Q2 2022 Physicians Realty Trust Earnings Call
And accordingly, and remain focused on the development of highly pre leased outpatient care facilities anchored by our existing investment grade health system partners.
Our pipeline for development financing currently includes over $100 million and potential commitments. If finalized construction of these projects will begin in 2023, and we have more opportunities in discussion.
Our acquisition pipeline for stabilized assets remains muted while price discovery in this environment continues.
Still we remain confident in our full year investment guidance, including development commitments and acquisitions of at least $250 million with the potential for more.
Despite the challenges of the current economic climate, we continue to execute consistently on our overall ESG strategy with the recent publication of our third annual ESG report and recognize the critical need to invest in healthy physical and social spaces for our communities.
Within our ESG report, we have substantially enhanced our disclosures by aligning with the global reporting initiative.
While expanding our reporting within the frameworks of the sustainability accounting standards Board and task force on climate related financial disclosures.
We adopted a climate mitigation plan recognized by the science based targets initiative.
In line with a well below two degrees Celsius strategy.
This increased transparency provides a better understanding of our impacts on the environment and society and the direct economic benefits to our tenants.
We've taken bold steps to build upon our D E ni efforts to shape and open and diverse internal culture, while setting aggressive multiyear goals to chart our progress.
While were proud to celebrate our milestones we recognize that our progress is simply a step forward for Doc as we continue to invest in better and our communities and families.
We remain firm in our conviction that outpatient care medical office facilities leased to investment grade tenants offers the best risk adjusted returns in real estate.
We seek to improve the quality of our portfolio with each investment decision we make.
We will continue to focus on creating long term value for our shareholders will ultimately getting the portfolio to a 100% concentration in outpatient care facilities overtime.
Before opening the call to Q&A, Jeff Theiler will share our financial results and Mark Don will provide more detail on our exceptional operating performance Jeff.
Thank you John .
In the second quarter of 2022, the company generated normalized funds from operations of $63 $7 million 27 per share our normalized funds available for distribution was $61 million, an increase of 11% over the comparable quarter of last year and our fad per share was 26.
And the broader economy, we now have two consecutive quarters of negative GDP growth and whether this will technically be defined later on as a recession is unclear. It is clear however that we are in highly uncertain times.
The economic experts are debating, whether we had bigger inflation problems or recession problems and while we hope for a soft landing like everyone else, we have positioned our portfolio to perform well in any scenario.
With the sale of the Great Falls Hospital, we have improved the percentage of our rent from investment grade quality entities to 66%.
This is far better than any other health care REIT and will provide exceptional stability to our rental income.
Alongside the safety, we also see green shoots of growth in an industry typically defined by more modest rent increases.
The 8% leasing spreads in the current role should lead to increasing internal growth in the quarters to come.
And alongside this enhanced rent growth, we are well shielded from inflationary increases in operating expenses based on our lease structure and high occupancy.
98% of our leases are protected from expense pressures, there sooner or triple net structure and our expense loss to vacancy is only 5%.
Our overall capital structure is designed to be conservative, while providing the flexibility needed to grow our company when the time is right.
We have eliminated virtually all refinancing risks over the next three years and currently maintain a consolidated debt to EBITDA ratio of 565 times, which will be reinforced with the $116 million of cash proceeds from the great fall sale.
We also raised $18 million on the ATM this quarter at an average price of $18 61 to help fund our acquisition pipeline.
With that I'll turn it to mark to walk through the details of the great fall sale and other operations Mark.
Alright, Thanks, Jeff.
We're proud to announce another very successful quarter of growth driven by our long term strategy of partnering directly with high quality health systems and physician groups to meet their real estate needs.
At the heart of this strategy is an acute focus on improving the overall quality of our real estate portfolio operating results and relationships.
We successfully made progress on all three of these initiatives this quarter as demonstrated by one the profitable sale of the Great Falls clinic facilities.
To achievement of record re leasing spreads.
And three excellent Kingsley tenant satisfaction survey results.
Starting with the Great falls disposition.
Since our first investment in 2013, we've watched the great falls clinic grow as an essential provider of care to the people of Great falls, the state of Montana, and even patients from Canada.
Over time, we ultimately acquired three facilities on this campus for a blended seven 9% cap rate.
<unk> have an inpatient surgical hospital and ambulatory surgery Center and a medical office building.
The facilities were 100% occupied and leased to the Great Falls clinic now a wholly owned subsidiary of surgery partners.
In 2019, Doc began discussions with the Great Falls clinic leadership team about a potential expansion to the hospital and surgery center facilities.
Under the leadership of Dave <unk>, our VP of construction and project management talk assisted in the design coordination and financing arrangements of these expansions in exchange for new long term leases covering the entire campus.
These lease extensions executed in September and October of 2021 increase the overall annual rental revenue increase the existing annual rent escalator by 50 basis points and extended the term to 20 years at each facility.
Through the value created with these new leases stock ultimately was able to opportunistically sell the existing facilities and future development expansion last month for approximately $116 3 million in net proceeds representing a gain on sale of $53 9 million a four 7%.
Physician cap rate and a 16% Unlevered IRR.
As Jeff mentioned the proceeds from this sale provides capital to recycle into accretive future acquisitions.
It also improves the quality of our portfolio and the security of our cash flows by increasing our investment grade tenancy to 66%.
The lifecycle of this investment is an outstanding example of the value created by the Doc team through our active asset management and trusted health care relationships.
Our leasing team also continues to leverage trusted health care relationships and market knowledge to unlock the value of the <unk> portfolio through strong tenant retention and lease renewal spreads.
During the second quarter, our leasing team completed 256000 square feet of lease renewals on the consolidated portfolio at an aggregate re leasing spread of 8.0%.
The highest quarterly mark in the company's history.
Importantly, we achieved these results without sacrificing retention or leasing costs in.
In total tenant improvements and incentive packages totaled just $2 19.
<unk> square foot per year on renewals well below industry averages as we continue to focus on net effective rent as the most important measure of total leasing performance.
While tenant retention of 76% is in line with long term medical office averages.
Given the strong demand for outpatient real estate, both on and off campus, we remain committed to unlocking the full value of our real estate through leasing.
When appropriate this strategy includes the selective vacating or suites that have higher rental potential with different tenants, even if that impacts same store metrics on a short term basis.
Looking forward to the second half of 2022, we expect lease renewal spreads to continue to be between 5% and 7% as the cost of new construction continues to outpace the benefits of renewing leases in place.
Simply stated we believe this is the strongest leasing market in the company's history, and we are optimistic about our pricing power in the years ahead.
At the portfolio level and mob same store NOI growth was one 9% in the second quarter.
The NOI was driven primarily by a year over year to 1% increase in base rental revenue.
Operating expenses were up 8.0% slightly below the 91% year over year CPI change as of June 30.
As expected increased operating expenses were largely offset by an eight 7% increase and expense recovery revenue due to the high occupancy and triple net structure of our portfolio.
In the nine years since our IPO, we've not only built one of the highest quality healthcare real estate portfolios in the industry, but we have also assembled an award winning health care real estate team.
Our efforts directly translate into care for tenants evidenced in our 2022 Kingsley associates tenant satisfaction survey results.
This year, we surveyed nearly 320 tenants representing approximately $5 5 million square feet.
Physicians Realty Trust received an impressive 74% response rate compared to the industry average of approximately 55% this year.
In addition, we beat the Kingsley index in every property management category, including overall management satisfaction with a score of 448 out of five zero.
While we sincerely appreciate the positive feedback from our health care partners.
The surveys that we actually value the most offer opportunities for improvements and where we can invest in better in order to earn our tenants trust and secure their renewal before the lease exploration.
Doc we believe that great customer service does not happen by accident. It happens by design and it all starts with a great team dedicated to our mission to help medical providers developers and shareholders realize better healthcare better communities and better returns.
With that I'll turn the call back to John .
Thank you Mark Michelle we're now ready for Q&A.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the <unk>.
Keith one moment please poll for your questions.
Our first question comes from the line of one Santa Maria with BMO Capital markets. Please proceed with your question.
Hi, good morning.
I was just hoping that.
Hey, John just hoping to start on the re leasing spreads obviously, a great number.
Just curious on as part of those negotiations or kind of annual rent increases.
We're getting and is there any shift away from a fixed towards a more of a floating structure, maybe with a cap and collar. So just curious on.
On a little bit more forward details on those lease negotiations.
Sure. Good morning, Juan this is mark.
So yes, we're really proud of our leasing teams efforts this quarter and seeing really strong leasing momentum to achieve those 8% re leasing spreads.
In addition to focused on the initial rate when the renewal kick software. We're also focused on the annual escalators you mentioned.
In fact, two thirds of our lease escalators this quarter had a rent bump of 3% or higher. So we're excited about the compounding cash flow from those embedded annual escalators going forward.
And we do try and put a lot of CPI adjustments into our new lease renewals.
Does come with sometimes a floor and the ceiling.
In the negotiations now I'd say.
Since the CPI number has been even higher than then.
Anticipated.
We're getting requests for more fixed escalators in those we're now pushing back in the 4% range on the on leases going forward.
So how quickly do you think you can get towards like a 3% plus escalator I mean should we just think of it as looking at your average lease term.
Okay, 5% rolling in.
I'm thinking that those growth, 3% plus versus I think you said two one at quarter end.
Yes, Juan it's Jay it's an incremental growth across the portfolio, while it's always been a good thing until the last couple of years, so with only 2% rolling this year to 3% next year, so but it is incrementally growing before this year, we had about 10% of the portfolio on CPI increaser and Thats a strategy.
We implemented.
Four years ago, as we started doing new generation in renewal leasing so it'll take time, but.
The higher increases.
They get us quicker than we thought.
And then just on the <unk>.
Investment pipeline in dispositions is still sticking to the guidance.
I'm, assuming that that sounds like it's going to be more development commitment.
Yes, right now we are saying right now.
Good one.
I was going to say is the is the dollar amount that you had previously targeted is that more the commitment dollars, we should be thinking about allocating our actual spend on which will earn yield on in this current year.
Yes.
It includes the future development commitments.
It really always has maybe have not made that as clear as we should but we.
We think we'll clear $250 million of development commitments and or acquisitions. This year, probably 50, 50 weighted maybe a little bit more towards the development commitments.
Most of those dollars the development dollars will be spent in 2023 and those will start generating.
Returns.
In 2024.
Thanks, guys I appreciate it.
Yes.
Thank you. Our next question comes from the line of Austin <unk> with Keybanc capital markets. Please proceed with your question.
Hi, Good morning, everybody just curious how the disposition in Montana came about how long that deal was in the works and then maybe if you could just speak to like the depth of the buyer pool.
Yes.
We've been really proud of that facility as mark kind of walk through the history of it was one of our first investments in the surgical hospital out there and then Theres a separate MLP with an ambulatory surgery center and it all on the same campus in a fairly large medical office building, we have been working with that.
The physicians and who we're co owners out there again for eight years. So we really haven't had a plan to sell it it was a very high yielding asset, but we've been approached by a number of potential buyers.
Just started exploring some price discovery with them and frankly, those exceeded our expectations. So it wasn't a planned disposition, but really an opportunity. So I think the pool really deep I think.
Once we started getting some.
Some offers for attractive we kind of took it to a broader market. So there's still a broader pool out there and again, we're excited to new owners.
People, we trusted take care of those physicians and thats important to us.
Okay.
And then so with sort of this shale I guess and the majority or sorry half of the capital needs.
On the $250 million being spent next year does this montana sale kind of meet the capital needs now for the year or are there other deals youre contemplating given the strong pricing you achieved here on this transaction.
Payoffs and I'll take that this is Jeff.
We're always looking at opportunistic dispositions.
The great fall sale takes us down in terms of leverage about a quarter turn so that puts us in a really good position to fund our acquisition pipeline through the remainder of the year.
But that said I mean, we have been getting inbounds on various assets and so we always we always look at opportunistically selling something to help fund our pipeline.
Got it and then just one clarification I couldnt make out what the development financing pipeline is today could you share that figure again.
Yes, it's over $100 million today, and we've got some other opportunities that we're kind of deepen negotiations on so and I think I think we are.
We felt like we might get to 100 150.
No commitments this year most of those dollars to be spent next year and I think we're on a good track to do that.
I appreciate the time thank you.
Yes, Thanks Paul.
Thank you. Our next question comes from the line of Conor Seversky with Bahrenburg. Please proceed with your question.
Good morning out there thanks for having me on the call.
Just to clarify the $65.8 million you have in real estate held for sale on the balance sheet for Q2 that did not include the Montana assets correct.
No that did include those assets okay. Okay.
Subsequent event the cell dose.
I don't want to they went under contract and then didn't close we're not in a contract in the second quarter Didnt closed.
Subsequent events.
To put it in.
Held for sale at that point.
Okay, Okay, and then on the.
Broad subject of cap rate expansion I'm, just wondering on a market by market basis, if you're seeing any more upward pressure.
In any market in particular versus others.
Yes.
Theres Hot markets like the Texas market continues to be hard Florida continues to be hot Atlanta continues to be strong, but you really across the board and kind of we're.
We're seeing more and more.
Assets that were for sale that kind of off market.
Under LOI or kind of contemplated transactions and then have seen those some of those assets come back to market.
It potentially better cap rates for the for the buyer. So I think we're still in that price discovery phase but.
Still there is still a strong bid out there for medical office buildings for Ya.
Okay. Thank you that's all for me.
Thank you. Our next question comes from the line of Michael Carroll with RBC Capital markets. Please proceed with your question.
Yes, Thanks, I wanted to drill down into the development interests that you're tracking in the marketplace. I mean is it more difficult for docs to find those types of investments just given the higher construction cost is higher or it's harder to pencil out those deals or are most of those deals more strategic and the actual cost for the health system or the developer.
Not as important as you would typically think.
Yes, Mike I mean, obviously cost is important to everybody, but these are all related to health system expansion and strategic expansions.
I think theyre, all but one are 100% pre leased by the health system and the other one is heavily pre leased to a health system and with a clear track on.
Where the physicians will come from to fill that space construction cost is high these are all yield on cost transactions.
Yeah.
I am a little hesitant to say exactly what the commitments arc of some some of them may may be determined there too expensive based upon kind of current market rents.
And these are all heavily pre leased strategic developments with.
High revenue outpatient surgical services.
But the hospitals want to pursue similar kind of a balanced approach we're not out there doing spec development, we are not out there.
And our funding comes with signed leases and with the sand GMP contract, where we know exactly what the cost is going to be.
And have your yields the yields that you demand for those I guess initial funding and take out acquisitions opportunity has that have those changed given what happened with interest rates.
Yes, those are starting to move up.
Okay.
Okay, and then I know you talked about this in your prepared remarks I'm not sure. If I missed this part I know it used to that the market is still in a price discovery mode right now I mean, how long do you think it's going to take for you to or the market to better understand where cap rates are.
Did you indicate how much you think cap rates have increased so far where you expect them to kind of settle out at.
Yes, I think I think we're starting to see assets that we underwrite well and that we're attracted to that are starting to move into the.
No.
Well well north of five but.
Mid fives.
Due to high fives are kind of we're starting to see more and more of that.
Those aren't always reflect the kind of quality and credit that we want to pursue.
But it's rare that we see we still get a lot of asks for the low fours, but I don't think anybody is out there paying local restore for assets right now.
Okay, great. Thanks.
Yes.
Thank you. Our next question comes from the line of Michael Griffin with Citi. Please proceed with your question.
Hey, Thanks for taking the question just going back to the 250000 of renewals can you talk about maybe what drove that was there any specific tenant types, where they are looking for expansion staying in their existing space any additional color on that would be great.
Yes, Michael Mark I'll take that one so on the renewals.
The 256000 square feet represented.
Retention rate of 77% and we do expect that.
The tenants are looking to stay in place and their existing suites now, especially as John was just mentioning the construction costs are rising so it's become more expensive to relocate supply chain challenges that made it difficult to relocate from a timing perspective as well.
And so that's also the combination of those two things are helping us to push on our leasing spreads while keeping retention high. So these are existing tenants and I'd say, our customer service and property management team does a great job keeping these tenants happy and then renewing in their space for the long term.
Great. That's helpful and then on the real estate Technology Fund investment mentioned in the release can you maybe expand on that a little bit sort of what that is maybe.
Continuing focused on investment in technology in your business. Some additional color there would be great.
Yes, Michael this is Jeff so it was a relatively small investment in a real estate technology Fund Thats run by fifth wall.
He has a lot of other Reits and real estate companies as Lps and while we think the investment itself will perform well. The primary reason for the investment is to just get an early look at the real estate technologies that are out there.
So you get enhanced access.
In early access to these types of technologies.
And ultimately what we'd like to do is enhance the efficiency of our operations and our portfolio. So we think it's a win win from both.
Access to these technologies as well as a good return.
Okay. That's it for me thanks for the time.
Thanks.
Thank you. Our next question comes from the line of Steven Valiquette with Barclays. Please proceed with your question.
Hi, Thanks, good morning, everybody.
So.
With your <unk>.
Bullish comments that were in one of the strongest leasing environment in the history of the company.
Re leasing spreads or re leasing spreads are trending quite favorably just hoping you could maybe give us some more color on just the context of that and the fact that the.
The operating expenses in the same store data were up 8% year over year.
Yes, with the better.
Leasing environment is also a higher cost I guess the question is at the end of the day.
Same store cash NOI growth is kind of hanging around that 2% to 3% range with the better leasing environment could that accelerate or do higher expenses kind of offset that and you kind of maintain that same sort of cash NOI growth over the next couple of years, just wanted to get more thoughts around that thanks.
Yes, Steve it's great question, so as mark alluded to kind of high construction costs and higher.
Kind of the opportunities for other space at much higher rates allows us to push kind of retention rates and our retention renewal rates at a higher cost at the end of the day. There is a total up to your points on total cost of occupancy that the tenant can bear the hospital system.
Investment grade tenants like we'd like to lease to conveyor.
So thats why service to those tenants in managing the operating costs and expenses the best we can.
And it really matters really.
Really are paying attention to the energy cost of the building the utility costs generally so the more we can do to help pull those costs down the more we can kind of push on the rent side as well and in a balanced way so.
8% an outstanding number.
I think it's a little unique to some of the particular buildings in leases.
That were impacted by the 8%, but we are seeing 5% to 6% for the next couple of quarters. So it'll be a balance overtime over time, but for the foreseeable future, we see the real opportunity to do that while at the same time and.
And pressing our tenants with management of the operating expenses to hold those down the best we can.
Okay got it okay, alright, that's it for me thanks.
Thank you. Our next question comes from the line of Adam Kramer with Morgan Stanley . Please proceed with your question.
Hey, guys. Good morning, and thanks for taking the question I guess kind of a little bit similar to the prior question, but just kind of looking at this quarter, our same store NOI number.
I think a little bit below kind of maybe where we were expecting and I think others as well.
Maybe below kind of the.
Historical trends that you guys have kind of performed as well wondering if theres anything in that number that maybe brought it a little bit lower.
And then kind of just thinking broader higher level right with <unk>.
Positive leasing momentum you guys are doing.
When do we kind of start to see that I guess, it kind of be the same store NOI.
Figures.
Adam This is Marc I'll take that that's a great question.
Our same store number this quarter $1 nine slightly below our historical average and a rent bump around two 4%.
And as I had mentioned about the leasing results. We're really excited about the leasing momentum that we have because whats pulling our same store down this quarter is a slight dip in our in our occupancy of that same store portfolio. So looking forward at the leasing momentum we've had actually I have a 100000 square feet of leases that are executed but not yet.
Commenced theyre under construction and so we're excited that those leases will be coming on later this year and early part of 2023 and just looking at your performance all those 100000 square feet is paying rent today are.
Our same store would have been about two 8% this quarter. So there's a nice pipeline coming of leases that are under construction and as you know.
These leasing results lag just a little bit until the cash flow starts.
Yeah to be clear under construction is the <unk> build outs and <unk>.
That's really helpful guys and I think thats.
Will that be able to kind of quantify the two point a number are you able to kind of give a.
Obviously, not exactly maybe more of a range of kind of the cash NOI.
This development would yield kind of.
<unk> to about two 8% from the $1 nine.
Yes, so the new developments typically our yield on cost above 6% I'm not sure. That's the question you are asking but thats in the new developments those numbers tend to be more than six and a much much higher than kind of current acquisition cap rates.
Okay got it that's helpful. And then just maybe switching gears a little bit and just a final one here just the opportunity set in the loan book, maybe comparing that.
Today versus call. It three 612 months ago, and how things may have changed.
Yes, so the loan books a little.
Unusual year ago, because we had $50 million out as part of the landmark mezzanine loans that was kind of the first step towards the eventual acquisition of that portfolio.
We do see some opportunities against some of our mezzanine excuse me some of our development financings is really in the form of mezzanine financing at a higher.
Kind of yielding right as part of the capital stack of those those projects. Some of our development is just kind of loan down or owned on where we are funding the development.
<unk> off our books in us greater opportunity to deploy more capital. So we're seeing more we're seeing more and more loan opportunities in the last year.
Kind of an unusually high number because of landmark and that went away as part of that acquisition.
Really helpful guys. Thanks again for the time chat soon.
Thank you.
Thank you. Our next question comes from the line of Dave Rodgers with Baird. Please proceed with your question.
Yes, good morning, I wanted to follow up on the leasing spreads Jason you made a comment just a couple of minutes ago regarding next couple of quarters had some good visibility, but there were some unique things about the assets that drove the bigger increases. So I guess the first question is do you not really see that continuing into next year is that just kind of cautiousness and then maybe maybe mark this would be a better question for you.
You on the rent spreads that you've achieved and the escalator increases is there anything unique between.
Between on campus or off campus or single tenant or multi tenant that's driving those numbers higher in in the second half of this year.
Yes, My comments, you said it or just cautious.
By now for the foreseeable future, we're seeing lots of <unk>.
Kind of 6% opportunities for roll up.
In some cases, it's just a function of which markets where the buildings are.
More aggressively we can push those rates I'll, let Jeff answer the or excuse me I'll, let mark answer the second half of the question.
Yes, so looking forward.
Our leasing spreads in the back half.
You think it will be looking at 5% to 7% re leasing spreads on target, which is as I've mentioned in the prepared remarks.
In terms of what we're seeing single tenant multi tenant or single tenant typically have very long leases. We don't have too many single tenant renewals right now sell primarily are.
Our leasing activity is in the multi tenant buildings and not seeing too much difference in the on campus versus off campus again, we're really paying attention to what the overall market rate is for the particular location of that asset.
Great. Thank you.
Thank you. Our next question comes from the line of Tayo Okusanya with Credit Suisse. Please proceed with your question.
Hi, Yes, good morning, everyone.
First of all just on acquisitions.
I know your target for the year versus where you are right now you seem to be running a little bit behind if you would let me use those words I'm just kind of curious is it the whole kind of price discovery.
Scenario right now, that's making you maybe not be as aggressive but maybe.
You expect to have better acquisition volumes in the back half of 2018.
I can't say a better time.
There's lots of them.
Lots of opportunities there.
Sellers' expectations are out of date right now so we're starting to see more and more we're getting closer to closer on a bid and ask that works for us in that.
We'll work with the seller so the second half of the year Youll see more acquisitions.
Got you. Okay. That's helpful. And then just curious in markets, where you tend to overlap.
In HR, but just kind of curious kind of post the merger what are you hearing from hospital systems.
In those markets. So what are you seeing in regards to how that merge them today, maybe competing.
And how are you guys kind of responding to that is if anything is changing at all.
Well a lot of our development opportunities are coming.
From health systems, who are looking for kind of expansion and strategic.
Relocation of some of their practices.
<unk>.
We're seeing some other opportunities in some markets that are more acquisition in nature and backfill in billings that are less than occupied by those health systems, where they would be interested in occupying them or if we were the owner.
We'll see some opportunities.
Okay. So you actually think that that's actually going to create more opportunities really because.
Physician practices and hospital systems are looking for alternatives to that.
I don't know if theyre looking for alternatives to others.
We're working closely with several health systems on opportunities just like that title so either new development.
On and off campus.
Or.
Occupying more space in existing buildings that are kind of that they are in today, but are.
We will move more space into it we own the buildings in the future.
Gotcha, Okay, and then last one from me just kind of any updates from a regulatory perspective anything changing from a Medicare reimbursements of commercial insurance reimbursement perspective that potentially.
Potentially it could impact physicians and hospital systems that maybe we should be aware of.
So we're not directly impacted by the inpatient rates, but that certainly affects the <unk>.
P&L of our health systems, which again, 66% of our space released to health systems, Thats outpatient space, but.
CMS did.
Did readjust their proposals for next year I think that came out in the last week. So that's a four 3% bump which is probably still not enough to cover existing inflation and nurses salaries in particular, but it is much better than it was last year commercial insurance.
Again talking to the health systems that share that data with us about their ongoing negotiations.
Those are growing in the 5% to 6% or more right depending upon the market. So.
We're still waiting on CMS too.
Kind of their proposal on the physician reimbursement was lower than it should be.
But they always start low and it kind of works higher by the time. The final rules. So we would expect that to improve as well again, reflecting inflation.
And then the outpatient surgery space. They are looking at about a 3% up and I'm sure they'll try to fight for smaller as well and again that's for Medicare So.
Commercial insurance rates should should grow at a patient access to 3% for those outpatient surgery center operators.
That we have so many that we lease so much space too.
Gotcha Okay.
Helpful. Thank you thanks a lot.
Thank you. Our next question comes from the line of Joshua <unk> with Bank of America. Please proceed with your question.
Yeah, Hey, Ron Thanks for the question just kind of curious how youre thinking about that needs over the next 18 months and what kind of rates you could potentially achieve.
Yeah, Hey, Josh This is Jeff the nice thing about our.
Lease maturity schedule as there is no refinancing or anything coming up over the next I guess over three years.
So there is no refinancing needs.
Right now we're comfortable where we are in the line so.
So I don't know that theres necessarily a need to term out that debt.
It's hard to say exactly what long term rates, what our 10 year rates would be right now just because there isn't a whole lot of activity in the market. So there's not a.
A lot of visibility, we would guess, maybe 5% or so give or take.
So like I said I don't think we will need to use it but thats, where we see rates right now.
Yes.
I've noticed some other Reits and life and annuity space. So it's kind of.
<unk>.
Sounded like term loans.
Would you do like a 10 year or like a term loan if you needed to term out the line kind of look attractive.
Yes, I mean, if we decided that we wanted to term out the line, we'd probably look I mean, the term loans are better execution right now than than 10 year debt I thought you were just asking about tenure costs.
Sorry, I was probably too specific just trying to get a sense of where we're at.
Cost of capitalism crossover companies.
I appreciate that thanks, guys.
Thank you we have reached the end of our question and answer session I would like to turn the call back over to Mr. Thomas for any closing remarks.
Thank you Michelle Thanks for everybody for joining US today, we are excited about the prospects of the third quarter and look forward to seeing you at the investor conferences and on the next earnings call. Thank you.
Yeah.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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