Q4 2020 RMR Group Inc Earnings Call
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Good morning, and welcome to the RMR group fourth quarter and fiscal year 2020 earnings call all.
All participants will be on lots and on the most so do need of systems, We signaled conference specialist the pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
That's good question you May of course Star then one and their touched on price.
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Yeah.
Please note this event is being recorded.
I would now like to turn the conference over to Michael Kodesch.
Director of Investor Relations. Please go ahead.
Good morning, and thank you for joining us today with.
With me on today's call are president and CEO, Adam Portnoy, and Chief Financial Officer, Matt Jarden.
And just the moment they will provide details about our business and performance for the fourth quarter and full year of fiscal 2020, followed by a question and answer session.
We'd 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 contains forward looking statements within the meaning of the private Securities Litigation Reform Act of night, and 95 and other securities laws.
These forward looking statements are based on RMR as beliefs and expectations as of today November Twentyth 2020.
And actual results may differ materially from those that we project.
The company undertakes no obligation to revise or publicly release the results of any revision to the forward looking statements made in today's conference call and.
Additional information concerning factors that could cause those differences is contained in our filings with the securities and Exchange Commission, where at the C, which can be found on our website at www Dot RMR group Dotcom and.
Doctors are cautioned not to place undue reliance upon any forward looking statements and.
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 right.
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 calculation of adjusted EBITDA margin can be found in the news release, we issued this morning.
And now I would like to turn the call over the Adam.
Thanks, Michael and good morning, everyone.
For the fiscal fourth quarter. We are pleased to report sequential increases and adjusted EBITDA adjusted EBITDA margin and adjusted net income per share the.
These improvements were driven by increases and stock price is it some of our managed equity reached stabilized. The operations are managed the operators and successful cost mitigation efforts at RMR.
Moving into the fiscal year 2021, we remain focused on ensuring our client companies to have adequate liquidity to weather a prolonged economic downturn, while at the same time being prepared to take advantage of strategic opportunities that may present themselves.
As of you as of now.
We ended fiscal year 2020, I believe our efforts have resulted in each of our client companies being well positioned for the future overtime I'm hopeful of these efforts should help us and earn back and portion of the over $55 million and lost revenues. We are currently experiencing as the majority of our managed the equity rates continue paying back.
Base business management fees on an enterprise value basis versus the higher historical gross investment basis share.
Turning to some of the more significant highlights across our client companies. We're very proud of announced this week the formation of our inaugural private capital investment vehicle, which is led by the investment from a large top tier global sovereign wealth fund this.
This global sovereign wealth fund represents a new relationship from RMR.
This new investment vehicle has the initial investments of $680 million and 12 industrial properties, our existing client company I O. P. D sold the initial properties into the vehicle and maintains a 22% ownership stake in the venture.
Hi, LPG also expects that its leverage will be substantially reduced as a result of this transaction and we plan to grow this vehicle with additional on district industrial properties in the future.
We also hope this new investment vehicle marks the beginning of the new line of business for RMR, which includes managing large pools of private capital on behalf of institutional clients for investments and core real estate assets.
From an operations perspective, I, albeit the same property cash basis, and Hawaii during the quarter increased 1.9% on a year over year basis.
And it leasing demand. It I LPG is also displayed continued strength as it entered into almost 800000 square feet of leases during the quarter.
Finally, I LPG continues to collect over 98% of rents.
Moving to our Officethree OPI continues to benefit from its high credit quality tenant base, including a large number of government tenants and its limited exposure to gateway city markets, which have tended to be more negatively affected by the pandemic.
Consolidated occupancy remains above 91% and OPI can change the experienced robust rank collections and close to 99%.
As a result of its stable tenant base OPI same property cash basis, and NOI increased 1.7% over the prior year. We were further encouraged by the quarter strong leasing activity as the OPI executed almost 600000 square feet of leases for a 31% roll up on rent.
And a weighted average lease term of more than 10 years and.
On 2020, OPI has issued over $400 million and senior notes with proceeds used to repay all amounts outstanding on their $750 million unsecured revolving credit facility.
As a result, OPI balance sheet remains investment grade rated its leverage stands at the low end of its target range and its dividends remains well covered two.
Switching gears to our health care REIT.
While DHC continues to experience and demick related headwinds and its senior living communities. The company remains well capitalized with over $1 billion of liquidity and no near term debt maturities dish.
Additionally, it is important to remember that approximately 77% of DHS and NOI now comes from its off the segment, which continues to benefit from a healthy life science real estate market share.
During the quarter leasing activity in the eighties office segment more than doubled sequentially as DHC executed over 200000 square feet of leases with a 4.1% roll up and rents and the weighted average lease term of seven years.
On the senior living side of the business, 97% of DHS communities are now open for new admissions, while the majority of residents currently moving into the communities are generally needs based we believe there is currently significant pent up demand and the market from seniors deferring move and decisions.
DHS primary operator, five star is currently working with additional referral sources to attract new residents without undermining rate of profitability, New resident leads were up 35% and the quarter with conversion rates getting back to pre pandemic levels and move ins income.
And just 31% over the prior quarter, both positive trends for de HCS senior living portfolio.
Finally, our busiest rate continues to be SBC SBC continues to face the most significant pandemic related challenges amongst all our client companies as hotels restaurants, and other service retail businesses are facing a difficult environment.
Operationally SVC has seen steady hotel occupancy advances in most markets as suburban extended stay hotels and select service hotels continue to outperform urban full service hotels on.
All but two of SVC 329 hotels and now open and the overall occupancy has steadily increased to 46% and September from a low of 21% and April the.
The biggest news this quarter it SBC involve the inability to reach resolution with the IDH gene Marriott after each failed to make the minimum required payments to the company.
Sbcs board decide to terminate these operators and transition management of these operators hotels to sonesta.
Our Mars dedicating significant time and effort currently to assist sonesta and preparing for successful transition, which is expected to begin at the end of November and.
In addition measures taken to improve liquidity further include the recently announced issuance of $450 million of senior unsecured notes due in 2027 and successfully securing waivers for all financial covenants through July 2022 on its $1 billion revolving credit.
City.
It's also important to note that over 25% of sbcs rents come from Travelcenters of America, which continues to perform well during the pandemic.
Good day reported yet another strong quarter of increased adjusted EBITDA and net income GA also closed on its $85 million public stock offering and early July which provided important liquidity to the company.
Turning to our efforts to expand and grow the RMR platform as capital markets and fundamentals began to recover from the lows. The Trump the pandemic conversations with sources of private capital both existing and possible new relationships have gained momentum while we have nothing specific to announce at this time.
We remain confident that our private capital management business will continue to expand either externally through an acquisition of of third party platform or goal or organically via relationships, we establish on our own such as the new investment vehicle with the global sovereign wealth fund that we recently announced the.
And involves one of our client companies.
Before I turn it over to Matt I'd like to reaffirm our confidence and the strategic actions, we have taken in reaction to the ongoing pandemic, our client companies and reinforce the fact that RMR remains well fortified by our 20 year evergreen contracts with the manage equity reach and our healthy operating cash flow.
As I've said in prior calls given the current economic environment I continue to believe and over the next 12 to 18 months, they may likely be unique opportunities to take advantage of and the market and will benefit our platform for years to come and now I'll turn the call over to Matt Jordan, Our Chief Financial Officer.
Thanks, Adam and good morning, everyone I'd like to start by acknowledging the continued effort and dedication we've seen across our organization in light of the on boarding pandemic.
While the last seven months of and challenging all our managed the office and industrial assets remained operational and available to our tenant.
And our corporate office, which reopened into and we have invested significantly and ensuring compliance of all federal and state safety mandate with the majority of our personnel coming into the office on a regular basis.
Turning to our results for the quarter.
On the fourth quarter of fiscal 2020, we reported adjusted net income of $6.4 million was 39 cents per share.
In addition to recurring adjustments the separation cost and unrealized gains on our investment and TJ. This quarter includes an add back of three cents per share for full year bonus accrual true up.
Adjusted EBITDA this quarter was $20.8 million as the.
Sequential quarter increase of 6.1%.
And adjusted EBITDA margin was 48.8% a sequential quarter increase of 170 basis points.
Both of these improvements reflect the ability and many of our client companies operations.
And our efforts to mitigate expenses where possible.
Management and advisory services revenues of $40.2 million was in line with our guidance of 39 of $41 million and represented an increase of almost $1 million on a sequential quarter basis.
The sequential quarter increase is due to growth and fee paying AUM across the majority of our managed equity rate and modest operating improvements and T. and sonesta.
Across our client companies rent the federal activity has slowed considerably and construction activity of seen limited delays from the pandemic.
This quarter RMR directly supervise the almost $44 million and capital improvements.
An increase on a year over year and sequential quarter basis.
Based on current trends both of these possible headwinds to our property management fees should continue to have limited adverse impact to our revenue.
Using October average share price share prices, coupled with an assumption that there is not another cobot related shutdown and significant parts of the country. We.
We are projecting total management and advisory services revenues to remain flat next quarter.
With that said looking ahead to the full fiscal year, our revenues will be favorably impacted by the falling client company activities.
First as it relates to the upcoming transition of ice GE and Marriott branded hotels. The net of the data on discussed earlier. We expect these transitions will result in $2.7 million of incremental revenues for fiscal year 2021 and.
And approximately $4 million on a run rate basis.
These projections the based on current operating estimate all of which are subject to change based on the uncertainty surrounding the ongoing pandemic impact of the hospitality sector and assumes and ice GE transition on to stem the first and the Marriott transition occurring in the first quarter of calendar 2021.
Secondly, we begin we expect to begin collecting fees again from Trnc, our mortgage Riet effective January onest.
These fees represent approximately $325000 per quarter or $1.3 million annually.
Turning to expenses for the quarter.
Cash compensation of $31.5 million was up approximately $1.9 million on a sequential quarter basis.
Primarily driven by the 2.2 million to all the bonus true up I discussed earlier.
Without the bonus adjustment cash compensation was down sequentially as we as we of restricted new hiring and many employees reached statutory limits on payroll taxes and four one k. contributions during the quarter.
At the can sit considering annual merit increases that were effective October 1st.
Projected bonus inflation and recent executive retirement, we expect cash compensation to be approximately $30.5 million per quarter and fiscal 2021.
We also expect this cash compensation to be reimbursed by our client companies and a rate of approximately 45% and fiscal 2021.
Regarding recently announced executive retirement net.
Next quarter, we expect the record separation costs of approximately $4.5 million.
DNA expenses this quarter were $5.8 million a day.
Decrease of $500000 on a sequential quarter basis.
We expect DNA cost to remain at approximately $6 million per quarter for the foreseeable future as we look to continue minimizing the scrip minimizing discretionary spending.
In closing our balance sheet remains strong as we ended the quarter with $370 million and cash and no debt and.
In addition, our adjusted EBITDA level continued to ensure our dividend remains well covered.
Concludes our formal remarks, operator with the please open the line the questions.
We will now begin the question and answer session.
Ask your question and the press Star then one on your touched on from.
The are you seeing and speakerphone, please pick up your handset before pressing the keys.
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At this time, we will pause momentarily to assemble our roster.
Our first question today will come from Bryan Maher with B. Riley FBR. Please go ahead.
Good morning, Adam and Matt.
Let's let's start just with the question on the LPT and the the new investment vehicle.
Wanted to kind of figure out how does the is working on a little bit more granularity. So what used to go the tile PT will now go to the net new RMR investment vehicle and should we be deconsolidating that from our eye on 18 model in the fourth calendar quarter of this year.
Hi, Brian Yes, the short answer the question is yes, it is going to be deconsolidated from the LPT.
Financial statements in the fourth quarter the.
The fees that vehicle that new vehicle has directly engaged in management agreements with RMR the.
The agreements are substantially similar to the agreements that we have with the existing reach for example, we have a property management agreement, which is almost identical to the property management agreement that exists with our managed Reits today, both the economics and the services provided.
We also have an asset management agreement or are some similar to a business management agreement there was a slight difference and the economics, there and the way. It's calculated the end result is about the same dollars in the retail as you know we get paid 50 basis points based on the lower of either.
Local cost or enterprise or market value or total market value and the new vehicle, we're earning 100 basis points on the equity book equity contributed to the vehicle so depending on how much leverage you have you can do the math, it's roughly equivalent dollars that were receiving.
Okay, and then as we think about the 12 assets and and whatever else is added later.
The day to day kind of overseeing of those properties will now shift to RMR not that theoretically wasn't really RMR before.
The aisle, Pts and the really won't have anything to do with that is that correct.
With the entity itself well it's.
It's essentially the same people are going to be managing those properties that were managing before before those properties were held in I O. PT remember I LPG has no employees is the outsources its entire management the RMR. So the people managing the assets across all of our offices across the country here and Newton are the same people.
The going to be managing those assets and now that it's and the new vehicle, but the vehicle itself has a separate contracts with the RMR versus the contract dialed PTC has with the RMR I LPTA, we'll continue to have a 22% ownership in the vehicle.
And Thats look you can think of it and simple form is almost like a passive limited partner interest in the vehicle.
As the best way to think about it now in terms of growing the vehicle.
It's important to note that there is no requirement that Io LPP must contribute any additional view any additional properties into the vehicle that being said, we anticipate that there will be additional properties that I Lpds board will likely sell into the vehicle and we also know that the partners in the vehicle.
The very keen to grow it and they're hopeful that I LPT will contribute additional properties into the vehicle. We see this as sort of the where the rare times you ever true win win in the sense that I LPTA is really looking at this as this is an efficient way for it the raise effectively.
Equity capital down at the asset level.
Versus raising very dilutive equity capital up at the corporate level by issuing stock and what we believe to be.
A low price.
And so and again, it's at high Lpgs the option, whether it wants to show any properties into the JV, There's no requirement to it there's no first rights as the call rights by the by the vehicle into high LPT. It's a truly one way of option if they want to sell anything into the vehicle on.
And so we think it's very fortuitous, it's a very it's a great source of growth from RMR and its a great short source of liquidity.
Hi, LPTA, if they choose to use it.
Got it and then.
Thanks for that and considering your conversations with the yen now.
Now to partners.
And the fine.
What would you anticipate the growth and that find to be either on a percentage basis on an absolute dollar basis over the next year or two and is there any change and the parameters of the let's say cap rate expectations that the fund had versus what I LPTA may have had prior.
I'll take your second.
0.1st which is no we don't anticipate to be significant change and the type of assets that I LPG will seek seek out nor the type of assets that the venture would be interested and one of the reasons that the partners in the venture.
Entered into this venture was that they very much like the strategy and the type of assets and I LPT seeks out those of the type of assets that it also those partners are also interested in investing and in terms of the size. Our partners are are large.
Capital providers, they have an appetite for up to several billion dollars to invest in this type of asset class I think all parties that went into this are hopeful that we can add significant assets. The this vehicle going forward and the appetite is in the billions of dollars.
Great and just last from me on the net debt.
This is kind of the day deal personnel. The this calendar quarter coming up and even next quarter. What is RMR doing to kind of help facilitate the growth of that and do you expect it to really Graham.
Grow a lot and 2021 and we're getting a lot of calls from people on the industry, who are surprised there calm and it's in that the dry from kind of nothing the kind of the big deal very fast what are your thoughts there thanks and Thats all yes.
Yes.
Great question.
There is.
From Sonesta standpoint.
It is growing and growing very rapidly they are hiring a lot of folks in the corporate office.
I will tell you. This is an incredibly great environment to be out trying to hold higher people with hotel experience.
We have been getting very high caliber of folks.
Interested in joining sonesta we.
We haven't even really been using honestly much head hundred firms the find people, Dave and finding us and we've been getting inundated and some sense with the number of resumes. So it's really a fantastic time to beach hiring folks and we are hiring folks and so thats the has been hiring folks.
From our margin perspective, we're really getting involve sort of in the transition of taking over the hotels here and the short term and what do we mean by that where lending some efforts on the HR side, some folks and other past asset management side of the business are devoting some energy and time, what I would call on a temporary basis.
Some folks and the accounting group on a temporary basis, our lending their time to help sonesta and this is really covered as part of the business management agreement between RMR and sonesta and with the other companies. This is not we have provided similar services in the past to our other managed to operate.
And are such as five star and TJ, we just happened to be now doing it with sonesta I don't see this as a permanent shift the folks at RMR, it's sort of just helping them over the next several call and several weeks and months as the gear up and take over these hotels there are several.
The large for example, there is 99 hotels or the.
It's 99 hotels that are coming over.
And less than about 10 days that are coming over and we seem to be very much on track to take those hotels.
The world nothing will be flawless, but I think it's going to be very well executed at the end of the day, there's been a lot of energy put into taking over these hotels a lot of planning has been put into taking over these hotels and I think we are well positioned and I think it will be successful I think the transition will be six.
Yes.
Thank you.
Our next question will come from on low with Oppenheimer. Please go ahead.
Yes. Thank you good morning, and thank you for taking my questions. So first of all congratulations on the closing of the private capital.
I have a couple of questions related to this investment vehicle and I think Adam you may have.
On to some of these but but let me see what did you have from you if additional cut on debt. So could you. Please talk about what and track to debt top tier global sovereign wealth funds and fast and this vehicle and then how do you plan to grow the vehicle and then finally, what auto vertical outside the industrial properties.
You see a potential to attract external capital. Thank you.
Sure. So I think the partners were attracted to the to this opportunity twofold one.
I think they were attracted to the assets themselves and the quality of the real estate that is held at IHOP BT and the type of real estate that the RMR group, helping I LPTA seeks out in the industrial space. I think there are also very attracted to the fact that RMR is a vertically integrate.
Adjusted.
Nationwide operator that can touch from many different asset classes. There was a tremendous amount of diligence done on us and our asset management capabilities, specifically, our property management capabilities, specifically our ability to produce reports on the accounting basis I think the from.
Not that we're fiduciary now and managing large pools of publicly traded vehicles was actually very much of plus the these partners. These partners are also fairly large and size and I think with day or true also attracted the into this opportunity was.
It's very hard for large EPS.
The institutional investors that need to put large amounts of money out too.
Specifically invest and lets say media mid size real estate investments. So, let's say of 40 million dollar industrial building 30 million dollar $60 million investment billing day, they're capable investing and portfolios, they're capable investing even and one off very large assets, but I think what they are.
Like the about the opportunity was this idea that they could sort of piggyback off the vial pp and they could sit and Io PT. Its business plan along with RMR is able to go out and meaningfully acquire properties that midmarket $30 million building $40 million building 50 million dollar Bill.
On the aggregate a pool of properties and then if I LPTA chooses to and again I can't help and emphasize this there is no coal the the fun Doesnt have a right the call properties. It doesn't have a first right of first refusal first the offer has no rights the pull the properties. This is truly a one.
One way option that I LPT has didn't present them to the fund now you on LPTA and its board will have the ability to the side I think.
And this has been discussed at the board level, it's likely that we will look like we will likely sell additional properties into the vehicle going forward because the cost of capital for aisle PBT to grow by issuing equity up at the corporate level is too dilutive.
No.
The calculus could change if the cost of our capital at the act at the corporate level debt issue equity changes and let's say the stock price the diabetes increases significantly that would be wonderful for everybody involved if that were to happen.
And we hope it does but absent that happening you know this is a way for hi, LPTA to raise equity at the asset level and so that's how we see the vehicle growing high LPG and go out acquire properties very efficiently sort of mid sized properties aggregate pools of them and then sell.
On into the vehicle and the its option.
With regards to you the last part of your question are there opportunities to do similar type structures with other asset classes with our vehicles. The short answer is yes. I think there are we are preliminary conversations with regards the other asset classes within our realm and the.
Our managed and owned by some of our rights.
Debt with other capital partners as well as some of these existing capital partners around the additional asset types that we could do a similar structure around.
The conversations are early but I think it's very much something that we could think about replicating.
In other vehicles.
That's great that's very helpful.
Now would you have established a relationship with the sovereign wealth funds and on building to track what does it change the way you think about how to use your cash and balance sheet. The acquisition do you need a transformative acquisition to get the where you want to be thank you.
We don't need a transformative acquisition to get where we want to go I think an acquisition struck.
Strategically could help accelerate us to get where we want to go and we continue to have conversations with parties around those types of transactions.
I continue to remain cautiously optimistic that one of those conversations will eventually bear fruit and that will perhaps enter into and M&A or an agreement to acquire another party.
I hope that were to happen in the coming months, but I will tell you you know the.
The pandemic has really slowed a lot of things down the giving an example, this vehicle that we just entered into.
Absent the pandemic I think we would have been announcing this in the summer or spring the pen demick really slowed the conversations going on from multiple reasons and thats sort of the same effect on some of our M&A discussions as well.
I continue to believe that in order to accelerate our growth into private capital M&A is the way that we could do that and if we were to do that there are going to continue to be I think opportunities to seed investment vehicles with some of the RMR cash and I continue to.
What in this environment the environment we're in today.
I continue to believe that there are opportunities that may present themselves in the next 12 18 months I can't even identify them yet but.
But I believe that this is the type of the these are the times that when those that are liquid can really do some amazing things and do transformational things. Because this is when there is a lot of dislocation and when there's a lot of dislocation that's when a lot of wealth can be created and.
And I just want RMR strategically to be in a position that we could execute on something like that and the coming months, because I really do believe werent environment.
And it's right for something like that the could happen.
Thank you Adam Thats it from me.
Our next question will come from Ronald Camden with Morgan Stanley. Please go ahead.
Hey, Good morning couple of couple from me Congrats on the and now some of the private vehicle some of the client costs and that we receive just just on on number will on for I, LPT and dropping the assets and the vehicle can you just remind us why why is it better to do that rather than potentially just although that.
On the market and reinvest in their portfolio and other assets of what what's the advantage for out the debt to drop the assets down and this vehicle.
Sure. The the advantage is that it it gets the market price for those assets and gets to continue to participate in a in the minority portion of the equity remember if we're buying the assets, we like we like the long term prospects and I LPD.
We it doesn't preclude us by the way from also outright selling assets, if thats something we would like to do.
I think the way the Io LPT Board is looking at this is it's just and other lever that it can pull.
To raise capital and do it efficiently.
It doesn't have to do it it's a one way option for Io PT. It does have the option to sell outright sell assets, but again you know.
I imagined and I LPT will remain active in the market and for example.
It would go out and acquire some assets and it may like these assets very much and would not like the turnaround Silva.
Outright sale and it may want to basically keep a small equity portion of the of the interest in the per in the properties going forward. So again I think it's an option. It's always good for companies to have options to raise capital and this is the other option doesn't preclude us from saw right selling assets.
It's just on other lever it can pull.
Got it helpful and that the SEKCO on maybe this one will be will be quick so I heard the 100 basis points.
The on I think you said equity is there any other incentive fees and promote structure with with this private vehicle or or just any other fees that.
And that we should think about obviously, you mentioned already but I don't think I caught it.
No there's no other fees associated with the vehicle other than what we outlined the property management fee and in the mid and the business or asset management fee.
Great and on the than the other one I had was in backing on one of the question before which is.
The is this open up and add new potentially some of the other.
The public managed to reduce could this.
Clearly the vehicles only looking at the industrial subsector of but as the something that down the line could be done and some of the other subs Subsector and segment, if theres appetite Boyd or how are you guys thinking about that.
The short answer is yes. It is something that we could explore for other asset types and other vehicles and we.
We are having the.
Eliminates the discussions around those types of.
Those types of vehicles with other asset classes with other vehicles with the existing partners and with new partners those conversations of preliminary.
And it's on it's unsure whether they will actually ever come to fruition, but we are exploring it because again.
We see this is a pretty interesting way for our client companies again optionally to have an other lever the pool.
To raise capital and group and help it grow.
Without having to issue what would be very dilutive equity in todays market for some of our vehicles, where they trade and so we think there is a lot of advantages to the structure and we are exploring it with some of the other vehicles.
Got it and my last question if I may on this the big picture question.
Really really related to sort of the hotel space.
Yes, I think with the vaccine announced and that we've seen over the last week or two on.
There is a lot more investor conversation a lot more interest about sort of what what the recovery of like from the hotel space overall.
Now I'd love to hear sort of your comments and how you guys are thinking about it.
Just again big picture.
Whether it's a.
Hi, and CBD hotels versus extended stay or limited service. How do you guys think that plays out over the next couple of years and the corollary to that it has and ask the position and in that and that view and.
And how do you think about that hopefully that makes sense.
Yes that does make sense from a big purchase of perspective, we've been ever since the pandemic began we pretty quickly sort of had to derive what it big picture. How did we think the next couple of years is going to play out.
The view, we had six months ago Hasnt changed much even as we get to where we are today and that view has been that we anticipate the things will be very tough for the.
The hospitality industry and many industries, probably to the second half of 21 that generally continues to be our view, especially around the hospitality industry.
I do think that in the hospitality industry, specifically once the vaccine is generally available widespread the to the general population, which I think by mid year 21 is a reasonable estimate given everything we know of.
That may be the improvement in the travel and leisure industry could be more accelerated debt and the current sort of.
Industry projections, there is a lot of folks and think that you're not going to get back to sort of where we were in 2019 to 2024 25.
Hi.
From a little bit more optimistic that once things really do open up that maybe things it may take a while but it may not take the 2024 25 two of back to 2019 and the hospitality industry with regards the sonesta specifically.
I think that one of the advantages that you of the big brands. The marriott's the fees the hilton's the hyatt's have traditionally had the.
It drives a lot of their business has been their rewards program.
And that rewards program is largely driven by business travel.
I do think the there is going to be some permanent reduction in business travel as a result coming out of this pandemic I just can't help but think that there's going to be less need to travel because I think we've all learned how to do a lot of work from with.
And with video conferences I.
I think a lot of Cfos and corporate America have noticed that their travel and entertainment budgets are way down in the last few quarters and Gee isn't that an interesting way to save costs. So I don't I can't tell you how much its going down whether it's 5% of 30%, but I do think it's kind of.
The reduction and it's going to be meaningful and when that happens the power that those big brands and the advantages the day half is going to be less significant.
And I think sonesta in that type of environment, where the rewards program again, which is typically what drives these big hotel brands and those reward programs are typically driven by business customers. Its.
Sort of you know a domino effect as the business customer Doesnt come back a 100% those rewards programs become less valuable those hotels, it's harder and harder for the merits. The geez the hilton's the highest the charge the feed the day charge and the justify the fees the charge to the.
Our owners and so I think Mary I'm, sorry, I think so thats the is going to be very well positioned in that environment.
To do very well and and then more specifically with sonesta I can't help but say this SBC.
Owns 34% of sonesta and any benefit that as debt at bits and has the has there is as a result SBC. The riet is going to directly benefit from that and that 34% is the Max the re could own and an operating so thats the Max by the tax laws, we can have SBC on.
The only other thing of I'd say about the vaccine really quickly big picture.
I generally think that yes second half of 21. There are exceptions for example, the senior living industry is is if we come top of mind and my view over the last few weeks because you know it's going to be that industry is going to get the vaccine in front of everybody else the workers and that industry and the residents and that industry.
And it's possible that that industry gets largely vaccinating Q1 of 21, if that actually happens there's the opportunity that the senior living industry could actually sort of front run the recovery the could sort of be the first of the business is the sort of come out of it because you could I really do believe there's a lot of pent up demand.
And from move ins and if those facilities and communities truly are vaccinated and can truly market themselves of being safer environments and the general population the it could be real turnaround the mad industry, starting in Q2, rather than Q3 of Q4. So that's the that's my Big picture view on what's going on.
Really helpful. Thanks, so much.
Our next question will come from kind of fully with RBC capital markets. Please go ahead.
Hi, Thanks for taking my question.
Just just another one on the follow up on the on the private vehicle with Io LPT.
I'm wondering if you could just perhaps outline some of the key drivers for potential fee growth longer term realize that.
You mentioned that the seize the initial fees are going to be similar to what they were on the properties were owned by the LPG per just wanted to see how the potential of trajectory the fees could differ potentially longer term. Thanks.
Sure I think the biggest driver of the fee growth would likely come from growing the vehicle itself and the best.
Landmark out there I can point to the Sade and how that hike and think about it is like.
I can tell you the partners and the vehicle of deep pockets and it very much would like to grow the vehicle and their aspirations are that the vehicle could be many billions of dollars is what they would like at the B.
And so it's really.
How.
How many assets that may help the t. acquire what is I LPTA cost of capital look like going forward and how many assets. The based on that does it then decide that it would like to sell into the vehicle going forward.
I think we will sell additional assets into it the rate of how many assets we sell into it the speed of which we do and how big It gets how fast you know that's hard to put a debt can and do what I can tell you that all parties involved anticipate the vehicle will grow and that the appetite began his many billions of dollars.
And Ken from a modeling perspective.
The way, we're thinking about it every hundred million and new capital is about one and a half million annually and new revenues to RMR. When you think of the asset management and property management fees together.
Gotcha Gotcha, and that's very helpful.
And just one more follow up if I may you mentioned briefly about the management fee on expectations for its from on I'm. Just wondering more broadly whether you could just give us and updates as to the just the overall growth opportunity within the commercial mortgage riet side as well as some of the Street finance.
And as well thanks.
Sure generally speaking we have another vehicle is the the RMR mortgage trust, which is the conversion of our old mutual fund into a mortgage riet.
That profit that conversion is mid process right now.
We are actively.
We have one loan that we've actually closed on on that vehicle, we have several loans under application that are pending.
We have publicly announced that weve been redeeming some of our auction rate preferred and that vehicle. We have also publicly announced and we're moving from.
Clearly good pace with the FCC in terms of being in a position to de 40 Act that I tell you all of that because that is the principal vehicle. The the organization is using its energy to put new mortgage investments into.
Centre Street, specifically is basically dormant and and its dormant because I'm the principal capital provider the eye of the only upfront capital provider there and it's just it's not right I cant front run the public markets and so on basically foregoing all opportunities to invest and mortgages at the moment and and.
Following the public vehicle to have first.
The first right and first dibs on all those opportunities until it gets fully invested.
The ballpark mid 21 give or take is the one I think that vehicle should be fully converted fully invested and so we actually have quite a bit of capital put the work and it's really a pretty well.
The opportunistic time to be putting capital to work in mortgages were able to get very good returns.
On what I'd say lower risk basis, meaning we don't have to make as you go high is up the risk curve as we were lets say a year ago and maybe get the same return because theres very few.
Capital providers and the market today willing to make let's say short term bridge loans, what I'd call light value add situations.
And so there are a few but theres not many we're one of the handful of its in the market and so it's a pretty interesting time for that vehicle and I think the we're 100% focus now putting new money to work in this new vehicle.
From on the existing vehicle I will just point out all of its loans are current or its loans have not gone have not had any defaults.
And the they've made all payments every month has been current since the pen Demick began so that's a pretty good testament to the quality of the portfolio that we put together over the last couple of years. Because this is a real stress test for that portfolio, it's actually performing quite well.
Great very helpful. Thank you very much.
Our next question will come from my carrier with Bank of America. Please go ahead.
Hey, Good morning. This is dean staff and on now from Mike on most of my questions have been answered, but I was wondering if you could provide some additional detail on some of the cost containment measures you've implemented.
It either of the parent company or or any of the affiliates recently and if we get any type of sustained market or macro downturn moving forward on what capacity you may have for additional cost measures and moving forward. Thanks.
Yeah, Let me talk about RMR the.
Typically so on the DNA line, you've seen the sizable decline over time, a lot of that is tied as Adam mentioned to travel and expense reductions.
It's also significantly tied to employment hiring restraints, which has kept the pretty beat [laughter].
And then there's some variable whether its site the professional or.
Operating related costs that with the <unk>.
Reduced headcount and reduced volumes of activity in the office itself, we're able to manage some of which will become permanent some of which will come back over time, which is why we've kind of increased our forward looking guidance to get back towards the 6 million.
And the progressive quarters.
And then on the people side, we're still operating and a very competitive environment here and greater Boston I do continue to expect some wage inflation and bonus inflation.
And we'll just look to be thoughtful over time and in terms of growing our head count.
But otherwise we have an obligation to support our client companies and.
And need to continue doing so.
Helpful. Thats all from me thanks.
Our next question will come from William Katz with Citi. Please go ahead.
Hi, This is actually Natalie wu on.
And so yes, most of my questions at the answering and appreciate on the color on the.
The capital.
I guess, just one more follow on on the call Nash and.
On Gen.
Well I appreciate and gain on your expectation on the top per acre.
Ration costs going into Q.
Fiscal 21, and then or.
Initiatives to improve cost efficiency.
So as we highlighted we have some retirements that will hit next quarter or the be about 4.5 million and separation costs. Those were decisions. Those individuals made to retire on their own we are not actively.
Reducing head count and don't expect too I think we've always had the history of running pretty efficient and leveraging technology to avoid.
Letting head count get out of the control.
The we don't expect.
To go any further on reductions around people and I think after next quarter's separation costs.
I would not model any going forward.
And we'll just continue to be very thoughtful around recurring cash compensation.
One thing I should have highlighted earlier is and this past year, while there was some inflation in salary and bonuses, we kept all our executive compensation flat for the senior leaders.
And that's something we may explore continuing based on how the pandemic plays out.
Okay. Thank you and Thats helpful.
Our next question will come from Brent Thill.
Yes, the ASCO.
Hey, guys, just starting with the inaugural private fund could you provide a little more color.
Just around the kinds of investments that funds going to be targeting and the industrial space outside of adding properties from I. LPG, specifically like what geographies and tenant industries, you're going to be focused on.
I think.
The type of investments that it will be targeting is similar to what I LPT invest and today.
E Commerce logistics primary.
Primarily.
Type investments I think we are focused on let's say the.
A top 50 markets with probably a more highlighted focus industrial the top 50 industrial markets was probably our sweet spot somewhere between you know market by 225 is sort of our sweet spot.
We tend to buy.
Longer leased single tenant industrial properties or logistics properties, not not only but that tends to be the type of property that I LPT invests in which I think would also go into the would be also attractive to the vehicle.
And so that sort of gives you a sense I mean.
I'm trying to think and typically our buildings are a little larger sort of the bulk distribution.
So if it's an Amazon facility, it's typically a regional distribution hub rather than the last mile hub.
It tends to be what we have.
Okay and.
And then given your diverse exposure across different real estate markets could you talk about how active transaction have been and the main subsectors and just where are you seeing cap rates recently.
Yes, it's a good question, there's overall and the acquisitions market and transaction market.
I would say in the places that we work in there is still.
The most of the most robust area is continues to be industrial that we that we participate in.
I would say and office there is lots of segments of office I would say ammo BS and medical office buildings are also well did very.
Very attractive to investors today life science buildings at the very Nichey.
Now.
Ill sub sector of office that I think is extremely attractive to investors today and cap rates have compressed there.
The other sectors, we play in.
General office, if its long term leased to credit tenants still the tracks of decent bit anything the its multi tenant or anything that has got a lot of lease roll on.
Typically there is there is a bit forward, but I don't think its a very aggressive cap rate the you'll see on those types of assets.
No in the retail sector. There are step there's parts of the retail sector. The.
There is no bid.
For it if anything the deal with let's say a b mall, that's heavily focused on apparel lets say you may not even find a bid.
On the hotel sector.
No there is not a lot of transaction activity occurring the transaction activity that you see out. There is you know people trying to buy pieces of debt on hotels is really the place that I've I've seen the most activity.
I think generally speaking there's been a little bit of shyness away from.
Call. It what was been traditionally the top four five gateway city markets the urban core assets on.
Unless they are well leased long term.
There you don't see a lot of those assets coming to market you don't see a lot of parties that are interested today and investing in those types of assets and those locations.
And that gives you a sense, but the areas that we are deploying capital on active in the marketplace and principally been the industrial side and the office side, we don't bid.
Did not active on the multifamily side, but my understanding is that is and also a sector that is staying relatively intact and cap rates of staying relatively consistent with where they were prior to the pandemic.
Okay, great. Thanks for those insights Adam and have a great Thanksgiving everyone.
Again, the two buckets question and of stars on one.
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