Q1 2021 RMR Group Inc Earnings Call

Good day and welcome to the RMR group fiscal first quarter 2021 earnings call. All participants will be in a listen only mode. So do you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note that this event is being recorded I would now like to turn.

The conference over to Michael Kurdish Director of Investor Relations. Please go ahead Sir.

Good morning, Thank you for joining the <unk> first quarter of fiscal 2021 conference call with me on today's call are president and CEO, and importantly, and Chief Financial Officer, Matt Jordan.

And just the moment they will provide details about our business and quarterly results followed by a question and answer session I would like to note 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 1995, and other Securities Laws, Inc.

Forward looking statements are based off of Rmr's beliefs and expectations as of today February the second 2021, 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.

Information concerning factors that could cause of the differences is contained in our filings with the securities and Exchange Commission should be thought of our website at www Dot RMR group dotcom.

The answers 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 calculation of adjusted EBITDA margin can be found in our earnings release and now I would like to turn the call of Adam.

Thanks, Michael and thank you for joining us this morning for the first quarter of fiscal 2021, which ended on December 31.

We reported adjusted net income of $6 $9 million of 41 per share and adjusted EBITDA of $21 4 million.

Both sequential quarter increases.

We ended calendar 2020 with $32 billion of gross assets under management, and we remain well capitalized with $383 million of cash and no debt.

Similar to last year due to RMR, having a september 30th year end and most of our client companies having December 31st year ends we are limited as to what we can discuss as we are reporting results in advance of our client companies.

Overall, I am reasonably optimistic as we begin 2021, while the pandemic has presented many challenges to the broader economy and many of the real estate sectors. We operate in it has also allowed the RMR to demonstrate the resilience and sustainability of our business model.

The out the pandemic our business continues to generate cash flow in excess of our dividend and operating margins remained strong.

In addition, with over 80% of our revenue is coming from our managed equity Reits are contractual arrangements continue to align us well with our REIT shareholders.

I'd like to highlight some of the more noteworthy events or at our client companies that have occurred since our last earnings call.

During this past quarter, we announced the closing of of private capital investment vehicle, which is known as the industrial fund.

I L. P. T use proceeds from the initial asset sales into this fund to repay debt, which should ensure <unk> leverage remains at a moderate level.

<unk> continues to focus on acquiring high quality industrial assets, but now has the option to sell interest in these acquisitions to the fund.

In early January I, LPT acquired a $44 million class a industrial building in Kansas City, Kansas is 100% leased for 12 years and this property could be a candidate for eventual sale into the industrial fund.

Given the RMR has expertise in sourcing small to medium sized property acquisitions, we believe our partners, who typically require large transactions to efficiently deploy capital. Appreciate this unique access to investment products and they have a sizable appetite to grow this vehicle in the future.

Turning to OPI. The company continued its capital recycling program in the quarter and recently announced an opportunistic sale of an office property in Richmond, Virginia for $130 million and the purchase of a newly constructed class a office building in South Carolina for $35 million.

While the pandemic long term impacts on the office sector remain uncertain.

It's kept its focus on back filling upcoming known move outs managing property level expenses and looking for capital recycling opportunities to improve its portfolio.

Shifting gears to the managed equity Reits more negatively affected by the pandemic.

We are pleased with the progress being made in the distribution of the COVID-19 vaccine with the rollout of the vaccine gaining momentum we believe the senior living and hospitality industries are both well positioned to improve materially in the second half of 2021.

Within its senior living portfolio.

The primary operator, five star has partnered with Cvs to administer vaccines to all participating residents and staff at their communities.

Currently more than 65% of five star's residents of received at least the first dose of the vaccine in approximately 93% of five star communities are accepting new residents.

While we expect the senior living business to recover in the long run we believe occupancy recoveries may be measured in the future.

Given an uncertain economic recovery GAC recently enhanced its liquidity by securing covenant waivers on its revolving credit facility sort of June 'twenty 'twenty two.

Similarly, SDC recently obtained covenant waivers through July 2022 related to its credit facility and issued $450 million of senior notes to improve its liquidity.

<unk> remains on schedule with the transfer of approximately 200 hotels to sonesta management as part of terminating its relationships with IHG and Marriott.

All of the IHG transitions have successfully occurred in the fourth quarter of 2020, and the merit conversions are expected to occur in the first quarter of 2021.

Finally in January of SBC received the termination notice from Hyatt covering 22 hotels.

Unless discussions with Hyatt result in a mutually beneficial agreement, we would expect SBC to also transition. These hotels. The sonesta later this year.

On a related note at year end Sonesta announced the acquisition of Red Lion hotels, which will significantly increase the size of the company to more than 1200 hotels.

This acquisition will also help accelerates the nest is development of the hotel franchising business.

That said the closing of this transaction is subject to a shareholder vote by Red Lion.

Travel centers of America continued executing on our strategic transformation, while simultaneously supporting the critical transportation of goods around the country during the pandemic.

<unk> recently closed a $200 million term loan the proceeds of which will be used for site level improvements updates to its it infrastructure and to fund franchising and other growth initiatives.

Turning to our efforts and growing the RMR platform earlier. This month, we were excited to announce the completion of RMR mortgage trusts conversion to a commercial mortgage REIT.

Since announcing its intention to convert RMR is mortgage origination and underwriting teams have closed seven loans totaling over $175 million.

Also have a strong pipeline of deals and we hope to have this new mortgage REIT fully invested in the coming months.

Given the resources, we have dedicated to our credit platform and the momentum we have coming into calendar 2021. We continue to believe there is an opportunity to make this a meaningful part of our assets under management in the future.

We also continued to invest significant time and organically building out our private capital asset management business, which includes transactions such as the industrial fund that I discussed earlier.

While I cannot share specifics there has been substantial progress in developing additional relationships with large sources of private capital, which may lead to additional opportunities for RMR and its client companies later this year.

We continue sourcing opportunities to grow AUM and accelerate our private capital fundraising capabilities to possible M&A activities.

Nevertheless, we recently found the number of attractive opportunities that fit our acquisition criteria to be increasingly limited.

Beyond the impact of the pandemic, which has itself caused many potential targets to remove themselves from the market. It is important to note that over the past several years transaction activity in the real estate asset management space has slowed materially.

After a flurry of activity in 2016, and 17, a limited number of transactions have occurred over the last few years that are involved the sale of a controlling stake in one of these businesses.

We are still engaged in discussions with a handful of potential M&A targets and we believe in the acquisition may occur sometime in the coming year net.

Nevertheless, our experience, thus far which suggests that any potential transaction would only require a portion of our available cash balance and leave us with significant excess capital. In addition, we continue to have success organically building, our private capital business.

Accordingly, our board continues to assess possible alternative uses for our excess cash which may involve a combination of strategies, including accretively deploying this capital into new investment vehicles or returning some of it to our shareholders.

I'll now turn the call over to Matt Jordan, Our Chief Financial Officer, who will review our financial results for the quarter.

Thanks, Adam and good morning, everyone as Adam highlighted earlier, we reported adjusted net income per share of <unk> 41.

And adjusted EBITDA of $21 $4 million this quarter.

Adjusted EBITDA margin was 49% this quarter, representing a 20 basis point increase sequentially and of 190 basis point increase from our 2020 low point.

Management and advisory service revenues were $41 $3 million this quarter, a $1 1 million increase on a sequential quarter basis the.

This increase was due to the share price appreciation over the course of the quarter, primarily the SBC and increases in construction management fees due to development activity.

As of December 31, 2020, all of our managed equity Reits, except the LPT of paying base business management fees on a market capitalization basis.

The impact of being on the slower measure of results in the loss revenue opportunity of approximately $52 million.

While there is still significant opportunity ahead. We are pleased that recent share price improvements have helped reduce our loss revenue opportunity from a high of $56 million this past summer.

As it relates to incentive fees for calendar 2020. Unfortunately, none of our managed equity Reits total returns exceeded their peer averages while the pandemic and repositioning efforts at our reach presented headwinds over this past measurement period, we are hopeful that several of the strategic actions outlined in Adam's prepared remarks could position are reached.

The outperforming their peer group and future measurement periods.

Looking ahead to next quarter, assuming December average share price is for our managed equity REIT hold steady.

We expect the management and advisory service revenues to be in line with this quarter.

With that said next quarter's revenues will include the impact of a number of other variables, which include a projected decline in construction activity, our managed Reits, resulting in decreased construction management fees of approximately $500000.

An incremental $300000 in quarterly revenues from the conversion of IHG and Marriott branded hotels to Sonesta management that Adam discussed earlier.

The re instituting of Trs <unk> management fees effective January one, which represent approximately $350000 in quarterly advisory revenues and finally, two less days in the second fiscal quarter, which will adversely impact revenues by approximately $500000.

Turning to expenses for the quarter cash compensation of $29 $5 million is flat sequentially. After excluding the $2 $2 million bonus true up in last quarter's cash compensation.

Cash compensation this quarter reflect the annual merit increases that were effective October one and.

And projected bonus inflation, both of which were offset by recent executive retirements.

We expect cash compensation to be approximately $30 million per quarter for the remainder of fiscal 2021.

G&A expenses this quarter was $6 3 million.

An increase of $400000 sequentially due to cost associated with implementing COVID-19 safety standards at our offices as well as insurance and cyber security cost inflation.

Looking ahead to next quarter as in previous years, we expect our board of directors will be issued annual share grants, which will result in next quarter, including incremental costs of approximately $500000.

As it relates to our tax rate in December 2019, New tax regulations were released expanding the types of corporate structures that needed to apply deduction limitations on executive compensation.

As these new regulations apply to Rmr's corporate structure accounting rules required we apply the new regulations upon release.

Recently, the IRS announced that the effective date of these new regulations would be December 18 2020.

Accordingly. This quarter's results include $500000 or of one time, two 3% tax rate benefit to remove the deduction limitations applied prior to December 18 2020.

This onetime benefit was incorporated into adjusted EPS This quarter and we expect our tax rate to return to approximately 14, 5% next quarter.

Finally, as Adam mentioned earlier, we ended the quarter with approximately $383 million in cash and we continue to have no debt.

Believe our balance sheet continues to leave us well positioned to assess strategic opportunities and invest in the new business initiatives.

That concludes our formal remarks, operator would you. Please open the lines of questions.

Yes, we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.

And our first question will come from Bryan Mayer with B B Riley Securities. Please go ahead.

Good morning, Adam and Matt and thanks for those comments.

I'd like to drill down a little bit more on the Red line and so that's the game plan.

What's the thought process is there and the the resource allocation to integrate the two and where do you envision that going over the next kind of three to five years.

Sure So the Red Lion acquisition at Sonesta, while it is subject to shareholder vote.

Sure, we'll close we're optimistic that we will close if it does close.

It will really significantly increased the size of sonesta to over 200 hotels.

That will make it one of the largest hotel companies in the United States in terms of number of hotels, it would be bigger than Hyatt.

To give you a frame of reference.

It also significantly increases or accelerates sonesta is franchising business to be a significant and major hotel operating company in America. Today, you have to have of franchising capability, which we have one at sonesta, we do franchise some hotels internationally outside the United State.

You don't have much or anything here domestically red lion virtually all of its hotels are franchised and it comes with a platform that really sort of help sonesta accelerate that growth.

We're we're seats and Esther going in the next few years is really becoming a top tier hotel platform or operating business in the industry.

And we think thats good for RMR, it's good for Sonesta, It's also really good for SBC.

<unk> is.

He is taking back many of the hotels it had with IHG and Marriott in.

It may take back some hotels from Hyatt taken back some hotels Wyndham and its giving almost the lion's share of those hotels.

The the manage its one thing das in essence of the manage at those hotels when its still a relatively small operating business. It's a very different thing for SBC and its shareholders. When it's one of the larger hotel operating businesses in America.

For SBC and again from Sbcs perspective, it owns 35% of sonesta. So it also gets the benefit from that we really try to answer your question, we really see sonesta, becoming a large.

Top tier hotel operating business manager and franchise or in the United States in the coming years in terms of resource allocations.

Growing very fast.

This is a very good time to be hiring in the hotel industry a lot of very good and talented folks are have been let go in the in the space Sonesta is maybe one of the only hotel operating businesses actively hiring new folks. So we've had a very good pipeline of new people coming on.

We recently hired a new chief operating officer, there that was announced.

And in addition to that we're also draw it's drawing upon in this transition period, a little bit of the resources of RMR that's per its management agreement with RMR. It gets the ability to do that and it is availing himself the itself of that so RMR is augmenting sonesta sort of in this.

What I would call short term transition period, we don't think that's going to be of long term thing, but kind of short term rmr's augmenting some of the staff over of Chester.

So we're very bullish about sonesta, and where it's going and the benefit for the entire complex.

Great and my follow up question is on the private real estate capital expansion.

You've done industrial do you see or can you foresee moving into another space, whether that let's say the hospitality or office and in light of all you see kind of day to day across your broad expanse of real estate in the U S, where you're seeing the biggest opportunities that you have.

I'd like to pursue.

Sure. The short answer is we are talking to folks about various sectors that we are we are involved with everything that you mentioned, we are talking to people in the health care side hospitality side, the retail side.

Off the side, so pretty much every sector, we touch and are involved as we are having some sort of dialogue with private capital investors about being able to expand that.

And so I think there will be some additional opportunities for us toward <unk> grow that business in 2021.

The answer your question, where I think the most interesting opportunities present themselves today.

There are obviously opportunities in hotels.

There's also some really interesting opportunities in my mind around net lease retail.

The single tenant net lease retail not necessarily malls.

But net lease retail and then maybe one of the most interesting spaces.

I personally think could be very interesting as office.

Office performance wise financially as a sector has held up extremely well during the pandemic, but there is a lot of sour and interest around the office.

Our office sector, because there's a lot of folks that believe that there's going to be of wholesale shift in the way office is being used.

Within RMR I'm not sure we believe it's going to be as big of a shift long term in office use.

By office users.

We take the view that there will be some changes, but eventually medium to long term large office use will largely returned back to the mean and most folks will end up back in the office at least most of the time.

In that backdrop presents in my view of really interest and opportunity around the office because you have the supply demand imbalance in terms of capital.

Seeking out to invest there and on a risk adjusted basis, you could argue the office could be perhaps one of the better opportunities out there today.

In my view, specifically thinking about office in and around the Sunbelt maybe.

Maybe outside of some of the top tier.

Tier one gateway cities could be an interesting strategy to think about so that gives you a sense of how we're thinking about stuff alright.

Alright, Thanks, Adam appreciate it.

The next question will come from Ronald Camden of Morgan Stanley. Please go ahead.

Great I'm, just just going back to sort of the industrial fund.

I'm just trying to get a sense of how quickly you guys are thinking about.

The portfolio can grow I know Theres 12, initially I think you touched on sort of our PT buying assets and potentially dropping down but.

How should we think about sort of the potential growth in that.

And maybe can you also clarify the strategy in terms of what Youre looking for in the industrial it sounds like it's smaller middle market.

Our properties and so forth.

It's about that as well thanks.

Sure so on the industrial side as a whole.

As a firm and we'll talk about where the assets might end up I think we it's hundreds of millions of dollars per year.

And then I think we could deploy there now where they actually end up from Rmr's perspective, we're a little bit agnostic. It could end up staying in IOP or they could LPT could decide to drop it down into the fund because remember it's at the option of the of IMTT to do that and you might ask next so what's what's the decision tree.

These are the decision tree there is really driven by the cost of capital for IMTT and specifically the cost of equity capital.

<unk> has the ability to basically through the industrial fund sell equity interest at the property level and NAV.

The today versus selling equity interest at the corporate level far below NAV. So obviously today. It makes a lot more sense, if you're going to raise equity capital to do it down at the property level at IMTT.

The and drop it down into the fund and so that's maybe where I sit where we sit today that may be the more likely outcome in terms of where assets end up but again from where we sit we're a little agnostic whether it just stays in IMTT or it goes down the industrial fund either way, it's growing and in fact if <unk>.

It ends up staying in ILP T. It's largely because perhaps the cost of equity capital at the corporate level has improved significantly and that would be a very good thing across the board for RMR by LPT shareholders for the whole host of reasons.

In terms of the strategy of the type of assets. We're looking at Youre right I think our sweet spot is more small to medium sized assets.

There is a tremendous amount of capital focused on investing in industrial real estate is probably the most favor is the most favored industrial.

Real estate sector in today's market to invest in there's a tremendous amount of capital that is earmarked to invest in that sector. Our competitive advantage is theres a lot of players out there they have to put a lot of money to work and they can really bid up large portfolios are larger single asset transactions our share of sweet spot is theres a little.

Less competition, and what I would call sub $50 million.

Actions in one offs, there's still competition, there, but theres a little less and we can efficiently acquire one of one off buildings around that around that size aggregate them either at IMTT or within Iot and then dropped down into the industrial fund, which I think our partners very much appreciate.

That ability to be able to do that in terms of the type of industrial properties were focused on Iot as well as the fund itself.

Essentially core industrial and what do we mean by that top 25 markets for industrial in the United States.

Typically newer buildings.

Typically we would be most of our buildings are single tenant net leased we have also some multi tenant buildings.

And so that's well leased long term leased good credit quality of larger building single tenant typically core industrial is what you would see us.

Great that's helpful.

Just had another one.

Thinking about sort of both the debt.

The fee paying AUM and incentive fees I guess number.

Number one so low.

On the fee paying side your thoughts of them that cover the.

This quarter clearly got a lot of work has gone into the company and so forth.

When you were talking to investors and so forth.

What sort of the view of what sort of the feedback you're getting.

In terms of the performance of those of those companies right because as we sort of reopened as the economy comes back comes in it feels like the market could go higher which would be upside for you guys. So just sort of curious.

What the investor feedback.

On the REIT companies add sorry, the for the long run, but the second part of that is our work sort of the shows that OTI is getting.

Closer and closer to earning an incentive fee.

Based on the performance of the stock.

Just curious what you guys are thinking about there and then how that strategy is evolving.

Sure. So we have four big equity reached the two biggest ones are healthcare REIT, which is THC and then our hospitality and retail we suggest BC.

I think yes, those two companies are poised well to benefit from the economic reopening the vaccinations, becoming more widespread.

Our house view within RMR, we feel generally pretty confident of things are going to start getting pretty much better as we get into the summer in third and fourth quarters in terms of those industries within the senior living industry may even be a little earlier than that.

The those senior living communities will largely as an industry the largely inoculated fully by the end of Q1 debt.

Poison debt positions them well that they may start to see a recovery of sort of the first sort of sector. The to see a rebound because if they are fully inoculated. They really can turn their attention to new admissions and growing occupancy and you could start to see a turnaround there maybe in the second quarter.

So we feel very good about where we are with as the economy opens in vaccinations in terms of what's going on on our hospitality healthcare, even the retail side of the house as well our office and industrial REIT and sectors continue to form have performed very well through the pandemic, we expect them to continue to perform.

Well I'll, let Matt talk about incentive fees, yes, and then I guess just on the Pam just add something to Adam's comment.

We talk to investors I think the one thing I would highlight is that loss revenue. That's gone from 56 of the low Fifty's now if we do nothing but just focus on our organic REIT that is all EBITDA flow through and just straightforward organic growth. So I think investors see that opportunity and should see it play out in 'twenty one.

Some of the reasons Adam talked about in terms of incentive fees. We agree with you Ron I think what we've seen since this incentive fee went.

The incentive fee structure was put in place as the troughs in performance at our image of equity Reits tend to present the opportunities in the long term as they recover.

10% of far outperform their peer group because of that low point.

And specifically as it relates to the OPI wallet is still a ways away youre right through January of this year. We are cautiously optimistic 22 is a long way away. So we're really not in a position the comment but.

I would agree with you on 'twenty one for OPI.

Got it helpful. Yes. It just seems like you can think about how the way of the companys position of the economy reopens.

I think there is some.

Potentially of nice upside for the piece so that answered all my questions very helpful. Thank you.

The next question will come from Owen Lau with Oppenheimer. Please go ahead.

Good morning, Thank you for taking my questions.

Adam could you please give us an update on the progress of your strategic strategic acquisition and I heard that you mentioned it would happen in the coming years and if I remember correctly previously you mentioned it may be happening in the coming months.

Could you please elaborate a little bit if day.

So any change in the thinking here. Thank you.

Thanks, Bill and thank you for that question there has been a little bit of a shift.

In our thinking and we talked I did go into I think of little bit of detail in my prepared remarks around that.

About two years ago, we were very public and talking to investors about how we were going to basically take this time to really try to.

Look seek out in the M&A partner of make a strategic acquisition the sort of help jumpstart our private capital investment business.

And simultaneously with that we also said we're going to try and organically building, we've been having I think pretty good success in getting some pretty good momentum building it ourselves organically the.

On the M&A front.

For two years has been at this we've had numerous conversations we are continuing to have whereas the clarity garages, the handful of conversations with folks but deal activity in and around real estate asset manager space has been very muted in the specifically in that sector.

Especially for control transaction, which I think again.

What we're focused on is the right thing for us the focus on for various reasons.

So there hasnt been a lot of activity and then even those conversations that we are still having it's becoming more and more evident to us that it's unlikely that we would be using the majority of the cash that we have built up on our balance sheet and so we always said that we were going to spend some time to really the.

<unk> the M&A market.

We're going to try to use the M&A process, the sort of jumpstart the private capital investment business, we haven't given up we're still trying that but it's becoming more and more evidence sort of where we're going to end up on this and I think what I meant what I am trying to say in my prepared remarks, we're starting to shift our thinking.

The little bit to start thinking about okay.

We do a deal and we may not even do a deal we may feel very comfortable just growing it organically, but even if we do a deal it's probably not going to use up most of our capital. If that's the case, we should probably start having some discussions at the board level about does it make sense to start thinking about returning some of that capital to shareholders.

And we've been asked that I've been asked that the team has been asked the by many investors for a long time.

I am trying to indicate there is a slight shift in thinking to say I think we are step closer than we were for the last few quarters in terms of taking that on and I expect in the coming board meetings were going to have pretty robust discussion around that in terms of is it now time to start thinking about have we gotten to the point, where it is now time to start thinking about return.

Some capital to shareholders. If we can get into debate about how to do that I don't think were quite at of.

Point, where I can comment on what that form might be that's pretty obvious forms of how to do that but I think that's really sort of a little bit of the shift in terms of where we're at and I think it's really the result of we've been doing this for a couple of years, we have a pretty good feel of what's out there of what's available and what it is we might do and so we haven't we.

We have some of them, we have some visibility better visibility I think into our cash needs.

Got it.

The follow up on debt thinking so does it mean that your I think you also talk about debt a little bit does it also mean that you are also open to buyback and one time dividend is that the way in the fastest should think about that.

Yes, I think thats exactly the way we are thinking about it in terms of when I say return capital to shareholders those of the obvious things dividend increase either one time or recurring.

Or stock buybacks.

Got it just one final housekeeping question, if I may so for the commercial mortgage with all M O M.

Could you. Please talk about if there is any change in the fee structure, how should we expect the rest of the new.

Contribution from all of them.

And to all of them all down to the world. Thank you, Yeah, Hey, Owen our MRM now that they are of mortgage REIT is going to follow the same contractual arrangement as TRP or other mortgage REIT, so it'll be a 150 basis points of equity.

And their equity of about 192 million. So it's about $2 9 million of annual fees.

Got it very helpful. Thanks, Matt Thanks, Adam.

The next question will come from Jim Sullivan with <unk>. Please go ahead.

Thank you.

Adam I just wanted to ask.

Couple of questions here on the Sonesta acquisition of Red line, you've talked about this earlier, but low.

Looking at the Oh.

The Red line has been able to do in terms of franchising over the last two years.

Actually had.

They've lost a considerable number of properties.

Where the franchises were terminated.

And they operate I think it's about five branch in mid scale of type brands in the economy with the economy, obviously of England.

No pun intended the lion's share of the portfolio.

So I guess when you talk about expanding of the franchising.

The amount to kind of a reversal of trends that the company and I just wonder if you can help us understand of what the strategy will be will you look to reduce the number of brands here number one.

And the number two.

Will you look to expand the franchising into higher price points or not.

Yes.

When it comes out of the sonesta of an issue.

Sure Jim Great Great questions and great to have you on the call.

With regards to the franchising business there Youre correct, a red line. Its all of its public has over the last few quarters, how the reduction in number of franchisees I think the goal. If we are able to acquire red light and again I'm optimistic we will but it is subject to a shareholder vote.

Is the.

The focus is really to stabilize the business the existing business as it is.

Stop the reduction of the number of franchises and even start to turn that around in the coming quarters.

I think.

In terms of the brands, our Midscale and economy in terms of what we're going to do.

I don't think theres been a distinct definitive there hasnt been a final decision about which brands. We may continue to run there's some obvious ones that have a large number of franchises that we would obviously keep theres a couple of brands that you have to wonder what doesn't make sense to continue with them.

But those decisions have yet to be made and won't probably be made until we close on the acquisition.

In terms of you know I also want to point out you know <unk> announced that its higher than the industry veteran who has over 35 years in franchising did it in a very similar economy segment, Keith peers and somebody that's going to be joining sonesta as part of if we had closed on this acquisition as an executive Vice president of the president of franchising.

Development, we are pretty confident that he has the experience and expertise to help us turn around that business and he is very focused on helping us do that in terms of where we could take it the.

Obviously, we can think about doing and again I would say this as some.

Some quarters after the acquisition sort of first step stabilize it reversed the trend start to maybe even grow the existing franchises and then you start thinking about okay, where are the logical place you can expand the type of franchising, they do which you're right is around the economy mid scale well the obvious places you would expand that too.

What we have under sonesta called Sonesta Es suites were sonesta simply suites were sonesta select.

That would be the logical place and I think that's where we would think about expanding the franchising business into the sonesta brands to start.

The Holy Grail of where we ultimately want to get to is ultimately franchising sonesta Royal Sonesta.

Of course, we are very cognizant of of the fab franchising economy hotels as of different business and franchising full service luxury hotels and so we do plan to get there, but I think we're planning to sort of work our way of the segments as we as we start the role.

The Red Lion franchising into the Sonesta business.

Okay and then one quick follow up question on the possibility of returning cash to shareholders, you've talked about that as a possibility of should consider the alternatives.

Is there of timing.

The.

A day when you think you're going to make a decision.

The Fisher cut bait here.

The three by the end of this year as the end of next year do you have any and full of tiny.

I think it's probably will make a decision one way or the other before the end of our fiscal year in our fiscal year September.

And so I think that's sort of the timeline.

We're focused on the sort of making the decision.

Around the question of returning shareholder capital share of cash.

The shareholders.

If we do it I think the win in sometime before the end of the fiscal year.

Okay, great. Thanks very much.

The next question will come from Kenneth Lee with RBC capital markets. Please go ahead.

Hi, Thanks for taking my question.

Just to piggyback on that previous question in terms of capital return to shareholders.

I'm wondering if you could just.

I share with us some of the key considerations that could potentially influence whether that capital return could take the form of either dividends or share repurchases. Thanks.

Sure. If we go down this path of returning capital to shareholders those of the obvious two questions we have.

Ah.

Both put money in shareholders' hands so to speak.

One is very tangible the other is less tangible meaning if it's not cash.

The issue around the debt.

We have wrestled with.

This is the early.

The discussions is in and around our flow and that sort of has an impact on whether we do a stock buyback or not if we were to do a return of capital share capital to shareholders and what I mean by that is we don't have a particularly large flow.

And we have dealt with many shareholders that have told us we'd love to buy more shares of we'd love to get into your company in a big way. We think of your business model is great, but you have such a small flow we can efficiently get in and out.

And so we have wrestled with that debt. That's the issue I think we wrestle in and around our <unk>.

Stock buyback.

Net.

You sort of debt.

We also have to deal with it also depends of course, where the share price is trading in and when we would consider.

<unk> buyback.

I really don't have a view of what that price would be in order to sort of push us one way or the other but obviously the share price is obviously of consideration as well cash is very tangible.

We can put shareholders, it's easy to quantify.

So that's those are the sort of the considerations as we go through it and again im not putting I'm not trying to tip. The scale of one way or the other I'm just telling you that those of the some of the issues we are thinking about.

Great very helpful. Thanks for the color and just one follow up if I may.

Mentioned in the.

Paired remarks ex.

Potentially expect some transition of hotels from Hyatt.

As well later this year wondering if you could just frame out the potential either revenue impact or at least give us the the number of hotels that sort.

Essentially the Paul Thanks.

Yes.

It would be if it happens and again.

SPC has been pretty clear around this debt.

It is likely going to have some discussions with Hyatt Hyatt Sp.

The SBC of termination notice it sounds a little of backwards, but they sent us the termination notice.

Yeah.

We are in.

Going to be engaged SBC and RMR, we're going to have some discussions with Hyatt, we'll see where those end up.

I really don't have a view one way or the other where theyre going to end up at this point.

But if they were to not be fruitful and.

We could end up taking back all of 22 hotels, there is a scenario where we only take back some of those hotels for example.

Or is there we take back none of them.

But again, it's 22 hotels, they're all Hyatt places is what the branded if they were to become sonesta as I said.

It would become sonesta selects is what I suspect they would become.

Matt do you have a view on the numbers.

This would be ballpark can you're probably talking half a million dollars of quarter and potential revenue opportunity and that's that's a very round number I think we'll see how the negotiations play out and give you more color next quarter.

Got you very helpful. Thanks again.

The next question will come from Mike carrier with Bank of America. Please go ahead.

Hey, Good morning. This is dean Stephan on for Mike carrier most of my questions have been answered. So just a quick one for me.

Given the lack of multifamily exposure across the real estate portfolio I was wondering if we could get some of your views in regards to the potential attractiveness of that sector and if you guys would consider new potential M&A JV or organic growth opportunities.

In that area down the line. Thanks.

Yes, great Great question, it's the one you're correct the incorrect to point out sort of the one sector in commercial real estate that we don't have the significant presence yes.

Yes. It is an area of it as we have strategic conversations around Prudential M&A debt, we have been focused on.

With folks that have a significant expertise and presence in that space. It's an area we could obviously acquire.

It's also something that we are thinking about as we.

Think about repositioning.

Many of the assets that in the senior living as well as maybe more importantly, the hotel side of the business that we SBC and THC are now taking have taken back debt.

Could consider possibly turning them are renovating converting them into multifamily specifically workforce housing.

That is something that I think the advantage of the RMR platform really gives the reach of B.

We're robust nationwide vertically integrated real estate company and we have offices all over the country. We can engage in of conversion project ourselves, we don't need to take of partner on the do something like that where we could take a handful maybe more than a handful of some of the properties, especially on the hotel side, perhaps and think about.

Converting them into multifamily, specifically workforce housing and that could be sort of a catalyst of sort of to grow of new line of business. We could then that could be a way of organically doing it of course it has to make sense. The SBC <unk> THC, if we did it with any senior living assets.

The make that conversion, but that's.

That's how we're thinking about it could come through strategic M&A, but we're also exploring building it ourselves to some extent.

Got it that's helpful. Thank you.

The next question will come from William Katz with Citi. Please go ahead.

Hi, this is <unk>.

William Katz.

Just one question on the debt.

Questions can you please give an update on the timing and level of such the acquisition.

Sure so.

Across the platform I don't expect there to be material dispositions in calendar year 'twenty one.

Both the two companies that were.

The <unk>.

Poised to consider large scale acquisition of dispositions as we went into the pandemic with specifically DHT and SBC specifically around <unk>.

Those two companies.

Both of those companies of largely put most disposition activity on hold there will be I think.

A smattering of our limited amount of disposition activity.

You could see in and around some hotels, but I don't think it will be large portfolios it could be one offs.

Could see some a smattering of disposition activity in and around senior living assets, but again I don't think would be a large portfolio I think it would be one offs.

I think you could see some opportunistic sales.

We had a very opportunistic sales in Richmond, Virginia, we sold the building for $130 million that building was.

It's fully leased it's of Great building, we do not plan to sell the building. It did not go to market. It was an off market transaction. We felt it was very good pricing. So we move forward with it we could see a couple of transactions like that that appear but I don't think dispositions in 'twenty, one will be a material story for the entire platform and we are very familiar we have.

Very limited disposition activity in the forward looking numbers.

Outlined in my prepared remarks.

Okay got it thank you.

Helpful.

The next question will come from Jim Sullivan with BTG. Please go ahead.

Yeah, Hi, thanks for taking the follow up Adam.

The other question I have is this is obviously with all of the distress that were seeing the of the market the.

Turning for a creative thinking.

And one of your peers.

One of the spec.

Recently that you probably saw the headline on and given your level of vertical integration I'm. Just curious are you know obviously, you're sitting here of a lot of cash, but I just wonder if you consider the feasibility of the attractiveness of the possibility of.

Forming of spec too.

<unk> looked at some companies that might be of distressed operators of of real estate owners.

As a way to.

Growth of business going forward.

Sure Bill.

Jim It's a great question, we have been obviously studying the stack business.

Pretty closely for several months.

A lot of investment banks of pitches decider.

Aggressively.

So far we have held off on it it's not to say, we couldn't think about doing something along the lines you've mentioned, Jim but so far we've held off and partly we have been holding off is because we we've talked a lot about how focused we have been on our own M&A activity and to date, we havent closed anything or announced anything and so.

So.

I'm, a little worried as an organization that it could be of distraction to be honest with you.

We could make some.

There's opportunity to make money there I agree, but until we sort of get the core business in terms of getting of private capital business up and really going and whether we're going to do that through some of the M&A on ourself ourselves.

I've just been worried that he will just be a large distraction for the organization.

Today that being said we.

We've seen our peers.

Several of our peers.

I think.

Simon just announced one in the CRE Tishman Jewish men Theres been a lot of folks that have done it and so we've been studying what they've been doing I don't rule. It out I guess sort of explaining why we have been a little reluctant to date to do it. It's just been out where we've been focused on M&A, but it is something we could consider.

Okay very good so the answer thank you.

This concludes our question and answer session I would like to turn the conference back over to Adam Portnoy for any closing remarks. Please go ahead Sir.

Thank you for joining us prior to our next quarterly earnings Conference call. We look forward to seeing many of you at the 2021 RBC capital markets financial institutional institutions Virtual conference on March 9th and 10th.

Operator that concludes our call.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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