Q2 2020 Earnings Call
[music].
Good day, and walk you know more groups second quarter fiscal $2020.
All participants will be able shlomi.
Sure sure need assistance, especially when we're talking specialist.
Okay.
I would now let's turn the conference over to Mike.
Director of Investor Relations. Please go ahead Sir.
Good afternoon. Thank you for joining RMR second quarter fiscal 2020 conference call.
With me on today's call, our President and CEO, Adam Portnoy, and Chief Financial Officer, Matt Jordan.
And just a moment they will provide details about our business in performance followed by a question answer session.
I would like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company.
Today's conference call contain forward looking statements within the meaning of the private Securities Litigation Reform Act 1995, and other security bought.
These forward looking statements are based on or Mars beliefs, and expectations as of today May 11, 2020, and actual results may differ materially from those that we forget.
The company undertakes no obligation to revise or publicly released the results of any revision to the forward looking statements made in todays conference call.
Additional information concerning factors that could cause those differences is contained in our filings with the securities and Exchange Commission, where FCC, which can be found on our website at www Dot RMR group dotcom.
Investors are cautioned not to place undue reliance upon any forward looking statements.
In addition, we may discuss non-GAAP numbers during this call, including adjusted net income adjusted earnings per share adjusted EBITDA and adjusted EBITDA margin.
A reconciliation of net income determined in accordance with U.S. generally accepted accounting principles to adjusted net income adjusted earnings per share adjusted EBITDA and the calculations of adjusted EBITDA margin can be found in the news release, we issued this morning.
Due to the current unique circumstances. The management team is conducting today's call from several locations and that's not listeners on the call bear with us should any technical difficulties arise.
And now I would like to turn the call over to Adam.
Thanks, Michael and thank you for joining us this afternoon.
The fiscal second quarter 2020 truly marked an unprecedented.
Business the economy in the World at March.
Given the gravity of the Cobra 19 pandemic over the last several weeks, we've been monitoring depending on mix impact our client companies as well as all of our stakeholders, including most importantly, our employees.
Condition, we haven't got taken significant time, ensuring the safety health and wellness of our employees and their families.
He's workforce efforts, including ensuring we preserve business continuity with the organization rapidly adjusting to working remotely.
Well, Matt will provide more detailed insights on the steps organization has taken a response to this endemic.
Moving the numerous protocols being utilized to protect the health and safety of our property management staff.
I'm proud to report that 100% of our managed office and industrial assets or operational and available to our tenants, but in most cases are being lightly utilized.
I would also be remiss I do not use this opportunity to acknowledge the efforts of our March property management Genie, keeping our buildings for training and supporting our tenants throughout the spending.
It's always management has been game that its central service from day, one of the pandemic and our people have executed flawlessly.
I'd also taking great pride didn't seem to move our March client companies on the front lines of our nation's responses and.
Travelcenters of America Skeptic truck stops open for business to support the critical work professional truck drivers as they transport vital goods around the country.
In addition, five star senior living it's been dedicated to protecting the health and wellbeing of our nation seniors maybe the most at risk from the effects of Cobot 19.
In terms of the state of the commercial real estate market well leasing activity remains strong for the quarter. We saw significant decline in activity beginning in late March though we continue to close many of the deals negotiated before the crisis unfolded.
Non essential active construction activity has also slowed or stopped completely in several markets, where we operate which impacts redevelopment in building intending to prevent work that was in process what planned at several of our made its assets.
In terms of transaction activity as of late March property sales have slowed considerably and we have seen several offerings withdrawn.
As it relates to our managed equity reach for many of the disposition transactions. We got underway, we have seen a reduction in a number of buyers and we have pulled some transactions due to buyers seeking price reductions because we had concerns around the viability of buyer financing.
For me actually equity reach that we're looking at possible acquisition opportunities. We continue to be active in the market, especially with regards to office and industrial properties, but there are limited opportunities to currently evaluate and we're proceeding cautiously.
Well the transaction markets have slowed considerably it is worth noting that in aggregate our client companies have closed in the sale eight properties the proceeds of $111 million since the beginning of March.
Considering the challenges posed by this crisis, our business remains well positioned given the underlying security over 20 year evergreen contracts with the managed equity reach and we continue to generate healthy operating cash flows.
We ended the quarter with approximately $377 million in cash and we continue to have no debt.
As a result organization is well prepared for what may be a very long recovery.
Moving to our results for the quarter.
The second quarter fiscal year 2020, we ended up which ended on March 31st.
We reported adjusted net income per share of 46 cents adjusted EBITDA of $23.9 million, an adjusted EBITDA margin of 51.3%.
From an operations perspective, this quarter our organization, we made very busy ranging 1.1 million square feet of leases on behalf of our client companies with a weighted average lease term of almost six years and a weighted average rollup in rent a 5.8%.
We also directly supervised approximately $32 million in capital improvements or client companies.
As I previously highlighted I expect leasing volumes in capital spending to slow next quarter as result of shelter in place orders and the expected slow reopening of the economy.
I'm pleased to report that across our platform, we collected almost 90% the repo rats.
The majority of the outstanding April rents have been there dress to get relief discussions with them tenets of our managed equity reach.
Today, we have granted rent relief to almost 300 tenants were less than 4% of contractual rents for the months are able to July 2020.
That's an organizational I believe it's important to partner with tenants experiencing financial hardships dust preserving our tenant relationships retention and portfolio stability.
Moving to some noteworthy highlights across our client companies.
Hi, LPG reported strong results this quarter with normalized FFO was $30.2 million, a 12% increase on a year over year basis, and adjusted EBITDA of $45.9 million, 35% increase year over year.
More importantly, I hope we teach portfolio has several important qualities that will help mitigate the disruptions. We are currently experiencing which include overall occupancy of 99% and approximately 75% of annualized rent coming from investment grade rated tenants for highly secure Hawaii land leases.
Further nearly 80% of bio PTC annual rate comes from logistics properties useful warehouse and distribution purposes, which is remains in strong demand with the increased reliance on E commerce.
Additionally, during the quarter I LPTA closed our previously announced joint venture transaction, raising net proceeds of approximately $108 million.
LPG was able to leverage our Morse historical relationship with a sovereign wealth industry.
And we fully expect I LPTA should be able to grow this relationship to support future industrial and logistics acquisitions.
Oh P I announced earnings that reinforced the strength of its portfolio and balance sheet with normalized stuff. That's all the dollar 40 per share exceeding consensus estimates and same property cash basis, and Hawaii, increasing 1.2% year over year.
The strength of opioids balance sheet is further highlighted by net debt to EBITDA ratio of only 5.9 times and almost $400 million of availability under its unsecured revolving credit facility.
I would be I also recently had its investment grade ratings reaffirmed with stable.
[noise] OPI is well positioned for the future given its well diversified portfolio of properties with one of the highest percentages are rents paid by investment grade rated tenants in the office sector.
62.2% of annualized rent.
And approximately 70% of annualized rent is paid by tenants operating industries deemed the central.
Well I O P.T. and OPI have seen limited initial impacts from the current economic conditions.
Do you see an FCC are each facing more significant headwinds.
As a result, each of these reach has announced plans to reduce their dividends to one centsper share and defer previously planned nonessential capital investments to conserve cash and liquidity.
As it relates the G.H.C. earlier this year completed any completed its kind of restructuring transaction with five star senior living.
And then the early part of calendar 2020 continued to make progress on its disposition program.
Despite the advent of the covert 19 pandemic DHC maintain strengthen its medical office in life science portfolio generated 2.6%, increasing cash basis, and Hawaii on a year over year basis.
With regards to it senior living communities.
DHL has had significant challenges in attracting new tenants do its communities, which is terrific, which in turn has led to occupancy declines.
The adverse financial impact of these occupancy the challenges is also coupled with growing operating expenses.
Additionally, G.H. she has seen the volume of patients at their medical office tenants reduced in some non essential businesses at close their doors entirely.
Even with these headwinds I'm confident that could reductions in DHS dividend in capital spending it has to be appropriate liquidity to weather current disruptions to which business.
That's me she is facing the most significant pandemic related challenges among all of our managed businesses as the impacts of Shelton placed orders across the country have disproportionately negatively impacted the hospitality and service retail sectors.
Species previously announced disposition program was building momentum as buyers had been selected for a number at Wyndham and Marriott branded hotels and SBC was in the process of launching the marketing our that sonesta Es suites hotels before covert 19 began to merely effect materially affect hotel operations.
As a result at the pen downtick pandemic lending for the hotel transactions as effectively ceased we now expect these transactions will be delayed until later in 2020 or 2021, if at all which may delay sbcs planned leverage reductions initiatives.
Well I highlighted rank collections for the month of April well, almost 90% across the RMR platform April rank collections for Sbcs service retail portfolio was only 45%.
As most of economy remains closed the service retail sector has been hit, especially hard and we have granted rent relief to numerous tenants to assess them through this difficult time.
Similar to DHC with its reduction of its dividend in capital spending I'm confident SBC has the appropriate liquidity to withstand the downturn and its business.
Falling why they represent less than 20% of our revenues I did want to briefly highlight some items to note relating to our mortgage origination platform in certain of our most of certain of our managed operators.
I continue to believe our mortgage origination platform had significant untapped potential well trained about has fully invested capital remains focused on asset managing its investments the quality of our underwriting in asset management is reflected in the spot do we have not taken any loan impairments a loan loss reserves today.
With that said there I'm on its board believed it was prudent to conserve cash by reducing its dividend to one centsper share to preserve cash and maximizing liquidity.
We also recently received shareholder approval from the RMR real estate income funds to convert from the mutual fund investing in real estate securities to a commercial mortgage riet.
This change in strategy will help further expand our mortgage origination capabilities.
In our Mark.
Lastly, a travelcenters of America, the new T., a management team has brought a renewed energy to the organization.
While the covert 19 pandemic will hamper just renewed momentum T.A. recently announced the reorganization of its leadership team and staff reductions both important steps in its repositioning efforts.
Additionally, despite the ongoing pandemic she saw fuel sales volume during the first quarter increased 3.6% in total fuel gross margin increased 9.6% both on a year over year basis.
Turning to our efforts to expand and grow the are more platform. We continue to spend time focused on a private capital asset management business, including transactions involving our managed equity reached such as the I LPG joint venture I mentioned before.
We believe these types of ventures demonstrate that our relationships with large sources of private capital such a sovereign wealth funds have only grown stronger and may lead to separately managed account opportunities far more in the future.
In addition, we continue exploring opportunities to grow AIU and accelerate our private capital fundraising capabilities to possible M&A activities.
The current environment has been disruptive to our efforts as any diligence efforts in negotiations cannot happen in life settings.
All the overall process that slowed we remain confident that in accretive transaction can be executed.
With that said as in prior earnings calls, we cannot speak to any specific transactions at this time.
Before I turn it over to Matt I want to reiterate that despite the ongoing crisis I remain optimistic about our margin ability to both whether the current market disruptions and pursue new opportunities for growth that may present themselves in the future.
I'll now turn the call over to match or our Chief Financial Officer.
Thanks, Adam Good afternoon, everyone is Adam suggested in his prepared remarks I wanted to first talk about some of the detailed action we've taken as an organization to ensure that health and safety of our employees tenant service providers and visitors.
Over the last two months our organization leveraging the advice of outside experts in industrial hygiene have design standard operating procedures to assist to address such items as air filtration janitorial products and procedures, social separation and the use of personal protective equipment.
In addition to implementing these procedures. We have also focused on mitigating unnecessary costs and many of our manage assets given temporary reductions usage, which includes the implementation of energy reduction protocols and the reduction of non essential building services.
In addition to implementing enhanced operating protocols are property management teams have established business continuity plans to ensure operational stability.
Non critical travel has been suspended regional leadership have not been allowed to work in the same location same time.
And personal protective equipment as required all property management employees.
At this time, our operations team turned their attention to preparing for tenants to reoccupy or me as assets.
As various states across the country east children place orders.
We will continue to leverage outside experts and best practices from our national platform and look forward to providing an update on these efforts in future calls.
Turning to this quarter's financial results.
The market disruptions caused by the pandemic, let the material declines and the share prices of our client companies and fee paying assets under management, which in turn has led to reductions in our base business management fee.
As Adam discussed our managed equity Reits have agreed to rent deferrals of certain other tenants.
In some construction activities will either be delayed or cancelled altogether is our managed equity we look to conserve capital.
These rent deferrals will have a temporary adverse impact on our property management fees as the B is calculated on a cash basis.
And then he reduced capital spending will lead to lower construction management fees in future quarters.
Considering these uncertainties, we went through our previously issued guidance and do not expect issue new guidance until the current situation stabilizes.
Well look to provide insights on what future revenue and cost could be your current economic and operating conditions continue.
For the fiscal second quarter, we reported adjusted net income of $7.6 million or 46 cents per share and adjusted EBITDA of $23.9 million.
Adjusted earnings this quarter adds back an aggregate of seven cents per share unrealized losses on our investment in CA and separation and transaction costs.
Management Advisory services revenues were $44.1 million this quarter, which represents a 740000 dollar increase on a year over year basis, primarily from acquisition related fee growth that I'll PT in FCC, partially offset by lower business management. These from D.A.C. and OPI as a result.
Declines in their market capitalization.
On a sequential quarter basis revenues decreased $4 million, primarily due to share price declines that are managed equity right.
For the quarter ended March 31st 2020, all of our managed equity recent currently paying based business management fees on a market capitalization base.
The impact of being on this lower measure for the determination of our base business management. These.
Results in a lost revenue opportunity of approximately $55 million using March average share prices.
As a reminder, our base business management visa calculated monthly that's a declines in our managed equity reached share prices, resulting from the pandemic was limited to the month of March.
Assuming I read share prices remain at April average levels, coupled with the adverse impacts of the rent deferrals and declines in construction that we previously highlighted we're projecting total management advisory service revenues to be between 36 and $39 million per quarter for the remainder of the fiscal year.
Turning to expense for the quarter cash compensation of $30.1 million was flat on a sequential quarter basis.
And our cash compensation reimbursements from our client companies remind remained at 43%.
While we have looked at our staffing levels, we've decided against making rational worked term reduction that would otherwise disrupt the scalable infrastructure we've built.
We expect this level of cash compensation to reflect our run rate for the remainder of the fiscal year.
DNA expenses this quarter was $7.3 million, which includes almost $500000 a one cents per share from annual share grants to our board of directors in March.
For the remainder of the fiscal year, we'll be looking to minimize unnecessary DNA costs.
And expect the ongoing pandemic to naturally limit discretionary expenditures such as trap.
We ended the quarter with approximately $377 million in cash and we continue to have no debt.
We believe our balance sheet continues to leave us with ample operating liquidity as well as positioning us to take advantage of strategic opportunity and that the new business initiatives.
Before we go to questions I want to acknowledge the hard work of number of people across the organization will help and having RMR recognized for the second at year end ROE would the energy star partner of the year Award by the U.S. Department of energy.
That concludes our formal remarks, operator would you. Please open the line the question.
Thank you, we'll now begin the question answer session.
Ask your question the refreshes Harbin Walnut touched on.
Sure isn't the speakerphone, please pick up your handset.
So the charter question. Please first of all of them too.
Ladies first question comes from no Katz with Citigroup. Please go ahead.
Thank you very much for a the update 'em appreciate all the commentary if everyone's doing okay. I'm just sort of thinking through trying on I appreciate sort of how you sort of feel the short term view of the a different reach if you will just trying to understand it when I look at them I sort of see some very high leverage across them, how should we think about.
Sort of fee paying AUM from here I. Appreciate your guidance for next couple of course on imagine revenues, but sort of wondering you have some things where you were looking to potentially disposal restructure but no. So I just think ahead here.
How should we thinking about just the outlook for keeping anyway. Thank you.
Sure Hi, Bill so with regards to fee paying a when you know given where we are with the share prices or reach first of all I do think.
What our contracts are demonstrating the complete alignment of interest between RMR and the managed treats.
Our Mars, taking you said, you're thinking see reduction, which is resulting in significant declines in gionee at the Manish returns resulted their share declines were specifically with regards to your question around leverage.
Yes. It S. P C and D. H C level level leverage levels are higher or more elevated than we would typically run those companies.
And you're right both those companies were sort of mid way through.
Disposition program should reduce leverage that being said given where we are today with those companies. Both of them are in a position that I think given the fact that we've reduced the dividend to one sent the share per quarter and substantially curtailed capital expenditures that they have more than.
Enough ample liquidity to make it through at least 2021, it's not beyond.
And so we feel pretty good about where those two companies are specifically and as it relates to RMR and fee paying a when nobody knows exactly where share prices move, but given the that how much those two company share prices have declined in the last several weeks, it's hard for me to imagine they.
Continued to decline further I think they wish entity knee jerk reaction to the dividend reductions.
And the fact that both those companies were sort of mid way through your disposition effort I think a lot of that's been reflected in stock and I think you know I think from this 0.4, there both in very very liquid positions and able to withstand the downturn certainly have enough on the financial flexibility through 21.
Okay. That's helpful and just a quick follow up and maybe I'm reading too much into it in your both them in the I'm personally is where you pulled the guides and again today you sort of mentioned that there's some potential risk of the long term contracts. Some sort of wondering how much of that is just boilerplate risk versus sort of any kind of.
As sort of shifting relationships with some of the reach that that might otherwise compromise somebody's longer term contracts.
Yes, Bill I think that's just boilerplate language that.
I believe it's often I think always in our press releases.
In announcements.
There's no shift in relationship between our more in the managed Reits at all.
If anything I think.
Today, those reach a benefiting handsomely from the expertise in the breadth of the depth of the arm organization.
Again, they are also benefiting from the fact of the great alignment of interest between the reach and our Mark those reach it had significant reductions in gene editing far more than they and many of their peers have experienced.
In the in the marketplace and so I don't think there's.
Any deterioration the relationship in fact, I would characterize it anyway, I'd say, probably stronger today than it's been an ever in the past.
Okay, great. Thank you very much.
Our next question comes from Oh, and well with Oppenheimer. Please go ahead.
Good off and then I.
Adam It Matt. Thank you for taking my questions. So given the coal fit a situation could you. Please update us on your thoughts about the timing of your strategic strategic acquisition and then in the meantime, do you need to preserve some capital for you'll manage which like pool for the lending purpose and Dan It's Dan any JV.
All the initiatives that are in my quick or potentially per show in the meantime.
Great.
Thanks, So with regards to our strategic M&A activities Big picture the strategy of or Mark has not changed as a result.
Going before the pandemic struck.
Our strategy was to try to diversify and grow our business.
And that continues to be our strategy.
With regards to specific M&A opportunities. We had we were we were moving down the road with a couple of opportunities.
Right when the pandemic sort of struck those opportunities I would say had been paused no.
Largely because both sides need to you know need to focus on their business at hand, where the short term.
I'm reasonably optimistic that those opportunities will continue to go forward.
The balance of 2020, so I think theres still a decent chance they will get something accomplished in 2020 with rigorously with regards to financial flexibility you know we've been for the last couple of years.
Putting financial flexibility is sort of are one of our priorities and I think its benefited us because we're going into the pandemic with a lot of cash and no debt at our Mark I think now even more so than before financial flexibility is very important especially into what could be a pretty deep recession and so.
So I think you know we had.
We were focused on maintaining financial flexibility in for I think we even more focused on it now that being said.
No often on the back half of it an event like what we're going through now and as you go through each actually manage emerge from the recession, there often or many opportunities for companies that are flush with liquidity and the companies like ourselves could take advantage of it. So I think there could be an opportunities for even less to do even more.
And I thought was thinking about you could do as we went into this downturn and so I'm fairly optimistic that you know I'm not sure exactly when or how but I'm pretty optimistic that there'll be opportunities presented to us. It may not have otherwise been there that we hope we can take advantage of using our financial fleet flexibility.
Okay.
In the coming months, if not years and with regards to JV opportunities you know, we sort of alluded to it with what we've done with one of our.
Managed reach our industrial read I LPG.
There we closed on a joint venture or that we closed our joint venture with a sovereign wealth investor that RMR had a historical relationship with I think our relationships with those that type of capital is only getting stronger and I think in this current environment for certain asset types, many of which that we currently invested.
And I think we will be able to take advantage that even more GB opportunities.
In the coming in the coming months, you know RMR itself pretty much focus is primarily not exclusively but primarily on what people would call core real estate or what people might define as a established and mature real estate that type of commercial real estate investing.
Tends to be more in favor in a recession.
Then when you're not in recession, and so that could play to our hand also very well and the current environment.
Okay. That's very helpful. So I know, it's a it's a tough and folman for your hotel in senior living businesses.
But how do you think about the potential changing consumer behavior, what are some of things you're doing all could potentially due to country in your customers to come back in the future. Thank you.
Sure with regards to hope you're right. The two sectors that are facing b.
Toughest are among the toughest effects of the current downturn or the pandemic.
Our hotels are hospitality and Arseven senior living space I think it's just two different stories with each with the hotels you know we largely partner most almost all of our hotels are operated by most of all hotels, if not all or change your part Oh operated by very large brand owners for example, Marriott.
Intercontinental Intercontinental Hotel group, Hi, Radisson are among the majority of the hotels, we operate and again, we deal with the hotel operator and brand donor were not dealing with franchisees and so I think we largely you know drought behind Dan I can tell you know a company.
Like Marriott Intercontinental extremely focused on what the new normal is gonna be as you as you would emerge from this endemic and they also a global hospitality companies they've had the benefit of seeing some other hotels opened up let's say in Asia or China, specifically a day as they have emerged from the.
Pandemic, a little bit ahead of the United States. So they can draw on those lessons and try to apply them, perhaps you're in the United States.
You know nobody knows the shore for how the hotel space will be.
How the hotel space is going to operate but everyone knows it's going to probably be different going forward.
With regard to senior living space, it's a different story there.
No I think that space is going to be dealing.
Probably with the affects of covert 19, probably much longer than maybe any other sector just because the population it services.
No not long after states may start to open up you're still going to see I think in nursing homes in assisted living and independent living you know very much they much in locked down or did I still have lot protocols they've been in place probably for a lot longer than the rest of the economy as a whole and I think it's gonna <unk>.
While for that space, just sort of come back I think that space is much more tied to less around the economy in more around the nature of the virus itself unless the virus itself subsides I think that we'll have that will have a direct impact on that industry more. So then.
Lets say, what's helping generally in the economy.
Okay. That's it for me thank you very much.
Our next question.
Hi, Mark.
Please go ahead.
Good afternoon, Adam and Matt.
On the deferrals that you guys drop with the managed street and their tenants.
How did you come up with your decision to kind of go one to three months and paybacks beginning in September for 12 months and when you look forward and you think about all the tenants that the for also been granted to you know where lies you're concerned with actually getting repayments into what level do you think that there could be.
Non repayments within the deferrals that have been struck today.
Sure. So every case was handled individually, we have a pretty large and robust asset management group within RMR that handles all those requests as they come in and we've also reached out to many tenants as well along the way basically you know we took the view.
We were going to.
Most of the tenants that we have worked with we started with one month deferrals.
We have gone as far as three maybe even for months and limited cases, depending on the nature of the business.
And we basically you know.
Decided early on that we didn't know how long this was going to require how how long people need deferrals, but we thought it probably makes sense to push people off to the fourth quarter until they had to start repaying us that just seems like a reasonable timeline to pick and most people have reacted fairly positive.
That timeline, meaning you know back in April we said if you didn't pay will give you a deferral in April right, but you don't have to start paying up till lets say October one you know paid that people went in 12 equal installments starting in October for the next year.
As we look out today, you know across the board the tenants that obviously, we worry the most about are somewhat talked about in my prepared remarks, the service retail <unk> retail.
Hey tenants within the SVC portfolio.
We only collect it 45% rents in April.
It's trending as we are 10 11 days into May very similar to that trend. So far we are basically the same point we were in April as we stand here in May and so I suspect that stay area that we know I'm, probably the most concerned about will be worried that there would be perhaps cheap.
Permanent impairment of some rents there and the other portfolios that we manage.
It's largely I'm not very mature material number.
Oh this pandemic, obviously in a downturn is disproportionately affected smaller tenants.
And we don't have a lot of small tenants in our office portfolio industrial portfolio, our medical office buildings life science buildings. So they just don't exist they are strong and and where we do have them, that's where we're tending to get the request a general sense, but it's not a.
Very meaningful piece of the revenues, we generate in those other portfolios. So.
Finally ahead, if I had to say you know outright the area, that's probably where most worried about is in the retail center at retail.
Right, but do you get the sense, though that the market as it relates SBC may have overreacted, given the fact that the net lease component of that portfolio, excluding T.K., which is fully paying is only something like 14% of annual minimum rents.
Short answer then yes, I believe the market has over negatively reacted.
At SVC.
Based on the fact that you're right teekays fully paid on the on our hospitality side, we have guarantees and security deposits, Craig sport and large portfolios with brand owners. So yes, I do believe the market has overshot to the downside.
Both SVC and DHC, yes.
Okay, and kind of shifting gears, a little bit where are you seeing in this you know kind of morass of real estate at the moment opportunities starting to pop up where you add them in the C suite at RMR, our spending your most time is it and you know kinda did better performers like why.
As an industrial where you might want to grab more because it's doing well or is it in the more dire markets like you know hotel in that lease where there could be you know really meaningful opportunities where are you guys spending your time to maximize the longer term results at the four ministries.
Yeah, I would say today with the opportunities that are available for us to spend time on on the office and industrial side transaction volume is a fraction of what it was or opportunities or a fraction of what they were before the pandemic, but the opportunities that are out there tend to be around industrial well leased.
Softness we don't do much in multifamily, but there are some multifamily opportunities in the market as well with regards to retail in hotels, there could be opportunities there, but there's nothing to act on at the moment and in chip will typically when you have a pull back like this it takes.
So while.
And for the sellers to get to the point, where they're willing to sell at distressed pricing if they have to and we're not at that point, yet I don't know when it will be but we're not there yet and so we're not seeing many opportunities like that that doesn't mean, they won't present themselves in the future and we won't try to take can take advantage of them.
But today, what we're seeing is really limited basically industrial and why at least office.
Hi, Thanks out and that's all for me.
I don't know its wasn't very comfortable kind of what do you work RBC capital markets. Please go ahead.
Hi, Thanks for taking my question just a just a follow up on on the last one in terms of the SBC and what you're seeing in terms of that 45% rent collections in the month of April just wondering if you see the potential for any kind of meaningful increase and de percentage rent.
Pearls in the near term or do you think this is sort of like a good level.
That's being done currently hit right now thanks.
Sure. So the best answer I can give you is that we're currently trending 10 11 days into May exactly where we were 10 11 days into April on that net lease retail portfolio.
Well you know.
We generally thought it may will probably be to low watermark for that portfolio.
And so it could be worse than April that's just given the fact that most states are just starting to open up.
It's our general view that we thought that probably by Jean.
Most age will have the opened up in some form or fashion and some of these retail tenants are most of these retail tenants will likely be able to be back up and operating in the be more economic activity. Starting in June. So we are bracing ourselves that may could be worse than April, but so far it's tracking right.
In line.
Gotcha very helpful and they just one one follow up if I may just given the current economic economic conditions and you mentioned this.
In the prepared remarks, but just wondering.
If you see any change in terms of the growth opportunities specifically within the commercial mortgage rates.
As was the Vitramon versus what you saw that maybe six months earlier. Thanks.
Yeah. That's a great question there are real lot of opportunities I think rosner mortgage origination platform.
We're one of the fuel platforms in the United States. Today, then it can has the ability to deploy capital and mortgage investments whole loans, there's a very small number of turns they're still deploying capital.
Most alternative lenders in the mortgage Riet space has stopped deploying capital there they're in a situation where they're dealing with their repo lenders in terms of having to you know provide capital excess capital.
In response to capital calls from those bags and so they've basically shut down new origination. So I think we're pretty in in a pretty unique circumstance.
Whereas I mentioned in her prepared remarks, one of our managed companies the arm or real estate income from which is a mutual fund business shareholders approved converting up business into a mortgage commercial mortgage rate and so we have the opportunity now the redeploy about $150 million of equity.
Before leverage.
Into commercial mortgages and today.
Given that there's so few competitors in the marketplace.
I think we have the opportunity to basically get.
Outsized returns with taking lower risk, we don't have to maybe chase.
These sort of value add.
Additional bridge loans the same way, we were let's say before the pandemic, we might have the opportunity to lend against more stable properties and it's sort of been caught up in a lot good ability to refinance in the current environment just because there's very few folks they can put on permanent for me.
I think the CMBS market for example, banks are they're starting to open you know the level of activity in those markets is very small.
And so I do think there's a real opportunity for RMR and our platform to take advantage of the current environment, we hope to in the coming months.
Great very helpful. Thank you very much and hope everyone stay safe.
Our next question.
Hi, My carrier bank merger options.
Hey, guys. This is dean stepping on for my carrier just a quick question for me given a tougher environment for strategic acquisitions or partnerships in the near maybe medium term you know moving forward and a healthy cash balance just wondering what's the minimum cash balance needed for liquidity purposes that RMR and have any of your thoughts.
Change in regards to returning some excess capital to shareholders moving forward. Thanks.
Sure.
Well minimum I'm not sure what the minimum is I mean I'm sure we could operate the business with less than 100 million cash on the balance sheet comfortably.
I think our thinking around returning cash to shareholders. It's been outweighed by the desire to maintain financial flexibility. You know we were short trying to balance the too as we went into the pandemic.
And I would say the scale, it's ticked a little bit towards financial flexibility.
Maintaining financial flexibility and again, it's being well positioned to take advantage trying to make sure we're well positioned to take advantage of any opportunity that might present itself. You know companies that are happening actual flexibility have access to capital no leverage lots of cash on its balance sheet, we can move very key.
Quickly if opportunities present themselves and this is the type of environment, maybe once in a generation maybe once in 100 your environment, where we might be able to take advantage of opportunities that we would never maybe have seen before and so I'm trying we're trying to make sure that the companies in a position that it can do that that all being.
Said.
You will know we will know that we kept our dividend stable or consistent we did not touch our dividend.
For the current quarter in our intention is to hopefully keep that dividend stable and consistent for the rest of year.
In light, even though our cash flow as Matt has gone through the numbers is likely to diminish or go down in this third and fourth quarters, depending on where stock prices move in our managed equity rigs. So in some ways you could you could interpret that as the do a willingness to actually be telling more cash.
Well then maybe prior.
Then the prior mentality, because we are going to be paying out a greater proportion of our free cash flow and we have in the past that said, we will still be paying less than 100% of our free cash flow, we're not going to be paying more than 100%, but it is gonna be more and so you can look it is sure to two sides of occur.
And our hope is to do that to the third and fourth quarter and that is a higher percentage payout of our free cash flow not over 100%, but it is higher.
Makes sense that's it for me.
And our next question today comes from Ross Campbell.
Morgan Stanley.
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Hey, Thanks, taking my question, just going back to something about going back to the question on asset classes.
Yeah, a different way just in terms of just less than bar. During this pandemic. Obviously don't very early you guys have had the benefit of being in different sort of property type and I've seen sort of or and how they perform has there been any thought you know about with asset class maybe you were.
Wanna get more involved in a less involved in it because she maybe asset class that you're not involved and currently that you know maybe easy to add ons. It's just sort of curious thinking medium to longer term here.
Sure you know it's.
Which as I said before I think industrial as a place that we continue to add on.
Entering to that a joint venture there and I O P.T. within southern wealth Investor I think gives us some capacity to grow that and grow that significantly.
On the office side I think we can pick our spots carefully you know well leased office buildings makes a lot of sense you know an area that we for a long the only significant area that we don't.
Have a significant presence in that could present itself as an opportunity could be multifamily as part of this whole.
As part of what's going on that's an area that we were focused on trying to.
Get more of a foothold in a we might have opportunities even get a greater foothold now as things present themselves you know us like I think everybody in the marketplace or trying to figure out.
What is the new normal when we emerge from this pandemic.
So much people think about right about in terms of things like.
For the last 20 years, you know urban density has been something that into commercial real estate market has been sort of paramount right people wanting to be in sort of live work play environments. We close the density to each other.
You know every year I for one is going to lifetime thinking was that going to continue.
Second to all change our people going to want is suburban office suddenly going to be.
Much more in favor than it was before because you can.
Because it won't be an earth dense area. So we're we're hitting about things like that we have a large suburban office portfolio. So might benefit from this and might be an area, where we should maybe invest even more it going forward, but those are things, we're thinking about right now.
Great and then my second question was just piggybacking on sort of the private capital conversations just sort of parents to get a sense of what what's the pauls.
Right now.
Asked is right to some extent, maybe some given that have like giving you I know one of the pandemic, but you get a sense that there's also a that was out there looking to BBB more opportunistic and trying to do work now positioned themselves on the back of its just trying to get a sense of has a conversation even start it or.
It's still too soon.
Yeah, that's a really good question in the in the conversations we've had with let's say sovereign wealth investors.
In large pools of capital I would say.
The majority of everyone. We talk to a very much opened for business and very much.
Wanting to try to take advantage of the opportunities I would I would say that that's been the overwhelming theme that we've come across with in time for stations with large pools of private capital, they're very keen to try to put money to work very keen to try to take advantage of the current environment now they might have a different view they might.
I have your views on certain asset classes might have changed for example, there's not a lot of folks I think trying to put money to work in retail or hotels at the moment.
But I think in office and industrial and multifamily.
ER and select others, a segments a niche segments I think there is money and I think people are very very much open they want to put money to work. So I like you a little bit was thinking that maybe investors who are gonna have deer in the headlights.
Reaction to all this thing will not be a wanted they want to be really a wait and see what happens that's not been the case in our experience in talking with these folks they're very much open for business. They very much wants the opportunities. They very much recognize this began could be a.
Once a lifetime if not once in 100 your opportunity to take advantage of the situation.
Okay. That's all for me.
And ladies and gentlemen, once more if you'd like to ask your question. Please press star one at this time, we will pause momentarily to assemble our roster.
And ladies and gentlemen, this concludes our question and answer session I'd like turn the conference back over Mr. Board patent only for any closing remarks.
Thank you everyone for joining us today for earnings call operator that concludes our call.
Thank you Sir This concludes todays conference call. Thank you all for attending today's presentation. You may now disconnect your lines have a wonderful day.