Operator:

Good morning, and welcome to the Healthpeak Properties, Inc. Second Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that, this event is being recorded. I would now like to turn the conference over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead.

Scott Brinker:

Okay. Thanks, Andrew. Good morning, everyone, and welcome to Healthpeak's second quarter earnings call. Joining me today for our prepared remarks is Pete Scott, our CFO and the senior team is available for Q&A. First, I'd like to congratulate our entire team on an incredible quarter. We executed on every one of our stated priorities, including merger integration, leasing, asset sales and accretive stock buybacks. Last evening, we increased our 2024 guidance for the second time this year, driven by out performance in leasing, same-store operations and stock buybacks. In addition, our conservative balance sheet and dividend payout ratio are competitive advantages that benefit future earnings growth. Merger integration continues to go exceptionally well, both financially and culturally, as we're meeting or exceeding every goal we set. For example, year one synergies are now tracking to be a bit higher than $45 million. More important, over the last several months, our newly combined team been focused on defining the core values of our desired culture. Those core values are now represented by the acronym, WE CARE. W for winning mindset, E for empower the team, C for collaborate and communicate, A for active integrity, R for respective relationship and E for excellence and execution. These are the core values we refer to each day in the office and hold each other accountable for. Our outstanding second quarter results are a reflection of those core values in action and the strong culture we are building together. One of my strategic goals has been to bring Healthpeak closer to its real estate and to become fully immersed in the underlying businesses of our tenants. The merger helped us accelerate that transformation. Today, 70% our people directly support real estate. Two years ago, that figure was less than 50%. And we're increasingly dialed into the health care ecosystem. This is critical because the health care sector is not a traditional real estate business. Investment outcomes are very much impacted by the underlying business taking place in our building, not just the attributes of the real estate itself. A thorough understanding of the operating and regulatory environment and close relationships with leading providers will drive superior investment and portfolio management decisions over time. Okay. I'd like to provide an update on our life science business. 2Q was by far our largest quarter of lease executions in several years. The attractive pipeline we've been talking about is now being converted into leases, as our tenants have gotten more comfortable in making real estate decisions. We signed 800,000 square feet of leases in the second quarter, 75% were renewals and 25% were new. The re-leasing spread was positive 6%, and, as has been the case for several years running, not a single tenant downsized upon renewal. In fact, several of the tenants took additional space. 84% of that leasing was done with existing tenants and the remaining 16% are new to the portfolio. On one hand, highlighting our competitive advantage from existing relationships, at the same time, adding new ones for future growth. Sponsorship is paramount to tenants and their brokers in this environment. Our credibility, portfolio quality, and strong balance sheet give us a competitive advantage. Our 2Q results and pipeline suggest we hit an inflection point well ahead of the sector at large. We expect 3Q to be a big leasing quarter as well. We signed an additional 180,000 square feet of leases in July, all of which were new with an average term of 10 years. And our pipeline remains strong, with 620,000 square feet under signed LOI, including at Vantage, Portside, and Directors Gateway. Moving to our outpatient medical business. We're driving strong performance through our platform, favorable industry fundamentals and our high-quality portfolio. Occupancy in outpatient portfolio was up 20 basis points in the quarter and re-leasing spreads were positive 4.7%. Operationally, we haven't skipped a beat with the merger and our increased scale allows us to take advantage of strong volume growth across the sector as underscored by HCA's exceptional second quarter results this week. Also, as announced yesterday, we're very pleased to strengthen our relationship with CommonSpirit for the next decade plus. We sold about 900,000 square feet of space leased to CommonSpirit in June and July as part of the sale transactions we announced yesterday. Our go-forward relationship represents 2 million square feet or approximately 3% of our total ABR, and is well diversified across more than 30 different cities, including Seattle, Houston, and Salt Lake City. We recently executed early renewals across the portfolio, which extends the blended maturity date to December of 2035. So, whilst have been three years and now improves to more than 11 years. The blended re-leasing spread is positive 13% and the annual rent escalator will increase to a fixed 3%. Note that the terms of the existing leases will remain in effect through the original maturity date, most which are in 2026, 2027, and 2028. We used our in-house leasing team to negotiate and execute the early renewal another example of the merger augmenting our platform capabilities. This was a win-win outcome and we're very pleased with the collaboration between Healthpeak and CommonSpirit. Okay. Moving to capital allocation. Yesterday, we announced $853 million of outpatient medical asset sales in five separate transactions at a 6.8% blended cap rate. These were non and less-core buildings in markets we're not looking to grow, such as North Dakota, Earl, Nebraska, and Upstate New York. The sales are accretive to our future growth profile and the cap rate on our remaining outpatient portfolio would certainly be inside the sales we announced yesterday. We included a comparative asset quality table in our earnings release that support those statements. The net proceeds create significant dry powder to drive future earnings growth. We bought that $88 million of stock since our last earnings call as we continue to believe the share price was undervalued in comparison to the intrinsic value of our real estate. Year-to-date, we repurchased $188 million of stock at a blended price of just under $18 per share, which equates to an implied cap rate in the high 7% range. To accretively fund these repurchases, we've sold $1.2 billion of assets year-to-date at a blended cap rate of 6.5%. Portfolio fine-tuning is usually dilutive, but we took advantage of the temporary dislocation in our stock price to strengthen our portfolio in a way that's actually accretive to earnings. And I'll close with external growth. Our deep health system relationships are driving compelling new development opportunities. The two projects we announced yesterday totaled $53 million and are 84% pre-leased with stabilized yields in the mid-7s. These projects offer compelling value. At a positive spread, we're recycling out of older, non and less-core assets into brand new buildings in core markets with leading health systems. We're currently underwriting an attractive pipeline of similar development projects with our health system partners. And now, Pete Scott will cover operating results, guidance and the balance sheet.

Operator:

We will now begin the question-and-answer session [Operator Instructions] Our first question will come from the line of Josh Dennerlein, Bank of America. Please go ahead.

Scott Brinker:

Yes. I mean most of what we're signing now is with 3% escalators. When we announced the transaction with physicians, almost a year ago at this point, we talked about the fact that their in-place escalator was a little bit lower, just given the timing of when they struck leases. A lot of them were single tenant, their blended escalator was more in the kind of low to mid-2s. Healthpeak had moved its escalator in the outpatient business up into the high 2s already. But as we sign new leases, almost everything is at 3%. So we do see our blended in-place escalator today is at about 2.5%, 2.6% in the outpatient business. Over the next few years, it will slowly climb into the high 2s, if not 3%. So yes, that should be the new normal.

Scott Brinker:

Yes. I mean we started the year with $40 million of synergies. We're up above $45 million at this point because, in large part, the internalization has gone ahead of plan in terms of more markets than we anticipated sooner and a little bit better upside. So that's a big reason for the increase in merger synergies. But even more important to us as a leadership team is just the improvement in the platform and interaction that Healthpeak employees now have with our properties and with our health systems. I think longer term is an even bigger impact than the financial accretion. It's more than 100 people now on Healthpeak's payroll directly interacting with our team that are interacting with our tenants every day. It's just a -- I think it's a terrific change in terms of our platform capabilities. So we've got two more planned for the balance of this year, including here in Denver, which we're excited about. It's a super high-quality team that we're bringing on that's going to manage this really high-quality portfolio that we have in Denver. So we'll be at about 50% of our outpatient and lab business by year-end will be internally managed. And we've got, I don't know, 10 million to 12 million square feet next year that is not in process yet, but we should be able to execute in 2025.

Operator:

Our next question comes from the line of Nick Yulico with Scotiabank. Please go ahead.

Peter Scott :

Yes. Hey, Nick, it's Pete. So the 620,000 square feet of LOIs, I would say that about half of that is associated with the three large projects you just mentioned, Vantage, Gateway as well Portside. And a couple of them are pretty large deals as well. Our hope is to convert all of those to leases this upcoming quarter. And as we do, we can provide more detail. I think the thing one I would add to it is the phasing in of the upside, that will happen over a couple of years. The lease is probably on average will commence middle of next year. So we'll get an immediate FFO benefit once a lease commences. And then beyond that, it's probably the year after that where you start to see a really big pickup in AFFO as cash rent starts getting paid. So I think that's probably the best way I can describe the LOI bucket and the upside opportunity. But we're trending in the right direction, and we feel really good about the foot traffic and all of those.

Peter Scott :

Yes. I think directionally, Nick, that is correct. I would say, a lot of our lease deals that you've seen have been with existing tenants as well. And there may be a little bit of giveback space that we'll have to lease up. But I'd say just on the gross numbers you mentioned, yes, probably about half of that.

Scott Brinker :

Hey, Nick, it's Scott. I'll take that. I think our team is doing a fantastic job capturing market share. We've got the big footprint in all three of the core markets, but I really feel like we are capturing an outsized share of the market right now. So hats off to the team. And the footprint that we build, even when kind of the business was exploding in popularity for the last decade, we held true to our strategy, staying the core submarkets, campus model. And it's really paying off right now because having a great real estate platform and building quality is obviously a huge differentiator as well. And we like the fact that we have A+ buildings, we have B- buildings and everything in between. So that when I talk about having a pretty broad base of demand, it's in part because of that footprint. We can cater to all types of tenants, and that's a huge advantage. So we're working with credit tenants doing big deals, early renewals. We're working with Series A relative startups and everything in between. But for the most part, the leasing is tied to companies that have successful capital raises, whether it's private or public. In 2Q, it was primarily existing tenants. The pipeline is a combination and more weighted towards new leasing, which is obviously a great thing to see.

Operator:

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

Scott Brinker:

Yeah. Hey, Austin, yeah, we could have waited, but I think we were able to strike a mutually beneficial outcome, and that's the reason that we went ahead and did the early renewal. There are some TIs, but it's pretty modest. We did an 8-plus year extension on average, and the TIs are roughly one year of rent, so pretty modest or at market. So we're happy with that that outcome. But more than anything, it was just -- it was a deal we thought was favorable to the company, and we were happy to move forward with it.

Scott Brinker:

Well, I mean, stock buybacks are more of a tactical move. It turned out very favorably for the company. We were trading at a pretty big discount to the value of the real estate, where were to sell assets in match fund to accretively buy back stock. We were trading at a discount to consensus NAV and our internal NAV. So just the dynamics made that easy decision. The profitability from buying back stock today is lower. But we do have a fantastic balance sheet. I mean, we finished the quarter at 5.2 times. And if you account for the sale proceeds from Uniti transaction, we're down near 5 times leverage, which on a balance sheet our size is pretty substantial dry powder. So depending on what happens with the stock, we do have the authorization to keep buying it back. It's obviously a bit less attractive today, but we still feel like we're trading at a discount to the value of our assets. When I think about an implied 7-cap today, plus or minus, and we just sold, for us, relatively low-quality outpatient medical by our standards, at a cap rate below that. So I think that's telling in terms of where the stock is trading. But I don't expect that to continue. I mean, if we continue to grow earnings signed leases and put up excellent results like we just did. I mean, our expectation is that we're going to be trading at a premium and issuing stock and growing the company. We do have big outpatient medical opportunity. We announced $50 million of new development today with one of our important partners. Core market, core system, highly pre-leased, accretive, 7.5% stabilized yield, there's a fairly big pipeline of similar projects behind that, that we could execute on and certainly have the dry powder to do so.

Scott Brinker:

Yeah. So if you think about our operating portfolio in life science, we're around 95% leased. But our development -- redevelopment portfolio has a lot of opportunities. So when you include the vacancy or availability there, I mean, it's more like 1.5 million feet that we need to lease up first, and that's our priority. But if our team continues to sign leases at these big development redevelopment projects, we could consider activating our land bank. We just need to -- to get comfortable with the return on cost relative our cost of capital. But we're certainly moving closer to making decisions like that, but I wouldn't say that we're there yet, Austin.

Operator:

Our next question comes from the line of John Kolakowski [ph] with Wells Fargo. Please go ahead.

Scott Bohn:

John, it's Scott Bohn. Yes, we've seen some of that come through. I mean we don't have a lot of kind of biomanufacturing bases in the portfolio. We've got some small-scale manufacturing within some of our facilities, but not a lot of true CDMOs. A handful throughout the portfolio, we actually have a deal that we're working on in Boston is one, but we are seeing some of that come back to the state. A lot of that, though, does end up in markets like RTP versus some of the core markets?

Peter Scott:

Yeah. Hey, John, it's Pete here, and welcome to the earnings call. I think this is your first one. I think just big picture, as we think about all three of our segments, lab, we think lab should continue to improve through the second half of this year. Certainly, leasing helps. But one of the things I mentioned at the beginning of the year was we did have some free rent on a couple of large leases that impacted the first half of year. As that burns off, we expect to see acceleration in the second half of the year, and we continue to expect that. Obviously, with getting a lot of leasing done our confidence level improves as well. I think on outpatient medical, we did say that we expected the second, third and fourth quarters to accelerate relative to the first quarter. We got a lot of questions on that. And as you saw, we were above 3% this quarter, and we continue to believe we'll be above 3% for the second half of the year. And then I know, we don't spend a lot of time on CCRCs, but we've had a pretty good first half of the year. Our expectation is not to hit 20% growth. I mean, that's going to normalize everything eventually normalize, and it will normalize on the CCRC side. But we still feel pretty, pretty confident about our full year growth expectations for that segment. In fact, we're doing a lot better than what our original expectations were. So I know you just asked about lab, but I figured I'd give you a more fulsome update.

Operator:

Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Capital Markets. Please go ahead.

Scott Brinker:

Yes. I mean the renewal TIs were really low, especially given the length of term that we signed for those renewals. The new leasing, the TIs were up relative to last year, but I guess we have a different reference point. I would say they were exceptionally low last quarter, and this year, they were just a bit higher. I don't think they were outsized in any way. I mean, what, 20% to 25% of the rent is pretty modest. But each space is different. I mean that's the thing that's important to comment on. When you're looking quarter-to-quarter, it all comes down to what leases were signed, which buildings, how much work that space needed but we don't see the TIs being outsized in any way, especially considering the improvements that that were made to those buildings, should last for the next 10 to 20 years and the length of leases that we signed. So, yes, we would not characterize it as high TIs to generate the leasing volume, not at all.

Scott Brinker:

Well, we got 10 years left with Calico, but I didn't see that news, but that would be a first. I mean despite what's happening in other sectors and industries moving out of higher-cost areas to lower-cost, lower-tax states, it just doesn't happen in life science, it's just the reverse. In fact, a lot of times, if a company has some promise, they need to move to one of the three core markets to find the talent, to hook up with the right venture capital firms, to have the infrastructure. What you just described, that's one in a million. The vast majority of our tenants are coming into South San Francisco, not out of it.

Scott Brinker:

Yes.

Michael Carroll:

Yes thanks. I just wanted to touch on your life science leasing pipeline. I know in the past, you've kind of tagged that around 2 million square feet. And obviously, you got a lot of leasing done in 2Q and so far in July. I know on the call, you continue to highlight that the pipeline is strong. Can you kind of quantify where the pipeline is today? And have you backfilled some new tenant interest given the space that you signed?

Michael Carroll:

Okay. But then the overall volume of the pipeline doesn't stand at about 2 million square feet anymore since you signed about roughly 1 million square feet? And then just real quick, too, on the 180,000 square feet that you signed in July, I mean that was -- can we assume that was in the in-place portfolio, not the development projects?

Michael Carroll:

Very good. Thank you.

Rich Anderson:

Thanks. Good morning. So what do you think explains this behavioral switch on the life science space with tenants starting to think more constructively about doing deals? At NAREIT, you talked about some good signs from a capital raising standpoint in the biopharma sector, but then you have an Alumis IPO that was – looks like my own personal EKG right now? So, I'm just wondering where this positive mindset is coming from in your mind?

Rich Anderson:

Okay. Good. And then second follow-up on the asset sales out of the outpatient medical, and maybe I should know this, but where is that coming from? Is that legacy dock or legacy doc? Sorry, confusing. Where -- is it the acquired portfolio or the legacy portfolio, let's put it that way?

Rich Anderson:

Okay. Thanks.

Operator:

Our next question comes from the line of Michael Griffin with Citi. Please go ahead.

Scott Brinker:

Yes. I mean the market is opening up. I would still say it's pretty slow. I mean volumes are way off their historical norms, but starting to pick up. There's still a lot of volatility in interest rates, which is a key driver of transaction volume, certainly in the private market. We were happy with the pricing that we got, high six cap for the asset quality that we sold. And I think if we were to acquire anything, it would be higher quality assets in our current stock price. Although improved is not yet where we would be out acquiring stabilized product, but we're getting closer. And certainly, if our cost of capital supported it, there'd be a significant pipeline just given the depth of the relationships that the key people here have across the health system environment. So that's obviously something that we think will happen in time. It's just a matter of when. In terms of life science, very little stabilized product is available. But there's certainly signs of distress. It seems like it always takes longer to play out than you might think. The vast majority is probably not interesting to us for the reason I mentioned, that we purposely did not go outside of our core market or do a bunch of conversions. But there's a handful that we're keeping a close eye on that would be very interesting to us, but there has not been capitulation to date. But remember, as I said, it always takes longer to play out than you think. So we now have the flexibility to pursue things like that when and if they become available.

Scott Brinker:

Yes, it's pretty simple, just certainty of execution. It's a transaction that the team has been working on for several months, if not a few quarters. And despite a lot of volatility, the buyer didn't retreat us on price and we can retreat them on the terms of the seller financing. We're comfortable with it. It's a very low LTV, relatively short-term. So there's clarity and certainty on getting the balance of the proceeds back over the next two to four years, if not sooner. But there really just isn't a financing market for something that large. So it was pretty simple. If we wanted to do a big execution on a sale, we really had no choice in a market like this, but to do the financing.

Scott Brinker:

Yes.

Wes Golladay:

Hey, good morning, everyone. Can you quantify how much you can grow the outpatient medical development pipeline over the next few years?

Wes Golladay:

All right. Thanks for that. And then you did call out the free rent to be aware of a potential move in earnings going forward. Is there any other moving parts to be aware of?

Wes Golladay:

I got that. Just maybe a clarification on the question, like -- there's no move-outs that you know of or anything in the portfolio that would cause anything that we need to model as we look into next year?

Wes Golladay:

Thanks for the time, everyone.

Operator:

Our next question comes from the line of Vikram Malhotra with Mizuho. Please go ahead.

Scott Brinker:

Yeah. On the first question, I mean, more than half of the LOI pipeline is new, new leasing on currently vacant space. So there's a lot of upside in that pipeline. But just to clarify and reemphasize Pete's point, I mean, there's still a time lag between signing the lease and when the rent gets paid. But obviously, great progress on that. And Pete, do you want to take the second one?

Vikram Malhotra:

No, that's great. A lot of good progress on the Life Science side. So maybe just to clarify, you mentioned accelerating growth on -- in MOBs, I think on the same-store portfolio in life science as well in the second half. And I just want to tie that back to sort of the guide on same-store, you moved it up by 25 bps. But just wondering if you can tie it to, if you're having accelerating growth, it would seem like there's perhaps more upside. So I'm wondering if there's something -- maybe the CCRCs or something else is pulling that back?

Vikram Malhotra:

Great. Congrats on the strong quarter. Thanks.

Jim Kammert :

Good morning. Thank you. Obviously, you've done a lot of portfolio curation to-date. But theoretically, how much more of the lab or OM portfolio would you sell if the price was right? To understand what's really sort of non-core remaining, if you will.

Jim Kammert :

That's great. And then just a quick housekeeping. In an earlier question in response, you noted that you thought it's pretty likely that the buyer of the OM portfolio here in July, would -- you're assuming they have other existing proceeds? Or you just expect them to refinance kind of the next two years or so, and that's going to be your source of repayment?

Jim Kammert :

Got it. All right. Thank you.

Mike Mueller :

Yes. Hi. I know you quote renewal spreads for lab and outpatient leasing. But how similar or different would the lab spreads be if you included comparable new leasing spreads as well?

Mike Mueller:

Got it. Okay. And then does it feel like the mid-single-digit renewal spread should be sticky in the back half of the year based on what you're seeing for expirations?

Mike Mueller:

Got it. Okay. Thank you.

Operator:

Our next question comes from the line of Michael Stroyeck with Green Street. Please go ahead.

Scott Brinker:

Yes, I mean we didn't shop the deal. This was a direct negotiations. So, there really isn't even an answer to that question. These are just the terms that were discussed from day one. There's not exactly a deep market of loans of this size in the outpatient medical business in recent years. So, yes, not a great comp.

Michael Stroyeck:

Got it, that's helpful. And then maybe one just on the mark-to-market on renewals. I saw a nice step-up in the MOB portfolio. Are there any common themes across the type of tenants or assets where you are seeing stronger pricing power?

Michael Stroyeck:

Great. Thanks for the time.

Operator:

This concludes our question-and-answer session. I'd like to turn conference back over to Scott Brinker for any closing remarks. .

Operator:

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

Operator:

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Healthpeak Properties to Report First Quarter 2024 Financial Results and Host Conference Call and Webcast. [Operator Instructions]

Andrew Johns:

Welcome to Healthpeak's First Quarter 2024 Financial Results Conference Call. Today's conference call contains certain forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations.

Peter Scott:

Thanks, Scott. 2024 is off to a great start. For the first quarter, we reported FFO as adjusted of $0.45 per share, AFFO of $0.41 per share and total portfolio same-store growth of 4.5%. Let me briefly touch on segment performance. Starting with outpatient medical, we reported same-store growth of 2.6%, driven by a positive 3.4% rent mark-to-market and an 84% retention rate.

Finishing now with guidance. We are increasing our FFO as adjusted guidance range by $0.02 and tightening the range to $1.76 to $1.80. We are increasing our AFFO guidance range by $0.02 and tightening the range to $1.53 to $1.57. Our increase in earnings guidance is driven by 3 items:

First, we increased same-store guidance by 25 basis points to 2.5% to 4%. Second, merger synergies continue to exceed expectations and are now forecast to be $45 million in 2024. Third, we have bought back $100 million worth of stock at an FFO yield in excess of 10%.

Joshua Dennerlein:

I just wanted to follow up on your comment that 2Q should be one of the best quarters for lab leasing. Just -- I guess my first question on that is just how are rents trending on what you're signing versus maybe a few quarters ago? And then just what about TIs and concessions?

Scott Brinker:

Yes, Josh, I'd just add, our leasing costs have been really pretty modest. If you just look in the supplemental for renewal leases, our TI and LC has been 5% or less of the rental rate, and even for new leases, it's in the 10% range. I mean, it's really pretty modest and very low free rent as well. So I think we held in exceptionally well, just given the quality of the portfolio and the submarkets and the relationships.

Scott Brinker:

Yes. I wouldn't say it's assets we want to sell. It's more markets where we don't have significant scale. And then there are some markets where we have a big health system relationship where they prefer to use their own in-house property management firm, and Atlanta is a good example of that, that we still had market. The fact that health system wants to use their own people, we can live with that.

Austin Wurschmidt:

Can you guys provide a breakdown of what's driving the increase to same-store cash NOI growth by segment?

Austin Wurschmidt:

Yes. I mean, I guess, just specific to the cash same-store NOI lab guidance, I think it was 1.5% to 3%. Pete, you referenced there's acceleration through the balance of the year is through rent burns off, I think, related to the RevMed and Voyager deals you've highlighted. So I guess, can you give us a sense of what the magnitude of upside is there? And then also just maybe what the risks are that's holding you back from going ahead and raising that at this point in the year?

Peter Scott:

I mean if you look, Austin, the capital raising has been at least year-to-date in '24 relative to year-to-date 2023, I mean, it's been up across every single category, especially on follow-on equity offerings as well as private placements that we fit into that bucket well. Certainly, there could be some risk going forward with interest rates going up. I think it's a little less rate-sensitive in the lab side of it and maybe cap rates in the world of real estate, and those private placements and follow-ons do take some time to come together.

Operator:

Next question comes from the line of Juan Sanabria with BMO Capital Markets.

Scott Brinker:

Yes. Juan, it's Scott here. We've done $350 million plus of pure asset sales year-to-date. The pipeline is at least that large, but it's a volatile environment as Austin just pointed out. So when we have clarity on transactions, we'll announce the details at that time, but it's certainly a big pipeline, more focused on outpatient medical, whereas the sales to date have been more life science or this R&D portfolio that we had in Poway. So yes, it's an active pipeline in terms of how the proceeds would be used. In large part, it depends on the environment in the stock price, in particular. That's been the highest and best use of capital in recent months just given where the stock was trading.

Scott Brinker:

It's probably the right range. Yes.

Scott Bohn:

Juan, it's Scott Bohn. I think with AI, you are seeing some -- maybe some automation labs within the labs, but you still have -- the bulk of those facilities will have chemistry and biology in your atypical lab build-outs. So we aren't seeing a dramatic shift in any -- by any means in the build-outs for some of our tenants who are more AI-focused. Our buildings have a ton of power to them, have the infrastructure, they have the capabilities to handle any of those needs.

Richard Anderson:

So nice beat on the synergies, typical, I guess, most REITs that's the low-hanging fruit of the story. But going forward is perhaps a little bit more difficult, which is the life science leasing that you've been talking about. I think $60 million of upside. Can you take a shot about what the timing of that is? It's not all next year. Could it be as far out into 2027? Or how long of a tail to the life science leasing do you think is possible here going forward?

Richard Anderson:

I don't mean to trivialize it. Let's call it, middle-hanging fruit, right? So second question might be a tough one to answer, but I'm going to ask it anyway. When you think about the entirety of the transaction, including everything, including whatever the transaction fees were, if that's 3% of $5 billion, that's $150 million. When do you think the merger, the combination is truly kind of breakeven for the company when you take everything into consideration?

Michael Griffin:

I was wondering if you could give some more color on the Poway disposition. You mentioned it's a mix of industrial lab and office space. Is the cap rate indicative of where lab might be trading today? Or were there some specificities given the asset mix that might warrant a higher cap rate?

Michael Griffin:

And Brinker, where would you say kind of Class A lab space is trading these days on a cap rate basis?

Michael Griffin:

Got you. That's helpful. And then maybe could you add some commentary around supply, particularly in South San Fran, where I think we've seen kind of elevated relative to the other core markets. And how might your competitive set compare to market supply overall?

Michael Carroll:

I wanted to touch on the life science LOIs that you kind of highlighted in the press release. I mean how many of those are true expansionary spaces that could be earmarked to push up overall occupancy levels within the space?

Peter Scott:

Yes. I'd say very few need to raise capital, if any. We wouldn't be having active discussions. In fact, you don't really have a lot of active discussions for deals that are contingent upon capital raising, those discussions tend to happen, at least today, after the capital has been raised. So I'd say that there's really no risk to that within the pipeline.

Peter Scott:

No. Because, as I said, I think all those tenants have effectively raised capital if they needed to raise capital. Not all of them need to raise capital. There's some mid-cap and large-cap names in there as well. So I think the answer to that is no, they're not delaying decisions. It does take a little bit longer to get lease deals done today though, specifically as you price out the various TI packages and build-outs.

Scott Brinker:

I mean the pipeline is 30-plus tenants, so we'll refrain from going down the list, but the quality of the discussions today is much higher than it has been in the last 2 years. So we can't give you certainty on any of the stuff. And certainly, the geopolitical environment doesn't help at the margin, but I don't think it's a driving factor. The bottom line is the pipeline is massively bigger than it ever has been in the last 2 years, continues to grow, and the quality of the conversations is higher.

Wesley Golladay:

Just want to follow up on the new lease conversation. Looking at the 1 million square feet, are you seeing any change in demand for first-generation space, any submarket standing out and any kind of categories picking up activity?

Wesley Golladay:

Okay. And then when you look at potential distressed opportunities, do you think you'll get any distressed pricing for those? Or is there still a lot of capital allocation in those great submarkets? And how would you look to potentially get involved? Would it be a JV, mezz-lending? Can you elaborate on that?

Operator:

Next question comes from the line of Jim Kammert with Evercore.

Scott Brinker:

Yes. Our re-leasing spread in the first quarter was around 3%. It could vary quarter to quarter. But as we look at our current pipeline, the renewal spreads will be above that level in the aggregate, some higher, some lower, but on average, certainly above the 3% across the portfolio. We still feel like it's in the 5% to 10% range. And at least in recent quarters, the leasing and TI that we're putting into the buildings to drive those rents is very modest, around 5% of rent on renewal leasing and around 10% on new leasing. So those are pretty modest leasing costs across commercial real estate.

Scott Brinker:

Yes. So for new development, that's true. I was speaking more to renewal and re-leasing spreads. But for new development, certainly, there's an expectation of turnkey or closer to it, which we've been talking about for the last year or so that we're actually having more success in the current environment on our second-generation space. It's turnkey in nature, but at a much more modest investment, but lower rent, lower OpEx, and no TI from the tenants. So that's certainly a big part of our leasing pipeline. But we are getting some interest in our development projects as well.

Michael Mueller:

Just curious, how do you see tenant retention shaping up for the balance of the year? And where do you think the 96% operating portfolio occupancy could end the year?

Operator:

Your next question comes from the line of Michael Stroyeck with Green Street.

Thomas Klaritch:

Yes. Really, you typically see -- this is Tom Klarich, but you see a decline from Q4 to Q1 pretty regularly because a lot of doctors hold over the holiday period and then when things settle down after the first of the year, they move out. So that's pretty typical. I wouldn't point to legacy peak or legacy dock as a cause for that.

Thomas Klaritch:

Just normal rhythm during the year.

Scott Brinker:

That was really it. I mean we have like the land bank and conversions in West Cambridge, where we'll eventually tear buildings down and build by science. But in terms of the stabilized assets, that's it.

Vikram Malhotra:

Maybe just first one, the -- you've talked a lot about the life sciences leasing pipeline, but I'm wondering if you can update us or just provide color on the watch list? Given the capital raising amount, I'm assuming it's lower, but any numbers, any magnitude or perhaps in other ways, like what's baked into the guide for the watch list?

John Thomas:

Vikram, it's JT. We have a lot of historical relationships across the portfolio. So we start -- we have kind of -- I hate to call it systematic, but routine kind of steady pipeline with a number of health systems in multiple states. So all highly pre-leased, all kind of outpatient services that are higher margin and that they need to kind of expand into kind of new markets for providing access to care in those markets. So it's pretty systematic across the board and just has to be at the right price and kind of the right markets for us to proceed, but pretty steady flow of kind of off-market relationship business.

Thomas Klaritch:

Yes. The -- that lease was a master lease with a system in Houston, and it covers basically 3 campuses. I do want to point out that we did do that lease internally, so we saved about $3.5 million of lease commissions on that deal. And we also had no TI contribution, and we eliminated our capital liability for 10 years. So it was a great deal.

Operator:

The next question comes from the line of Tayo Okusanya with Deutsche Bank.

Peter Scott:

Yes. And then on revenue synergies, we've been pretty clear that, that $60 million run rate does not include revenue synergies, so that could be some upside, whether that's through better lease execution, better retention, better lease rates, so on and so forth, that would be upside. I think it's a little challenging to our articulator to go through what we think that is, but we certainly think that there are revenue synergies out there for us to get.

Peter Scott:

Yes, that's the right way to describe that.

Scott Brinker:

Yes. Thanks for joining us, everyone. Good momentum here. Happy to talk about it today and look forward to seeing you in the coming weeks and months. Take care.

Operator:

Good morning, and welcome to the Healthpeak Properties, Inc. Fourth Quarter Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead.

Peter Scott:

Thanks, Scott. Starting with our financial results. We finished the year on a strong note. For the fourth quarter, we reported FFO as adjusted of $0.46 per share and total portfolio same-store growth of 3.6%. For the full year, we reported FFO as adjusted of $1.78 per share and total portfolio same-store growth of 4.8%. And our balance sheet is in great shape as we finished the year with 5.2x net debt to EBITDA. Let me provide a little more color on segment performance. In lab, same-store growth for the quarter was 2.7%, bringing our full year growth to 3.7%, in line with the midpoint of our guidance range.

Fourth, our current FFO outlook includes a negative $0.03 mark-to-market on the $1.9 billion of DOC debt that we will assume. Notably, we do not add back this headwind to FFO as adjusted. Fifth, perhaps conservatively, we do not include any benefit from the Graphite Bio termination fee in our FFO as adjusted. Fixed item, the components of same-store growth are as follows:

We see outpatient medical ranging from positive 2.5% to positive 3.5%. Fundamentals in outpatient medical continue to improve versus historical norms, including higher tenant retention, increased rent mark-to-market and increased escalators. Our outpatient medical same-store NOI for 2024 is approximately $825 million or 60% of the overall pool. We have included the DOC portfolio in our same-store pool for 2024, given the size and strategic nature of the merger.

Nicholas Yulico:

I guess first question is just relating to the guidance. I appreciate all the info you gave us on the DOC impact plus some of the other year-over-year items. But is there any way to kind of think about what just legacy Peak FFO or AFFO growth would be year-over-year? Just putting aside sort of all the merger impacts, maybe just on like a percentage basis or pennies impact?

Peter Scott:

Good question, Nick. I'm not surprised that you're asking it. We did disclose that we've signed year-to-date about 175,000 square feet of leases and LOIs. The first week of January is quite slow. So that's probably a pretty good 4-week number. If you annualize that, it's still trending in a positive direction as you compare it to a year ago where leasing was. I'll turn it actually to Scott Bohn to give a little bit more color on the composition of those leases and LOIs.

Juan Sanabria:

Just a question on dispositions. You talked about potential for more assets to come on the market. So just curious, if you could give a little bit more flavor for the types of assets that you may look to sell. Would they be kind of core, long-leased assets, stabilized or maybe more noncore assets. Just kind of curious on what may be being floated out there at this point in time.

Peter Scott:

Yes. Sure, Juan. I think from an FFO perspective, I would say that the cadence, there's probably not a huge amount of variability as you look out across the 4 quarters in the year. I will say that some of these larger leases that are commencing in the first quarter for lab, especially some of the ones we've been pretty vocal about like the Voyager deal out in Boston that we did that commenced at the beginning of this month or January, I should say, beginning of the year as well as the RevMed deal. I mean, they just came with 3 months of free rent, and we have the MGM deal that we just commenced as they took over one of the Amgen buildings that expired.

Operator:

Your next question comes from the line of Michael Griffin with Citi.

Peter Scott:

Yes. Greg, it's Pete. I can certainly start with that. And I'll hit on the biggest ones. Vantage, we actually delivered a portion of that late last year. And then the initial occupancy is for what's remaining, and we do have another lease with Astellas that's expected to start later this year. So that's really the reason why that got pushed back a little bit. It's because we delivered a portion of that.

Michael Griffin:

Great. Thanks. And then I just wanted to touch again on the synergies from the merger. You talked about realizing about $40 million to $60 million of that. It seems like the merger is going on pace or maybe even better than expected. Curious if you could see any additional upside kind of on top of that $60 million or if that's sort of the kind of highest level of synergies that you could see.

Richard Anderson:

So on the Amgen and Sorrento spaces, I think your -- the next time we'll see that in the numbers is 2026, correct me if I'm wrong. Is any one of the other sort of maybe faster to the punch. It sounds like Sorrento is a little bit more ready to use based on what your comments were. I'm just curious what the realistic time line is to see them back in cash paying assets?

Scott Brinker:

Yes. I mean it's really been a 2% to 3% growth business for the last decade. We do see that accelerating. It's not going to 10%, but we do think it's going to improve for the forward 5 to 10 years versus the previous 5 to 10 years, just given supply demand, construction cost and therefore, our ability to push rents. So our guidance this year is at the very high end, actually well above the high end of any guidance we've given in that segment historically.

Richard Anderson:

How do you condition tenants to be okay with higher rents, right, because they've lived with this world and you got to be careful about sort of screwing up the system, so to speak. Is it there for the taking, you think? Or do you sort of have to sort of thread that needle?

Thomas Klaritch:

Yes. If you look at, Rich, the rents, I mean, we've seen -- what's actually benefited us is the new developments because the market rents that are coming in on those is typically 20% or so higher than what the existing rates are. So it gives us a little room to grow. And then if you look at our tenancy back 20 years ago, it was 25% hospital leases and 75% third-party physicians. Today, that number is 65% hospital. So you do have a little more ability to push the rents up when you're dealing with the institutions like that.

John Thomas:

Yes. No, I agree with that, Tom. And I think we've seen 6 straight quarters of well above that in renewal spreads and then conditioning -- your comment about conditioning tenants, the options, as Tom said, historically was to go to a new building, but the rents now are 20% higher than the new building. So it's just -- it's much more, I guess, negotiating leverage. And if you're raising the rents 5% to 10%, that's better than the 20%, and that's the conditioning.

Operator:

Your next question comes from the line of Wes Golladay with Baird.

Peter Scott:

Yes. The seller financing, I mean, we actually did quite well off of providing that on our senior housing sales, which were 3, 4 years ago. So it's a business that we actually like if we provide the right LTV to the counterparty. With these loans, we've gotten repaid a lot over the last few years. I mean the balance was, I think, $600 million, $700 million. It was pretty high, down now to about $175 million. And our guidance for this year, call it, outlook, we had 0 to $100 million getting repaid. So $50 million at the midpoint, could be a little bit higher than that. And obviously, that's probably more front of the year weighted as well. I think our expectation is if it gets repaid, it will get repaid in the very near term, if not, it would get extended, which obviously, if it gets extended versus repaid, then there's an earnings benefit to that. But again, the expectation given where the LTVs of those are is that as the counterparty sell assets, we'd expect to get those loans repaid and probably more towards the front end of the year.

Scott Bohn:

Yes. Wes, this is Scott. Scott Bohn I think from a demand perspective, we're in line with pre-COVID levels across all 3 portfolios. Boards are still cautious, as Pete mentioned, is taking new space and expansions and things like that. We are seeing some groups who have been on the sidelines are kind of -- have been floating around in the market, really kind of starting to dig in on space plans and getting real as they approach funding at some of the capital markets, both private and public open up. So I think that we're off to a strong start for the year. We like the way that the pipeline is shaping up.

Operator:

Your next question comes from the line of Jim Kammert with Evercore.

Peter Scott:

Yes. Happy to take that, Jim. I mean, obviously, on the development side, we still have to finish out the Vantage project, which is pretty significant. We've also got some new HCA developments that are kicking off. I mean that's a great program for us, and we'd like to continue to recycle capital and keep that program going and the yields are starting to increase on that, which is great.

Scott Brinker:

Yes, there's no new starts in lab in that forecast. There's a couple of new starts in outpatient medical. Some are from legacy Healthpeak, others from legacy DOC just commitments that were made in some cases, 2 years ago. Any new commitments, though on development, it's because the yields are attractive, 7%, 8%, highly pre-leased. So we continue to find those very attractive and would recycle capital so that we can go ahead and move forward with those.

Scott Brinker:

Yes. Correct .

Scott Brinker:

Yes, we're at 85% occupancy today. I would think we could get back into 90s. In that portfolio, it's performing well. We've got good assets, mostly in Florida, obviously, favorable supply/demand in that market for seniors, we've got a really good operating partner in LCS. We've got a really strong internal team overseeing it.

Operator:

Your next question comes from the line of Joshua Dennerlein with Bank of America.

Scott Brinker:

Yes, hard to say. We are getting the benefit of the internalization in the peak portfolio that we obviously would not have done absent the merger, so it comes hard to parse the 2 numbers. But I think we said historically, DOC has lower in-place escalators than Healthpeak, but that's converging over time as they sign new leases with, as John said, 3% or better escalators. So I'm guessing it'd be a little bit lower but not materially.

Joshua Dennerlein:

Okay. Okay. That's helpful. And then maybe 1 different kind of question. Just you mentioned the stock price, you're not happy with it. Just kind of curious for your appetite for stock buybacks here.

Michael Mueller:

I know there are some moving parts with properties that are going into redevelopment. But can you give us a little more color, unless I missed it, in terms of the lab same-store NOI, what's embedded in there for occupancy and spreads for '24 compared to what you did, especially when the spread tightened in '23 .

Michael Mueller:

Sure. And maybe 1 follow-up, talk about positive spreads. Would you think that the spreads would be closer to what you were showing in 24 -- fourth quarter '24 or full year '23?

Operator:

Your next question comes from the line of Vikram Malhotra with Mizuho.

Scott Brinker:

Yes. Well, we still see some occupancy growth in 2024. Rental rates will grow, but more in the mid-single digits as opposed to high single digits just given the fundamentals in that sector. Then obviously, we've had a huge benefit from contract labor coming down over the past 18 months. We're largely through that benefit. We have very little contract labor in the portfolio today. So you just lose a lot of that benefit in same store. So I mean, that's what's happening at the property level. And then obviously, our accounting for this asset class has an impact as well.

Vikram Malhotra:

Okay. That makes sense. And then you mentioned sort of relationships or key in MOBs and you've got a great HCA program. I'm just wondering 2 subparts to that. One, is there likelihood of the HCA program expanding, becoming bigger or other types of properties within HCA. And then second, just is there a pathway for similar programs with larger health systems?

John Thomas:

Yes. Vikram, I think you're aware, we've been doing this with Northside in Atlanta, have a project that's actually about to top out and further opportunities on the Northside pretty routinely. Same thing at -- we both -- both organizations have a great relationship with on [indiscernible], and we continue to have development opportunities there as well to come, so standby. But those are just a couple of great examples and fantastic markets.

Austin Wurschmidt:

Scott, you flagged the estimated mark-to-market on lab of 5% to 10%. I'm just curious how that compares to the lease expiration you have over the next several years? And I'm also curious if there's -- what sort of the variation between larger versus smaller requirements? You noted some strength in sort of that smaller segment requirements. So any detail would be helpful.

Austin Wurschmidt:

But even as we get into sort of '25 and '26, I mean, do you expect that still to be pretty muted? Or is there any opportunities? I know you guys have flagged in the past, I think '25 was going to be a little bit of a more attractive year. Like does that then reaccelerate still as we get into next year? Or has the gradual moderation in market rents sort of wiped away some of that upside?

Austin Wurschmidt:

That's helpful. And then you guys gave a little bit of color around sort of the thoughts around synergies. But I guess I'm just curious how much of that $40 million do you think kind of hits right out of the gate when the deal closes? And what is sort of that go-get for the balance of the year? How would you kind of break down the cadence of that? And then thinking about maybe what could end up getting pull forward even or even upside beyond maybe the high end of that? Just curious the latest thoughts.

Austin Wurschmidt:

It just means you do.

Operator:

Our final question will come from the line of John Pawlowski with Green Street.

Scott Brinker:

I mean, it could be 0 if the market is tighter, it could be a couple of billion dollars if the market opens up. I mean, we'll see, John, we're having all sorts of discussions, but we have them. We've been saying that on a couple of quarters in a row of earnings call. So we'll just have to see how the market plays out. But there's a lot of active discussions across the portfolio today.

Scott Brinker:

Yes. I don't really have a different answer than what I gave in active discussions across the portfolio. I mean it could be a very material number if the markets open up..

John Pawlowski:

Okay. And maybe a follow-up. Can you just help us understand the 2 development starts $90 million. I know it's a small volume, but 7% to 8% development yield on a risk-adjusted basis seems pretty thin relative to again, where the stock is trading or even debt repayment, again, on a risk-adjusted basis. So why is development winning out of the use of proceeds right now?

Operator:

This concludes our question-and-answer session. I'd like to turn the conference back over to Scott Brinker for any closing remarks.

Operator:

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

Operator:

Good morning and welcome to the Physicians Realty Trust's Second Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there'll be an opportunity to ask questions to ask. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Bradley Page, Senior Vice President, General Counsel, please go ahead.

John Thomas:

Thank you, Brad. On July 19, we celebrated DOC's 10th anniversary as a public company from our earliest days it's the custodians of a modest portfolio of 19 buildings, the DOC team is remained committed to a discipline strategy of thoughtful growth, and prudent balance sheet management. This steadfast approach, combined with our unmatched partnerships with health systems and physicians across the country, has propelled our portfolio to nearly 300 owned assets totaling over 16 million rentable square feet. While we are proud to reflect on our achievements so far, we are excited to embrace the opportunities available for DOC's next decade, the demand for the U.S. healthcare delivery system will continue to grow in tandem with the aging of America, and providers need to expand their outpatient presence to effectively care for their patients. Physicians Realty Trust remains ready to partner with our clients to address these changes. We are well positioned to finance and own the purpose built outpatient facilities that will replace expensive and aged inpatient space. The opportunity to deliver accretive growth for acquisitions has been limited for much of the past two years, due to rapidly rising interest rates and the expected uncertainty as to where investment yield should settle. We've chosen to remain patient during this time prudently waiting for market pricing to meet our cost of capital. That doesn't mean we've been stagnant. Our team has worked diligently to remain connected with our health system partners, while also thoughtfully evaluating where the puck is moving for outpatient real estate. We're pleased to share that our patients is beginning to be rewarded. During the quarter we completed a modest number of acquisitions, highlighted by the purchase of the Cardiovascular Associates building in Birmingham, Alabama, in a first year yield of 7%. This 73,000 square foot building was designed and built in response to market innovations that now allow many cardiology services and procedures to be performed in an outpatient facility. This is a natural clinically evolution with Medicare and commercial payers, each recognizing the higher quality and lower cost of providing cardiology services in an outpatient location. We expect this to be a growth strategy for us as the first of many similar cardiology focused outpatient facilities, we will purchase development finance in the future. In addition to the acquisition of Stable Properties, we will continue to invest meaningful capital in the development of outpatient medical facilities. This capital will be provided in varying forms including loan down debt facilities and mezzanine financing arrangements on heavily preleased projects. Many of these projects will eventually come on balance sheet through contractual take out commitments. Our pipeline includes $68 million in contractual commitments to projects under construction, and the potential for $500 million of further investments in projects in the planning stage. Projects within our development pipeline are diverse in nature, reflecting the robust opportunity available for outpatient medical investors. Four projects in our active pipeline are redevelopments of existing buildings, one is the conversion of a vacant Big Box retail anchor, and three represent the conversion of suburban general office buildings. In each case, these projects will soon be helping leading healthcare providers deliver care in their communities. We expect that our stabilized yields on these opportunities will exceed the interest rates received during each respective construction period, with first year rent returns that we project to exceed 7% wants stabilized. In any case, these financing opportunities will have higher long-term IRRs than we can achieve in the current acquisition market. We have not finalized these capital commitments and some are all may not come to fruition. Yet we are confident that our opportunity for attractive development financings will continue to grow. Within the existing portfolio DOC's leasing team continues to do an outstanding job of maximizing the performance of our portfolio. We have ambitious goals to achieve positive net absorption this year while also capturing the exceptional renewal spreads and increasing escalators that we've delivered in recent quarters. That momentum has continued this quarter with leasing spreads totaling 7.8%. Overtime, the achievement of leasing results and excessive historical levels are and maintaining or improving total occupancy should lead to sustainable and NOI growth over time that is sustainably higher than what the outpatient medical space has provided in the past. We projected this past quarter as the trough for same store growth as we sign and commence most both new and renewal leases in the future. Jeff will now share comments on our financial results of second quarter 2023 and Mark will discuss our operating results. Jeff?

Mark Theine :

Thanks, Jeff. Outpatient medical same store NOI growth totaled 0.8% for the quarter. This deviation from our long-term trend of 2% to 3% is the result of a decline in same store portfolio occupancy to 94.4%. While incremental vacancy creates near term headwinds, we believe that the current economic environment provides us with the opportunity to create long term value through aggressive leasing initiatives. We appreciate the value creation requires patience. But our conviction in the unique pricing powered offered by our high-quality portfolio and best-in-class management platform couldn't be greater. This confidence is substantiated by full portfolio renewal spreads that have outpaced our closest peers since the beginning of 2022. That momentum continued this quarter, where we achieved renewal spreads of 7.8% across 244,000 square feet of leasing activity. Importantly, tenant retention remain high at 78%. And we successfully increased contractual escalations on lease renewals by 40 basis points relative to expiring levels. These exceptional renewal results were achieved with modest leasing costs of $1.19 per square foot per year. As seen elsewhere in the broader real estate sector. Health System tenants are currently engaging in a flight to quality, rising construction expenses and stubbornly high interest rates have increased the cost of building new, benefiting existing owners of quality real estate. Our leasing team is focused on capitalizing on the opportunity to boost occupancy and remains engaged in the comprehensive campaign to increase the visibility of our space. This includes improved online marketing, the leveraging of technology to demonstrate the capabilities of our space and targeting of key brokers to drive foot traffic. We're seeing these efforts gain traction. For the quarter we realize positive absorption of 4,100 square feet an average annual escalations of 3% on new leasing activity. Our pipeline of new leasing activity continues to accelerate, with active proposals extended on over 120,000 square feet of vacant space. We are encouraged by these early indicators for future net absorption. And we'd like to say thank you to all of our nationwide leasing partners. We sincerely value the relationships with this accomplished team of healthcare leasing professionals, and look forward to seeing many of them at our annual DOC Management Summit in Milwaukee this September. Beyond these excellent leasing efforts, we are focused on the efficient management of operating expenses across the portfolio. The $1.7 million annual increase in same store expenses was primarily attributable to increases in janitorial maintenance, payroll and security costs. However, most of these increases were experienced early last year amid a higher inflation environment. Sequentially, operating expenses are down at $0.2 million or negative 0.4%. Inflationary pressure on operating expenses appears to be easing, which we believe will allow our leasing discussions to focus on growth and base rent and ultimately fuel future NOI growth. We're accomplishing these financial goals, while also remaining focused on developing our strong relationships with industry leading health systems and physician practice tenants. After all, if these relationships that have contributed towards our success and building the portfolio since our IPO in 2013 10 years later, the continued strength of these relationships is evident in our 2023 Kingsley Associates Tenant Satisfaction Survey results. This year, we surveyed over 450 tenants representing approximately 4.9 million square feet. Physicians Realty Trust received an impressive 73% response rate compared to the industry average of 58% this year. In addition, we beat the Kingsley Index in every major property management category, including overall management satisfaction with a score of 4.53 out of 5. While we sincerely appreciate the positive feedback from our healthcare partners. The surveys we actually value the most are those that offer opportunities for improvement, and where we can invest in better in order to earn that tenants trust and lease renewal before the lease expiration. This year, fewer than 2% of the 458 survey tenants affirmatively indicated that they are unlikely to renew their lease when that expires. Based on this feedback from our healthcare provider partners, Physicians Realty Trust is well positioned to capitalize on the continued demand for outpatient space while driving long-term value for our shareholders. With that, I'll turn the call back to JT

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Juan Sanabria from BMO. Please go ahead.

Jeff Theiler :

Yeah, good question. There's not a lot of trades happening. What we're seeing is, you know, things in the mid-6s to low-7, you know, for our underwriting and the criteria and the quality that we want to acquire. We're looking at high-6s and low-7s is being kind of matching cost of capital, but same time not going up the risk spectrum to achieve those yields. So, again, not a lot of trades happening. There's still some trades happening in the mid-6s. We're really excited about CDA [ph], which we were able to work with our partners there to achieve a 7% first year yield on that acquisition, a smaller transaction was 8%. And then we had another one at 7%. So those are the target ranges we're looking for with our cost of capital without jeopardizing the quality and credit or the buildings themselves.

Mark Theine :

Yeah, this was Mark, I'll take that one. So at least the team's been doing a great job both focusing on retention and leasing spreads. We've consistently been in that mid-single digit and we had a very strong quarter of 7.8% leasing spread this quarter. Going forward in the back half of the year, we expect that trend to continue in the mid to high single digit leasing spreads and we're not only focused just on that spread but also increasing the annual escalator over the life of the term of the lease and. And we've been very successful in getting three and occasionally even 4% rent bumps built into the lease going forward.

Operator:

The next question comes from Nick Joseph from Citi. Please go ahead.

Mark Theine :

Yeah, thanks, Nick. And I'll ask Jeff to respond.

Nick Joseph :

Yeah, no, that's very helpful. Thank you. And then just in terms of providing capital for developments. How's the competition changed there? You've seen a pullback on banks, I would think you would be from construction lending. So does that actually open up even more of an opportunity than you'd seen previously?

Nick Joseph :

Thanks. And as that pipeline grows, and sort of internal cap or any kind of any kind of internal risk mitigation that you put on just to not have too much exposure there.

Nick Joseph :

Thank you very much.

Michael Stroyeck:

Thanks. So one on pricing power for me. Just curious if you're seeing any bifurcation between the companies on campus and off-campus portfolios in terms of releasing spreads?

Michael Stroyeck:

Great, thanks. And then maybe one more. So despite some pretty high construction costs, we are still seeing some elevated AOB [ph] construction activity. Are there any pockets of your portfolio where you are becoming increasingly worried about new supply?

Michael Stroyeck:

Great, thank you.

Michael Carroll:

Yep. Thanks. Maybe this is a question for Jeff. I know after the term loan, your cash balance increased pretty significantly. What's the near term plans for that cash balance? Is that year marked for new investments or is there some debt pay downs that you want to utilize cash for to?

Michael Carroll:

Okay, and then what's the preference for investment activity over the next six to 12 months? I know that you highlighted acquisitions developments, mez debt. I mean, where are the bigger opportunities right now?

Michael Carroll:

Okay. And the cap rates that I've been hearing, I guess we're MOBs are trading at or at least higher quality. And MOBs is like in the low to mid-6 range. And I know JT, you're highlighting and just completed some deals at the seven. I guess what's different about the type of deals that you're looking at? Are these just more off-market relationship type deals that are getting you up into that 7% range?

Michael Carroll:

Okay. And you would agree that the higher quality deals are trading in the low to mid-6s, I guess generally right now in the MOB space.

Michael Carroll:

Okay, great. Thank you.

Operator:

Next question comes from Steven Valiquette from Barclays. Please go ahead.

John Thomas:

Yeah. Hi. I'll have our give you a little more color, but it's we really do think we've hit a trial there. And again, it's still a kind of quarter-over-quarter with an intentional non-renewal last year and then a non-renewal but tuck-in where they cut some space back at the beginning of the year, which had a quarter-over-quarter continued impact, but we do think this quarter is a trough and kind of with leases, both commencing and being executed in the near term and net absorption, we're headed in the right direction, Mark do you want to add anything?

Steven Valiquette :

Okay, got it. That's helpful. Thanks.

Ronald Camden :

Hey, just a couple quick ones for me. So going back to sort of the capital allocation, so one on the acquisition front, obviously, not seeing enough deals and leaning more towards some of these development. Any way to sort of quantify what that run-rate could be sort of on a long-term basis? Like, is there $100 million-$200 million of opportunities as you're building out these relationships? Just how can we get some more sort of hard numbers around that?

John Thomas:

Yeah. I think part of that is like, right now we have more opportunities in there. And I think that is we'll get kind of a continuous cycle of those facilities coming online, starting commencing, and as new buildings are coming online and stabilized paying rent, we'll start new constructions as well. So, again, we're really working to build up that kind of continuous cycle there. And so good opportunity to do that.

John Thomas:

Yeah, I think Mark just addressed that. But again, just to repeat, it's really kind of three events, two intentional and one were tended to cut back some space. And we're already in the process of backfilling that space with a lot of tours. And they partially lease some of that space already. So second half of the year, we'll start seeing the benefits of those. But the non-renewed leases that we did intentionally one of those that surgery center that is now come online, it's been accredited, and is starting to treat patients and paying rent in this quarter. So we'll start seeing the benefits of all that. It's really two or three events out of 300 buildings.

John Thomas:

Yep.

Unidentified Analyst:

Hi, thank you for taking my question. The first one is kind of quick, how much rent is expected to commence in the second half of this year?

Unidentified Analyst:

Got it. Thanks. You mentioned with the new embedded escalators been able to achieve on average 3% and even some 4% can you remind me what the weighted average escalators embedded in the entire portfolio is?

Unidentified Analyst:

Okay, got it. Thank you, guys.

Unidentified Analyst:

Hey, good morning, guys. [Indiscernible] on for Connor, today. Thanks for taking the question. In terms of the competition for assets, do you guys still see a lot of activity from foreign capital or have those entities move to the sidelines and potentially offering more opportunities for Physicians group?

Unidentified Analyst:

Great. And can you offer any color as to how much the portfolio is utilized by admin or mathematical functions, like the revenue cycle for example? Do you get that leases? Go ahead.

Unidentified Analyst:

Yeah, I was just going to say, do you get the sense that lease sizes could decrease as leases kind of roll over and the company utilizes those hybrid structures?

Unidentified Analyst:

Great. Thanks, guys.

Michael Gorman:

Yeah, thanks. Good morning, JT, maybe kind of continuing off of what you just mentioned there, how do we contextualize the opportunity set that you have with some of these redevelopments. And I understand its purpose built versus the risk of kind of new supply? And I know, we talked about that earlier, but just maybe less disciplined operators than yourselves just taking suburban office portfolios or vacant big boxes and trying to just slap an MOB label on them and jump into the marketplace? What's the potential risk there?

Michael Gorman:

Great, that's helpful. And then you started out the comments, obviously highlighting 10 years as a public company, which is great. And then it was just reminded me that one of the things that you focused on when you first came out was exploiting kind of a risk return gap in the MLB [ph] marketplace that you saw. I'm curious. I know, there's not a lot of transaction volume. But as we've seen the capital markets and the transaction markets get more stressed, are you seeing any kind of risk reward gaps, that would be more interesting to you, whether it's a particular physician group type, or whether it's a particular geography that as the markets get better, they're likely to generate more deal volume for you?

Michael Gorman:

Got it. So it's more on the ownership side than on the actual building side where you see that differentiation?

Michael Gorman:

I remember it well. Absolutely.

Michael Gorman:

Thank you.

Mike Miller :

Yeah. Hi, just a quick one here. For the CVA acquisition, just curious why your partner wanted to have a 1% stake in the JV.

Mike Miller :

Okay, that was it. Thank you.

Austin Wurschmidt:

Great. Thanks, and good morning. Just curious on the incremental developments you added to the backlog? Are you seeing any increase on yields for those deals? Or is 7% to 8% still the right range?

Austin Wurschmidt:

Got it. That's helpful. And then Mark, I believe he said 34,000 square feet of executed leases commencing in the back half the year. I think that figure previously was in the 58,000 square feet. So just wanted to clarify, is it safe to assume that the delta there is just what commenced in the second quarter?

Austin Wurschmidt:

Got it. Understood. And then as the tenants take occupancy in the back half and we continue to see positive net absorption how do we think about the expense benefit and sort of that operating leverage moving forward?

Austin Wurschmidt:

That's helpful. Thanks for the time.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to John Thomas for any closing remarks.

Operator:

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Greetings and welcome to the Physicians Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Page, SVP, General Counsel. Please go ahead.

John Thomas:

Thank you, Brad. Physicians Realty Trust provides real estate capital to healthcare providers that specialize in outpatient medical services. We provide this capital in a number of ways. We acquire outpatient medical real estate designed to facilitate surgery, oncology, and other specialty services required by patients in high demand and the physician patient encounters ancillary to these medical services. We financed the development of these types of buildings. And we finance the transformation of buildings that may have become out of date as is, but provide a low cost option for transforming to host these medical services and meet the demands of our growinG&Aging US population. Our facilities and providers we partner with around the country provide accessed care for the entire population in the markets where we are located, not just the finite small percentage of seniors that can pay for and want senior housing. For years, the fundamental case for owning outpatient medical facilities has been strong, but is now stronger than ever. First, healthcare providers benefit from undeniable demographic tailwinds currently and that will dramatically increase demand for services in both the near and long-term. Second, due to Medicare's Progressive Payment System and Part C modernization, providers are incentivized to provide care at the lowest possible cost consistent with the clinical science available at the time to treat the patient safely and effectively. Third, current expense pressures are temporary and correctable. These pressures are caused by the unique combination of real time inflation and backward looking payer revenue rates that are set based on past costs rather than current or future expected costs. Each of these factors incentivizes health systems to move patients out of the inpatient hospital setting and into newer, lower cost outpatient sites of care as a means of improving their margin on services provided. These trends have been known and visible for years and have only accelerated in the post-COVID world. Time and time again, buildings hosting outpatient medical services have proven to be resilient and an essential class of real estate. When one of our clients chooses to reduce their space at the end of their lease, is not due to a top -- it is not due to a desire to work from home, the result of slowing demand or a consequence of a rapid rise in interest rates. Rather, our non-renewals are driven by unique and specific situations like physician retirements or a change in practice ownership. These are not structural trends or challenges. Our real estate is necessary for physicians and health systems to deliver their mission to meet ever increasing demand. Unlike other real estate asset classes faced with declining demand for space. Revenue from outpatient medical services grew 8% in 2022, in comparison inpatient revenues experienced no growth. High construction costs and the limited supply growth have allowed us to meaningfully increase rental rates in most markets and we expect to see that trend continue. The opportunity for new acquisition investments remains low for now as private investors make short-term wages on medical office cap rates returning to 2020 levels even at the cost of negative leverage. We believe that patience is a virtue and we will benefit from outsized growth and acquisition opportunities with our dry powder when market cap rates and the long-term cost of capital reach equilibrium. We do see a growing number of opportunities to finance new outpatient medical investments in our active pipeline in discussions now exceeds $300 million. We're proud of the two projects we started this past quarter, including our first on balance sheet development and expect to start several new projects later this year. We're excited to share that we've executed contractual commitments related to a $40 million medical office development located in the high growth at Atlanta Server of Beaufort Georgia. The 97,000 square foot outpatient medical facility, which includes an ambulatory surgery center, is 100% pre-leased on 10-year triple net lease terms with 91% leased directly to Northside Hospital, an investment-grade quality health system. The site also allows for an additional 100,000 square foot medical facility in the future, where we will have the development rights to build. Northside Hospital and affiliated physicians have executed leases based on a 6.2% yield on cost to deliver the project with 3% risk escalators on all lease agreements. Physicians that lease space and provide services in the building have contributed 44 some of the capital to develop this building. This investment increases our long standing partnership with Northside Hospital and is a direct reflection of DOC's strong relationships with health systems, we want to work with a long-term partner who knows healthcare first. Before our next earnings call, we will celebrate the 10th anniversary of an of our initial public offering. We appreciate your support, the support of all the families that work for and with DOC, and the investment-grade credit and high quality providers that partner with us meet the healthcare needs and the communities we serve. We look forward to the next 10 years and beyond. We believe we have the highest occupancy, the best balance sheet, and the best strategy for outsized growth well into the next 10 years and beyond. Quarter one was uneventful until we lost George Chapman, who passed away unexpectedly and well before his time. George made Healthcare REIT the powerhouse that it is today. I can't count the number of senior executives and professionals at public and private REITs and otherwise, that owe their careers to George's inspiration and mentorship. I can name at least three public REIT CEOs who are our stewards and direct beneficiaries of George's leadership. But more important than all the financial and business success, George was motivated most by his love for his family, Toledo, The Art, Cornell [ph] and the University of Toledo and taking care of seniors in advancing access to healthcare services for all regardless of their ability to pay. I believe George is looking down on all of us asking us how we are going to work to expand access to care to all, expanding senior housing to more, and providing professional opportunities to the youth of Toledo and everywhere to meet these objectives. George, we miss you . We at DOC are committed to your passion and mission. Jeff will now share comments on our financial results of Q1 2023 and Mark will discuss our operating results. Jeff?

Mark Theine:

Thanks Jeff. To best capitalize on the opportunity we have within our portfolio, we are occasionally better served by transitioning space from 1 physician organization to another. These decisions are made to improve the overall financial health and value of our buildings over the long-term, but generally have a short-term impact on our net operating income. Among other benefits, these strategic efforts have served to dramatically improve the credit profile of our portfolio. This is especially relevant in today's environment where higher operating expenses are offsetting revenue gains for health systems. DOC's portfolio remains well-insulated from these pressures by the underlying credit quality of our tenants, 67% of which are investment grade quality. Better yet, 90% of our investment-grade tenants have a credit rating of A minus or higher. This means that these tenants would need to be downgraded several times before they could potentially lose their investment-grade status. Our commitment to credit quality remains unmatched by our peers and we believe this strategy will pay dividends for our shareholders in any economic environment. MOB same-store NOI growth was 1% during the quarter, our 20th consecutive quarter of positive same-store growth. Headline performance in the period was adversely affected by a unique situation at a single location in our portfolio. Specifically, our asset management team was faced with a physician group tenant that had a reduced need for real estate and an in place plan to consolidate locations. We made the decision to move aggressively to retain at least part of their space in our building as a means of preserving the healthcare ecosystem of the asset, and we are already in discussions with several potential providers to lease space not renewed by this tenant. Overall, this asset represents less than 1% of the same-store pool. Conversely, the 14 building landmark portfolio joined the same-store pool this quarter. As expected from such a high quality portfolio, occupancy is up 50 basis points since our acquisition and the portfolio grew cash NOI by 4.1% year-over-year. In total, the portfolio is exceeding our underwriting expectations and is representative of the quality facilities and tenant at the center of DOC's investment criteria. First quarter renewal spreads were impacted by the same scenario I just discussed during our same-store commentary with headline spreads totaling negative 0.7%. Excluding this one asset, renewal spreads for the quarter were positive 10.1%. In total, our leasing team completed 367,000 square feet of leasing activity this quarter including 289,000 square feet of lease renewals and a 72% retention rate. The great work this quarter by our leasing team to reprice lease renewals at today's fair market value with a 10.1% leasing spread should not be overlooked by one lease. Additionally, this leasing activity offers strong compounding growth for the future as approximately 60% lease assigned this quarter contain annual rent escalations of 3% or more. Looking back to the 2018 to 2021 time period, only 25% of our leasing activity on average contained annual rent escalations of 3% or more. Despite the short-term impact of a few vacancies in the portfolio, we believe the long-term value opportunity for our portfolio is fully intact as outpatient services drive retention and market pressures continue to increase triple net rental rates. Our team is focused on unlocking the full value of our portfolio through aggressive leasing initiatives, exceptional property management and smart capital improvement investments. Before turning the call back to JT and opening for questions, I'd like to quickly say congratulations to John Sweet, the Founder of DOC for earning the 2022 Lifetime Award from Healthcare Real Estate Insights. The award was presented in January at the Revista Medical Real Estate Investment Forum. John has always been known by hospital executives, brokers, developers, and investors for his witty sense of humor, unwavering integrity, and creativity in structuring investment transactions. As we celebrate the company's 10th anniversary this July, we cannot be happier to honor John for his career and contributions to the medical office industry, and we recognize as mentorship and friendship to all of us at DOC. Congratulations, John. With that, I'll turn the call back over to JT.

Operator:

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question comes from Austin Wurschmidt with KeyBanc Capital Markets Inc.

Mark Theine:

Hey, good morning Austin. Its Mark Theine. So, as I mentioned in the prepared remarks, our leasing statistics were outsized by this one tenant, but our portfolio we're really starting from a position of strength with industry leading 95% occupancy. Over the history of our company, we've always been in that 95% occupancy range. So, we are experiencing a couple of one or two kind of moveouts and normal churn of the portfolio. But long-term, our occupancy has always been around 95%. We've been well served by our triple net leases, high occupancy, especially in this inflationary environment.

Mark Theine:

Yes. So, again, we feel very confident in our comments about the improvements in the back half of the year. Really pointing to that, we do have 58,000 square feet of leases signed that are under construction and we expect rent commencement in the back half of the year. So, as those leases start to come on, we'll recognize them in our occupancy and obviously, our rent growth. So, that'll get us more in line with our expectations of the 2% to 3% same-store growth in the back half of the year.

John Thomas:

Yes. Awesome. Thanks it's JT. It's still modest on the acquisition front. We do have some growing pipeline. There's some activity out in the market. There's still private buyers in particular in in the low sixes range, we'd like to be higher in the sixes and up into the seven cap rate, but without jeopardizing quality or the credit quality or the quality of the facility. So, we'll see some activity pickup and we can expect more to come to market. Working with some health systems, looking at some potential monetizations there, So, we're excited about that. The real pipeline is on the development front and just working through kind of final documentation and pricing of those transactions.

Operator:

Our next question comes from Juan Sanabria, BMO Capital Markets.

John Thomas:

Yes, Juan, we -- those get price too well in advance of actual construction starts. And the Beaufort project has with the 3% bumps, the quality of the location. Our IRR on that facility is much closer to 8.5% to 9% So, we'd like it to be higher when we start on that particular, but it's still a fantastic project. The second project is not priced and we would price it at a different rate today in the current market. At the time, we were negotiating through that and we'll be purchase acquisition rates for in the low 5. So, it's just -- it's obviously a timing thing with that and we're looking at different ways to think about that and the long-term commitments we make there. So, development starts, the things we're negotiating now are in the high sixes, low sevens, from a current yield because most projects we do are on a -- kind of loan down or more of a construction loan project and those are in the high sixes to low sevens if we were pricing them today.

John Thomas:

Yes, I'll speak about dispositions and ask Mark to give you some more specific details. We don't have a meaningful disposition strategy for this year. Opportunistically, we may sell a building here or there. We have we own 300 -- almost 300 buildings. So, there's always a handful in the in the portfolio that are older, smaller, in different markets where we're not strategically growing. So, from time-to-time, we may strategically dispose of something, but nothing specific. No material plans. Mark, do you want about this?

Juan Sanabria:

Thanks guys.

Operator:

Our next question comes from Ronald Camden with Morgan Stanley.

Mark Theine:

Yes. This is Mark. I'll take that one again. So, start with the fact, again, this is our 20th consecutive quarter of same-positive same-store NOI growth. And we currently we don't have a redevelopment or repositioning bucket, we report on all of our properties. So, as I mentioned last quarter, you know, we were expecting same-store to have a little bit slower start, but picking up in the back half of the year. And this one building in particular was a 110,000 square foot cancer center. We acquired in 2014 at a 7 cap and for nine years, they paid their rent on time every month. And we -- through our relationship with them, became aware of their plans to consolidate their office space and really reduce their square footage by about 50%. Some of which was admin space, some of which is clinical space, but the direct impact from this one tenant on same-store this quarter is 73 basis points same-store. So, our one would have been 1.73 excluding this building, and it had a 30 basis point impact on our occupancy year-over-year. So, just to help kind of contextualize this a little bit more, $200,000 in our same-store pool out of $82 million of cash NOI moves same-store 25 basis points. So, it doesn't take a lot of cash flow to really move same-store percentage quarter-over-quarter. So, again, what I said before, what gives us confidence in the back half of the year is the lease assigned that are under construction and we'll commence in the back half of the year. Our target for increasing our occupancy there is really our investment-grade hospital systems that are existing in the buildings and we're working closer with them to continue to expand.

Mark Theine:

No. Nothing, nothing to this size.

Operator:

Our next question comes from Michael Carroll with RBC Capital Markets.

John Thomas:

Yes. It's really trying to understand how that is -- how they're making the math work on those projects and talking to some of those private buyers. They have some all equity with low returned expectations. There's not a lot of bank financing. I wouldn't say there's high volume of those transactions, but there are people out in the market kind of high fives, low sixes. So, I don't think that's reflective of what the current value is. It's more of a reflection of people with buckets of capital, they're willing to take a bet that interest rates decline next year and cap rates go back to the 5s. I think that's kind of the simple math they're doing. We are active acquisition pipeline. It's in the high 6s as low 7s. We don't have a lot of volume in those numbers, but we do have good discussions in place.

John Thomas:

Yes.

John Thomas:

No. We the -- it's got 3% bumps. Again, about half the equity is coming from the physicians that are leasing the building. They've already written those checks. So, we've got this advanced funding from last year. It's really early of last year mid spring kind of discussion around the pricing at the time, 6.2% was much higher than acquisition cap rates and time. So, we -- again, the development is not a spot financing production. So, it's -- we were pricing it today. It would be higher. Our long-term IRR on that project, Mike, is still in the mid 8% to 9% and that's without executing another transaction changing cap rates or interest rates in the future. So, we feel good about it. We'd price it higher today if we could, but we're still going to make money on the project.

John Thomas:

There's some unique circumstances with Northside and its location. They own the land. So it's on our ground lease. They have they have the second building's already designed and we think there's leasing demand to move forward with that project in the next year and that one will price again based upon kind of current pricing at the time. But and it would be priced differently if we were starting it today. But it's worth that ask for us to build it on balance sheet again for some unique circumstances. The tenant base is partly their employees, partly affiliated positions that aren't employed by them. A combination of, health care compliance and Northside their own balance sheet management. So we're excited to do it. We're working with RTG as the developer on that project to we who we partnered with before. They do a great job and have done a great job getting the billing to a 100% pre-leasing before we started funding it.

Mark Theine:

I think you I think you'll see some, but our preference is the loan down where we're getting current construction loan yield and have more optionality on the back end to -- on the -- on potential of an acquisition. But you may see it from time to time. But, we're excited to do it and expand our relationship. It's a great market. Atlanta is still, very high.

Operator:

Our next question comes from Michael Griffin with Citi.

John Thomas:

Yes. You know, beginning in the fourth quarter of last year, as interest rates were, you know, rising dramatically and fast and cap rates on acquisitions was not keeping up with that and still hasn't really reached equilibrium. We've been very modest on acquisitions. Not even a lot of builders trying to continue discussions we've walked away from opportunities where they were very attractive 18 months ago that aren't attractive or aren't as attractive today. Many sellers are just holding firm and hoping that interest rates decline and the cap rates improve from their perspectives next year. So we don't expect a lot of acquisition opportunity this year. The development pipeline, again, those are usually two years of construction projects and we can get outsized deals there. But you do take some capital risk and you do take some modest development risk, which we don't think we're taking any there because of the getting to 100 percent pre-leasing with investment grade quality tenants like the Northside project. So, I think those are mitigate over time that $300 million pipeline we're talking about, much of which won't even price or get started into a later in the year. So, again, it's a balance and forward looking projection if best we can about how to, how to price those projects. Jeff?

Michael Griffin:

Thanks for that, Jeff. I appreciate the additional disclosure on the release about the ATM issuance. I double checked with the prior quarter one, and so it wasn't any new news. So appreciate that. And then maybe one for Mark, just on the leasing side of thing. I think the lease percentage ticked down a little bit in the quarter, but it's still pretty high at around 95%. How are you kind of incorporating this into expectations around leasing occupancy growth this year and the ultimate impact on same-store? Thank you.

Michael Griffin:

Great. Thanks. That's it for me. And as an Atlanta native, just wanted to say I have to check out the new properties next time I'm back in my back there. Thanks.

Operator:

Our next question comes from John Pawlowski with Green Street.

Mark Theine:

Hey, John. This is Mark again. So first, welcome to the DOC call. Great to have you here. We appreciate the support from Green Street. Landmark, it's -- about 1.4 million square feet out of our 15 million square foot, 50.2 million square foot same store portfolio. So, while great results there just based upon the, overall size of the same store portfolio, it doesn't have outsized impact on our same store results. But those properties alone right there, 4.1% from the same store is a result of some increased occupancy and done a really good job. The landmark portfolio itself is 11% percent of the same store pool so year over year again, 4.1% percent growth there.

Mark Theine:

Yes, John. So the one thing I would add to what you just said, you're starting to build on it correctly with the excluding Zingmister [ph]. But the one thing I'd add is, again, is the 58,000 square feet of leases that are already signed and under construction. Once those come online on a run rate basis, they'll add to approximately $400,000 of NOI a quarter. So that will continue to help build our same store and that could be another 40, 50 basis points there just from leases that are already signed. So again, that's on a run rate basis. They'll come online throughout the -- the back half of the year, not all at the same time, obviously, but throughout the back half of the year. And, that's what gives us confidence that we'll be rebounding into our more historical range of 2% to 3%.

John Thomas:

Yes. John, there's we have a core value called CARE, where we collaborate, communicate, act with their integrity. We respect the relationships and we execute consistently. We've built this company for 10 years by being reliable with our health partners and we do re-price. We have re-priced where we have the opportunity. Again, we are in the I8 on an IRR basis on this transaction, 6.2 is the first year yield that grows 3% a year within, primarily an investment grade health system, and we'll have the opportunity to expand this campus by another 100,000 feet in the near future. So we don't see it as a as a project you walk away from. We see as a project you work with your partner and get to the finish line where you can. Other projects we've done exactly what you suggested. We've walked away from purchase options that again where we have the optionality and that's kind of the preferential way we like to do the development projects. So each situation, stands on its own merits and circumstances.

Operator:

Our next question comes from Mike Miller with JPMorgan.

John Thomas :

No, it's a small part of the total project. The ASC, which is the first step of the redevelopment of that location with Emery is it's cap rates in the high. It's been closer to an eight, but we're committing capital to redevelop that. So, ultimate yield on that's in the sevens. And then the construction project is a separate loan, and then it's priced at 6.75% 6.8%. And then we have optionality whether to purchase that building on the back end and we'll evaluate to John's point a minute ago, evaluate the value of that purchase option at the time of execution or walk away from it or try to reprice it. So it's a small piece, the ASC piece. It's nice yielding with a small $4 million or $5 million acquisition, and then we've committed capital to renovate and improve that billing.

Operator:

Our next question comes from Tayo Okusanya with Credit Suisse.

John Thomas :

Hey, Tayo. One clarification, you said, you know, kind a holding out or non-renewal space to hold out for a better tenant. That's really not exactly what we do. In non-renewal space because we have a better tenant in hand. And that's the perfect example is the 55,000 square feet of leases that are under construction. So it just takes a period of time to build out that space for the incoming tenant. And we don't count that as least, occupied space until the rent commences, as appropriate accounting. And that particular location are those 55,000 feet. Is 50 bps of same store?

John Thomas :

Yes. Yes. So pretty meaningful contribution. And gets us back to 95% actual lease space when those commence. On the building that where we had to repositioning this quarter. We already have an active lease pipeline. Again, those discussions have been in place for a while. Amy Hall and her team have done a great job of building a list of tenants to backfill and lease that space at market rates. And we think that building get back to kind of high occupancy in second half of this year or first half of next year. So it'll start contributing again momentarily.

John Thomas :

Yes, Tayo. So I think you're making a great point here, which is that our vacancy and short term leases really have an opportunity right now to increase cash flow as we're in an environment where rental rates are increasing quickly. In fact, just yesterday, just as a as an example, we were shared a leasing flyer for our brand new development in Texas and our second largest market. It's not an investment that development deal that we're directly involved with, but it's located right next to a large existing building we own. And the development rental rates and in that leasing flyer were 40% higher than the rents we have in place in our existing building that was built five years ago. So similar, you know, quality, even larger building a large delta between what current construction rental rates asking rental rates are and where are they embedded in rental rates of our portfolio are. So there's a great opportunity. And that's where our leasing team, our asset management team is focused on, is really understanding each market and bringing those current leases mark to market. As I said, I absent the one lease we discussed. We had 10.1% leasing spreads this quarter, which is a phenomenal job by our entire leasing team. And great potential with our asset management team.

John Thomas :

Thanks, Tayo.

Josh Dennerlein :

Yes. Hey, guys. Thanks for the time. Just kind a wanted to ask about something you mentioned in the opening remarks. I think I heard correctly, you mentioned you expect the transaction activity to pick up in the second half of this year. What's driving that your expected -- that expected pickup?

Josh Dennerlein :

Interesting. Are those mostly like one-off assets or are they more, like, portfolio of size.

Josh Dennerlein :

All right. Thank you.

Operator:

Our next question comes from Steven Valiquette with Barclays.

John Thomas :

Yes, Steve. So operating expenses in the same-store pool were up 6.9% year-over-year sort of in line with some recent inflation for this. We're coming off of a period last year where this comparable operating expenses were really flat in the comparable period, but prior a year ago. And if you if you look a little deeper into that, what we're seeing on operating expense growth is number one utilities, not necessarily consumption because we made some very intelligent and wise capital investments in the building. But in the rate of utilities, we're seeing a pretty large increase. And then we're also seeing some increases in labor related to janitorial engineering, things like that. So year-over-year, that's where the operating expense growth is. But again, one of the benefits of our highly occupied triple net lease portfolio is that those operating expenses are nearly offset in our recoveries which are baked into that rental revenue line item there as well. So our asset management team, property management team are always focused on keeping total occupants see cost low, managing operating expense as well and leveraging economies of scale. But we'll continue to try and focus on keeping those operating expenses below the inflation line.

Operator:

We are closing our question-and-answer session. Now, I would like to turn the floor back over to John Thomas for closing comments. Please go ahead.

Operator:

This concludes today's conference call. You may now disconnect your lines. Thank you for your participation, and have a great day.

Operator:

Greetings and welcome to the Physicians Realty Trust Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Page. Thank you, Mr. Page. You may begin.

John Thomas:

Thank you, Brad. Physicians Realty Trust demonstrated resilience throughout 2022 and enters 2023 from a position of strength. Our assets are performing well, demand for our space remained strong, and our balance sheet is well-positioned for outsized external growth. We're proud of our achievements during the year, including attainment of the highest annual Fed, funds available for distribution for share in the history of the company. The cash growth is supported by record leasing performance. For the year, we executed leases totaling more than one million rentable square feet including over 800,000 feet of renewals and an average spread of 6%. Retention remained strong as 77% and more than 60% of our executed leases had an average annual escalator at 3% or greater. We remain focused on creating long-term value on behalf of our shareholders. This can occasionally require the selective non-renewal of leases when we believe that the space can be re-let to stronger health system tenants. While this has the effect of hurting total occupancy and same-store NOI growth in the short-term, we believe that these decisions result in a stronger portfolio that delivers superior cash flow growth in the future. During 2022, we increase the amount of space leased to investment grade quality tenants from 65% to almost 67%. And we believe that we continue to have the highest portfolio leased rate of any public medical office building investor. The rapidly changing interest rate environment required us to be disciplined when evaluating external growth opportunities during 2022. Still, we were able to add to shareholders -- add value to shareholders through the transaction we did choose to pursue. In July, we opportunistically sold disposed of our three Great Falls Montana medical facilities at a 4.7% cap rate, generating a $54 million game and an outstanding 16% unlevered IRR. We match this transaction with a $160 million of new investments in 2022 highlighted by our $82 million acquisition of the Calco Medical Center in Brooklyn, New York, at a 5.5% stabilized cash yield. We also continue to work with several health systems to move development and redevelopment projects forward that we expect to proceed in 2023 and generate rent in 2024. Our financial achievements were matched by our accomplishments as they relate to corporate responsibility in 2022. We made measurable progress toward our goal being a sustainable -- sustainability leader across all real estate industry sectors. For the year, we invested in 31 projects totaling $5.6 million that will directly reduce the energy footprint of our facilities, while also enhancing the desirability of these assets to tenants. Thoughtful investments like these are a critical part of our long-term sustainability objectives, including our goal announced in 2021 to reduce our portfolio's greenhouse gas emissions by 40% by 2030, over our 2018 baseline. Social accomplishments in 2022 include 902 hours of volunteer work, individually and corporately, to the communities we serve, which exceeded our 600-hour goal by over 50%. Doc also provided more than $408,000 to philanthropic fundraising and in-kind donations to community and healthcare provider organizations, benefiting their research and mission initiatives. In addition, in 2022, we earned recognition for Modern Healthcare as One of the Best Places to Work in Healthcare for the second year in a row, and Top Workplaces Honors from the Milwaukee Journal Sentinel in our headquarters for the fifth year in a row. Our ESG efforts continue to receive recognition at asset and corporate levels. During 2022, Doc assets were certified by IREM under their Certified Sustainable Property program, bring our aggregate count to 38 properties with this designation. Separately, we earned 16 new ENERGY STAR property certifications under their recently relaunched medical office building program, bringing our certification count to 26 and qualifying Doc as a premier member of the Certification Nation's efforts. We're also proud to share that we were named to Bloomberg's Gender Equity Index in January of 2023 as a first-time submitter, distinguishing our work in gender equity in enhanced public disclosure. We're thankful to have been recognized in each of these ways and remain committed to maintaining our status as a leader within the healthcare REIT sector on matters of ESG. In a few minutes, Jeff will discuss the strength of our balance sheet and Mark Theine will provide more details on our operating results. Before that, I'd like to take a moment to speak toward our expectations for the year ahead. In 2023, we have set ambitious goals to increase our occupancy at market rate and continue seeking medical office acquisitions and development opportunities. Our development financing pipeline is more extensive than ever, with more than $200 million at cost of opportunities under evaluation and exclusive negotiation. We expect to proceed with many of these opportunities and are targeting stabilized project yields in the 7% to 8% range. The acquisition market has not yet stabilized with current and capital market conditions. On market transactions are working around the high six cap rate. Still, with low volumes and a limited financing market. We do not believe the market is reached equilibrium, with our weighted average cost of capital, or the markets cost of capital growth generally. In conclusion, DPhysicians Realty Trust in 2023 with a strong, stable and proven portfolio. Our balance sheet is strong and we remain disciplined and capital deployment, patiently waiting for acquisition and development opportunities that will be accretive to our long term financial goals. We celebrate our 10th anniversary this summer, and we are proud that we have built this company to last for decades to come. I will now turn the discussion over to Jeff. Jeff?

Mark Theine:

Thanks, Jeff. Our tenured asset management, leasing and capital projects teams are united in our focus to serve our healthcare partners. While growing cash flow for our stakeholders. We contributed to these goals in 2022 by delivering record renewal spreads, maintaining retention, and efficiently prioritizing capital project investments in this inflationary environment. These successes are the direct results of our commitments to outstanding customer service and in line with our care core values. Despite the difficult macro environment, we delivered record full year renewal spreads of 6% while maintaining retention of 77%. Importantly, these results were achieved without offering excessive incentives. With full year renewal TI's totaling just $0.80 per square foot per year. This efficiency was matched by our capital projects team, who deployed $23.9 million of recurring CapEx in 2022, representing $1.48 per square foot. During the fourth quarter, we continued our positive momentum by achieving renewals spreads of 7% on 141,000 square feet of volume, with leasing costs totaling $0.45 per square foot per year. In addition, new leases totaling 42,000 square feet commenced during the quarter at an average rate of $18.64. Tenant improvement costs on new leases totaling $3.89 per square foot per year remain well within industry averages, demonstrating our commitment to bottom line effective rent rather than headline rate. The weighted average annual rent escalator on this quarters 182,000 square feet of leasing totaled 2.9%, a significant increase against the portfolio average of 2.4% MOB same-store NOI growth was 1.5% in the fourth quarter, below our historical 2% to 3% growth rate due to the 30 basis point decline in occupancy from the vacancies we discussed last quarter. In total, this 51,000 square feet of lost occupancy across 13.5 million square foot same-store portfolio is largely explained by activity at two specific buildings. First, same-store occupancy continues to be impacted by the strategic non-renewal of suites and an MOB in Minnesota to allow for the construction of a brand new ASC that is currently under construction and leased to the dominant investment grade health system in the market. The new 21,000 square foot surgery center is expected to be completed and paying rent during the third quarter of 2023. Second, 22,000 square feet of vacancy is attributable to an MOB in Pennsylvania, where our historical physician tenants were employed by a hospital and relocated to the hospitals-owned medical office facility at the end of the lease term. We are making several investments to improve this space. And we have partnered with the local brokerage team with strong healthcare relationships. Overall, we do not view the small amount of negative net absorption to be indicative of market conditions or our potential for internal growth, but rather one-off events that will have a short-term impact on the portfolio. Excluding these two assets, MOB same-store NOI growth would have been 2%. Well, we don't typically highlight our sequential same-store results, the 1.3% growth in NOI, stable occupancy in 0.5% reduction in operating expenses show positive progress in the impact of our team's efforts. This is our 19th consecutive quarter of positive same-store NOI cash growth. Again, we enter 2023 with strong leasing momentum. The macro leasing environment continues to offer an advantage to existing medical office inventory, with quality space in move in condition due to the cost and time required for new construction, especially in markets like Phoenix, Nashville, Atlanta and Dallas where Doc has a strong presence. At the beginning of the year, our leasing and marketing teams launched a comprehensive campaign to increase online exposure of our properties, target key brokers and market influencers and leverage the relationships and knowledge of our in-house property management team. Just two months into the year, our efforts are already yielding results, as tours of vacant space are up nearly 30% year-over-year, and we are trading proposals on over 162,000 square feet of vacant space in the portfolio. Our leasing and property management teams have a busy calendar of broker open houses to showcase our portfolio and demonstrate new virtual reality technology, which allows prospective tenants to visualize a customized suite and finishes before commencing expensive construction. We have dedicated approximately 60% of our 2023 recurring capital budget of 24 million to 26 million to leasing initiatives that include renovating vacant suites, tenant improvement allowances to retain and attract healthcare providers and general building renovations where there's a strong leasing activity due to the supply and demand of physicians in the market. Through these collective efforts, we believe that there's opportunity for an increase in total portfolio occupancy in the back half of the year. Following a typical three to six months, it takes to design construct and commence a new lease. We expect this positive momentum to also appear in lease renewals, while 2023 scheduled expiration volume remains small at 4.5% of the consolidated portfolio. The market conditions that help contribute to our success in 2022 remain intact. For the full year, we expect renewal spreads to be in the mid single-digits compared to the long-term MOB industry expectations of 2% to 3%. And we anticipate retention to be in line with our historical average of 75%. To conclude, we anticipate that our operational initiatives will lead to improve same-store NOI growth beginning of the third quarter of 2023. While below target same-store performance is frustrating in the short-term. We believe that long-term value is maximized through thoughtful portfolio management, intelligent capital investments and aggressive leasing initiatives. The thesis for medical office is as strong as ever, and we're excited to execute on behalf of our stakeholders in 2023. With that, I'll turn the call back over to John.

Operator:

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Juan Sanabria with BMO Capital Markets. Please go ahead.

Jeff Theiler:

Hey, Juan thanks a lot. This is JT. I think our ambitious goals this year around both vacancy and really non-renewing lower quality credit tenants with higher quality health system tenants who need to expand into space in their building. So it's 95% to 96% somewhere in that number is full occupancy, and so our ambitious goal is just to hit those numbers, and so positive accretion for the year, and our compensation goals are tied to that as well. So, we're, you know, we think that's very achievable, somewhere in that range, and same-store is a number that is impacted by a small percentage, very small percentage of move out, some of which we caused on our own in sequential quarters and it takes a couple of more quarters to backfill that space with both leases signed, but also more importantly, completing the TI and the commencement of those leases. So, back after the year, we have expectations for good, solid return to our same-store growth numbers that are historical. First half the year, we're burdened by the decisions we made, we think the right decisions in the third and fourth quarter of 2022.

John Thomas:

Yeah. Great question. And we're seeing a significant movement in cap rates, they're just not many transactions occurring. Sellers are just holding on, hopeful that we returned to the glory days of 2020 and 2019 from cap rate perspective. But transactions are occurring in the mid-sixes. And we think we have a great cost of capital in the current environment, but that cost of capital still expects needs high sixes to mid-sevens cap rates, depending upon the annual increase reserves in the rents and things like that to execute. So, we think there's a good opportunity in the back half of the year assuming that market reaches equilibrium in that range. But in the current environment, we're just not seeing many trades that right quality, right credit, right location that we want to buy, in the mid-sixes. So we want to see those cap rates move up. And, like Jeff said, we've got a balance sheet loaded to execute once we reach equal equilibrium. It's my word in cap rates with market cost of capital.

John Thomas:

Next one.

Joshua Dennerlein:

Yes. Hey, guys. I just wanted to follow up on some of your opening remarks on the lease escalators. I think you said you -- for you just signed in 4Q, I think, 2.9%, up from 2.4% in the in-place portfolio. I guess how are the current conversations going for leases renewing in 2023? Are you able to push a little bit more aggressively on the go-forward leases?

Joshua Dennerlein:

Hello?

John Thomas:

Maria, can they -- can you hear us?

Operator:

Yes. I can…

Joshua Dennerlein:

Yeah. Went out, basically, right when you started talking.

Joshua Dennerlein:

That's what I figured. All the good stuff.

Joshua Dennerlein:

Okay. Appreciate that color. And then, maybe one big picture question for me. Any kind of, like, changes you're seeing with health systems in the current environment kind of coming out of COVID? I know they did have labor pressures. Just some challenges on that front. Like, anything they're looking to do differently that might help your business or hurt it a little bit? Just trying to get a sense of the landscape.

Joshua Dennerlein:

Appreciate that. Thank you.

Operator:

Your next question comes from Tayo Okusanya with Credit Suisse. Please go ahead.

Jeff Theiler:

Yeah, thank you, Tayo. I’m going to ask Mark to respond to that.

Tayo Okusanya:

That’s helpful. And the continued investments in real estate technology again, I think you guys put like 0.5 million into that again this year, this quarter. Could you just talk a little bit about again, your ultimate return on investment that you're looking for how this is going to help you guy, you know, in lower operating expenses, just again, as you just kind of look at more investments on the technology side. What exactly you kind of expect to get out of that?

Tayo Okusanya:

Are you partnering with any of those companies at this point and seeing any kind of result?

Tayo Okusanya:

Right. And then one more for me if you can indulge me, just some capital allocation question. So some of the recent equity issuances again, what again are going to be the use of the funds, especially this kind of given the issuance of that your current kind of implied cap rate. And lastly, how do we think about the dividend outlook going forward, given like the 96% EFFO payout ratio?

Jeff Theiler:

I’d be happy. Hey, Tayo so – yes, we did some equity issuance on the ATM, we're trading at an implied cap rate in the mid 6% range. That's consistent with where we've seen Class A medical office buildings being marketed. We haven't seen many transactions closing still. And cap rates have really only been moving in one direction which is up, so we thought it was prudent to strengthen our balance sheet at these levels, which we think is going give us a great opportunity when the market stabilizes at what we think the right numbers are to really be an active investor and to really generate strong earnings accretion, which is a certainly a departure from the previous times when cap rates were so low, it's hard to generate earnings accretion, we think we're going to be able to get best-in-class, Class A MOB's at really good pricing. So, we feel good about the strengthening of the balance sheet. You know, obviously in the meantime, it also pays down our variable rate debt, which is seems to – also seem to be only moving in one direction, which is higher with the Feds increases. So, we think it's a smart capital allocation decision.

John Thomas:

Thanks Tayo.

Operator:

Our next question comes from Michael Griffin with Citi. Please go ahead.

Jeff Theiler:

Hey Mike, I'll take that. Yes, look, I think we're running at the low end of our leverage range, right, which -- we've put our leverage range out at 5.5% to 6%. Certainly, one can argue that the capital markets have been very choppy over the last few months. I mean, certainly we've had a good month in the capital markets overall, or good year-to-date, I should say. But that's not guaranteed by any stretch. So, really, the idea it's kind of a -- it's not a discount to where we're trading on an implied cap rate versus where we'd be buying assets today if they were closing. So, I think it makes sense to have that optionality to kind of build that dry powder now, such that if the capital markets freeze up for some reason, we're still going to be in a position to grow and grow when others can't.

Jeff Theiler:

Yes, I think that -- I mean they go hand-in-hand, right. But yes, I think that's how we're thinking about it. Our implied cap rate versus where assets are trading in the -- are being marketed right now, I should say.

Mark Theine:

Yes, certainly. So, again, we strategically did not renew two leases to -- in Minnesota to bring in an investment-grade tenant. So, that's going to create great long-term value for the company, for the portfolio, for shareholders. And we're going to continue to look at opportunities always to replace existing tenants with investment-grade quality, great long-term tenants. So, it does create a near-term drag on our same-store results, which is frustrating, but it provides the right long-term value and we will always look for those opportunities in 2023 and years after that. So, the good news is our leasing team has done a fantastic job this year of already commencing conversations on 162,000 square feet of new leases and taking space. Now, not all that will get done, but those are good conversations to start the year. And we feel good about filling vacant spaces throughout 2023 and really growing our net absorption.

Mark Theine:

Appreciate it.

Ronald Camden:

Hey, just two quick ones. Staying on the balance sheet. So, the -- if I look at the $66 million plus or minus equity issuance post Q, just trying to get a sense of what that was put towards? And sort of the related question to that is, so if I annualized your interest costs for Q, I get to sort of an $80 million number. Is that sort of the right ballpark, or it's some debt get paid down? Hopefully that makes sense.

Ronald Camden:

Got it. And then just on the acquisition, I know you guys are not providing guidance given sort of what you've talked about and – can you talk a little bit more about just what the competition is like why are cap rate thing so tight, who's sort of stepping up and still buying here and why haven't we seen sort of more widening? Thanks.

Ronald Camden:

Got it. That's it for me. Thanks so much.

Operator:

Next question comes from Michael Carroll with RBC. Please go ahead.

John Thomas:

Yeah, Mike, great question. I think that's when they're marketed that rate. Almost by definition, that means the price should be better – from a – shouldn't move up from that range. And so, frankly, the fact that assets are even marketed, above six is a dramatic change from where they were marketed six months ago, and they still need to move a little higher. So, we're waiting patiently. We're not – we're not out of the market, as far as, you know, exploring opportunities. But, when we – when we make an offer on a Class A asset that we're really excited about it's – it's going to be higher than, mid 6%.

John Thomas:

Yeah. Generally, and we're IRR investors. So, depends on the annual increases where they are market rents and things like that. So it's a combination of factors, but from a cap rate perspective, just the market generally is – it's we're seeing trades very few. But we are seeing trades in the mid 6s on assets that if they were trading, let's just call it seven. We would be pretty excited about it moving in the right direction. So it's just few and far between, but we think the market is moving in the right direction, as a buyer, in a long-term investment.

Jeff Theiler:

Yes, I think, that's a fair way to think about.

John Thomas :

Yes. And we're very transparent. That's all we buy. And so that's what we're talking about. So you can get lower quality at a higher rate. You can do other asset classes at a higher rate. But right now for Class A assets and that's and I think, in part that's where we see development kind of leading the way for the next several years is health systems really we're looking for new strategic locations. And we're working with several right now on kind of helping them develop those locations and getting in a more attractive yield in the current cost capital environment.

John Thomas :

That's a great question. So it was about -- we have 16 million square feet, and we're talking about 40,000 square feet where we did that last year and we're already backfilling that space. It just takes time for the new leases to commence post TI. There will be a little bit of that in the first quarter of this year, but it's -- when the tenant has too much space, I mean, that's almost worse than having the tenant kind of renew a lease and occupy space that we think there's a better market rates for -- out there for to compete for that space. So, we have a little bit of that in the first quarter of this year. But it's not a lot across 60 million square feet. But in short-term, it's negative; long-term, it’s very beneficial to the company.

Operator:

Our next question comes from Dave Rodgers with Baird. Please go ahead.

John Thomas :

Dave, those are all great questions. Hope is not a strategy or we not depend upon RFPs to find assets or work with health systems. Those tend to be auction type processes where there's always some low bidder that you don't want to compete with. Not that we couldn't. And so I think the 200 million is active discussions with health systems. Last year when both supply chain and inflation was going up, you couldn't get a construction, a contractor to give you a quote on contract to build a building that was good for more than a day. I mean, historically you get a bid and 90 days later, 180 days later, it was still a good number. So last year, a lot of the projects we're working on are still there and that's the confidence in that $200 million number is some of those projects that are carrying over, and we the health system that positions, we're waiting on some stability, stabilization in the construction, and also the timeline with supply chain and other things that are beyond everybody's control. And so, numbers are coming in today, we're proceeding with some projects that we thought would begins construction in the fourth quarter, but the tenant, the capital, us, the contractors, all have more stability today than we had three months ago. And frankly, that's going to create much more long-term value for us by that short delay in those -- on those projects. So we'll be breaking ground in the next 30 days on projects that we've been working on for a couple of years. So we feel really confident in that number going forward and we see a lot of more opportunity in that space.

Operator:

Your next question comes from Steven Valiquette with Barclays. Please go ahead.

Mark Theine:

Yeah, Steven. This is Mark. Thanks for pointing that out. I should have mentioned that earlier, but we've done a great job sequentially keeping our operating expenses actually declined a little bit. Contributing to that sequential change utilities was a large contributor quarter-over-quarter and actually a decrease in holding that relatively flat and same with general maintenance category there, year-over-year those were -- those two categories were up about 700,000 and 600,000. But quarter-over-quarter, we did a great job with our asset management team to keep those flat. I think we're also seeing the results of some of our ESG efforts in the utility expense from LED upgrades things like that, where we've made wise capital investments, and we're starting to see that reduction in the operating expenses from some of those projects that we completed this year.

Mark Theine:

Yeah, the obvious ones would be snow removal and markets -- North Dakota was hit pretty hard with our snow removal costs in the fourth quarter, but really don't have a lot of seasonality in our operating expenses outside those obvious ones. And again, our highly occupied triple net lease portfolio help insulate the overall NOI same-store numbers there. But, clearly, we watch that carefully for our healthcare tenants and partners, because it's the overall occupancy cost that matters when we talk to them about lease renewals.

Operator:

The next question comes from Mike Miller with JPMorgan. Please, go ahead.

John Thomas:

I can't help but laugh at the second question, because it's a great question. Actually, it's -- the long term return profile there is much better than about anything else we do. It just -- it's just taking time. It's a very strategic location. For some reason, 20 years ago -- 25 years ago, physicians and hospitals thought condo projects for the right way to build buildings and invest in buildings. And in this particular case, a kind that was built in a incredibly strategic location, across the street from three health systems. And so, we're really excited about the long term -- and maybe the -- maybe the best, kind of, IRR cash yield we'll ever get from individual investments. It just takes time to accumulate the condos over time. So, a great question. We know it looks odd, but at the same time, on the back end, we're going to have fantastic returns from those investments. On the on the development, that's a good question. It takes 18 months to build these buildings. So the ones under construction or about to begin construction, those will -- it just plays out over time, over the 18 month construction cycle. So of that $200 million -- for your model averaged out over 18 months, but it's something like that. So it's -- and frankly, that's the projects we know we will probably finance this year, or contractually commit to financing this year. And we're working on others. So I think there's -- I think there are opportunities for kind of outsized investment on the development side.

Operator:

There are no further questions at this time. I would like to turn the floor back over to John Thomas for closing comments. Please, go ahead.

Operator:

-- concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation. Have a great day.

Operator:

Greetings and welcome to the Physicians Realty Trust Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Page, Senior Vice President, General Counsel. Thank you. You may begin.

John Thomas:

Thank you, Brad, and good afternoon. Thank you for joining us. The third quarter of 2022 is a quiet and steady as you go quarter for DOC further demonstrating the stability of medical office as an essential real estate class. This year has been challenging for health systems and physicians alike, as medical cost structures have been impacted by double-digit inflation in both staffing costs and supplies that have been further complicated by lagging government and commercial reimbursements. Despite these headwinds, the United States demand for healthcare services is at an all-time high in the past as the population ages and patients receive procedures that were deferred during the pandemic. Providers have continued a long-term shift of care to the outpatient setting where advances in clinical science now allow for many higher margin services like orthopedic surgery to be performed in a lower cost environment. CMS has again expanded the list of procedures that can be performed in ASCs going into 2023. This trend is predictable and rational. Our patient care sites benefit from a more stable staffing model, increased operating efficiency and improved patient convenience, all while freeing up hospital capacity for higher acuity needs. Our portfolio is built with this dynamic in mind. While capital market volatility continues to produce a mismatch between buyers and sellers in the pricing of new investments, our entire team is focused on portfolio optimization and working with our health system partners to address their real estate needs for the years ahead. This partnership focus continues to enhance our development pipeline, and we continue to see the potential for a higher volume of development financing opportunities in 2023. Within the existing portfolio, we continue to benefit from the increased market rental rates, driven primarily by general inflation and rising construction cost. Renewal spreads exceeded our expectations at 6.2% for the third quarter, bringing our year-to-date spreads to 5.7% across 670,000 square feet of activity within our consolidated portfolio. Importantly, these high spreads have not come at the expense of retention, which remains near 80%. We remain excited about the performance of our portfolio despite a challenging macroeconomic environment. Mark will share more details in a few minutes. In September, Hurricane Ian calls wide-scale destruction on the west coast of Florida, and our prayers and best wishes go out to the families directly affected by the storm. Our Florida based team's quick response help to mitigate the storms impact on our healthcare partner providers, their patients and our real estate assets. Fortunately, we experienced only minor wind damage to a couple of our smaller facilities and the property will be back in operation quickly. We had no material financial impacts in the storm, and we will thankful that our team members and their families affected by the storm our site. We've all seen the difficult expense environment healthcare organizations are experiencing driven by extraordinarily tight labor markets and medical supply cost as well as non-cash mark-to-market losses in their investment balances. We've devoted significant resources at DOC to building a professional credit team who assist us in underwriting our investments but also periodically reviewing the financial results of our tenants. We have visibility through lease reporting requirements into 94% of our tenants by AVR with the average size of the tenants without this requirement totaling less than 5,000 square feet. We also utilize independent claims data to monitor procedure volumes across our portfolio. Our largest tenant concentration is with CommonSpirit across 12 markets. CommonSpirit's S&P investment grade A minus credit rating was reaffirmed in September with a stable outlook. Moody's and Fitch also reaffirmed their respective IG rating for CommonSpirit as well. According to S&P, CommonSpirit's strong credit rating reflects CommonSpirit's exceptionally broad geographic reach, supporting a financially diversified health system across 21 states with a large $34 billion revenue base. CommonSpirit has $15 billion of unrestricted reserves and 175 days cash on hand. While CommonSpirit's 2022 operating margins were strained at negative 4.5%, S&P believes CommonSpiritt's labor initiatives and market strategies and performance initiatives should help the system achieve their targeted 5% to 6% EBITDA targets by June of 2023. With 66% percent of our space leased to similarly strong investment grade health systems, we see similar resiliency across our tenant base despite broader market challenges. Across the healthcare delivery industry, volumes and opportunities for revenue growth is there, and CMS, Medicare and commercial insurers are increasing reimbursement rates for 2023, reflecting higher inflation and labor costs. Doc continues to make progress in our sustainability efforts, creating value for our healthcare provider partners, shareholders and communities through short and long range business human capital and operations planning. As a benchmark of our efforts, Doc currently scored 75 out of 100 in the recently released 2022 GRESB Real Estate Assessment. Outperforming the international average is 74. We also earned a Green Star Designation award to submitters achieving scores of 50-plus on GRESB's implementation and measurement of the management and policy sections. In addition, the Company earned an A rating and a score of 98 out of 100 on the 2022 GRESB Public Disclosure Level, ranking first in its healthcare comparison group. As we look to 2023, it is difficult to project external growth until capital costs become more predictable, and we can match our cost of capital to market opportunities, acquisitions or development financing. That said the market appears to recognize that asset valuations will need to adjust to complete transactions and construction supply chains seem to be improving in our favor. Our balance sheet is in great shape and our debt metrics are well managed, with no near-term maturities so that when the current market conditions settle down, we are well-positioned to grow and grow at higher levels. We expect to continue to capture higher leasing spreads and those increases in contractual revenue along with our 2020 acquisitions and our 2021 development financing will increase our 2023 NOI including same-store NOI. We will complete our 10th anniversary in July '23 in a very positive way. We believe medical office has as asset class has proven time and time again to be the safest and most offensive and most predictable real estate for investment and operational success. I will now ask Jeff to present our Q3 financial performance and then Mark will address the performance of our high-performing award winning asset and property management team. Jeff?

Mark Theine:

Thanks, Jeff. Physicians Realty Trust completed a productive third quarter with our portfolio of outpatient medical facilities demonstrated stability growth amid the current economic environment. We are especially proud to share this quarter that our leasing team achieved above average leasing spreads of 6.2% in Q3 on the heels of an impressive 8% leasing spreads last quarter in Q2. The consecutive quarters of strong releasing spreads above the historical 2% to 3% is a direct result of the mission critical nature of our assets and the enhanced value of our portfolio during a rapidly rising replacement costs. Importantly, we've achieved these results without sacrificing retention, without excessive concessions, and not discounting annual rent escalators. In total, tenant improvement and incentive packages totaled to $0.61 per square foot per year on renewals, while we achieved an 81% retention rate and a 3.1% average annual rent escalator across our 251,000 square feet of leasing activity in the consolidated portfolio during the quarter. Leasing costs were particularly low this quarter as 25% of our renewal volume was completed via automatic lease renewal language in the lease or by tenant options to extend the term with no landlord contributions for tenant improvements or commissions. Given the current cost to build and finance a new development, we anticipate healthcare providers will continue to utilize existing medical office inventory, ultimately driving up total occupancy costs in quality facilities with well capitalized real estate partners. In terms of new leasing activity, Doc currently has 85,000 square feet of executed leases in construction, but not yet paying rent. We anticipate approximately 20,000 square feet of these leases will commence in Q4, with the remainder commencing rent payments in the first half of 2023. MOB same-store NOI grew 1.1% during the third quarter, with results legging due to a 40 basis point decline in same-store occupancy. Over half of this decline resulted from an opportunity to increase occupancy long-term in a building with an investment grade ASE tenants. While we're not satisfied with the 1.1% result, it's important to view the occupancy in the context of the broader MOB landscape. Our 94.7% same-store lease rate is meaningfully higher than industry averages. Tenant demand for medical office facilities has never been stronger and we remain focused on unlocking the value of our portfolio for the long-term. When necessary, this includes the selective vacating of suites that have higher potential with a different tenant, even if growth is impacted on a short-term basis. Looking ahead, we expect same-store occupancy the bottom in fourth quarter before returning to prior ranges as suites currently under construction become online. Same-store operating expenses were up just 2.1% year-over-year, despite the high single digit inflation experienced throughout the economy. This performance is a credit to our asset and property management teams working diligently on behalf of our healthcare provider partners to minimize total occupancy costs. Specifically, this quarter's results was driven by the successful challenging of several real estate tax assessments, resulting in a year-over-year property tax decline of nearly $1 million that served to offset increases in non-controllable utility expenses. These property tax outcomes are just one example among many of the ways that our team works diligently to execute consistently on behalf of our shareholders and hospital system partners to deliver value during this period of economic uncertainty. I'll turn the call back over to John.

Operator:

[Operator Instructions] Our first question comes from the line of Omotayo Okusanya with Credit Suisse. Please proceed with your question.

John Thomas:

Yes, great, great question Omotayo. That's one of the reasons we've preferred and we've always focused on really non-profit hospitals primarily is the market strength and the market share. Those facilities typically have and the long-term commitments of those facilities have to their markets. As you know, DE came out of the accession system to 25 years. Obviously, the systems and merchants have been mailer for 10 years. It's the providers and the organizations that we partner with and vast majority of our investment grade tenant base, which is 66% of the whole portfolio, our non-profit health systems with long-term commitments to those communities. And so what we are seeing is a lot of, again, like I said, portfolio optimization where they want to lease the right space at the right price for both of us at market rents, which are increasing. And then the stronger systems, again that we work with are looking at new growth opportunities and that's where the development financing opportunities are coming. So, it's a tough market. Revenue and volumes are high. The challenge many hospitals are having with the volumes and the revenue opportunities is they don't have the staff to actually provide the service. Our health systems are fighting through those issues and again have high utilization. But the expense structure, wage cost, supply costs are exceeding reimbursement rates, which there is always a time lag. And government in particular can be a year to two years behind kind of current inflation costs. So, CMS did better this year. They are not doing enough for physicians, and we expect that they will address that during the line of accession. The commercial insurers are stepping up as well to increase reimbursement to appropriate inflationary levels. So, we are seeing a lot of positive momentum. Everybody is tightening their belt as best they can. But most of the systems we are working with, in the bigger markets stronger markets, are really looking at expansion opportunities not retrenching.

John Thomas:

Yes, our expectation is we will be back to a normal pace in 2023. So, as I mentioned a minute ago, really focused on portfolio optimization right now, we have had two or three locations, where we just didn't renew it at least on purpose, so that we provide an expansion opportunity for, frankly stronger tenants in those buildings. So, same-store can be such a short-term number, really focused on the long-term performance of the portfolio. And with that, we have had a couple of quarters in a row with dynamics like that short-term negative impact on same store, but hit a long-term benefit to the organization. Mark, do you want to expand on that?

Operator:

Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.

Jeff Theiler:

Absolutely. So our leasing team has been doing a great job on both renewals and out there focusing on leasing the vacant spaces that we have. As I mentioned, we have 85,000 square feet of new leases that are signed in under construction, when those are completed and generating revenue bill at about 100 basis points same-store. To recruit new tenants and it is tough right now given the construction climate out there. And on a per square foot basis per year, this last quarter, I think we were close to $6, which is per square foot per year, meaningfully higher than our renewals where we're experiencing quite a bit of tenants exercising options to renew or we have auto lease renewal language and a lot of our leases, keeping our CapEx low on renewals.

Jeff Theiler:

Juan, this is Jeff. No, I mean, we haven't seen anything material in terms of any relief request or anything like that. Coverages remain about the same. I mean, they're probably a little bit down, but nothing that would concern us at this point. I think JT's remarks were just addressing the overall industry. And what the health systems are going through right now. But we're not concerned about our own portfolio at this point.

Austin Wurschmidt:

I'm just curious on the 25% automatic renewals that you referenced. How are leasing spreads negotiated for those types of deals given you're spending less on TI dollars? And are you able to change for the escalator dynamics within those types of leases?

Austin Wurschmidt:

And I know next year's expirations, not really a huge number overall, but you did highlight this quarter is coming in above your expectation. I suspect those might have been negotiated during a different economic backdrop. So, what does give you guys the confidence you can continue to achieve releasing spreads above historical levels, given sort of this tenants are catching up the reimbursement environments catching up, and it's just a little bit tougher overall for given some of the expense pressures, etc?

Operator:

Our next question comes from the line of Michael Griffin with Citi. Please proceed with your question.

Jeff Theiler:

Yes, the markets the most part is shut down. Right now, I mean, the interest rates have climbed dramatically since our most recent investments in the second quarter or the beginning of the third quarter. Banks have shut down lending to the private market. So, while you can find a loan from small regional banks, you're not going to get large capacity for portfolios are their expensive assets. So assets, looking at cap rates. I think now the brokers have learned that it's going to best case scenario to six and if you look at the cost of debt, if you can even get it and the equity prices of the MOB buyers in the public market, you're in the 60s and 70s before it becomes accretive. And you match up capital market cost with going with seller expectations. They just haven't caught up there yet. So we've just paused. We're continuing with our development financing. We're about 200 million of total investments for the year. We're still working through some of our development pipeline. Again, assuming we can get kind of can match up our yield expectations and needs compared to our capital cost. And we expect next year to be pretty robust buyers market, if you will. So, market just as not pricing discovery continues. It's getting closer, but we're not there yet.

Jeff Theiler:

Yes, let me address the JV partner first. It's one of our long standing partners. As I mentioned earlier, we're in our 10th anniversary year as a public company. Are they beginning in year one we did, we started doing some one-on-one JV opportunities with them. That's a great sophisticated private company in Dallas that we've known for a long time and they found opportunities for us to co-invest and we sold them assets, we bought assets from them, etc. So a great partner they brought us into this opportunity. So if you recall, we had just completed the sale of Great Falls in Montana at 4.7% cap rate. This is an asset that wasn't Calko asset and Brooklyn was not on the market, when our JV partner started talking to them earlier this year. Expectations and fair expectations are in the low four cap rate range. By the time we were invited to join those discussions, we had just completed the Great Falls transaction. We needed a substantially better price than the low fours. We were able to commence seller to accept a first year 5.5% cap rate. There is a little bit of leasing opportunity there, not much, but long-term great investment grade tenant base, lot of physicians affiliated with that health system in the building, new asset, relatively new building less than nine years old in the Brooklyn market. And the opportunity for cap rate compression, once cap rates start going back in that direction, we thought are outstanding. So the IRRs look fantastic. And again, we just had that recent sale just perfect opportunity to recycle that cash, those proceeds, into a high yielding long-term asset.

Joshua Dennerlein:

Yes, thanks guys. Maybe just a follow-up on the Calko acquisition. Just curious how you're thinking about your weighted average cost of capital and how that compares to that 5.5 about for asset?

Joshua Dennerlein:

Okay. But how are you thinking about your WAC these days? Where does it stand? How do you think about on a long-term basis?

Operator:

Our next question comes from the line of [Rondel Camden] with Morgan Stanley. Please proceed with your question.

Jeff Theiler:

Yes, that's a good question. We've got about 18% variable rate debt which we're certainly cognizant of that especially as rates seem like they're going to continue to increase. We do like having some cushion a variable rate debt that's easy to pay down, if we have loan paybacks from our mezzanine program and that kind of thing. It's a good short-term use of proceeds that is kind of anti-dilutive when you get paid back. But certainly, that's something that we continue to evaluate on a quarter-to-quarter basis, hedging strategies, et cetera.

Jeff Theiler:

I mean, like everyone, the freight interest rate headwinds as they continue to go up. I think the same store NOI, particularly if you add in some additional leasing opportunities that we think we might be able to get. We do believe we'd be able to overcome that kind of headwind, if you will. But certainly it's kind of a tight environment right now. Ideally, we get some creative acquisition opportunities as well, which could further enhance our FAD and FFO per share growth.

Jeff Theiler:

I think it depends, Jeff again. So, it depends on, kind of where we can find pricing in the market. I mean, there's certainly potential acquisition pricing that would work even at our cost of equity right now. We haven't seen it yet because the markets kind of shut down. But should the pricing go to there, I think using equity would be a viable way to do that. Certainly, we look at capital recycling as well. And we've been in contact with potential JV partners for years. And if we had an opportunity that we could avail ourselves of that source of capital, we would also consider that as well.

Michael Carroll:

I'm going to touch back on an overall market rent. I mean, for MLPs I mean, how broad base is rank growth? I mean, is it really regional, I mean, are you seeing it like there's a difference between on campus off campus? I mean, how much has it been on up really in 2022? And have you seen it accelerated through the end of this year?

Mark Theine:

Yes, I think it also varies a little bit by specialty of the tenant as well, where there's higher acuity specialty and more custom build out. Those are very sticky spaces, and therefore have a little bit more opportunity to influence the rental rate upon renewal. Just the alternative and the construction cost to relocate, those are very difficult and especially and expensive in today's market. So you have a little bit more of an opportunity to increase based on specialty.

Michael Carroll:

Yes, that's all fine. Now, it's probably difficult to kind of answer this now just because the market is so uncertain. But to current market rents today, can you support a new development project or break ground a new development project given where things are right now? Or does rent need to go up a certain percentage to really kind of make some of that underwriting workout?

Michael Carroll:

Okay. And then just how difficult it is to probably source new acquisitions? I mean, are you seeing other opportunities on the debt side? I mean, could we expect you to be a little bit more active making debt investments over the next few quarters? Or do you really need to see where interest rates kind of really hammer out before you are willing to do even that type of stuff?

Operator:

Next question comes from the line of Steven Valiquette with Barclays. Please proceed with your question.

Jeff Theiler:

Yes, I'll take that. So I think next year we do think that there is going to be a nice rebound in our same-store. Our operating expenses this quarter were particularly low because of some of the real estate tax challenges that we were successful in contesting on behalf of our healthcare partners. Without those real estate tax benefits, we would have been closer to 7% increase in our operating expenses and it is an inflationary environment out there, we will continue to work on behalf of our healthcare partners to keep those operating expenses as low as we can. But the nice thing about our portfolio is that it's very well insulated due to our high occupancy and triple net lease structure. So we think that those operating expense increases next year will be offset. And therefore really going to benefit from the leasing work we have done both in terms of the new leases coming online, the 85,000 square feet I mentioned and these leasing spreads. And so, I think in 2023, we will start to see the benefit of that and get back to our normal levels or even just a bit above our normal levels in the back half of next year.

Mike Mueller:

I have two quick leasing related questions. First, Mark, on your comment about same-store occupancy bottoming in the fourth quarter, what's the rough magnitude of the decline relative to 3Q 94.7%? And the second question is, just on the rent escalators, you've baked into your 2022 leasing. How do they compare to prior years escalators?

Operator:

Our next question comes from the line of Dave Rodgers with Robert W. Baird. Please proceed with your question.

Mark Theine:

Yes, I don't know that this was necessarily that much bigger of leasing volume or turnover. And next year, we've got about 4.6% of our lease is up for renewal, that's kind of been our average, and our lease expiration schedules been 3% to 4% a year, until we get to 2026 in those CommonSpirit leases. So right now, there's just been construction timing of the new leases completing those and starting rent payments.

Dave Rodgers:

And then JT, maybe just for you, with regard to you talked about kind of fully leased acquisitions, you've got fully stabilized developments that you're financing. Do you see an opportunity between that to do more maybe on the value add side with the leasing team you have and the people that are in the organization to maybe add incremental value particularly coming out of the backside of the dislocation and pricing?

Operator:

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Operator:

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

Operator:

Greetings and welcome to the Physicians Realty Trust Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Page, Senior Vice President, General Counsel. Thank you, Sir. You may begin.

John Thomas:

Thank you, Brad. Physicians Realty Trust continue to deliver stable and reliable cash flow growth during the second quarter, driven by exceptional leasing spreads of 8% on 256,000 square feet of renewals and our asset management team's thoughtful management of operational expenses. These results will be impressive in any period, but are especially remarkable in an economic climate made challenging by double-digit inflation and rapidly rising interest rates. Doc was built with times like these in mind, where we have a foundation of strength with almost 300 facilities in 36 states, 95% leased and no meaningful debt maturities before our revolving line of credit matures in 2025. Our balance sheet couldn’t be stronger supplemented by the recent Great Falls Disposition. In addition, we remain protected from inflation operating expense growth, given our portfolio is 95% leased rate with only 2% exposed to full service, gross leases impacted by inflation. We don't believe that any other healthcare real estate portfolio public or private can come close to providing investors with that level of cash flow stability. In past periods of volatility provide any lesson to real estate investors, it is that there is almost always a timing disconnect between the changes in investor's cost of capital and potential seller's expectations on valuation. This scenario is precisely what we've seen in the first half of 2022, and while Doc has chosen to remain disciplined in our deployment of capital toward new investments. However, this discipline does not mean we have been passive as volatility can also create opportunity. A great example of this strategy is our just announced disposition of a surgical hospital and two adjacent medical office buildings in Great Falls, Montana. Mark will share more details in a moment. We are beginning to see evidence that rational investors like Doc are shifting the transaction market to a more balanced bid versus us. We've made progress in advancing our pipeline 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 in potential commitments. It 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 this science-based targets initiative in line with a well below two degree Celsius strategy. This increased transparency provided 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 DE&I efforts to shape an open and diverse internal culture while setting aggressive multi-year goals to chart our progress. While we're proud to celebrate our milestones, we recognize that our progress is simply a step forward for Doc as we continue to invest in better in our communities and families. We remain firm in our conviction that outpatient care of medical office facilities leads 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 while ultimately getting the portfolio to a 100% concentration in outpatient care facilities over time. Before opening the call to Q&A, Jeff Theiler will share our financial results and Mark Theine will provide more detail on our exceptional operating performance. Jeff?

Mark Theine:

All right. 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, two, achievement of record releasing spreads and three, excellent Kingsley Tenant satisfaction survey results. Starting with the Great Falls disposition; since our first investment in 2013, we have 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 7.9% cap rate, consisting of inpatient surgical hospital, an 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 Domres, our VP of Construction and Project Management, Doc 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 increased the overall annual rental revenue, increased 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, Doc 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 4.7% disposition 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 tendency to 66%. The life cycle of this investment is an outstanding example of the value created by the Doc team through its active asset management and trusted healthcare relationships. Our leasing team also continues to leverage trusted healthcare relationships and market knowledge to unlock the value of the Doc portfolio through strong tenant retention and lease renewal spreads. During the second quarter, our leasing team completed 256,000 square feet of lease renewals on the consolidated portfolio at an aggregate releasing spread of 8.0%, the highest quarterly mark in the company's history. Importantly, we achieve these results without sacrificing retention or leasing costs. In total tenant improvements and incentive packages total just $2.19 per 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 of 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 benefit 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 MOB same-store NOI growth was 1.9% in the second quarter. The NOI was driven primarily by a year-over-year 2.1% increase in base rental revenue. Operating expenses were up 8.0% slightly below the 9.1% year-over-year CPI change as of June 30. As expected, increased operating expenses were largely offset by an 8.7% increase in expense recovery revenue due to the high occupancy and triple net structure of our portfolio. In the nine years since our IPO, we have not only built one of the highest quality healthcare real estate portfolios in the industry, but we have also assembled an award-winning healthcare real estate team. Our efforts directly translate into care for tenants, evident 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 4.48 out of 5.0. While we sincerely appreciate the positive feedback from our healthcare 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 tenant's trust and secure their renewal before the lease expiration. At Doc, we believe that great customer service does not happen by accident. It happens by design and it all starts with the 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.

Operator:

Thank you. We'll now be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.

Mark Theine:

Sure. Good morning, Juan. This is Mark. So yeah, we're really proud of our leasing team's efforts this quarter and seeing really strong leasing momentum to achieve those 8% releasing spreads. In addition to focused on the initial rate, when the renewal kicks off 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 that does come with sometimes the floor and the ceiling. And in the negotiations now I'd say, since the CBI number's been even higher than anticipated we're getting requests for more fixed escalators and those we're now pushing back in the 4% range on leases going forward.

Jeff Theiler:

Yeah Juan. It's JT, it's an incremental growth across the portfolio. Walt's [ph] always been a good thing until the last couple of years. So with only 2% rolling this year, 3% next year, but it is incrementally growing. Before this year, we had about 10% of the portfolio on CPI increasers and that's a strategy we implemented four years ago as we started doing new generation and renewal leasing. So it'll take time, but I think the higher increases may get us quicker than we thought.

John Thomas:

It includes the future development commitments and really always has. We maybe have not made that as clear as we should, but we think we'll clear $250 million of development commitments and/or acquisitions this year, probably 50-50 weighted, maybe a little bit more toward the development commitments. Most of those dollars, the development dollars will be spent in 2023 and those will start generating returns in 2024.

Austin Wurschmidt:

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?