Healthpeak Properties Inc (DOC) 2021 Q1 法說會逐字稿

Greetings, and welcome to the Physicians Realty Trust First Quarter 2021 Earnings Conference Call. (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, Brad. You may begin.

Thank you, 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 a more detailed description of potential risks and other important factors that could cause actual results to differ from those contained in any forward-looking statements, please refer to our filings with the Securities and Exchange Commission. With that, I would now like to turn the call over to the company's CEO, John Thomas. 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 health care real estate are just beginning to see signs of a recovery, medical office clinical visits have been and remain at pre-COVID levels and have been for a long time. We credit this operational strength to our nation's health care providers, who adapted quickly at the onset of the pandemic to manage COVID outbreaks while continuing to provide necessary non-COVID health care services. They accomplished this by shifting non-COVID care to the outpatient 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 health care that will continue to grow in the years ahead, especially for more acute orthopedics, oncology and cardiology procedures. Beyond the pandemic, demand for medical office buildings continues to grow in line with our nation's continued need for outpatient health care. CMS estimates $4.1 trillion were spent on health care services in 2020 and the national health care 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 health care real estate can count on medical office to remain open, occupied and busy. Medical office does not need to recover, as an asset class it was only impacted temporarily in spring 2020, and DOC has maintained close to 96% occupancy routinely ever since. We remain focused on growing our funds available for distribution each year, and we'll continue to manage our organization to achieve that result annually.

On the acquisitions front, we announced the purchase of a brand new medical office facility with an onsite outpatient surgery center on the campus of AdventHealth's hospital in Wesley Chapel, Florida. Several members of our team have long-term relationships with AdventHealth, and we hope to find future opportunities for investment with this system across their national footprint. We also finalized commitments to finance 3 new medical office facilities anchored by leading investment grade health care systems, with 2 buildings being off campus and one on campus. We continue to evaluate a number of new development projects, and expect a positive uptick in development for the year and going forward.

Our investment pipeline continues to grow, with visibility on nearly $200 million in prospective opportunities that we expect to close in the coming months, plus a growing number of acquisitions in negotiation that we would expect to execute in the third and fourth quarters. Our growth this year may be slightly weighted to the second half of the year, but we remain very confident in our acquisition guidance of $400 to $600 million in new investments in 2021. In June 2020, we published our inaugural ESG report, sharing our hard work on environmental management of our buildings since 2018 and progress toward ambitious goals to improve the energy utilization and waste management of all of our facilities.

We will publish our second annual ESG report in June 2021, and we will be proud to report great progress on all of our environmental, social and governance goals and the DOC culture. Under Mark Theine's leadership, Physicians Realty Trust earned the EPA's ENERGY STAR Partner of the Year, and we expect this to be the first of many awards recognizing our commitment and success in reducing our carbon footprint and providing a better setting for our physicians and providers through better managed buildings. Jeff will now review our financial results, and Mark Theine will share our operating results. Jeff?

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 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 and the rest of our health care REIT peers. With our enterprise leverage of 5x debt to EBITDA, including our pro rata JV debt, and our 62% investment grade tenant base, we believe we offer our shareholders the best risk-adjusted investment in health care real estate. We raised $52.4 million of net proceeds on the ATM in the first quarter, effectively pre-funding a portion of what we anticipate to be a substantial year of growth for the company. Our revolving credit facility is only 18% drawn with $156 million outstanding, leaving $694 million of availability. We generally expect a target leverage of 5.25x debt to EBITDA on an enterprise basis going forward.

We continue to be confident in the acquisition guidance we laid out several months ago of $400 to $600 million of new investments, despite the relatively slow start in this quarter. We have been, admittedly, picky. However, we also have high visibility on a number of the types of medical office buildings we are seeking: those with investment grade rated health system tenants, performing specialized medical procedures in strong demographic areas. JT referenced the pipeline value of those deals and -- those types of deals and negotiations during his prepared remarks. Because these are primarily relationship deals, we feel a higher degree of certainty than if we were trying to acquire them at auction. And we still expect to end the year within the total acquisition amounts we guided to, at an average cap rate between 5% to 6%, subject to suitable capital market conditions.

Turning to other portfolio metrics, our first quarter G&A, which usually trends higher than the rest of the year, was on track at $9.5 million, and we expect to meet our guidance range of $36 million to $38 million for the year. Our recurring capital expenditures were well under budget at $5.6 million, as our team managed to create some additional efficiencies, and some TIs that were budgeted for new leases turned out better than expected. We now expect to be at the bottom of a recurring CapEx guidance range of $25 million to $27 million for 2021. I will now turn the call over to Mark to walk through some of our portfolio statistics in more detail. Mark?

Thanks, Jeff. The first quarter of 2021 represented another solid and consistent quarter for Physicians Realty Trust. 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 health care providers the benefits of a national real estate owner with scale, paired with the 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 1 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 tours and tenants looking for existing medical office space as construction prices continue to drastically increase. In fact, subsequent to the end of the quarter, we just executed a new 18-year lease for the single largest vacancy in our portfolio: A suite totaling 22,000 square feet at the MeadowView MOB in Kingsport, Tennessee.

Having navigated through a year of the challenges posed by the pandemic, I'm proud of our team's uninterrupted focus and continued achievements. Similar to our asset management and leasing teams, our capital projects team also had an excellent quarter, efficiently prioritizing recurring CapEx investments totaling $5.6 million, or 7% of cash NOI, and ahead of 2021 guidance. Embedded within all capital investments made by DOC is a solid commitment to the materials and practices that enhance the patient experience, as well as our G2 sustainability philosophy.

This quarter, DOC was nationally recognized as a 2021 ENERGY STAR Partner of the Year from the U.S. Environmental Protection Agency and the U.S. Department of Energy. This prestigious award is the highest level of EPA recognition, as partners must perform at a superior level of energy management, demonstrate best practices across the organization and prove portfolio-wide energy savings. We're proud to celebrate the recognition from the EPA for our ESG efforts to date, but recognize that this is simply a step forward for DOC as we continue to Invest in Better as leaders across the real estate industry. With that, I'll now turn the call back over to John Thomas.

Thank you, Mark. And Paul, we'll now take questions.

(Operator Instructions) Our first question comes from Juan Sanabria with BMO Capital Markets.

I was just hoping, John, you could talk a little bit more about the development funding you referenced in your prepared remarks. The types of yields you're expecting, if mainly that includes rights 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've seen a number of new development financing opportunities this year. As I mentioned, we've started 3. One is an on-campus building that's 75% pre-leased to the health system and with lots of potential demand for the lease-up during the construction cycle. So that's a mezzanine loan financing. So we're 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's 100% pre-leased to an investment grade credit that is more of the -- or not more of, is the loan-to-own structure. And in that one, we typically get 6+% 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's, again, closer to 75% pre-leasing. And it's a mezzanine loan with an option to acquire at the end.

So we've been pretty successful with both types of financings. Some we take a little less risk and the developer has more lease-up risk, if you will. And then the 100% lease opportunities, we really like that loan-to-own structure as we featured in our annual shareholder report, the building we built down at Sacred Heart. So we expect to do more of both types this year and be productive. All of these are buildings that'll CO in 2022, so next year, and be great additions to the portfolio.

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've got under -- I guess under various mezzanine loans, we did a large package at the end of the year, so we're 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 rights of first refusal, ROFR rights.

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

Yes, we're in the low 5s for class A assets. As Jeff mentioned, we're really picky on the high quality assets. And again, these are Health System anchored and heavily leased buildings that we've been acquiring. They're all off market so that does help us. The auctions that have been published, cap rates that are coming through the marketed deals seem to be compressing, but we're in the low 5s to mid-5s on class A acquisitions. And then stretched closer to 6 on, usually smaller assets that are off campus, and/or the development projects that, again, we're financing this year.

Our next question comes from Jordan Sadler with KeyBanc Capital Markets.

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

Yes, that's 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're underwriting right now, in terms of additional capital you'll put out the door, how much is that of the $200 million plus that you flagged?

Yes, most of the $200 million, or a -- I won't say all of the $200 million; they were at LOI or close, are acquisitions. We have additional development financings that we're still underwriting and competing for, if you will. So that would be in addition to the $200 million.

Rest of the 2, okay. And what's the nature of the $200 million? Is it your bread and butter transactions, some anchor deals, affiliated deals, typically? Off campus?

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

Okay. And then I heard the word picky. Obviously Jeff mentioned, I just heard you mention it again. So what are you flagging? I'm interested in maybe the lessons learned, if at all, from the pandemic, if there's something that has informed your underwriting. I know you guys came out on the other side pretty well, but is there anything where you've looked at some assets and this is now filtered in to your new underwriting?

Hey, Jordan, this is Jeff. I'll take a stab at that. So as you said, I mean, we came through the pandemic really well. I think a testament to the underwriting that we did and the continuous monitoring of the credit team of our tenants. So I don't know that it's really changed anything. For the last number of years, we've had a really strong focus on investment grade tenants, large health system-anchored buildings. And so when we say picky, I think that's really what we're talking about, is picky in terms of the tenants and the specialties and where they are. So nothing different than the last few years that we've been focused on these types of tenants, just 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 piece. 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 a year-over-year metric, because I heard the 80% and 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 Q4 would have been a 2.6% same-store NOI growth if parking was at pre-pandemic levels.

Q1.

I'm sorry, Q1.

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

Yes, yes, Q1.

And then the 80% versus the 48%, what were those 2 periods?

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

Our next question comes from Nick Joseph with Citi.

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

Nick, it's -- like I said, we're very confident in the $400 million to $600 million number. And I think that's probably the best way to say it. I think the next 2 quarters will be -- hopefully get more in the third quarter and accelerate the little bit of delay from the first quarter. But again, $200 million is in near term visibility, another $100 million in active negotiation, if you will. And then we do have good confidence in the balance.

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

Hey Nick, this is Jeff. Yes. So certainly we've been using the ATM opportunistically. We'll continue to do that. Like we said, we feel very confident in the overall volume of acquisitions for the year. So we're going to try to use the ATM when it's appropriate, and if we pre-fund some of that, that's fine. We just want to make sure we're in a good capital position to run through our guidance. So it's 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 supplement that as well.

Our next question comes from Vikram Malhotra with Morgan Stanley.

Maybe just first one, you alluded to backfilling the largest vacancy in the portfolio. Maybe just give us some more details about kind of that lease, and what that -- if that were in place, what does that do to total NOI?

Yes, Vikram, thanks for the question. Really excited about this new lease. As I mentioned, we're 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, of a 22,000 square foot lease at our MeadowView building. The tenant is the existing anchor in that building. They occupy the first 2 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 a NOI perspective and same-store perspective, it's going to have a nice bump for our future growth. It's 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 a 28 to 25 basis point increase in our same-store.

Got it. And then you also referenced the post-quarter, again, the tour activity picking up quite dramatically, and the governor on supply being construction costs, et cetera. So I'm just wondering, give us color, maybe some of the larger systems or tenants that you're 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're starting from a great position of strength there, and working hard to fill up those vacancies, both on-campus and off-campus. We're 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's primarily due to the fact that they can't grow within our building, so we do have a little bit of repurposing to do there. But again, strength, increase in volume and activity, and from our hospital partners, especially.

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

You know, Vikram, not really. And our AER is in better shape than it's ever been. It's 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, 62% of our tenant base is investment grade health systems. Many of those health systems -- I think we had tracked -- it quantified at -- the aggregate of all 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's been open and operating and busy. And as I said, volumes are at pre-COVID levels. So the activity in our buildings, for 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.

Our next question comes from Amanda Sweitzer with Baird.

Following up a bit more on the stronger leasing activity that you're seeing, have you seen an acceleration in rents 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're 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've 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've 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 is actually a little bit lower than we originally projected from some TI savings there.

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

Amanda, it's Jeff. So as we look at our cost of equity today, clearly the stock's done better through this year than 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's gone down as well, so that makes an overall cost of capital hurdle easier to achieve with the acquisitions that we're looking at. So as we look at the stock price, where it's been lately, I think it's at levels where we can achieve the full volume of our acquisition guidance and still provide accretive returns to the shareholders.

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

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 how should we think about that?

Yes, Mike, we'd done that, I think, 3 years ago, maybe, but -- so we've been --

Did you?

Yes -- no, no, I'm glad you recognized it. It was a really a culmination of the culture of our organization. So it really goes across the board, invest in better people, invest in better health systems, invest in better buildings. It's just 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. You know, we've had almost no turnover in our organization. The team performed extremely well during the work from home, and still mostly working from home. 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, so.

That makes sense. And then I guess, JT, can you talk a little bit about the type of patients that are flowing to outpatient settings now due to the pandemic, that were previously going to inpatient settings? Does that change on the type of buildings that they're going to? I mean, is it more surgery centers or on or off campus? Or how's that kind of evolving?

Yes. So Jeff spoke to this earlier, as well. What we learned from last year was that -- just reaffirmed the strategy that we've seen and believed in for years. And again, investing in better, looking into the future, which is where health care services are best performed and can be clinically performed. And you know, it was 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 wasn't trauma was being directed to outpatient settings.

And we did that consumer survey that we had commissioned in 5 of our largest markets. The survey found if you didn't have COVID, you wanted to go to health care services at least a mile away from a hospital. So we didn't pick them out, that was just the way the feedback came from the market, from the communities.

And so, again, certain buildings we're 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 that were trying to keep, orthopedic surgery in the inpatient setting or in the inpatient facilities, last year lost all that volume to outpatient facilities and other providers. And so that's why we see -- we think we see, an uptick in new development. We're financing at least 1 project, and we think some others this year, where hospitals are moving or investing in surgery centers away from the hospital campus, again, to take care of orthopedics in particular.

And then there's going to be a significant move of procedural cardiology, again, out of the 4 corners of an inpatient facility and into the outpatient setting. And those buildings will typically be closer to a hospital, but don't necessarily have to be on the campus. But again, I think those are things we'll continue to see.

And oncology just continues to, sadly, but it continues to grow and grow in our portfolio. And providing linear accelerators or radiation oncology closer to the patients and the consumer, if you will. Again, it's the trend that we've been seeing for years, and we're seeing, and that's one of our development projects this year, as well.

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

Yes, I think what we saw last year was an acceleration, again, just because people didn't want to go to the hospital. People avoided care. Sadly, there's a lot of people that died last year, not from COVID, but from not getting the care they needed because they were afraid to go to the hospital. But what's going to -- I think it's here to stay, just from consumers now are more comfortable with it in the outpatient setting.

And then CMS is phasing out the so-called inpatient-only rule, which is, Medicare for years had put out a list of procedures that they would only pay for if it was done in a hospital, so in the inpatient setting. They've been shifting more and more, or paying for more and more procedures to be done in the outpatient setting. That's what helped drive the move of total joint replacements from the inpatient facility to the outpatient facilities over the last couple of years. And that's been a pretty dramatic shift of procedures and volume. And then 2 years ago, or last year, started the shift of cardiology procedures as well. So I think it's by 2023, I believe, is the CMS has declared they won't have an inpatient rule at all. They'll just pay for procedures and let the clinicians pick the best clinical setting, which will tend to be more efficient, lower cost, outpatient care facilities convenient to patients and the physicians themselves.

Our next question comes from Connor Siversky with Berenberg.

Just really one from me, quick follow-up to Mike right there. So we've seen this chart from time to time comparing outpatient visits, inpatient procedures. And I'm wondering if you could provide any color as to what inning we're in, in that trend. And by that, I mean how much left is there to really take out of the inpatient environment?

There's a lot. There's a lot of volume. I think last year may have been the -- or maybe 2019 was the first year the number of procedures done in the outpatient setting was greater than the number of admissions, if you will, in the inpatient setting. But that number accelerated in 2020. And it's going to continue to -- that shift, as we've just talked about, is going to continue to shift. So you're talking basis points on basically $1 trillion a year of health care services. So every year, basis points would be billions of dollars moving out of the hospital and into the outpatient setting. And in cardiology, we're just getting started. So that's a pretty dramatic shift. So you're going to go from a 100% 2 years ago to 5% moving outpatient every year. I'm making that number up; it'll be a slow evolution, but then it'll ramp up pretty dramatically, about how much cardiology will move out of the hospital.

That's 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 of medical office buildings in order to facilitate some of these procedures?

Yes. When you have outpatient surgery, you usually have to have separate ingress and egress points for surgical patients. Again, we're thinking differently about lobbies and dedicated elevators, really lessons learned, if you will, from the pandemic, or preventing the next pandemic, or anticipating another pandemic in the future. Cardiology buildings, the whole idea there is moving cardiology into an outpatient 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 outpatient setting, a lot of that's being done with robots. It's really a pretty fascinating procedure to watch. The robots require a little bit more room than a typical OR fits, so again, you're getting a little bit more space. And then again, oncology, as it continues to move to the outpatient setting, you have a whole different psychological effect of how those buildings are designed, dealing with the patients and their families there.

Our next question comes from Daniel Bernstein with Capital One.

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

Yes, it's one of our elastic revenue sources. Dan, the issue is valet parking. It's not the volume of patients, it's 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 a car that's not theirs, 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. Okay. Really, that's all I had. I appreciate it.

Thank you. And to conclude on that comment, we do expect it to fully recover and do well in the future.

Our next question comes from Joshua Dennerlein with Bank of America.

Hey, JT, hope all is well. I'm curious on the inpatient rule. Do you typically see an increase in many MOB developments or RFPs once something comes off that inpatient list?

Yes, there's usually a time lag. So cardiology's been -- I think it was 2 years ago, there were 13 procedures that were moved off the inpatient-only rule. And last year there was another 20. So it takes some time for the clinicians to organize around a different setting. And then that affects design, as we talked about before. So total joints took -- didn't take -- accelerated pretty quickly -- (technical difficulty), forgive me for that computer message. Total joints, it took a little bit of time, but it moved rapidly to the outpatient setting, and in pretty dramatic fashion. And then, obviously last year, people stayed [out of hospitals] as much as they could. So I think the prediction is, on total joints, that we'll be at about 90% will be done in an outpatient setting by 2025, and what would be left would be patients with comorbidities. They just require more intensive services other than the orthopedic procedure itself.

Cardiology will be a little slower with that move, but it's going to pick up pretty dramatically this year. We're already starting to see cardiology-dedicated ASCs, and there's a lot of planning going on around that with the physician groups we're talking to.

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

Yes, I think that last year, again, showed that we could do -- 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, you'll have some open heart surgery, and then some cancer surgery, but it's really going to be for the high acuity patient and the high acuity medical conditions, infections like COVID, and then everything else is going to be outpatient.

Our next question comes from Omotayo Okusanya with Mizuho.

I just wanted to follow up on that last line of questioning, and agree, definitely with the model of everything shifting outpatient. 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 pipelines or development pipelines of any of your peers really ramp up. Occupancy is steady. We haven't seen this huge ramp in occupancy. So I guess it's, how do we match that -- what we're seeing at that level, versus how it's going to translate to operating metrics in dollars and cents? What do you see?

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

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

Thanks, everybody, for joining us today. Again, we're off to a great start and we've got some 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 you all to get vaccinated. If you can't find a vaccine, give us a call, we'll 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.