Greetings and welcome to Physicians Realty Trust First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my please to introduce your host Brad Page, Senior Vice President, General Counsel. Thank you Brad. You may begin.

Thanks, Paul. Good afternoon, and welcome to the Physicians Realty Trust first quarter 2021 earnings conference call and webcast. Joining me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; Mark Theine, Executive Vice President, Asset Management; John Lucey, Chief Accounting and Administrative Officer; and Laurie Becker, Senior Vice President, Controller. During this call, John Thomas will provide a summary of the company’s activities and performance for the first quarter of 2021 and year-to-date as well as our strategic focus for 2021. Jeff Theiler will review our financial results for the first quarter of 2021. Then Mark Theine will provide a summary of our operations for the first quarter. Following that, we will open the call for questions. Today’s call will contain Forward-Looking Statements as defined by the Private Securities Litigation Reform Act of 1995. They are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe our assumptions are reasonable, our forward-looking statements are not guarantees of future performance. Our actual results could materially differ from our current expectations and those anticipated or implied in such forward-looking statements. For more detailed description of potential risks and other important factors that could cause actual results to differ from those contained in any forward-looking statements, please refer to our filings with the Securities and Exchange Commission. With that, I would now like to turn the call over to the company’s CEO, John Thomas. John?

Thank you, Brad, and thank you for joining us this afternoon. Physicians Realty Trust is off to a very good start for 2021. This begins with our pure play focus on medical office facilities, which continues to serve us and our shareholders well. While other types of healthcare real estate are just beginning to see signs of a recovery, medical office clinical visits have been and remained at pre-COVID levels and have been for a long time. We created this operational strength to our nation’s healthcare providers who adapted quickly at the onset of the pandemic to manage COVID outbreaks while continuing to provide necessary non-COVID healthcare services. They accomplished this by shifting non-COVID care to the out-patient setting, accelerating a trend that has been apparent for the past 25-years. All indications are that this is a permanent change in the delivery of healthcare that will continue to grow in the years ahead, especially for more acute orthopedics, oncology and cardiology procedures. Beyond the pandemic, demand for medical office buildings continues to grow in line with our nation’s continued need for out-patient healthcare. CMS estimates $4.1 trillion were spent on healthcare services in 2020. And the national healthcare spending in the United States is expected to grow at an average annual rate of 5.4% from 2019 to 2028, outpacing GDP as well. We expect that an outsized portion of this spend will be directed to off-campus facilities in particular where we continue to see health systems demanding more space. The trends in favor of medical office have proven to be very predictable and reliable. And as a result, we expect our portfolio to produce a consistent and reliable rental income stream with steady growth over time for the benefit of our shareholders. Public investors in healthcare real estate can count…

Thank you, John. In the first quarter of 2021, the company generated normalized funds from operations of $57.7 million. Normalized FFO per share was $0.27 versus $0.26 in the same quarter of last year, an increase of 3.8%. Our normalized funds available for distribution were $54.5 million, an increase of 7.8% over the comparable quarter of last year and our FAD per share was $0.25. We remain highly focused on this metric as it is the most direct way to measure our company’s performance versus our peers, and we will continue to focus on growing our FAD per share at an outsized rate for our shareholders. We continue to see strong operating performance from our $5 billion medical office building portfolio in the first quarter of the year, the same-store NOI growth was right in line with expectations at 2.4%, and we increased the lease percentage of our portfolio by 10 basis points to 95.8%. Our portfolio continues to be ably - continues to manage the strain of the COVID pandemic, and we collected the usual 99.7% of our billings in the current quarter. The one deferment we granted last year continues to be paid back on time, and the last and final payment will be made in June. Barring an unforeseen intensification of COVID in the future, it now appears that DOC has been able to manage through the worst of the pandemic and emerge with no material negative impacts. This is a direct testament to the strength of the medical office asset class in general, and in particular, the strength of our investment-grade tenant base as well as the high quality of our buildings, credit team and property managers. The balance sheet has been an area of focus for us and is now a positive differentiator between us…

Thanks, Jeff. The first quarter of 2021 represented another solid and consistent quarter for Physicians Realty Trust. I’m once again pleased to highlight the strength of our underlying assets and the value of our asset management, leasing and property management platform. DOC’s best-in-class operations team remains dedicated to enhancing the physician-patient experience offering healthcare providers the benefits of a national real estate owner with scale paired with a personal touch of local management. From a performance perspective, our MOB same-store NOI growth in the first quarter was 2.4%. Predictably, NOI growth was driven primarily by a year-over-year 2.4% increase in base rental revenue, in line with our weighted average annual rent escalator. Year-over-year, operating expenses were up $2 million overall, primarily driven by a $0.6 million increase in real estate taxes and a $0.6 million increase in insurance costs. However, the value of our net lease structure is once again evident in the nearly dollar-for-dollar increase in operating expense recovery revenues. Lastly, lower parking revenue had a 20 basis point impact on Q1 same-store NOI growth. Specifically, paid parking receipts have now returned to 80% of normal levels during the first quarter, which compares favorably to 48% of normal levels experienced nearly one year ago during the height of the pandemic. Turning to leasing activity. We continue to see significant opportunities to add value as we capitalize on increased demand in our larger markets. We completed 197,000 square feet of leasing activity during the period with a 76% retention rate and positive 6,000 square feet of net absorption. While Q1 leasing volume represented 1.4% of the portfolio due to our staggered lease expiration schedule, we have had a significant increase in leasing tourists and tenants looking for existing medical office space as construction prices continued to drastically increase. In fact,…

Thank you, Mark. Epoch, we will now take questions.

Thank you. [Operator Instructions] Our first question comes from Juan Sanabria with BMO Capital Markets. Please proceed with your question.

Hi. Thank you for the time. I was just hoping, John, you could talk a little bit more about the development funding you referenced in your prepared remarks, types of yields you are expecting if mainly that includes price to purchase the asset upon completion and if you could remind us what kind of pre-leasing you typically look for before committing that kind of capital?

Yes. Happy to, Juan. So we have seen a number of new development financing opportunities this year. As I mentioned, we have started three. One is an on-campus building that is 75% pre-leased to the health system and with lots of potential demand for the lease-up during the construction cycle. And that is a mezzanine loan financing, so we are providing much of the non-construction loan, equity if you will, with the developer funding the balance, and then we have options to acquire it on the back end after CO. Then we have another off-campus building that is 100% pre-leased to an investment-grade credit that is more of that - or not more, obviously, kind of the loan-to-own structure. And in that, we typically get 6% plus yield during construction, and then it converts to ownership. We have a call option, if you will, to convert that to ownership after CO. So the other building mentioned is also more like the mezzanine loan financing with an anchor health system, ASC -- anchor health system joint venture ASC with a national operator, and then some other pre-leasing with physicians. So that one is again closer to 75% pre-leasing and it is a mezzanine loan with an option to acquire at the end. So we have been pretty successful with both types of financings. Some we take a little less risk and the developer has more kind of lease-up risk, if you will, in the 100% leased opportunities. We really like that loan-to-own structure as we featured in our annual shareholder report, the building we have built at the Sacred Heart. So we expect to do more of those types this year and be productive. All of these are buildings that will CO in 2022, so next year, and they will be great additions to the portfolio.

And how big is the pipeline of opportunities where you have the right of acquiring assets that you’ve already committed to? Do you have any sense of that scale?

Yes. We have got it under, I guess, various mezzanine loans. We did a large package at the end of the year. So we are pushing $500 million, $600 million of underlying asset value securing our mezzanine loans. In all of those, we have some form of option to acquire and/or right of first refusal, ROFR rights.

Great. And then just one last question for me, just on cap rates, and I recognize you are sticking to your 5% to 6% guidance range. Just curious, we are obviously hearing about increased competition, but how you are feeling about within that range where you are more likely to come out and where things are trending for the deals you are looking at that are under LOIs or what have you, just to give us a sense of where the deals are trending pricing wise?

Yes. We are in the low fives for Class A assets. As Jeff mentioned, we are really picky on the high quality assets. And again, these are health system anchored and heavily leased buildings that we have been acquiring. They are all off market, so that does help us. The auctions that have been published, cap rates that are coming through the marketed deals seems to be compressing. But we are in the low-five to mid-five on Class A acquisitions and then stretch closer to six on usually smaller assets that are off-campus and/or the development projects that again we are financing this year.

Thank you.

Thank you, Juan.

Thank you. Our next question comes from Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.

Hey, guys. So just a point of clarity on the $500 million to $600 million, you mentioned JT. you have mezz supporting presently $500 million to $600 million of assets that you have rights on or acquisition rates or options to purchase? Is that what you were saying?

Yes, that is right. So the underlying value of the buildings that are securing our mezz loans is well in excess of $500 million.

Okay. And in terms of the pipeline of additional mezz loans and/or development loans that you are underwriting right now in terms of additional capital you put out the door, how much is that of the $200 million plus that you flagged?

Yes. Most of the $200 million or I must say all of the $200 million there were kind of an LOI or close are acquisitions. We have additional development financings that we are still underwriting and competing for, if you will. So that would be in addition to the $200 million.

Okay. And what is the nature of the $200 million? Is it sort of your bread and butter transactions, some anchor deals, affiliated deals typically?

Yes. These are newer. It is a mix of on and off-campus. Some are just finalizing construction. They are all health system anchored and heavily leased to health systems. But there are some physician groups obviously in some of those buildings, and the pipeline itself is just bread and butter buildings.

Okay. And then I heard the word picky, obviously Jeff mentioned, I just heard you mentioned it again. So what is sort of you are flagging? I’m kind of interested in maybe the lessons learned, if at all from the pandemic, if there is something that kind of has informed your underwriting. I know you guys came out aside pretty well, but is there anything that we have looked at some assets, and this is now filtered in your new underwriting?

Hey, Jordan, this is Jeff. I will take a stab at that. So as you said, I mean, we came through the pandemic really well. I think a testament to the underwriting that we did and kind of the continuous monitoring of the credit team of our tenants. So I don’t know that is really changed anything. For the last number of years, we have had a really strong focus on investment-grade tenants, large health system anchored buildings. And so when we say picky, I think that is really what we are talking about. It is picky in terms of the tenants and the specialties and where they are. So nothing different than the last few years that we have been focused on these types of tenants, just kind of a continuation of the strategy, which really served us well during COVID.

Perfect. Maybe just one for Mark before I get off the clarity on the parking fees. Mark, you said, I think 20 basis points of the 2.4% rental revenue - sorry, 2.4% of NOI was related to the parking benefit, but I’m not sure if that was sort of a year-over-year metric because I heard the 80%, the 48%, but I was just trying to clarify what periods we were talking about there?

Yes, Jordan, happy to clarify. So the same-store impact from lower parking revenue was 20 basis points in the quarter. So our 2.4% would have been a 2.6% same-store NOI growth if parking was at pre-pandemic levels. So we -.

Q1?

I’m sorry, Q1.

Q1 it would have been 2.6%, right? Yes, okay.

Yes, yes. Q1.

And then the 80% versus the 48%, what were those two periods?

Yes. So the first quarter was we have returned to 80% of the pre-pandemic levels compared to 48% and we were at our lowest point last year kind of in that March-April time period. So we have got about $130,000 of parking revenue kind of upside to return to normal levels is what the dollar figure is.

Perfect. Thank you very much.

Yes.

Thanks, Jordan.

Thank you. Our next question comes from Nick Joseph with Citi. Please proceed with your question.

Thanks. We have talked a lot about the acquisition pipeline, but JT, you mentioned kind of beyond what is under LOI right now in negotiations. Can you try to put a size of that pipeline that is kind of the next step beyond the near-term?

Yes, Nick, it is, like I said, we are very confident in the $400 million to $600 million number, and I think that is probably the best way to say it. I think the next two quarters we will hopefully get more in the third quarter and accelerate a little bit of delay from the first quarter. But again, $200 million is in near-term visibility, another $100 million kind of in active negotiation, if you will, and then we do have good confidence of the balance.

Thanks. And then you talked about the ATM issuance to pre-fund. How do you think about funding the remainder of this expected acquisition growth kind of going forward over the next few quarters?

Hey, Nick, this is Jeff. Yes. So certainly, we have been using the ATM opportunistically, we will continue to do that. Like we said, we feel very confident in the overall volume of acquisitions for the year. So we are going to try to use the ATM when it is appropriate. And if we pre-fund some of that, that is fine. We just want to make sure we are in a good capital position to kind of run through our guidance. So it is likely to be the ATM. If there happens to be a big portfolio deal or something like that, we would look at maybe a follow-on offering to complement that as well.

Thank you.

Thank you. Our next question comes from Vikram Malhotra with Morgan Stanley. Please proceed with your question.

Thanks for taking the questions. Good afternoon. Maybe just first one, you alluded to backfilling the largest vacancy in the portfolio. Maybe just give us some more details about that lease and if that were in place, sort of what does that do to total NOI?

Yes, Vikram. Thanks for the question. Really excited about this new lease. As I mentioned, we are seeing a significant increase in our leasing tours and interest in the buildings across the portfolio, and I think this is a perfect example this quarter or what we just signed after the quarter ended here, the 22,000 square foot lease at our MeadowView building. The tenant is the existing anchor in that building. They occupy the first two floors of this building and now are expanding to the third floor and will occupy 100% of the building. Last year they invested over $3 million of their own money into a surgery center on the second floor. So this group is growing quick, the largest multi-specialty group in the area and needed this for their future growth. So from NOI perspective and same-store perspective, it is going to have a nice bump for our future growth, and kind of -- it is got a year of ramping up as they do construction and build out. But once we get to a run rate basis, it should help with that 28 to 25 basis point increase in our same-store.

Got it. And then you also referenced that post-quarter, again the tour activity picking up quite dramatically and the governor on supply being construction costs, etc. So I’m just wondering, give us a color maybe some of the larger systems or tenants that you are talking to. How are they thinking about sort of expansion space and maybe more granular - the type of space on off-campus? What are these tenants specifically looking for?

Yes. Well, as you know, our portfolio is 96% leased, so we are starting from a great position of strength there and working hard to fill up those vacancies, both on-campus and off-campus. We are definitely seeing growth in the off-campus space as groups are looking to expand just existing services. And when we do lose a tenant, it is primarily due to the fact that they can’t grow within our buildings. So we do have a little bit of repurposing to do there. But again, increase in volume and activity and from our hospital partners especially.

And then maybe just last one. Any update or anything that is come up on the watch list? I mean, we are still seeing the effects of the pandemic and a lot of different health systems or health operators are still getting funding from the government. So just wondering if there is anything cropped up from a watch list perspective?

Vikram, not really. Our AR is in better shape than it is ever been. It is just been, again, I think a testament, as Jeff mentioned, our credit team and our asset management team and just the close relationship we have with our tenants. So a lot of the health system - again, our - 62% of our tenant base is investment-grade health systems. Many of those health systems, I think we attract and quantify that - the aggregate of all of the health systems that we do business with had pulled in about $9 billion of the funds through the various structures through the CARES Act funding. But what we look at primarily and focus on is the activity in our buildings, and that has been full steam ahead since last May and everything has been open and operating and busy. And as I said, volumes are at pre-COVID levels. So the activity in our buildings -- before the pandemic and certainly now well supports the rent being paid in those buildings. And so we don’t have any discomfort. And hopefully, at some point, hopefully some of that CARES Act money turns into grants and not a loan and kind of removes some of that strain on the health system generally.

Fair enough. Thanks so much.

Yes. Thank you.

Thank you. Our next question comes from Amanda Sweitzer with Baird. Please proceed with your question.

Thanks. Following a bit more on the stronger leasing activity that you are seeing, have you seen an acceleration in rent above your prior expectations or have you been able to pull back on TIs or other leasing concessions as a result of that strength you are seeing?

Good question, Amanda. This is Mark. The answer is yes to both. As a result of some of the increases in construction pricing, rental rates have been rising around the country. So we have been able to push on rate as it just gets more expensive for providers to move from building to building or construct new. So we have been pushing on rate quite a bit there. And then on TIs, I mean, just because it is harder to move, our leasing team did a good job this quarter of offering less tenant improvement allowances from the landlord. So our CapEx was actually a little bit lower than we originally projected from some TI savings there.

That is great to hear. And then higher level on capital allocation, can you talk more about how you are thinking about your cost of equity today just relative to the decline in cap rates that you are seeing for medical office broadly? Has that caused you to change your hurdle price for equity issuances at all?

Yes. Hey, Amanda, it is Jeff. So as we look at our cost of equity today, clearly the stock has done better through this year than kind of a lot of last year. So the cost of equity for us has been pretty steady, I would say. I mean, certainly cap rates have gone down and become a little bit more competitive, luckily the cost of our debt has gone down as well. So that makes an overall cost of capital hurdle easier to achieve with the acquisitions that we are looking at. So as we look at kind of the stock price where it is been lately, I think it is at levels where we can achieve the full volume of our acquisition guidance and still provide accretive returns to the shareholders.

That is helpful. Thanks for the time.

Thank you, Amanda.

Thank you. Our next question comes from Michael Carroll with RBC Capital Markets. Please proceed with your question.

Yes, thanks. So I guess, I noticed in the press release that you guys trademarked a phrase, invest in better. Can you talk a little bit about that phrase and I guess how should we think about that?

Yes, Mike. we done that I think three years ago, maybe. But...

Did you?

Yes. I’m glad you recognized it. It was really a combination of the culture of our organization. So it really goes across the board; invest in better people, invest in better health system, invest in better buildings. So it is something that came out of our kind of internal strategy discussions and then as we try to message to investors, to prospective clients and health systems and to people that we recruit. We have had almost no turnover in our organization. The team performed extremely well during the work from home and still mostly working from home, and we take a lot of pride in that. So everything we do, we try to do it with excellence, and as we say, invest in better.

No, it makes sense. I guess, JT, can you talk a little bit about the type of patients that are flowing to out-patient settings now, I guess, due to the pandemic that were previously going to in-patient settings? Does that change the type of buildings that they are going to? I mean, is it more surgery centers or on or off-campus? I guess, how is that kind of evolving?

Yes. So Jeff spoke to this earlier as well, what we learned from last year was that just reaffirm the strategy that we have seen and believed in for years, and again, investing in better, looking into the future, which is where healthcare services are best performed and can be clinically performed. And the buildings with surgery centers last year away from hospitals that were the busiest during the kind of - once things settled down last May and people learned how to kind of isolate COVID patients in the hospital, literally all other care that was in trauma was being directed to out-patient settings. And we did that consumer surveys we had commissioned in five of our largest markets, the survey found if you didn’t have COVID, you wanted to go a healthcare services at least a mile away from the hospital. So we didn’t pick the mile, that was just the feedback came from the market, from the communities. And so, again, certain buildings we are investing in, we mentioned the Wesley Chapel building, which is on-campus, but it has a surgery center. Orthopedics, total joints are just moving out of the hospitals rapidly. And hospitals that didn’t have or they were trying to keep orthopedic surgery in the in-patient setting or in the in-patient facilities last year, lost all that volume to out-patient facilities and other providers. And so that is why we see -- we think we see an uptick in new development. We are financing at least one project. And we think some others this year where hospitals are moving are investing in surgery centers away from the hospital campus, again to take care of orthopedics in particular. And then there is going to be a significant move of procedural cardiology again out of the four corners of an in-patient facility and into the out-patient setting. And those buildings will typically be closer to a hospital, but don’t necessarily have to be on the campus. But again, I think those are the things we will continue to see. And oncology just continues to, sadly, but continues to grow in our portfolio and providing linear accelerators or radiation oncology closer to the patients and the consumer, if you will. Again, it is the trend that we have been seeing for years and we are seeing, and that is one of our development projects this year as well.

Okay. And then is there - I guess what has driven this change? I mean, is it just - obviously, it is consumers’ preference given the pandemic of staying away from hospitals. But what is going to keep that from kind of reverting back? I mean, has there been any changes to regulations or advancements of technology that is going to help drive that shift to out-patient or maybe accelerate that shift to out-patient that we have seen over the past few decades?

Yes. I think what we saw last year was an acceleration, again, just because people didn’t want to go the hospital, people avoided care. Sadly, there was a lot of people that died last year from - not from COVID, but from not getting the care they needed because they were afraid to go to the hospital. But what is going to - I think it is here to stay just from a consumer now are more comfortable with it in the out-patient setting. And then CMS is phasing out the so-called in-patient-only rule, which is Medicare for years have put out a list of procedures that they would only pay for if it was done in an hospital, so in the in-patient setting. They have been shifting more and more or paying for more and more procedures to be done in the out-patient setting. That is what helped drive the move of total joint replacements from the in-patient facility to the out-patient facilities. Over the last couple of years there has been a pretty dramatic shift of procedures and volume. And then two years ago or last year started the shift of cardiology procedures as well. So I think it is about 2023, I believe, is the CMS has declared they won’t have an in-patient rule at all. They will just pay for procedures and let the clinicians pick the best clinical setting which will tend to be more efficient lower cost out-patient care facilities, convenient to patients and the physicians themselves.

Great. Thank you.

Yes. Thank you.

Thank you. Our next question comes from Connor Siversky with Berenberg. Please proceed with your question.

Good afternoon, everybody. Thanks for having me on the call. Just really one for me, quick follow-up to Mike right there. So we have seen this chart from time to time comparing out-patient visits, in-patient procedures, and I’m wondering if you could provide any color as to what inning we are in, in that trend? And by that I mean, how much left is there to really take out of the in-patient environment?

There is a lot. I mean, there is a lot of volume. I think last year or maybe 2019 was the first year the number of procedures done in the out-patient setting was greater than the number of admissions, if you will, in the in-patient setting. But that number accelerated in 2020 and it is going to continue that shift, as we just talked about, is going to continue to shift. You are talking basis points on basically a trillion dollars a year of healthcare services. So every year, basis points would be billions of dollars moving out of the hospital and into the out-patient setting. And in cardiology, we are just getting started. So that is a pretty dramatic shift. So you are going to go from 100% two years ago to 5% moving out-patient every year, I’m making that number up. It will be a slow evolution, but then it will ramp up pretty dramatically about how much cardiology will move out of the hospital.

That is helpful. I’m wondering then as these higher acuity procedures are moved out of the hospital, do you expect any change in the design philosophy at medical office buildings in order to facilitate some of these procedures?

Yes. I mean, when you have out-patient surgery you’ll have to have separate ingress and egress points for surgical patients. Again, we are thinking differently about lobbies and dedicated elevators, really kind of lessons learned from, if you will, from the pandemic or preventing the next pandemic or anticipating another pandemic in the future. Cardiology buildings are - I mean, the whole idea there is moving cardiology into an out-patient surgical facility. And so the types of rooms that are there are going to be unique for that service. The move of total joints out of the hospital into the out-patient setting, a lot of that is being done with robots. It is really a pretty fascinating procedure to watch. The robots require a little bit more room than a typical OR fit. So again, you are getting a little bit more space. And then, again, oncology, it continues to move to the out-patient setting. You have a whole different psychological effect of how those buildings are designed dealing with the patients and their families there.

That is interesting stuff. Thanks for the color. I will leave it there.

You are welcome.

Thank you. Our next question comes from Daniel Bernstein with Capital One. Please proceed with your question.

I will say, I concur that was just interesting question and answer just now. So maybe I’m reading too much into the parking volume, but it seems to me the hospital volume has come back a little bit more like 90% or so and parking volume here is staying 80%. Am I reading too much into this that maybe telehealth has impacted the amount of car volume that is coming in? I’m just trying to really assess whether you are going to come back to pre-pandemic levels in terms of parking receipts? I know it is not a huge portion of your rents, but trying to...

Yes. It is one of our elastic revenue. Dan, the issue is valet parking. It is not the volume of patients, it is valet parking. So with COVID, valets are still restricted in a lot of states. And then just people’s comfort level getting in and out of the car, that is not there and vice versa. So that will come back. And again, I think even in many ways stronger once we get more vaccine out and more herd immunity.

Okay. Really, that is all I had. I appreciate it. Thanks.

Thank you. And to conclude on that comment, we do expect it to fully recover.

Thank you. Our next question comes from Joshua Dennerlein with Bank of America. Please proceed with your question.

Yes. Hey JT. Hope all is well. I’m curious on the in-patient rule. Do you typically see an increase in many MOB developments or RFPs once something comes off that in-patient list?

Yes. There is usually a time lag. So like cardiology has been - I think it was two years ago, there were 13 procedures that were moved off the in-patient-only rule, and last year there was another 20. So just it takes some time for the clinicians to kind of organize around a different setting, and then that affects design, as we talked about before. So total joints took - I mean, accelerated pretty quickly. Forgive me for that computer message. Total joints, it took a little bit of time, but it moved rapidly to the out-patient setting in pretty dramatic fashion. And then, I think in obviously last year people are getting - as much as they could. So I think the prediction is on total joints that will be at about 90% will be done in an out-patient setting by 2025. And what would be left would be patients with comorbidities. They just require more intensive services other than the orthopedic procedure. So cardiology, a little slower to that move, but it is going to pick up pretty dramatically this year. I mean, we are already starting to see cardiology dedicated ASCs. And there is a lot of planning going on around that with physician groups we are talking to.

Okay. And then interesting commentary on the comorbidity, it is what is kind of going to be a left after 2025 for total joints. Is that the kind of way to think about hospitals as they are going to be like the unique patients that require really high level of acuity and then pretty much anything else can be kind of done off-campus?

Yes. I think last year again showed that we could perform that way. So the hospitals of the future are going to be for highly intense medical conditions like COVID, transplant and trauma. And then you’ll have some oncology surgery have some like open heart surgery and then some cancer surgery. But it is really going to be for the high acuity patient and the high acuity medical conditions, infections like COVID, then everything else is going to be out-patient.

Okay, interesting. Appreciate it.

Thank you. Our next question comes from Omotayo Okusanya with Mizuho. Please proceed with your question.

Yes. Good afternoon, everyone. I just wanted to follow-up on that kind of last line of questioning, and I agree definitely with the model of everything shifting out-patient. How should we be thinking about how that translates into future demand? And I ask that question from the perspective of we haven’t really seen your development pipeline or development pipelines of any of your peers really ramp up. Occupancy is steady, we haven’t seen this huge kind of ramp in occupancy. So I guess, how do we kind of match that kind of what we are seeing at that level versus how it is going to translate to kind of operating metrics in dollars and cents for DOC?

Tayo, it is a big question. I mean, I mentioned in my prepared remarks, again, the CMS actuary predicts medical spending is going to grow 5%, 5.5% I think on average every year between now and 2028. And the 2028 is kind of the - I guess, the beginning of the back end of the baby boom population. So what is going to top out on them, the aging part of the population start catching up in the younger population. But again, the vast majority like we just talked about, that spend is going to continue to shift to the out-patient setting. And I think we talk about the hospital of future whether it be existing physical plans or the physical plans that feature - again, those rooms are going to be designed to be able to convert every room into intense - some kind of intensified care so you could take care of a COVID patient and again have more access to the ventilators and things that you need for that kind of care. So I think that is just - getting to those metrics is right now we just know what the age - I mean, actually accurate on the aging of the population, how much demand they are going to have, how much it is going to cost and then of course governments and payers, insurance companies, employers are trying to shift the cost curve. So it is not just about aggregating populations in dollars, it is also trying to take into account lower cost settings. Again, that will be in the out-patient setting.

Got you. Thank you.

Thanks, Tayo.

Thank you. There are no further questions at this time. I would like to turn the floor back over to John Thomas for any closing comments.

Thanks everybody for joining us today. Again, we are off to a great start and we have got some fantastic things to share with you in the upcoming quarters. And look forward to seeing many of you during the NAREIT Zooms, and hopefully in-person soon, and we just encourage all to get vaccinated. If you can’t find a vaccine, give us a call, we will help you find one. Thank you much.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.