ken.
And continues to grow and grow and our portfolio and and and.
Providing linear accelerators of radiation oncology closer to the patients and the consumer if you will.
And again, it's the trend that we've been seeing for years, and we're seeing and that's one of our development projects this year as well.
Okay, and then is there I guess what has driven this change had been the suggest obviously at the consumer's preference given the pandemic of staying away from hospitals, but.
What's going to keep debt from kind of reverting back and has there been any changes to regulations of advancements of technology, that's going to help drive that shift to outpatient or maybe accelerate that shift to outpatient that we've seen over the past few decades.
Yes, I think what we saw last year was an acceleration again, just because people didn't want and go to the hospital and people avoided cares and sadly there is a lot of people that died last year from.
Not from COVID-19, but from not getting the care they need because they were afraid to go to the hospital.
But what's kind of it.
And I think I think it's here to stay just from and consumers now are more comfortable with it.
And in the outpatient setting and then CMS is is phasing out the so-called inpatient only rule, which is Medicare for years had put out a list of procedures that they would only pay for if it was done in the hospital so in the inpatient setting.
They they've been shifting more and more.
Our paying for more and more procedures to be done and the outpatient setting that's what helped drive the the move of total joint replacements from the inpatient facility to the outpatient facilities over the last couple of years.
And that's been a pretty dramatic shift of the.
Procedures and volume.
And then two years ago, where last year started the shift of cardiology procedures as well. So I think it's about 2023 I believe is the CMS has declared they won't have an inpatient rule at all and all.
And they'll just pay for procedures and let the clinicians pick the best clinical setting.
We'll tend to be more efficient lower cost.
The outpatient care facilities convenient to patients and physicians themselves.
Okay, great. Thank you.
Yes. Thank you.
Okay.
Thank you. Our next question comes from Conor Seversky with Bear and burn. Please proceed with your question.
Good afternoon, everybody. Thanks for having me on the call and it's really one from me quick follow up to Mike right. There. So.
So we've seen this chart from time to time, comparing outpatient visits and patient procedures and.
And and I'm wondering if you could provide any color as to what inning, we're in and that trend and by that I mean, how much left is there to really take out of the inpatient environment.
There's a lot of I mean, there's a lot of volume I think last year was made and the or maybe 2019 was the first year. The number of procedures done and the outpatient setting was greater than the number of admissions. If you will and the in the inpatient setting, but then number of accelerated in 2020, and it's going to continue to the shifts.
Jeff as we've just talked about is going to continue to two shifts and you were talking.
No.
<unk> points on basically a trillion dollars of your of health care services.
And so every year.
And the basis points would be billions of dollars moving out of the hospital and into the outpatient setting and the cardiology, we're just getting started.
And that's a pretty dramatic shifts so you're going and youre going to go from 100% two years ago to.
You know five per cent moving outpatient every year I'm, making that number up and it'll it'll be a slow evolution, but then it'll ramp up pretty dramatically about how much cardiology and move out of the hospital.
Yeah.
So that's helpful and I'm wondering then as these higher acuity procedures or moved out of the hospital do you expect any change and the design philosophy of medical office buildings in order to facilitate some of these procedures.
Yeah. You mean, you know when you have outpatient surgery, you usually have to have a separate the ingress and egress points for surgical patients.
And we're.
We're thinking differently about lobbies and.
And designated dedicated elevators are really kind of.
Lessons learned from if you will from the pandemic are preventing them and the next pandemic or are anticipating and other pandemic and the future.
The cardiology buildings are I mean, the whole idea there is moving cardiology into an outpatient surgical facility and so the types of rooms that are there going to be you know you need for that service.
The move of total joints out of the hospital into the outpatient setting.
Lot of that is being done with robots, it's really a pretty you know.
Fascinating procedure to watch and the robots and require a little bit more room than the typical of.
Our fifth so again, you're getting a little bit more space and then.
And in oncology.
And as it continues to move to the outpatient setting.
Yeah.
A whole different psychological effect of how those buildings are designed.
Even with the patients and their and their families. There.
And that's interesting stuff thanks for the color I'll leave it there.
Okay.
Yes.
Thank you. Our next question comes from Daniel Bernstein with capital. One. Please proceed with your question.
Yes, I'll say off the car that was just interesting question and answer just now.
So maybe I'm reading too much into the.
Parking volume, but it seems to me and the hospital volume has come back a little bit more of like 90 per cent or so and park and volume here.
And you're saying 80%.
And my reading too much into this debt.
And maybe telehealth has impacted.
The amount of car volume, that's coming in and I'm, just trying to really assess whether youre.
Youre going to come back to pre pandemic levels in terms of park and receipts I know, it's John Yeah Ruche and.
And of your rents, but no I'm trying to just the business yes.
And that's one of our elastic revenue sources at the end of the issues of valet parking is not it's not the volume of patients it's valet parking and so it with COVID-19 and you know of malaise.
Still restricted and a lot of state and then just people's comfort level getting in and out of the car, it's not theirs and and vice versa. So that that will come back and again, I think even and many way stronger.
You know once we get more vaccine out and the more herd immunity.
Okay, and really that's all I had.
I appreciate it thanks.
Yeah.
And to conclude on that comment we do expect it to fully recover and do all of them.
Thank you. Our next question comes from Joshua generally and with Bank of America. Please proceed with your question.
Yeah, Hey, J T.
Hope all is well I'm curious on the inpatient rule do you typically see and you're in.
Increase and many MLB developments or Rfps once.
And it comes off the inpatient list.
Yeah, you know it and usually theres, usually a time lag so like cardiology spin.
And I think it was two years ago. There of 13 procedures that were that were moved off the inpatient only rule.
And last year there was another 20, so it just it takes some time for the <unk>.
Clinicians to kind of organize around.
And a different setting and then and then that affects design and as we've talked about before so the total joints took didn't take the accelerated pretty quickly.
That was the prudent forgive me, but the computer message.
Total joints.
It took a little bit of time, but it moved rapidly to the outpatient setting and pretty dramatic fashion, and then and the and obviously last year.
And as much as they could.
Hi.
I think the prediction is on total joints that will be ended at about 90% will be done and.
And in outpatient setting by 2025, and what would be left would be patients with comorbidities.
The just require more intensive services other than the the orthopedic procedure itself.
Cardiology little slower that moved but it's going to it's going to pick up pretty dramatically. This year and we're already starting to see cardiology dedicated ASC and.
And there's a lot of planning going on around that with the physician groups, we're talking to.
Okay and then.
Interesting commentary on the the comorbidity of what's kind of going to be of left after 2025 per total joints.
Yeah, that's the kind of way to think about hospitals and theyre going to be like the unique patients that require really high level of acuity and then pretty much anything else could be kind of done all cash.
Yeah, I think I think net last year again showed that we could do it.
<unk> performed that way so the hospitals of the future of going to be for highly.
Hi, Lee intense medical conditions like COVID-19.
Transplant and.
Trauma and then you'll have some oncology surgery, you'll have some.
The open like open heart surgery, and then some of them.
The cancer surgery, but that's it's really going to be for the high acuity patients and the high.
Acuity medical conditions infections like COVID-19.
And then everything else is going to outpatient.
Okay interesting.
Sure.
Yes.
Thank you. Our next question comes from all Matteo Okusanya.
With Mizuho. Please proceed with your question.
Good afternoon, everyone I just wanted to follow up on that kind of line that last line of questioning and.
And a great definitely and with the model of everything shifting outpatient.
How should we be thinking about how that translates into future demand and.
And I asked that question from the perspective of you know we haven't really seen you know your development pipeline the development pipelines of any of the appears to really ramp up.
Occupancy steady, we havent seen the huge kind of ramp and Occupancies and so I guess its how do we kind of match that kind of what we're seeing that that level of the rest of how it is going to translate to kind of operating metrics and dollars and cents with the yossi.
And that's a lot that's the big question I mean, I mentioned him up my prepared remarks again, the the CMS actuary predicts the medical spending is going to grow 5% plus 5% 5.5 per cent I think you know of.
The average every year between now and 2028 and that the 2028 is kind of the I guess the beginning of the the backend of the you know the baby boom population and so you know once kind of top out on the you know the aging part of the population and start catching up and the younger population.
But again the vast majority of that can you just talk about is kind of of that spend is going to continue to shift to the to the outpatient setting.
And.
And I think we talked about the hustle and future whether it be existing physical plant or the the physical plans and the future again those rooms are going to be designed to be able to convert every room into.
Some kind of intensified care. So you can take care of the of the.
COVID-19 patient and you know of.
And have more access to the ban letters and things that you need from that kind of care.
So I think that's just.
Getting to those metrics right now, we just know what the age of it.
Actuarially accurate on the the aging of the population and how much demand and they're gonna have how much kind of cost.
And then of course.
Governments, and payers and insurance companies and employers are trying to shift the.
And the cost curve and so it's not just about aggregating populations and dollars and it's also trying to take into account lower cost settings, and again that would be and the outpatient setting.
Gotcha Alright.
Thank you.
Thanks Todd.
Thank you there are no further questions at this time I would like to turn the floor back over to John Thomas for any closing comments.
Thanks, everybody for joining us today again, we're off to a great start and we've got some some fantastic things to share with you and the upcoming quarters and look forward to seeing many of you during the the NAREIT zooms and hopefully in person soon and.
And we just encourage you all to get the get vaccinated. If you. If you don't can't ban of vaccine and give us the call will help you find more thank you much.
Yes.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.