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Edited Transcript of DOC earnings conference call or presentation 7-May-20 2:00pm GMT

Q1 2020 Physicians Realty Trust Earnings Call

Milwaukee Jun 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Physicians Realty Trust earnings conference call or presentation Thursday, May 7, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley D. Page

Physicians Realty Trust - Senior VP & General Counsel

* Del Mar Deeni Taylor

Physicians Realty Trust - Executive VP & CIO

* Jeffrey Nelson Theiler

Physicians Realty Trust - Executive VP, CFO & Head of IR

* John T. Thomas

Physicians Realty Trust - President, CEO & Trustee

* Mark D. Theine

Physicians Realty Trust - EVP of Asset Management

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Conference Call Participants

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* Connor Serge Siversky

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Daniel Marc Bernstein

Capital One Securities, Inc., Research Division - Research Analyst

* Jonathan Hughes

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Jordan Sadler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Michael Albert Carroll

RBC Capital Markets, Research Division - Analyst

* Michael Anderson Griffin

Citigroup Inc, Research Division - Senior Associate

* Michael Patrick Gorman

BTIG, LLC, Research Division - MD & REIT Analyst

* Omotayo Tejamude Okusanya

Mizuho Securities USA LLC, Research Division - MD & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to the Physicians Realty Trust First Quarter 2020 Earnings Conference Call. [Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to your host, Bradley Page, Senior Vice President and General Counsel. You may begin.

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Bradley D. Page, Physicians Realty Trust - Senior VP & General Counsel [2]

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Thank you. Good morning and welcome to the Physicians Realty Trust First Quarter 2020 Earnings Conference Call and Webcast. Joining me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; Mark Theine, Executive Vice President Asset management; John Lucey, Chief Accounting and Administrative Officer; Laurie Becker, Senior Vice President, Controller; and Dan Klein, Deputy Chief Investment Officer.

During this call, John Thomas will provide a summary of the company's activities and performance for the first quarter of 2020 and year-to-date as well as our strategic focus for the remainder of 2020. Jeff Theiler will review our financial results for the first quarter of 2020 and our thoughts for the remainder of the year, then Mark Theine will provide a summary of our operations for the first quarter of 2020. 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 1995. They 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, our forward-looking statements are not guarantees of future performance.

Our actual results could differ materially from our current expectations and those anticipated or implied in 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 in any forward-looking statements, please refer to our filings with the Securities and Exchange Commission.

With that, I would now like to turn the call over to the company's CEO, John Thomas.

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [3]

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Thank you, Brad. Thank you for joining us this morning. Physicians Realty Trust entered 2020 with a healthy portfolio, a strong balance sheet and a pipeline poised for growth. We welcome you to our first quarter 2020 earnings call, which we are happy to discuss today, although we know you may be more interested in current events.

I'm pleased to report the entire DOC team is healthy and working efficiently, effectively and in most cases, remotely from home, with a small team rotating through our DOC headquarters to keep DOC's essential operations working and performing very well. We are pleased to report that our portfolio of medical office facilities has remained resilient during this difficult time. 248 of our 260 medical facilities have remained open to serve patients without interruption, and 93% of our tenant suites are currently operational.

These providers are bravely answering the call to treat patients and provide essential health care services. We honor their bravery and sacrifice. After my comments, our EVP and Chief Financial Officer, Jeff Theiler, will provide a financial report for quarter 1 with balance sheet updates through April 30, then Mark Theine, our EVP, Asset management, will provide a quarter 1 operating report as well as a general update on our operations since April 1.

I will then address April and May rent collections before taking your questions.

Prior to the onset of COVID-19, we were gearing up for a strong 2020 of operational excellence and external growth. In anticipation of this growth, we rightsized our balance sheet by raising $239 million of equity in the first quarter very efficiently through our ATM. As the COVID-19 situation intensified in March, we did not, and have not since, contractually committed any new capital to acquisitions.

We completed the conversion of 1 loan to ownership in Fort Worth, Texas, with a modest additional investment, and we continue to fund our development projects. One of our 2 development projects leased to U.S. Oncology, a subsidiary of investment-grade rated McKesson, completed certificate of occupancy and rent has commenced.

We remain very well capitalized, finished the quarter with a debt-to-EBITDA ratio of 5.1x. While we slowed down our external growth in March and April, we expect to be able to proceed with our previously targeted investments once the capital markets stabilize and economic conditions add clarity. DOC's relationship-based investment strategy and history of repeat business continues to benefit our long-term business plan, as the medical office owners we were working with have all agreed to postpone transactions for the time being.

As of today, we haven't lost any of the investment opportunities that we were expecting to complete in the second and third quarter or otherwise. Due to this quarantine and consequential economic and capital market uncertainty, we pulled our 2020 acquisition guidance on March 19. So while we cannot commit to the timing, volume or investment price of our anticipated transactions, we do expect the opportunity to proceed with acquisition activity at the appropriate time, and our pipeline remains robust.

Many aspects of the future remain unclear. As you know, the U.S. federal government has pumped trillions of dollars into the U.S. economy with hundreds of billions of those dollars directed to health care providers. While the overall financial impact of COVID-19 are still uncertain for our health system partners, it appears likely that the federal government subsidies, in whatever form, will not be enough to offset the direct and indirect cost of the pandemic.

One of the most important factors to the recovery of the health care system will be how quickly the employment rate improves to offset any potential spike in the Medicaid population. Nevertheless, we believe that the lessons learned from the crisis will improve the efficiency, capacity and appropriate utilization of health care services in the U.S.

Early in this shutdown, our outpatient facilities, including surgical facilities, were seeing an increase in volume as inpatient hospitals shifted care to the outpatient settings, many off-campus, in order to prepare for the expected need for their inpatient facilities. Unfortunately, however, as state and local governments realized, there wasn't the testing capability and adequate PPE to provide for necessary but perhaps non urgent health care services.

We began to place restrictions on non urgent care, specifically surgery that can be scheduled and temporarily delayed. While the U.S. has been growing its outpatient capacity for years, we are realizing now, more than ever, that our most precious high acuity facilities may best be preserved for complex medical needs like COVID-19.

This would naturally lead to the vast majority of health care, specifically surgical and routine necessary procedural care, being directed to less intensive, modern and convenient medical office buildings, preserving hospital capacity for the most complex medical services and highlighting the opportunity for DOC in the years ahead. While we don't know the total impact of COVID-19 on these numbers, the CMS Office of the Actuary published April 3 its most recent estimates of national health care spending in the United States.

According to the actuary's report, the U.S. national health care spend is expected to grow at an average annual rate of 5.4% from 2019 to 2028. CMS in the report estimated that national health care spending reached $3.81 trillion in 2019 and would increase to just over $4 trillion in 2020.

CMS projected that by 2028, health care spending would reach $6.19 trillion and would account for 19.7% of GDP, up from 17.7% in 2018. Short-term shocks don't change these long-term tailwinds, driven by the growth in the aging population and people generally living longer. There are lessons to be learned by the events of the last 3 months, most of which we believe will be beneficial to our real estate investment thesis and strategy. Jeff will now review our financial results for quarter 1, and then Mark will share the results of his team. Jeff?

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Jeffrey Nelson Theiler, Physicians Realty Trust - Executive VP, CFO & Head of IR [4]

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Thank you, John. In the first quarter of 2020, the company generated normalized funds from operations of $52.7 million, which was an increase of 11% over the comparable quarter last year.

Normalized FFO per share was $0.26 versus $0.25 in the same quarter of last year, and our normalized funds available for distribution were $0.25 per share or $50.5 million, an increase of 20% over the comparable quarter of last year. As our cost of capital has changed, alongside the COVID-19 pandemic, we have taken concrete steps to reduce our investment activity. Consequently, in our March COVID-19 update, we withdrew our previously issued acquisition guidance and have postponed the majority of our deals until we have more visibility on the capital markets.

We did, however, complete several investments that were already in process. In the quarter, we invested a total of $19 million, with the vast majority of that going towards a 45,000 square-foot building in Westerville, Ohio, anchored by the investment-grade rated Ohio State University Wexner Medical Center.

Once the short-term rent abatement ends following the completion of TI work in June, the investment will produce an initial cash yield of 6.1%. We also converted a $47 million loan investment into the ownership of Texas Oncology's 98,000 square foot Fort Worth cancer center and MOB, which is expected to yield 5.5% once stabilized.

Subsequent to the end of the quarter, we funded the final $4.6 million committed under our Denton, Texas construction loan and provided another $13 million mezzanine loan for a health care building in Columbus, Ohio. In sum, our total year-to-date investments have been $36.6 million. We do not have any other transactions in the closing process at this time and our only remaining investment obligation is the final $14 million needed to complete our Sacred Heart ASC development.

On the capital side, we raised $239 million on the ATM in the first quarter prior to the market downturn, at a weighted average share price of $19.57 per share. We utilized the majority of these proceeds to pay down our line of credit, which reduced our consolidated debt to 29% of gross assets and gave us an annualized consolidated debt to EBITDAre ratio of 5.1x.

As of the date of this earnings call, we have approximately $228 million drawn on our $850 million revolving credit facility, leaving $622 million available to draw and another $30 million of cash on hand. Our debt maturity schedule is advantageous, with no material term debt maturing until 2023.

At the current time, we aren't overly worried about liquidity, but we'll closely monitor our operations month-to-month and adjust our short-term capital buffers as appropriate. At this point, I'd like to highlight the additional disclosure we put out this quarter on COVID-19 related statistics. We understand that investors and analysts are interested in how our portfolio is bearing in this uncertain environment, so we have tried to provide you as much information as possible.

In this COVID-19 supplement, you can find breakouts by specialties as well as utilization statistics and projected reopening dates. JT will also provide more details on our April and May collection a bit later in the call.

To wrap up on operations for the first quarter, we generated same-store NOI growth of 1.6%. Our G&A came in slightly under budget, at $9 million, primarily due to lower travel, legal and other miscellaneous expenses. Recurring capital expenditures were also lower than budget, at $3 million, as we went through our portfolio and prioritized our spending appropriately.

And finally, based on the rest of the year's certainty for uncertainty, we've adjusted some of the 2020 guidance that was issued on the previous earnings call. I've already mentioned, we withdrew our acquisition guidance in March, based on capital market conditions, so that remains withdrawn.

We will also leave the G&A guidance unchanged at this point, at $33.5 million to $35.5 million for 2020. Our recurring CapEx is expected to be a little lower as we delay some nonessential projects. So our new expectation for the year is $17 million to $19 million versus our previous guidance of $24 million to $26 million. I will now turn the call over to Mark to walk through our portfolio statistics in more detail. Mark?

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Mark D. Theine, Physicians Realty Trust - EVP of Asset Management [5]

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Thanks, Jeff. We delivered strong first quarter results, building on DOC's excellent performance in 2019, and I'd like to start by recognizing the outstanding efforts of those on our operations team who have executed consistently during the challenges of the past couple of months. As you know, we've invested a considerable amount of time and energy cultivating a unique culture, with talented and engaged team members who truly care about our health care partners and it's paying dividends now.

Despite working remotely and practicing social distancing, our asset management, property management and leasing teams continue to function at a high level and have shown great strength and resilience. Before focusing on how we are navigating through the current environment, I'd like to share a few highlights from the first quarter.

DOC's portfolio at the end of Q1 2020 was an industry-leading 96% leased, including 59% leased directly to investment-grade quality tenants and their subsidiaries, which we believe is more than any other publicly traded portfolio in the health care real estate market. Leasing results in the first quarter were strong, with an 86% tenant retention rate, renewal leasing spreads of approximately 1% and positive portfolio net absorption of 26,000 square feet.

Looking ahead, DOC has less than 5% of its portfolio scheduled to renew in any year through the end of 2023. We believe the low number of lease expirations should result in lower levels of volatility in net operating income, as well as require significantly less in concessions for tenant improvements and leasing commissions, compared to other MOB portfolios with much greater levels of annual lease expirations in this uncertain market.

Moving to same-store NOI growth. Our 238 property same-store MOB portfolio generated cash NOI growth of 1.6%. The same-store NOI growth is slightly below our average annual rent escalation of 2.3% as a result of a 20 basis point decline in occupancy in the same-store portfolio, primarily from a 21,980 square foot vacancy at our MeadowView MOB in Kingsport, Tennessee and short-term rent abatement at a 17,500 square foot surgery center in Cornwall, New York, which recently renewed for a new 15-year term in Q4 2019.

One final highlight from the first quarter. I am extremely proud to share that both the Baylor Cancer Center in Dallas, Texas, and Northside/Towne Lake MOB in Atlanta, Georgia, earned the Regional award for the outstanding building of the year, also known as TOBY from BOMA, for their respective regions. These outstanding MOBs demonstrating the exceptional quality of DOC's portfolio will next advance to BOMA's international TOBY competition in June, where DOC will have 2 of the 6 entries competing for the top award. The TOBY awards recognize excellence in building operations, policies, management, community involvement and ESG efforts.

Now turning to the current operating environment and our focus on the COVID pandemic. The health and safety of our health care partners and our team members has, of course, been the top priority. In early March, as the first COVID cases emerged in our markets, we quickly commenced in cleaning procedures and communicated extensively with our health care partners and our entire operations team, including an informational webinar featuring DOC trustee member, Dr. William Ebinger.

At that time, we also formed a COVID task force to review and enforce operational procedures that included, but are not limited to, janitorial frequency and product selection, scheduling and use of PPE for essential employees, social distancing, signage in building common areas and elevators, air filtration and management of construction activities. Across the portfolio, the entire team worked tirelessly to implement these new procedures to ensure our buildings promote a healthy environment. Nearly all of our facilities remained open during the month of April, and the vast majority expect to start increasing patient volumes again in early to mid-May under enhanced guidelines for safe patient care.

Most recently, as an example, in Atlanta, Georgia, our largest market, the Governor has begun reopening select businesses to start rebuilding the economy. As of this week, 93% of DOC's occupied space was utilized. Those offices temporarily postponing patient visits and not open, primarily include dentists, ophthalmologists, plastic surgery and physical therapy offices.

Interestingly, utilization and profitability at the LifeCare LTACHs also improved considerably during March and April as the demand increased due to COVID-19 cases and CMS expanded the scope of care LTACHs can provide and accelerated reimbursement payments.

Looking ahead to our leasing outlook for the remainder of the year, we expect strong tenant retention as practices simply remain in place during the COVID pandemic. For the remainder of 2020, we have just 87 leases scheduled to renew, representing 2.1% of ABR, but we do expect some leases to extend term early as part of agreement for near-term rent deferral. While new leasing activity could slow in the future, we are seeing a strong pipeline of leasing activity at this time, including some recent inbound calls from on-campus practices look to off-campus MOBs as patients and families are hesitant to visit hospital campus treating COVID patients.

To conclude, we are prioritizing the health and safety of our team members and those in our facilities first and using this time wisely to invest in our relationships with our hospital and physician partners during this time of need. The high-quality nature of our health care partners has never been a more powerful differentiating component than it is today. With the majority of our tenants investment-grade quality, and approximately 7 year weighted average lease term remaining in the portfolio, we are well positioned to endure this period.

With that, I'll turn the call back over to JT to discuss our success collecting April and May rents. JT?

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [6]

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Thank you, Mark. We know there is 1 statistic that more than any other you want to discuss. We are very pleased to report our April 2020 cash rent collections stand at 94.4% of billings. We anticipate collecting most, if not all, of the remaining 6% over time. We are already off to a promising start in May, with over 74% collected as of May 6, which is consistent with April's pace of collections.

During April, DOC received inquiries from tenants, who represent 21% of our annual base rent, or ABR, about their options for paying rent during the COVID-19 pandemic. These inquiries largely came from small tenants, ambulatory surgery center tenants and the specialists that perform surgical care, like ophthalmologists and orthopedic surgeons, hit hard by the national and state limitations on performing non urgent surgery that can be postponed.

DOC has used this period of time to engage with all of our tenants and on a case-by-case basis, assist them with the process of applying for Federal Paycheck Protection Program loans and/or Medicare grants and advanced payments.

Before the CARES Act was even passed, we had retained 2 different consultants, each of which are active in medical practice management and the SBA process. For these tenants who pursued PPP, medical assistance and other sources of liquidity, we waived lease late fee obligations and patiently worked with our tenants while they sourced working capital to pay rent through these programs.

In the end, tenants representing just over 5% of our ABR have not paid April rent thus far, but again, we believe most, if not all of this rent is collectible and will be collected. We refer you to our COVID-19 supplemental update posted this morning for more details. While our April rent collections were strong and May is off to a good start, we do expect tenants to continue to have constraints on the revenue, collections and working capital for the remainder of the second quarter.

Fortunately, with the increase in PPE production, our outpatient care facilities can now start providing surgeries that have been delayed. Many of our providers are reporting full schedules and expanding surgical hours to the weekends as well. By the end of this weekend, the government prohibitions on scheduled surgery have expired for 91% of DOC ABR.

This is updated as of this morning, with the addition of Maryland overnight, and is better than reported in our COVID supplement. In addition, as of this week, only 2 of our buildings are currently closed, 1 a wellness center leased to CommonSpirit and a small legacy building.

Our provider tenants are anxious to care for their patients and get back to work. We're now happy to address your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Michael Carroll from RBC Capital Markets.

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Michael Albert Carroll, RBC Capital Markets, Research Division - Analyst [2]

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I also wanted to thank you guys for providing the COVID supplement presentation. Looks like there's a lot of good details in this presentation. I wanted to dive into the uncollected rents in April (technical difficulty) percent of rents that have requested for deferral that you denied. Why were these denied? And is there concerns on the collectability of the 3% of rents that weren't paid from this bucket?

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [3]

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Yes, Mike, it's JT. And we hope you were all safe and your family as well. I'm going to ask Jeff to respond to that question.

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Jeffrey Nelson Theiler, Physicians Realty Trust - Executive VP, CFO & Head of IR [4]

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Okay. Mike, no, it's a great question. So in April, we received rent deferral or rent questions from about 21% of our tenants. And we have a pretty good advantage in processing these requests because over the past 3 years, we've really invested an enormous amount of time and resources into building a dedicated credit department that tracks tenant financials actively. And so we have a really good sense of what their usual revenues and volumes are, as well as the resources available to pay rent.

And so as these requests come in, we put them through a really detailed review process and then we segregate them into tenants that have the resources or aren't showing enough negative impacts on their business, and we think they can still pay rent, versus the ones that are really showing significant struggles, and those are the ones that we're working with and giving them additional time as they avail themselves of government resources, like the Medicare Acceleration Payments or the PPP loans, those types of things.

So the tenants that were rejected or their relief requests were rejected were ones that we had done the credit work on and determined that they had the ability to pay rent.

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Michael Albert Carroll, RBC Capital Markets, Research Division - Analyst [5]

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Okay. And then the 7% of -- that you're in discussion with, at least on the April billings, I mean, it looks like the majority of that was already paid, should we assume that, that's a good starting point for potential -- was it May and June deferrals will come from that bucket?

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Jeffrey Nelson Theiler, Physicians Realty Trust - Executive VP, CFO & Head of IR [6]

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No, it's a great question, Mike. So in the first week of May, of those 7% of tenants that we were working with, about half of them received their government assistance or have since been able to pay their May rent.

So I think what probably the way to look at it is, you cut that bucket roughly in half. So 3% or so of the total ABR we're still working with, and then the other ones have had a successful resolution already.

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Operator [7]

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And our next question is from Nick Joseph from Citi.

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Michael Anderson Griffin, Citigroup Inc, Research Division - Senior Associate [8]

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This is Michael Griffin on for Nick. Just curious, you mentioned states reopening, nonessential medical procedures starting up again. I'm wondering what your thoughts on how long it will take to work through that pent-up demand for those nonessential procedures?

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [9]

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Yes. That's a great question. We don't have a solid sense of that, but again, most all of April's work was delayed or deferred, and so some of the facilities that we've talked to performed almost no surgery in April, have very full schedules. They're asking us to expand hours into the evenings, open on Saturdays and things like that.

So we think May and June will be very full schedules. That's what, again, most of our providers are reporting to us. And then the question, I think, is then how quickly can they then build up a new schedule as patients return to the clinical setting, the diagnostic setting, and that, we don't know yet.

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Michael Anderson Griffin, Citigroup Inc, Research Division - Senior Associate [10]

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Got it. And then 1 more, a question on deferrals. For deferrals that would be granted, what -- what do you have -- do you have a sense of the length of time frame for repayment?

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [11]

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Yes we really approached this, as Jeff said, not in kind of automatic deferrals for any specific requests. It's been on a case-by-case basis. We haven't specifically granted deferrals at all. Again, we on specific conditions, we've waived late fees in anticipation of tenants paying their rent. And we've had no tenant has asked for abatement. No tenants have threatened to not pay. They just asked us for time to pay when they can. And again, we've evaluated those on a case-by-case basis.

So I think the 1 situation we know they have the best color on kind of when they'll be able to get caught up is probably a June, July kind of time frame. But that's a small percentage of the unpaid billings in April, and very comfortable that, that tenant will be able to get caught up, if not by the end of the quarter, early in the second -- third quarter.

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Operator [12]

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Next question comes from Connor Siversky from Berenberg.

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Connor Serge Siversky, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [13]

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First question for me, I mean, seeing how the practices typically generate revenue from lower acuity procedures are the ones most affected, and while it's good to see that some states are loosening restrictions, I mean, how are you guys looking at the possibility of a second wave of COVID in the fall and winter months? I mean, any commentary here from your team or conversations with your tenants would be appreciated here.

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [14]

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Yes, Connor, great question. And again, we hope all your family is safe as well. The issue for the reason elective surgery or scheduled surgery, which I think is a better term, was really restricted in most states was the lack of PPEs, so the surgical gowns, the mask, all the things they need just to protect both the health care teams, but the patients themselves.

Our tenants are telling us that they've been able to start stockpiling PPEs with -- when they were shut down in April, many of which never saw -- their communities never saw a big wave. And in fact, were loaning out some of the PPEs that they were stockpiling to the inpatient facilities that were starting to see some COVID patients.

So that's the big issue. So it's -- they can decant the inpatient hospitals if they're the wave, and if they've got the PPE, they can be a beneficial part of the system versus just shutting down. And so again, our anticipation is that most of the tenants we're talking to and providers we're talking to are in a second wave event, they will have time to stockpile PPEs and be able to stay open and contribute to the health care system and not just be shut down. But again, that's subject to volumes and other things outside of their control and our control as well. But that's the anticipated response for the fall.

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Connor Serge Siversky, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [15]

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All right. Cool. I appreciate the color there. And then I think we're operating under the impression here the acquisition market is going to be muted through the end of the year. I think it kind of levels the playing field to some degree. Are you guys exploring any new opportunities here? Or can you provide any color on kind of your strategic views going forward when it comes to expanding the portfolio in the future.

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [16]

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Yes, I'm going to ask Deeni to comment as well, but just before he weighs in, as I said in my prepared comments, the good news is most of the pipeline that we had built up in the fourth quarter and early in the first quarter -- fourth quarter of '19 and the first quarter of this year that we expected to capitalize and invest in, in the second quarter and third quarter is still there. And the sellers, if you will, the developers and the owners of those buildings are -- physicians, in particular, are waiting on us to get through this situation to proceed. Again, we don't know what the price will be, but we hopefully can have a meeting of the minds with those sellers and get back to the growth when conditions arise. Deeni, why don't you weigh in as well?

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Del Mar Deeni Taylor, Physicians Realty Trust - Executive VP & CIO [17]

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Well, I think that 1 of the things we're doing, we're taking a very active process to watch all the deals that are in the market, what few are out there, and continue to monitor both who are the sellers and what their expectations are. And as JT has said, we've been fortunate that the sellers that we've been working with understand the situation and are holding back as we watch what happens in the market. But we're watching as close as we can all the deals that are out there potentially coming.

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Operator [18]

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And our next question is from Jonathan Hughes from Raymond James.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [19]

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I'll echo Mike's earlier comments on the COVID supplement. It's very helpful. So thanks for that. On the investment-grade tenants, I noticed April collections there at 97%. Is that normal, like, say, versus a year ago? I'm guessing I would have expected it may be more like 100%, given the quality of that rent stream?

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [20]

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Yes. Great question, Jonathan. Again, I hope all is well with your family. The -- it's really 2 subsidiaries of investment-grade tenants. One is a very large multi-specialty group that's only partly owned by the investment-grade tenant. So it's 1 of those unfortunate situations where they're kind of caught in limbo between they're too big for the PPP program. It's kind of 1 of the flaws in the way the PPP was structured, and they're not wholly owned by the health system.

So it's -- there's kind of tricky for the health system to step in and pay rent on behalf of physicians that they're only partly owners of. That is the situation I mentioned a minute ago, where we fully expect to get that resolved by the end of the quarter, just because -- as the health system steps in and works with that physician group to, a, get them back, busy working and b, to get their rent caught up. So we're fully, fully confident in the resolution of that one.

The other is a small ASC, again, that's in a joint venture with a health system, health system majority owner. And unfortunately, again, in a similar situation, have not stepped into to pay that rent, but we expect to get it collected. Again, another kind of flaw in the PPP program, where Shake Shack did qualify, and even though with 8,000 employees, but a surgery center that's partly owned by a health system can't benefit under a similar structure because they're, again, have to count all the health system employees as well. We tried to get that fixed in round 2 of the CARES Act, but it just didn't have quite enough momentum in the Senate.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [21]

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Okay. And on the credit guarantee on investment-grade exposure, I mean, you bring it up. I mean, how much of your, I guess, 57% of rent, if you include Northside as investment grade, how much of that 57% investment-grade rent exposure is, is paid explicitly by the system? Or is it paid by that physician group that might just be affiliated with the system, kind of like the example you mentioned earlier, where maybe that system is a joint venture owner, so it's not fully guaranteeing that lease payment.

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [22]

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This is not precisely correct, but the 97%, you see the paid is more or less the direct payment by the health system -- percentage. Just 2 unique situations where, again, no credit issue, just the structure of those 2 groups made it more complicated in this kind of situation.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [23]

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Okay. That's helpful. And then my last one. I know procedures are expected to come back in a hurry due to pent-up demand, but do you see any risks that some may be overlooking due to the prevalence of high deductible health care plans? Do you think some people could actually put off these electives, the ones that truly are elective, to maybe even late 2021 after they hit their minimums and don't have to come out-of-pocket so much. Is that a risk that maybe you're thinking about and your operator and physician groups are discussing?

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [24]

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Yes. Jonathan, that's a good question. And potentially, that's an issue. But again, these are -- what will be done in May and June are things that were already scheduled in late March and April. And so again, I think the patients in those cases had already come to the conclusion that they weren't going to defer -- the case for any longer.

So we'll see. I think the bigger issue is a gap in backfilling after the surge in actually performing procedures, to be clear, in May and June, is how quickly will patients go back to the diagnostics and kind of fill up the pipeline for late summer and early fall.

And again, back to that surge question from before, which is the PPP -- the PPE, to be precise, protective equipment, available. And again, our providers are telling us they're stockpiling now and expect to stay open during a second surge of the COVID in the fall, if that occurs. It's a great question, but we don't see that. Scheduled surgery has always got that kind of seasonality to it, which is if you get to the early fall and you can wait until the end of the year and you've got your deductibles burned out. That's why December is so good for orthopedic surgeons.

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Operator [25]

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And our next question is from Tayo Okusanya from Mizuho.

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Omotayo Tejamude Okusanya, Mizuho Securities USA LLC, Research Division - MD & Senior Equity Research Analyst [26]

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Again, I think some of the supplemental information and the updates are very helpful.

With the updates, some of the data you put out just about when it's kind of sliced up, the rent collections are pretty interesting. Specifically, it seems like, again, you've kind of collected more of your rents on your investment-grade versus your non investment-grade tenants.

You've collected more rents from your on-campus versus your off-campus tenants. I'm just kind of curious, is that kind of guiding your decision going forward regarding investments and kind of how you kind of think about underwriting on a going-forward basis? And if so, how?

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [27]

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Tayo, we -- again, we think that outpatient off-campus buildings have performed very well. It's the affiliated off-campus buildings, which is really the sweet spot of our investment thesis. We've got -- actually was the best collection rate we had, at 95%. So other than the hospitals in LTACH, which paid 100%. And so we're very proud of that. But the off-campus affiliated MOB, we think would have been the star in the last 6 weeks, again, but for the lack of PPE.

And we think those, again, that's where patients are going to want to go and not go to the hospital and get mixed up with the COVID cases in that building. So again, lots of reasons for on-campus buildings, but we think the underlying thesis has been not only reaffirmed, but we think will grow over time is our long-term view that off-campus affiliated MOBs is really the sweet spot of our long-term strategy.

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Omotayo Tejamude Okusanya, Mizuho Securities USA LLC, Research Division - MD & Senior Equity Research Analyst [28]

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Okay. That's helpful. And 1 more for me. Again, with hospitals kind of being the lifeblood of your business, could you just talk a little bit about, again, how you're feeling or what you're seeing in regards to all the federal and state aid hospital systems are getting, whether it's part of the CARES Act or what have you, and whether you have a sense whether that's actually going to be enough or if they need more aid, and what the implications are for kind of rent collectibility, if not in April and May, maybe further down the road, if hospital systems are still kind of struggling with profitability, especially as the patient mix is likely to kind of change post-COVID, just given we have 30 million Americans who no longer have employment.

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [29]

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Yes, Tayo, great question. I mean, no question, all the health systems, investment-grade or otherwise, have been really pinched. Not only do they have kind of high expenses in getting prepared for COVID cases, but also the bigger issue has been the opportunity cost, the lost revenue, primarily from surgery that could be scheduled, and, and again, we think lots of health systems will see more than ever the benefit of shifting outpatient care and scheduled care to outpatient care facilities in the future, to be better prepared for these kind of things going forward.

In the near term, obviously, there's a pinch on both the revenue and the expenses and the profitability. The federal government has pumped a lot of money into it. It has not pumped enough. Hospitals are still looking for more. There's going to be a CARES Act 4 or fourth round of legislation. I've got a pretty good summary of that on my desk, most of which seems to be pretty acceptable to the Senate, and so we expect more money there.

One of the big issues is part of the Medicare advance payments was just that, advances and -- is a loan. And so hospitals, there's a fairly large number with bipartisan support in the House -- of Congressmen, Congress people, looking to convert that to, if not a pure grant, at lease extending the term of those loans and the interest rates, so as not to put pressure on hospitals, just when everything is kind of returning to normal, to then have a big obligation that they have to pay back to Congress.

So, will that turn into a grant? That's probably a 50-50 guess at best or outcome at best. But I do think there's a lot of momentum to ease the payback periods and payback terms for that part of the Medicare money that's been advanced. So bottom line is, expect more federal money to come in, expect more money to go to the states to help the states offset their Medicaid costs.

And as I mentioned in my opening comments, the biggest issue really to your question is, how quickly can we get employment back to some kind of normal rates and get those people back on commercial insurance. Again, they have opportunity for COBRA right now, but that's -- long term, it's really about the employer commercial insurance, and that's the profitability of the health care systems.

I will conclude with that question. Happy to have a follow-up. But I'll conclude that with we're in touch with our largest health systems, really all of our health systems, all of our tenants, very routinely, as Mark and Amy Hall and myself and Jeff and others have been in communication with them. And again, all of that has been a very collegial. We've been there providing support to them in their buildings and helping to manage the traffic flow with our brave employees and partners that have helped manage that on the front end.

At the same time, our health systems are all -- many of which are starting to look for growth opportunities. I mean, I fully expect to see some hospital consolidation coming out of this. Fully expect with that situation I've talked about before, that hospitals will employ more physicians after this, not less. So some of our hospital systems that are investment-grade and have the capabilities to grow in the future are looking for targets right now for more consolidation. We just think we'll be part of that and everybody will benefit eventually.

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Operator [30]

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And our next question is from Daniel Bernstein from Capital One.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [31]

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I just want to follow-up on the last comments you made, John. Do you see an opportunity for hospitals to increase their monetizations, assuming this -- everybody gets over this and hospitals come back to profitability, but they are losing money today. And do you see MOB monetizations picking up and some opportunities from that end coming your way?

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [32]

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Yes. We certainly do, Dan. And again, glad you're well, and thanks for the early morning comment, that was helpful. So the -- there are already a couple of the proprietary hospital companies out there looking to monetize some MOBs. There's 1 nonprofit that we're aware of that's looking to -- they're starting to package up. They've been in the process of it, but I think they're starting to think about accelerating that now.

We think a lot of hospitals that we -- the systems that we've been talking to and are aware of that were thinking about doing developments and funding it on their own are more likely to at least consider using third-party capital like DOC's and others. So I think that's a very real realistic. And again, we're starting to see evidence of it already. And we certainly -- that's where we shine. As you know, like we have done with CommonSpirit and Northside and other health care systems over the years, and I think we'll have great opportunities going forward to do that.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [33]

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And then the other question I had is in terms of leases. I mean, retention rates are higher. We're hearing of early renewals. I think you made some comments about that earlier in the -- earlier in the earnings call here. Are you seeing any change in the terms of the leases in terms of the length of the lease or requirements on TI or rate? Just trying to understand if there's some early signs there on pressure on rate and maybe term.

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [34]

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Yes. We -- I wouldn't say anything unique. And the 1 thing we've seen, again, which is probably just temporary, but may turn into long-term, is hospitals looking for really every square foot of space they can in the near-term as they need to spread both their employees out and their and patients out during this period of time.

But I think, really, more important to your question is, I think what we're seeing is kind of routine leasing. There's been, obviously, a slowdown because of -- in kind, I hate to say use the word speculative, but where you're trying to recruit new tenants to a building and you can't rotate them through or show the space currently.

But the health system where we're directly engaged, we've had some really nice extension renewals at kind of normal renewal rates and adding some term. We'll see how the second quarter ends, but we could have more space leased by the end of the second quarter than we've ever had, and we have the most space leased of any MOB portfolio.

So Mark, anything to add?

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Mark D. Theine, Physicians Realty Trust - EVP of Asset Management [35]

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No.

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Operator [36]

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Our next question is from Jordan Sadler from KeyBanc Capital Markets.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [37]

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So my question relates to a couple of points that we're dancing around here a little bit, and there seems to be 2 opposing forces in terms of where patient care is administered in the near term, at least. And first, there's a notion that patients would rather not go to hospitals for fear of being -- fear of contagion, but maybe even the same for doctors' offices.

And that's kind of balanced by the political support that you've been discussing, which is bipartisan for hospitals, right? So the liquidity, the capital, seems to be there politically. So my question for you is, I guess, first, on the doctors' offices, what are you guys doing? Or what are your tenants doing at the facility level to make patients feel more comfortable coming to the office or coming to their facilities?

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Mark D. Theine, Physicians Realty Trust - EVP of Asset Management [38]

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Sure, Jordan, this is Mark. So from an operations standpoint, in our facilities, as I mentioned in our prepared remarks, we established a task force to review all of our building operations policies, and we're doing a lot of things on social distancing, signage, collaborating closely with our hospital partners about hours of operations, extending building hours, opening on Saturdays to spread out patient visits.

Doing, obviously, extensive cleaning and increasing the scheduling of our day porters within the buildings and adjusting engineering hours, things like that, that we think will help with the operations of the building and, ultimately, allow our patients and our physicians to get back to operations quickly.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [39]

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Is there any...

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [40]

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Jordan.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [41]

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Oh sorry. Go ahead, John.

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [42]

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Okay, it's JT. I was just going to add to that exactly that, which has been -- 93% of our spaces have remained open more or less continuously. Now, obviously, hours have been adjusted and things like that and the surgery centers have been temporarily closed or dramatically reduced hours, but operationally, they've stayed open. And again, it's been a learning process, and best practices all along.

Some health systems have done it a little bit differently than others, but again, it's all in a collaborative way. So again, trying to make the facilities as inviting and as -- with signage and communication and hand sanitizer, all the things that you can do to try to make it comfortable. And then there's screening and then there's testing. And so screening is about communicating if you have these symptoms, where to go and then usually, that is the where to go is to the testing location, which is in another part of -- if it's on-campus, the campus, or if it's not on-campus, another place.

We heard in 1 of the surgery centers that's just opened up this week, the cars -- I mean, the person coming in for the surgery literally gets screened in their car on a temperature check and kind of those kind of things. Again, that's the health care provider for doing that. So it's a very collaborative approach. It's really the providers who set the standard.

And in our cancer facilities, segregating, providing kind of different areas for entry for the cancer patients coming in, limiting the amount of visitors. I mean it's 266 buildings, we've learned a lot. And again, almost all of them have stayed open the whole time and accommodating that question. But again, it's going to take time, as we all know. And but hopefully, we can be as inviting as possible and the care will get provided.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [43]

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And coming back to the restart of elective procedures because you've had a view into it across some of your markets, as you've highlighted in the slides. Can you speak to what you've seen specifically in the markets that are currently open? Are those at 100% plus utilization?

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [44]

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Yes. Yes. I'll give you an example. In the Texas market, 1 facility did 35 surgical cases the first 3.5 weeks of April. They're doing 75 a week right now. So that's -- and, again, just catching up and kind of their normal caseload is 50 to 60 surgical cases a week in a 5-day period.

So in Texas, 1 of the things that -- kind of the restrictions that are there that's, I think, pretty probably pretty similar. Again, we're in 32 states. So each state has got a little bit different kind of parameters around how to open up. In Texas, you've got to kind of set aside 25% of the facility for the potential of a COVID patient. And again, that's where the surgical hospitals and the larger surgery centers that have, again, just a little bit bigger physical capacity can actually accommodate more patients more quickly.

So that's good anecdotal piece. One surgery center, where we have a lot of facilities with, I think they were -- had very limited percentage in April, and they've commented publicly that they're back to 50% and look to catch up pretty quickly to ramp it up to 100-plus percent of their normal volume as they catch up on delayed procedures.

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Operator [45]

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And our next question is from Michael Gorman from BTIG.

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Michael Patrick Gorman, BTIG, LLC, Research Division - MD & REIT Analyst [46]

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JT, I was just wondering if you could kind of talk a little bit bigger picture, as you guys look at the health care landscape. And I was interested in 1 of your comments at the outset about pushing additional care outpatient, obviously, and reserving the hospitals.

This is, obviously, a trend that's been going on in U.S. health care for a while, but now -- is there any pushback or any sense that we've overdone the drawdown in inpatient capacity in the country and any discussions on how to make that profitable when there isn't a pandemic, but also have that capability with the health care operators when it becomes necessary.

I'm just trying to think about how that could potentially shift provisions of care if we have to keep the inpatient facilities around when there isn't something for them to do, but we want them there when there is a crisis.

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [47]

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Yes, Mike, that's a great question. And I've always loved the ophthalmologist and based on your influence, but our ophthalmologists, they had to close first in this situation. There are, obviously, lots of discussion about both the physical plant health care system and the payment system. Our payment system has been geared for years around procedures and not medicine and has incented, this has proven out over the last 6 weeks, really incented to move cases to the lowest cost setting.

Unfortunately, we didn't have the PPE to do that over the last couple of months. So I think there's a lot of commentary and a lot of legislative debate and intellect and academic debate about that. If you talk to Michael Dowling at Northwell, I was listening to him speak 10 days ago or so, and he was -- he's commenting about this exact thing. He says, we have to have more ICUs and more inpatient beds for a situation like this, but our surgeons are all sitting at home doing nothing because they can't come to the facility.

And so kind of that balance of kind of a redesign of both the payment system and the infrastructure. And as Mark mentioned, our LTACHs, which have struggled for years because they've been kind of a stepchild of the inpatient facilities, they are, by definition, ventilator hospitals and are thriving right now in this environment.

So I think it's going to be a whole redesign of the system, preserving inpatient capacity, maybe enhancing the physical design of inpatient capacity and shifting care to the more appropriate setting. And the payment system is going to have to adapt to that as well. And we've seen a lot of changes in a lot of emergency changes to the payment system, like in the LTACH situation, to address the situation. And I think that will begin the process of redesigning the system. And I wouldn't say this is Medicare for all. I'm just saying a total redesign of the system over time.

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Michael Patrick Gorman, BTIG, LLC, Research Division - MD & REIT Analyst [48]

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Right. And I guess my question is, have you also have you heard from any of your healthcare system tenants, and it's probably too early, they're still putting out fires, but some eye towards whether it's off-campus or on-campus, having their outpatient facilities better equipped as flex space for future crisis or future pandemics where they can flex capacity if they need to?

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [49]

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Yes. No, I've already started to hear that. And there's -- the architects who are -- have high-volume health care work are already putting out, not only white papers, but kind of early thoughts around the redesign of, again, both inpatient and outpatient facilities from lessons learned from this. When we had the terrorist events in -- after September, in 2001, the big issue is we didn't have the ERs weren't set up for patients coming in with a biological attack. And so the ERs got adapted to and became a requirement to have kind of space set aside for that. That's a microcosm of, I think what we'll see here.

And the other thing is medical office buildings and outpatient care buildings that have been built in the last 10 years have had very little -- just general office space provided for physicians. It's kind of been -- it's all been about procedure rooms and exam rooms and the physician sees you there and brings in a computer on wheels or an iPad to do them -- to record all that.

There's no place for a physician to do telehealth in these buildings. And so we think there will be a redesign around the expansion because telehealth is here to stay. It's just a matter of where it will be conducted. I don't think it will be telehealth from home.

I don't think it'd be telehealth from the medical office building, but we think there'll be a redesign of our buildings and changes to our buildings and future buildings in the outpatient care setting to facilitate HIPAA compliant, telehealth encounters. And we think that's a good thing and an efficiency of the system that this crisis has shown can work very well.

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Operator [50]

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We have reached the end of the question-and-answer session. And I will now turn the call over to John Thomas for closing remarks.

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John T. Thomas, Physicians Realty Trust - President, CEO & Trustee [51]

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Thank you, again, for joining us today. We do hope that all of your families and colleagues are safe and well. And we look forward to speaking with you soon. Thank you.

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Operator [52]

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And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.