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Physicians Realty Trust (NYSE:DOC)
Q1 2020 Earnings Call
May 8, 2020, 9:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, welcome to Physicians Realty Trust First Quarter 2020 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] I will now turn the conference over to your host, Bradley Page, Senior Vice President, General Counsel. You may begin.

Bradley D. Page -- Senior Vice President, General Counsel

Thank you. Good morning, and welcome to the Physicians Realty Trust first quarter 2020 earnings conference call and webcast. Joining me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; Mark Theine, Executive Vice President, Asset Management; John Lucey, Chief Accounting and Administrative Officer; Laurie Becker, Senior Vice President, Controller; and Dan Klein, Deputy Chief Investment Officer.

During this call, John Thomas will provide a summary of the Company's activities and performance for the first quarter of 2020 and year-to-date, as well as our strategic focus for the remainder of 2020. Jeff Theiler will review our financial results for the first quarter of 2020 and our thoughts for the remainder of the year. Then, Mark Theine will provide a summary of our operations for the first quarter of 2020. Following that, we will open the call for questions.

Today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. They are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe our assumptions are reasonable, our forward-looking statements are not guarantees of future performance.

Our actual results could differ materially from our current expectations and those anticipated or implied in such forward-looking statements. For a more detailed description of potential risks and other important factors that could cause actual results to differ from those contained in any forward-looking statements, please refer to our filings with the Securities and Exchange Commission.

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

John T. Thomas -- President & Chief Executive Officer, Trustee

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

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

These providers are bravely answering the call to treat patients and provide essential healthcare services. We honor their bravery and sacrifice. After my comments, our EVP and Chief Financial Officer, Jeff Theiler, will provide a financial report for quarter one with balance sheet updates through April 30, and Mark Theine, our EVP, Asset Management, will provide a quarter one operating report as well as a general update on our operations since April 1. I will then address April and May rent collections before taking your questions.

Prior to the onset of COVID-19, we were gearing up for a strong 2020 of operational excellence and external growth. In anticipation of this growth, we right-sized our balance sheet by raising $239 million of equity in the first quarter very efficiently through our ATM. As the COVID-19 situation intensified in March, we did not and have not since contractually committed any new capital to acquisitions. We completed the conversion of one loan to ownership in Fort Worth, Texas, with a modest additional investment and we continued to fund our development projects.

One of our two development projects leased to U.S. Oncology, a subsidiary of investment-grade rated McKesson, completed a certificate of occupancy and rent has commenced. We remained very well capitalized, finished the quarter with a debt-to-EBITDA ratio of 5.1 times. While we slowed down our external growth in March and April, we expect to be able to proceed with our previously targeted investments once the capital market stabilize and economic conditions add clarity.

DOC's relationship-based investment strategy and history of repeat business continues to benefit our long-term business plan, as the medical office owners we were working with, have all agreed to postpone transactions for the time being. As of today, we haven't lost any of the investment opportunities that we were expecting to complete in the second and third quarter or otherwise. Due to this quarantines and consequential economic and capital market uncertainty, we pulled our 2020 acquisition guidance on March 19. And while we cannot commit to the timing, volume or investment price of our anticipated transactions, we do expect the opportunity to proceed with acquisition activity at the appropriate time and our pipeline remains robust.

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

One of the most important factors to the recovery of the healthcare system will be how quickly the employment rate improves to offset any potential spike in the Medicaid population. Nevertheless, we believe that the lessons learned from the crisis will improve the efficiency, capacity and appropriate utilization of healthcare services in the U.S. Early in this shutdown, our outpatient facilities, including surgical facilities, were seeing an increase in volumes as inpatient hospital shifted care to the outpatient settings, many off campus, in order to prepare for the expected need for their inpatient facilities.

Unfortunately, however, as state and local governments realized there wasn't the testing capability and adequate PPE to provide for necessary, but perhaps non-urgent healthcare services, began to place restrictions on non-urgent care, specifically surgery that can be scheduled and temporarily delayed. While the U.S. has been growing its outpatient capacity for years, we are realizing now more than ever, that our most precious high acuity facilities may best be preserved for complex medical needs like COVID-19. This would naturally lead to the vast majority of healthcare, specifically surgical and routine necessary procedural care being directed to less intensive, modern and convenient medical office buildings, preserving hospital capacity for the most complex medical services and highlighting the opportunity for DOC in the years ahead.

While we don't know the total impact of COVID-19 on these numbers, the CMS Office of the Actuary published April 3, its most recent estimates of national healthcare spending in the United States. According to the Actuary's report, U.S. national healthcare spend is expected to grow at an average annual rate of 5.4% from 2019 to 2028. CMS and the report estimated that national healthcare spending reached $3.81 trillion in 2019. It would increase to just over $4 trillion in 2020.

CMS projected that by 2028 healthcare spending would reach $6.19 trillion and would account for 19.7% of GDP, up from 17.7% in 2018. Short-term shocks don't change these long-term tailwinds driven by the growth in the aging population and people generally living longer. There are lessons to be learned by the events of the last three months, most of which we believe will be beneficial to our real estate investment thesis and strategy.

Jeff will now review our financial results for quarter one and then Mark will share the results of his team. Jeff?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Thank you, John. In the first quarter of 2020, the Company generated normalized funds from operations of $52.7 million, which was an increase of 11% over the comparable quarter last year. Normalized FFO per share was $0.26 versus $0.25 in the same quarter of last year. And our normalized funds available for distribution were $0.25 per share or $50.5 million, an increase of 20% over the comparable quarter of last year.

As our cost of capital has changed alongside the COVID-19 pandemic, we have taken concrete steps to reduce our investment activity. Consequently, in our March COVID-19 update, we went through our previously issued acquisition guidance and have postponed the majority of our deals until we have more visibility on the capital markets. We did, however, complete several investments that were already in process.

In the quarter, we invested a total of $19 million with the vast majority of that going toward a 45,000 square foot building in Westerville, Ohio, anchored by the investment-grade rated Ohio State University, Wexner Medical Center. Once the short-term rent abatement ends following the completion of TI work in June, the investment will produce an initial cash yield of 6.1%. We also converted a $47 million loan investment into the ownership of Texas Oncology's 98,000 square foot Fort Worth Cancer Center and MOB, which is expected to yield 5.5% once stabilized.

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

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

As of the date of this earnings call, we have approximately $228 million drawn on our $850 million revolving credit facility, leaving $622 million available to draw and another $30 million cash on hand. Our debt maturity schedule is advantageous with no material term debt maturing until 2023. At the current time, we aren't overly worried about liquidity, but we'll closely monitor our operations month to month and adjust our short-term capital buffers as appropriate.

At this point, I'd like to highlight the additional disclosure we put out this quarter on COVID-19-related statistics. We understand that investors and analysts are interested in how our portfolio is bearing in this uncertain environment. So we have tried to provide you as much information as possible. In this COVID-19 supplement, you can find breakouts by specialties as well as utilization statistics and projected reopening dates. JT will also provide more details on our April and May collections a bit later in the call.

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

And finally based on the rest of the year certainty for uncertainty, we've adjusted some of the 2020 guidance that was issued on the previous earnings call. I've already mentioned, we issued our acquisition guidance in March based on capital market conditions, so that remains withdrawn. We will also leave the G&A guidance unchanged at this point at $33.5 million to $35.5 million for 2020.

Our recurring CapEx is expected to be a little lower as we delayed some non-essential projects. So our new expectation for the year is $17 million to $19 million versus our previous guidance of $24 million to $26 million.

I will now turn the call over to Mark to walk through our portfolio statistics in more detail. Mark?

Mark D. Theine -- Executive Vice President, Asset Management

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

Despite working remotely and practicing social distancing, our asset management, property management and leasing teams continue to function at a high level and they've shown great strength and resilience. Before focusing on how we are navigating through the current environment, I'd like to share a few highlights from the first quarter. DOC's portfolio at the end of Q1 2020 was an industry leading 96% leased, including 59% leased directly to investment-grade quality tenants and their subsidiaries, which we believe is more than any other publicly traded portfolio in the healthcare real estate market.

Leasing results in the first quarter were strong with an 86% tenant retention rate, renewal leasing spreads of approximately 1% and positive portfolio net absorption of 26,000 square feet. Looking ahead, DOC has less than 5% of its portfolio scheduled to renew in any year through the end of 2023. We believe the low number of lease expirations should result in lower levels of volatility and net operating income, as well as require significantly less concessions for tenant improvements and leasing commissions compared to other MOB portfolios with much greater levels of annual lease expirations in this uncertain market.

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

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

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

At that time, we also formed a COVID task force to review and enforce operational procedures that included, but are not limited to, janitorial frequency and product selection, scheduling and use of PPE for essential employees, social distancing, signage in building, common areas and elevators, air filtration and management of construction activities. Across the portfolios, the entire team worked tirelessly to implement these new procedures to ensure our buildings promote a healthy environment.

Nearly all of our facilities remained open during the month of April and the vast majority expect to start increasing patient volumes again in early to-mid May under enhanced guidelines for safe patient care. Most recently, as an example, in Atlanta, Georgia, our largest market, the Governor has begun reopening select businesses to start rebuilding the economy.

As of this week, 93% of DOC's occupied space was utilized. Those offices temporarily postponing patient visits and not open, primarily includes dentists, ophthalmologists, plastic surgery and physical therapy offices. Interestingly, utilization and profitability at the LifeCare LTACHs also improved considerably during March and April, as the demand increased due to COVID-19 cases and CMS expanded the scope of care LTACHs can provide and accelerated reimbursement payments.

Looking ahead, to our leasing outlook for the remainder of the year, we expect strong tenant retention as practices simply remain in place during the COVID pandemic. For the remainder of 2020, we have just 87 leases scheduled to renew representing 2.1% of ABR, but we do expect some leases to extend term early as part of agreement for near-term rent deferral.

While new leasing activity could slow in the future, we are seeing a strong pipeline of leasing activity at this time, including some recent inbound calls from on-campus practices [Technical Issues] to off-campus MOBs as patients and families are hesitant to visit hospital campus treating COVID patients.

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

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

John T. Thomas -- President & Chief Executive Officer, Trustee

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

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

DOC has used this period of time to engage with all of our tenants and on a case-by-case basis, assist them with the process of applying for federal Paycheck Protection Program loans and/or Medicare grants and advanced payments. Before the CARES Act was even passed, we had retained two different consultants, each of which are active in medical practice management and the SBA process. For these tenants who pursued PPP, medical assistants and other sources of liquidity, we waived lease late fee obligations and patiently worked with our tenants, while they sourced working capital to pay rent through these programs.

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

Fortunately, with the increase in PPE production, our outpatient care facilities can now start providing surgeries that had been delayed. Many of our providers are reporting full schedules and expanding surgical hours to the weekends as well. By the end of this weekend, the government prohibitions on scheduled surgery had expired for 91% of DOC's ABR. This is updated as of this morning with the addition of Maryland overnight and is better than reported in our COVID supplement.

In addition, as of this week, only two of our buildings are currently closed, one, a wellness center leased to CommonSpirit, and a small legacy building. Our provider tenants are anxious to care for their patients and get back to work.

We're now happy to address your questions.

Questions and Answers:

Operator

And at this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Michael Carroll from RBC Capital Markets. Please proceed with your question.

Michael Carroll -- RBC Capital Markets -- Analyst

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

John T. Thomas -- President & Chief Executive Officer, Trustee

Yeah. Mike, this is JT. And we hope you are all safe and your family as well. I'm going to ask Jeff to respond to that question.

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Hi, Mike. It's a great question. So in April, we received rent deferral or rent questions from about 21% of our tenants. And we have a pretty good advantage in processing these requests, because over the past three years, we've really invested an enormous amount of time and resources into building a dedicated credit department that tracks tenant financials actively. And so we have a really good sense of what their usual revenues and volumes are as well as the resources available to pay rent.

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

Michael Carroll -- RBC Capital Markets -- Analyst

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

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

It's a great question, Mike. So in the first week of May, of those 7% of tenants that we were working with, about half of them received their government assistance or have since been able to pay their May rent. So I think what probably the way to look at it is, you cut that bucket roughly in half. So 3% or so of the total ABR were still working with. And then there's the other ones have had a successful resolution already.

Michael Carroll -- RBC Capital Markets -- Analyst

Great. Thanks, Jeff.

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Thanks, Mike.

John T. Thomas -- President & Chief Executive Officer, Trustee

Thank you, Mike.

Operator

And our next question is from Nick Joseph from Citi. Please proceed with your question.

Michael Griffin -- Citi -- Analyst

Hi, this is Michael Griffin on for Nick. I'm just curious you mentioned the States reopening, not central medical procedures starting up again. I'm wondering what your thoughts on how long it will take to work through that pent-up demand for those non-essential procedures?

John T. Thomas -- President & Chief Executive Officer, Trustee

Yeah, that's a great question. We don't have a solid sense of that, but, again, most of -- all of April's work was delayed or deferred. And so some of the facilities that we talked to performed almost no surgery in April have very full schedules, they're asking us to expand hours into the evenings, open on Saturdays and things like that. So we think May and June will be very full schedules. That's what again, most of our providers reporting to us. And then the question I think has been how quickly can they then build up a new schedule as patients return to the clinical setting, the diagnostic setting, and that we don't know yet.

Michael Griffin -- Citi -- Analyst

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

John T. Thomas -- President & Chief Executive Officer, Trustee

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

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

Michael Griffin -- Citi -- Analyst

Okay. That's it for me. Thank you.

John T. Thomas -- President & Chief Executive Officer, Trustee

Thank you.

Operator

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

Connor Siversky -- Berenberg Capital Markets LLC -- Analyst

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

John T. Thomas -- President & Chief Executive Officer, Trustee

Yeah. Connor, great question. And again, we hope all your family safe as well. The issue for -- the reason elective surgery or scheduled surgery, which I think is a better term, was really restricted in those states was the lack of PPE. So they get surgical gowns, the mask, all the things they need just to breathe, protect the -- both the healthcare teams, but the patients themselves.

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

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

Connor Siversky -- Berenberg Capital Markets LLC -- Analyst

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

John T. Thomas -- President & Chief Executive Officer, Trustee

Yeah, I'm going to ask Deeni to comment as well, but just before he weighs in, I said in my prepared comments, the good news is most of the pipeline that we had built up in the fourth quarter and early in the first quarter -- fourth quarter of 2019 and the first quarter of this year, that we expected to capitalize and invest in the second quarter and third quarter is still there. And the sellers if you will, the developers and the owners of those buildings or physicians in particular are waiting on us to get through this situation to proceed. And we don't know what the price will be, but we hopefully can have a meeting of the minds with those sellers and get back to the growth, when conditions arise. Deeni, why don't you weigh in as well?

D. Deeni Taylor -- Executive Vice President, Chief Investment Officer

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

Connor Siversky -- Berenberg Capital Markets LLC -- Analyst

All right. Thanks for the color there. That's all for me.

John T. Thomas -- President & Chief Executive Officer, Trustee

Thanks.

Operator

And our next question is from Jonathan Hughes from Raymond James. Please proceed with your question.

Jonathan Hughes -- Raymond James -- Analyst

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

John T. Thomas -- President & Chief Executive Officer, Trustee

Yes, it's a great question, Jonathan. Again, hope all is well with your family. The -- it's really two subsidiaries of investment-grade tenants. One is a very large multispecialty group that's only partly owned by the investment-grade tenant. So it's one of those unfortunate situations, where they're kind of caught in limbo between -- they're too big for the PPP program. It's kind of one of the flaws in the way the PPP was structured and they're not wholly owned by the health system. So it's kind of tricky for the health system to step in and pay rent on behalf of physicians that they are only partly owners of. That is the situation I've mentioned a minute ago, where we fully expect to get that resolved by the end of the quarter, just because of, as the health system steps in and works with that physician group to get them back busy working and being to get their rent caught out.

So we're fully confident in the resolution of that one. The other is a small ASC. Again, that's in a joint venture with the health system -- health system majority owner. And unfortunately, again, similar situation, have not stepped into pay that rent, but we expect to get it collected. Again, another kind of flaw in the PPP program were shake shack did qualify and even though with 8,000 employees, but their surgery center that's partly owned by health system can't benefit on their similar structure, because they again had to count the health system employees as well. We tried to get that fixed and round two the CARES Act, but it's didn't have quite enough momentum in the Senate.

Jonathan Hughes -- Raymond James -- Analyst

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

John T. Thomas -- President & Chief Executive Officer, Trustee

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

Jonathan Hughes -- Raymond James -- Analyst

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

John T. Thomas -- President & Chief Executive Officer, Trustee

Yeah. Jonathan, that's a good question. And potentially that's an issue. But again, these are what will be done in May and June are things that were already scheduled in March -- late-March and April. And so again, I think the patients in those cases had already come to the conclusion that they weren't going to defer the case for any longer. So we'll see. I think the bigger issue is a gap in back-filling after the surge in -- actually performing procedures to be clear in May and June is, how quickly will patients go back to the diagnostics and kind of fill up the pipeline for late summer and early fall, and again, back to that surge question from before, which is the PPP, the PPE to be precise, protective equipment available.

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

Jonathan Hughes -- Raymond James -- Analyst

Okay. I appreciate the color. Thanks for your time.

John T. Thomas -- President & Chief Executive Officer, Trustee

Yeah.

Operator

And our next question is from Tayo Okusanya from Mizuho. Please proceed with your question.

Omotayo Okusanya -- Mizuho Securities USA -- Analyst

Yes. Good morning. Again, I think some of the supplemental information on the updates are very helpful. With the updates, some of the data you put are just about, when it's kind of sliced up the rent, rent collections are pretty interesting. Specifically, it seems like, again, you've kind of collected more of your rents from investment-grade versus your non-investment grade tenants. You've collected more rents from your on-campus versus off-campus tenants. I'm just kind of curious, is that kind of guiding your decision going forward regarding investments and kind of how you kind of think about underwriting on a going-forward basis? And if so, how?

John T. Thomas -- President & Chief Executive Officer, Trustee

Tayo, we -- again, we think the outpatient off-campus buildings have performed very well. The affiliated off-campus buildings, which is really the sweet spot of our investment thesis. We've got that -- it actually was the best collecting rate we had, 95%. So other than the hospitals and LTACHs, which paid 100%. And so we're very proud of that. But the off-campus affiliated MOB, we think it would have been the star in the last six weeks, again, but for the lack of PPE. And we think those, again -- that's where patients are going to want to go and not go to the hospital and get mixed up with the COVID cases in that building. So again, lots of reasons for on-campus buildings, but we think the underlying thesis has been not only reaffirmed, but we think we'll grow over time as our long-term view that off-campus affiliated MOB is really the sweet spot of our long-term strategy.

Omotayo Okusanya -- Mizuho Securities USA -- Analyst

Okay. That's helpful. Then one more for me. Again, with hospitals kind of being the lifeblood of your business, could you just talk a little bit about, again, how you're feeling or what you're seeing in regards to all the federal and state-aid hospital systems are getting, whether it's part of the CARES Act or what have you?

And whether you have a sense whether that's actually going to be enough, if they need more aid? And what the implications are for kind of rent collectability, if not in April and May, maybe further down the road as hospital system just to kind of struggling with profitability, especially as the patient mix is likely to kind of change post-COVID just given we have 30 million Americans who no longer have employment?

John T. Thomas -- President & Chief Executive Officer, Trustee

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

In the near-term, obviously, there's a pinch on both the revenue and expenses and the profitability. The federal government has pumped a lot of money into it.

It's not pumped enough. Hospitals are still looking for more. There's going to be a CARES Act four or fourth round of legislation. I've got a pretty good summary of that on my desk, most of which seems to be pretty acceptable to the Senate. And so we expect more money there.

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

So well, that turned into a grant, that's probably a 50/50 guess at best or outcome at best. But I do think there's a lot of momentum to ease the payback periods and payback terms for that part of the Medicare money that's been advanced. So bottom line is expect more federal money to come in, expect more money to go to the states to help -- the states offset their Medicaid costs. And as I mentioned in my opening comments, the biggest issue really to your question is how quickly can we get employment back to some kind of normal rates and get those people back on commercial insurance.

Again, they have opportunity for COVID right now, but that's -- long term, it's really about the employer commercial insurance and that's the profitability of the healthcare systems. I will conclude that question. Happy to have a follow-up, but I'll conclude that with, we're in touch with our largest health systems, really all of our health systems, all of our tenants, very routinely as Mark and Amy Hall and myself and Jeff and others have been in communication with them. And again, all of that's been a very collegial. We've been there providing support to them and their buildings, and helping to manage the traffic flow with our brave employees and partners that have helped to manage that, and then on the front end, at the same time, our health systems [Indecipherable].

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

Omotayo Okusanya -- Mizuho Securities USA -- Analyst

That's good. Thank you.

Operator

And our next question is from Daniel Bernstein with Capital One. Please proceed with your question.

Daniel Bernstein -- Capital One Securities -- Analyst

Good morning, and I'll echo others comments that I hope you and your family and everybody's doing very well. Let's put a follow-up on the last comments you made, John. Do you see an opportunity for hospitals to increase their monetizations? Assuming this, everybody gets over this and hospitals come back to profitability, but they are losing money today and do you see MOB monetizations picking up and some opportunities from that end coming your way?

John T. Thomas -- President & Chief Executive Officer, Trustee

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

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

Daniel Bernstein -- Capital One Securities -- Analyst

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

John T. Thomas -- President & Chief Executive Officer, Trustee

Yeah. I wouldn't say anything unique. I mean one thing we've seen again, which is probably just temporary, but may turn into long term is, hospitals looking for really every square foot of space they can. In the near term, if they need to spread both their employees out and their -- and patients out during this period of time. But I think really more important to your question is, I think what we're seeing is kind of routine leasing. There's been obviously a slowdown because of kind of -- I'd say, you use the word speculative though, where you're trying to recruit new tenants to a building and you can't rotate them through or show space currently. But the health system where we're directly engaged, we've had some really nice extensions, renewals, that kind of normal renewal rates and adding some term. We'll see how the second quarter end, so we could have more space leased on the end of the second quarter than we've ever had. And we have the most space leased of any MOB portfolio, so [Indecipherable].

Daniel Bernstein -- Capital One Securities -- Analyst

No, I think that's fine. That's all I have. I'll hop off. Thank you.

John T. Thomas -- President & Chief Executive Officer, Trustee

Thanks, Dan.

Operator

Our next question is from Jordan Sadler from KeyBanc Capital Markets. Please proceed with your question.

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Thanks. Good morning, guys. And of course, hope you're doing well. So my question relates to a couple of points that we're dancing around here a little bit. And it seems to be two opposing forces in terms of where patient care is administered in the near term at least. And first, there is a notion that patients would rather not go to hospitals for fear of being -- fear of contagion, but maybe then the same for doctor's offices. And that's kind of balanced by the political support that you've been discussing, which is bipartisan for hospitals, right? So the liquidity, the capital seems to be there politically.

So my question for you is, I guess, first on the doctor's offices. What are you guys doing or what are your tenants doing at the facility level to make patients feel more comfortable coming to the office or coming to their facilities?

Mark D. Theine -- Executive Vice President, Asset Management

Sure. Good morning, Jordan. This is Mark. So from an operation standpoint in our facilities, as I mentioned in our prepared remarks, we established a task force to review all of our building operations, policies. And we're doing a lot of things on social distancing, signage, collaborating closely with our hospital partners, about hours of operations, extending building hours, opening on Saturdays to spread out patient visits, doing obviously extensive cleaning and increasing the scheduling of our day porters within the buildings and adjusting engineering hours, things like that, that we think will help with the operations of the building and ultimately allow our patients and our physicians to get back to operations quickly.

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Is there any...

John T. Thomas -- President & Chief Executive Officer, Trustee

Hey, Jordan. This is...

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Sorry. Go ahead, John.

John T. Thomas -- President & Chief Executive Officer, Trustee

Okay. I was going to add to that, [Indecipherable] 93% of our spaces have remained open more or less continuously. Now, obviously hours have been adjusted and things like that and the surgery centers have been temporarily closed or dramatically reduced hours. But operationally, they've stayed open. And again, it's been a learning process and best practices all along. Some health systems had done it a little bit differently than others, but again it's all in a collaborative way.

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

We heard one of the surgery centers that's just opened up this week, the cars -- the person coming in for the surgery literally gets screened in their car, and a temperature check and kind of the -- those kinds of things. Again, that's the healthcare provider for doing that. So it's a very collaborative approach. It's really the providers who set the standard. And in our cancer facilities, segregating, providing kind of different areas for entry for their cancer patients coming in, limiting the amount of visitors, and it's a 266 buildings, we've learned a lot. And again, almost all of them have stayed open the whole time and accommodating that question. But again, it's going to take time as we all know. And -- but hopefully, we can be as inviting as possible and material provided.

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

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

John T. Thomas -- President & Chief Executive Officer, Trustee

Yes, so -- yeah, I'll give you an example. In the Texas market, one facility did 35 surgical cases in the first 3.5 weeks of April. They're doing 75 a week right now. So that's -- and then -- again, just catching up and kind of their normal case load is 50 to 60 surgical cases a week in a five-day period. So in Texas, one of the things that the kind of the restrictions that are there, that's, I think, pretty probably closed, even in 32 States. So each state has got a little bit different kind of parameters around. How to open up in Texas, you've got to kind of set aside 25% of the facility for the potential of a COVID patient.

And again, that's where the surgical hospitals and larger surgery centers that have, again, just a little bit bigger physical capacity can actually accommodate more patients more quickly. So that's a good anecdotal piece. One surgery center where we have a lot of facilities with, I think they were -- had very limited percentage in April and they've commented publicly that they're back to 50% and look to catch up pretty quickly to ramp it up to a 100%-plus of their normal volume as they catch up on delayed procedures.

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Thank you for the time.

John T. Thomas -- President & Chief Executive Officer, Trustee

Thank you, Jordan.

Operator

And our next question is from Michael Gorman from BTIG. Please proceed with your question.

Michael Gorman -- BTIG -- Analyst

Yeah, thanks. Good morning, everybody.

John T. Thomas -- President & Chief Executive Officer, Trustee

Hi.

Michael Gorman -- BTIG -- Analyst

JT, I was just wondering if you could kind of talk a little bit bigger picture as you guys look at the healthcare landscape. And I was interested in one of your comments at the outset about pushing additional care outpatient obviously and reserving the hospitals. This is obviously a trend that's been going on in U.S. healthcare for a while, but now we -- is there any pushback or any sense that we've overdone the draw down in inpatient capacity in the country and any discussions on how to make that profitable when there isn't a pandemic, but also have that capability with the healthcare operators when it becomes necessary? I'm just trying to think about how that could potentially shift provisions of care if we have to keep the inpatient facilities around when there isn't something for them to do, but we want them there when there is a crisis.

John T. Thomas -- President & Chief Executive Officer, Trustee

Yeah. Mike, it's a great question. And I've always loved ophthalmologist, and then based on your influence, but if they're ophthalmologist, they had to close first in this situation. There's obviously lots of discussion about both the physical plant healthcare system and the payment system. Our payment system has been geared for years around procedures and not medicine and has incented, this is -- it's proven out over the last six weeks really incented the -- moved cases to the lowest cost setting.

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

And so we've seen kind of that balance of kind of a redesign of both the payment system and the infrastructure, and as Mark mentioned our LTACHs, which have struggled for years, because they've been kind of the stepchild of the inpatient facilities. They are by definition ventilator hospitals and are thriving right now in this environment. So I think it's going to be a whole redesign of the system preserving inpatient capacity, maybe enhancing the physical design of inpatient capacity and shifting care to more appropriate setting and the payment system is going to have to adapt to that as well. And we've seen a lot of changes in -- a lot of emergency changes to the payment system, like in the LTACHs situation to address the situation, and I think that'll begin the process of redesigning the system. And I wouldn't say this as Medicare for All, I'm just saying a total redesign of the system over time.

Michael Gorman -- BTIG -- Analyst

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

John T. Thomas -- President & Chief Executive Officer, Trustee

Yeah. Now I've already started to hear that. And there's -- the architects who are -- have high volume healthcare work are already putting out, not only white papers, but kind of early thoughts around the redesign of, again both inpatient and outpatient facilities from lessons learned from this. When we had the terrorist events in after September in 2001, the big issue is we didn't have the ERs didn't -- weren't set up for patients coming in with a biological attack.

And so the ER has got adapted to and became a requirement to have a kind of space set aside for that. That's a microcosm of I think what we'll see here. And the other thing is medical office buildings and outpatient care buildings have been built in the last 10 years. We've had very little just general office space provided for physicians. It's kind of been -- it's all have been about procedure rooms and exam rooms and the physician sees you there and brings in a computer on wheels or an iPad to do the -- to record all that.

There's no room -- there's no place for physicians to do telehealth in these buildings. And so we think there'll be a redesign around, the expansion and because telehealth here to stay, it's just a matter of where it will be conducted. I don't think it'll be telehealth from home, I don't think it'd be telehealth from the medical office building, but we think there'll be a redesign of our buildings and changes to our buildings and future buildings in the outpatient care setting to facilitate HIPAA compliant, telehealth encounters. And we think that's a good thing. And efficiency of the system that this crisis has shown can work very well.

Michael Gorman -- BTIG -- Analyst

Thanks. I appreciate your thoughts. I hope you all stay well.

John T. Thomas -- President & Chief Executive Officer, Trustee

Thanks, Mike.

Operator

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

John T. Thomas -- President & Chief Executive Officer, Trustee

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

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Bradley D. Page -- Senior Vice President, General Counsel

John T. Thomas -- President & Chief Executive Officer, Trustee

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Mark D. Theine -- Executive Vice President, Asset Management

D. Deeni Taylor -- Executive Vice President, Chief Investment Officer

Michael Carroll -- RBC Capital Markets -- Analyst

Michael Griffin -- Citi -- Analyst

Connor Siversky -- Berenberg Capital Markets LLC -- Analyst

Jonathan Hughes -- Raymond James -- Analyst

Omotayo Okusanya -- Mizuho Securities USA -- Analyst

Daniel Bernstein -- Capital One Securities -- Analyst

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Michael Gorman -- BTIG -- Analyst

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