Q3 2021 RMR Group Inc Earnings Call
Good day and welcome to the RMR Group fiscal third quarter 2021 earnings conference call on.
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I'd now like to turn the conference over to Michael Kodak's Director of Investor Relations. Please go ahead Sir.
Good afternoon, and thank you for joining Rmr's third quarter of fiscal 2021 conference call.
With me on today's call are president and CEO, Adam Portnoy, and Chief Financial Officer, Matt Jordan.
And just a moment they will provide details about our business and quarterly results followed by a question and answer session.
I would like to note that the recording 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.
These forward looking statements are based on Rmr's beliefs and expectations as of today August 6.2021, and actual results may differ materially from those that we project.
Company undertakes no obligation to revise or publicly release the results of any revision to the forward looking statements made on today's conference call.
Information concerning factors that could cause those differences is contained in our filings with the securities and Exchange Commission, which can be found on our website at www Dot RMR group Dot com.
You are cautioned not to place undue reliance upon any forward looking statements. In addition, we may discuss non-GAAP measures 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 over to Adam.
Thank you Michael Good afternoon, and thank you all for joining us this quarter I'm pleased to report adjusted net income of 47 per share an increase of 27% on a sequential quarter basis, and 24% on a year over year basis.
Further adjusted EBITDA of $24.4 million represents a 16% increase on a sequential quarter basis, a 25% increase on a year over year basis.
Our results this quarter highlight the significant progress we've made over the past year navigating the pandemic as I reflect on the last 15 months 1 of the lasting impressions I come away with is the resiliency of our platform and the commitment of our people to this organization.
To begin today's quarterly commentary I want to start by discussing what we're seeing across the commercial real estate sectors, we manage and how some of our key operating metrics are trending.
As of today over 70% of the U S. Adult population has received at least 1 dose of the Covid vaccine.
Airline traveler totals are at the highest level seen since the beginning of the pandemic and we are experiencing increased office utilization rates at the properties we manage.
In terms of organic AUM growth due to the combination of increasing levels of capital being allocated to commercial real estate investments generally and historically low interest rates. We continue to experience significant competition for acquisition at our client companies, most notably in the industrial life Science.
And high quality office property sectors.
Illustrations of the competitive landscape for deploying capital most impactful at our company IOP T. Our private industrial fund and the trim on the mortgage platform as each of these groups has over $500 million of dry powder to put to work.
For example, this quarter alone our organization has screened over $6.6 billion and industrial deals and we underwrote approximately $3.5 billion on.
Debt financing opportunities.
Nevertheless, we continue to remain disciplined in our underwriting in the face of a very competitive market environment.
From an operating perspective this quarter, we saw many positive signs most notably continued leasing momentum across our platform.
This quarter, we arranged over 2 million square feet of leases on behalf of our client companies with a weighted average lease term of over 11 years and an average roll up on rent of just over 9%.
We believe the office workplace remains a critical part of most businesses and our continued leasing velocity reinforces this belief.
I also would like to take a moment to highlight our expanded development capabilities, which is important as growth through acquisitions becomes more difficult over the last few years. We are taking any taken on increasingly larger scale development projects with Opi's 20 mass Av redevelopment a grew.
Current example of our expanding capabilities.
This project is a 427000 square foot RMR managed redevelopment project in Washington D. C with total cost of approximately $200 million.
That is expected to be delivered in the first quarter of 2023.
Finally, as it relates to the strength of our tenants. We remain pleased with cash collection rates continue to hover at approximately 99%.
Additionally, and in an environment of elevated inflation, our clients remain well positioned with over 80% of our leases at RMR managed assets, having inflation protection measures such as contractual rent bumps or CPI adjustments.
I'd now like to highlight some of the recent notable activities at our client companies.
And Mei OPI raised $300 million of senior unsecured notes and used the proceeds to pay down higher cost debt.
This offering was 6 times oversubscribed, which is a positive indication of interest and OPI and commercial office real estate generally.
In June OPI acquired 2 class a office properties for a total of $550 million and commenced the redevelopment of 20 mass Av, which I highlighted earlier.
We expect OPI will continue its successful strategy of recycling capital into higher quality and better performing assets, which has increased the portfolio's weighted average lease term decreased opi's capex burden and expanded the company's footprint into faster growing markets.
As previously announced DHT in 5 star amended their management agreements, which allows for the transition of 108 senior living communities from 5 star to a diverse group of best in class operators.
This process is well underway and should be completed by calendar year end.
As DHT has already announced that 76 communities are under agreement to be managed by for new operators the.
The transition of these communities should ultimately be mutually beneficial and leave each respective client company better positioned.
DHT same property shop occupancy experienced its first sequential quarter increase since the pandemic began.
We believe senior living will benefit from many fundamental tailwind, including limited supply growth in a rapidly growing target demographic that supports demand for senior living over the next decade.
Turning to SBC and more specifically its hotel portfolio that is managed primarily by sonesta.
Since the conversion of 205 hotels over the past 3 quarters Sonesta has been able to deliver significant improvements in occupancy room rates and revpar.
These positive trends, which have occurred despite the ongoing pandemic and the disruption of transitioning hotels from other managers have resulted in SBC reporting positive hotel EBITDA. This quarter for the first time since the first quarter of 2020.
As currently 1 of the largest hotel brands in the United States Sonesta continues to invest in its infrastructure and franchising capabilities positioning us very well for the future.
And travel centers of America, which is also 1 of Spc's largest tenants they reported adjusted EBITDA of $73.5 million this past quarter.
An increase of 82% compared to the same period in 2019.
These results highlight the progress Ta has made in its business since the beginning of 2020.
Before I turn to our cash deployment initiatives I want to note that RMR mortgage trust and Tremont mortgage trust remain on track to complete their merger with shareholder votes scheduled for mid September.
As a reminder, we expect the combined platform to benefit for benefit from enhanced scale with fully invested assets expected to approach $1 billion as well as to be immediately accretive to both sets of shareholders provide increased shareholder liquidity and reduce the respective cost of capital.
We ended the quarter with approximately $400 million in cash and as mentioned last quarter. Our board continues to assess potential alternatives for excess cash beyond what is required to fund growth initiatives.
<unk>, our expectation that the most likely form of a return of capital to shareholders. We will be in the form of a special 1 time dividend later this year.
With regards to our growth initiatives, we remain committed to organically building relationships with providers of private LP capital and we continue to dialogue with a handful of potential real estate private M&A M&A targets.
We are hopeful to announce progress on each of these initiatives for growth in the coming months.
Finally, as I mentioned last quarter, we have begun building our own internal capital markets team to expand into other sources of private capital such as family offices and high net worth investors and expect to announce more regarding this initiative on our next quarterly earnings call.
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 afternoon, everyone.
This quarter's results were robust characterized by strong momentum across many of our key operating and financial metrics.
We recorded sequential quarter and year over year increases in every headline metric the.
For the majority of which were also in line with our guidance for the quarter.
I will plan to spend most of my prepared remarks detailing the drivers behind our results as well as expectations for the fourth fiscal quarter.
Management and advisory services revenues increase for the fourth straight quarter with revenues, reaching $45.5 million, a $3.5 million increase on a sequential quarter basis.
This increase was primarily driven by the following factors first the average enterprise value at OPI, the AC and SBC increased meaningfully this quarter, adding almost $1.9 million on incremental revenues.
Secondly for many of the reasons articulated by Adam earlier or manage operators had strong operating results, which in turn led to approximately $1.6 million of incremental fees.
And lastly, as typically occurs over the course of each calendar year construction activity across our clients increase sequentially, which in turn generated approximately $800000 on incremental construction management fees.
Looking ahead to next quarter, we expect management and advisory service revenues to be between 46 and $47.5 million under the following assumptions first no material changes from July 2021 average enterprise values across our managed equity Reits.
Secondly revenues from our manage operators are expected to be flat as growth at sonesta in Ta is expected to be muted by declines at 5 star as they transitioned THC communities to other operators.
And lastly continued increases in construction activity across the platform that should generate approximately $1 million and incremental revenues.
This meaningful increase in construction management fees is primarily due to next quarter being our first full quarter, realizing incremental fees from recent amendments to our management agreements with DHT in SBC.
That provides for RMR to oversee all major capital projects and repositioning at hotels and senior living communities for a 3% fee.
Moving to incentive fees from our managed equity Reits.
<unk> continues to accrue an incentive fee for calendar 2021.
As a reminder, we only record incentive fee revenue at December 31 of each year.
However, if June 30th had been the end of a measurement period, we would have earned an annual incentive fee of approximately $22.2 million.
With regards to the calculation of our incentive fees. We were recently informed by S&P global debt. The SNL indices, we benchmark our rights against will be discontinued effective August 7.
We are currently working with S&P to identify an alternative with the goal of finding REIT indices that most closely replicate the performance of the expiring legacy SNL benchmarks.
Turning to expenses for the quarter.
Cash compensation of $35 million and our cash reimbursement rate of 43%. This quarter were both flat on a sequential quarter basis.
Based on our head count assumptions statutory payroll payroll tax withholding limits being reached and post pandemic vacation usage usage next quarter, we expect cash compensation to be approximately $30 million.
As it relates to equity based compensation with our fiscal year and approaching RMR share awards to officers and employees will occur in September.
Based on RMR historical grant levels, we expect we expect approximately $500000 in incremental equity compensation next quarter. The large majority of which is not recoverable.
As Adam noted earlier adjusted EBITDA. This quarter was $24.4 million, an increase of 16% on a sequential quarter basis.
Our adjusted EBITDA margin. This quarter was 51, 1% a sequential quarter increase of 300 basis points.
Our adjusted EBITDA margin getting back over 50% illustrates the operating leverage of the platform and our earnings potential as we experienced service revenue growth.
Looking ahead to next quarter, we expect adjusted earnings per share to range from 48 to 51 per share and adjusted EBITDA to be between $24, 5 and $26.5 million.
Before we go to questions I would like to highlight that we recently ranked first on the BOMA International $3.60 per performance program standings.
We always look to highlight our vertically integrated platform and believe this to be a differentiator when meeting with potential sources of private capital.
Rmr's National real estate operations teams focused solely on our clients' assets.
And we remain proud of our investments in sustainability.
Continual education and training of our team members and maintaining superior relationships with our tenants.
That concludes our formal remarks, operator would you. Please open the line for questions.
Absolutely we will now begin the question and answer session.
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Today's first question comes from Bryan Maher with B Riley FBR. Please go ahead.
Good afternoon, everyone.
Couple of questions for me and first of all congratulations on what seems like we're turning the corner on on a lot of different levels here.
Given we've listened to obviously all of the calls.
Most of you manage reads have sizable chunks of liquidity and we continue to hear as you mentioned that on the difficulty in buying assets at reasonable prices that all being said and with IL <unk> and Ta.
Others, having some land available how deep is the appetite or willingness to develop.
Ground up at RMR versus continuing to chase assets at really low cap rates.
Thanks, Brian.
Good afternoon, that's a really good question and I'm glad you picked up on it from the prepared remarks, because it is a growing part development activity redevelopment activity has been becoming a bigger part of the whole RMR story.
I would say, it's still a minority part of our story, it's still a small part, but I think it's going to grow over time.
At the very least I think to be a significant or major commercial real estate operator investor manager in this country you have to have significant development capabilities sort of as a minimum and we sort of been developing that internally through hires and growing a much larger department within <unk>.
With its focus on development.
I would say in the short to medium term most of the development activity that is occurring is sort of ancillary to our existing real estate holdings and that's in the form of when you have 2200 properties in every state in the country and then also in Canada and the Caribbean you have.
A lot of different properties a lot of different.
Going to a lot of different cycles and.
And there's obviously a handful of properties that they are useful life may have <unk>.
Expired in that area around them have developed into other locales that would mean that that real estate would become much more valuable if it was converted into something else.
And that's sort of the what I call the low hanging fruit that we've been most focused on.
That's what you are seeing a 20 mass Av that's what we saw when we talked about the Torrey pines redevelopment that happened at THC, that's largely completed it was over $100 million.
That's what you see.
When you hear SBC talk about doing something in the Nashville market on a site that is currently a travel center at that site itself could be.
Upwards of $1 billion mixed use for.
For the 5 million square foot redevelopment. So I think it is going to become a bigger part of what we do in the industrial side you probably noticed we have a our first what I would call a relatively modest development going on down to the Dallas market that we that.
We indicated an IOP to we bought the land from an affiliate company.
And are going to be developing that into industrial I think you will continue to be a growing part of our business going forward.
Don't think its going to overtake just.
The traditional buying core real estate managing core real estate I think that's going to be the lion's share of what we do for the foreseeable future, but I do think there'll be more and more should have opportunities to what I call build to core and that's really what we're doing we're building products to core real estate.
With pretty healthy returns and eventually medium to long term. This is probably years away I could see us.
Deploying buying vacant lots vacant land buying properties, specifically with the idea that you would tear down or redeveloped or to develop something on that I think that's more longer term.
<unk> see us do it may be the first place you might start to see us do something like that on a limited basis might be in and around industrial.
And what we're seeing there just because of the competition for industrial acquiring <unk>.
Industrial properties, but thats sort of gives you a flavor for what we're doing around development and redevelopment.
Do you think we could see a scenario where.
Within your private investment vehicles or yourself personally.
Buying and developing land of the various uses that the managed REIT target.
With the end game debt, the managed REIT or a take out such that the REIT don't have the overhang of non EBITDA generating capital at work.
It's certainly possible Brian.
Put that is less likely and I'll tell you why it's not because I'm not confident in our development capabilities are being able to do it.
It's obviously.
Related party transaction, if RMR was to build something and then try to sell it into REIT into the rights and.
Fortunately or unfortunately, we have a lot of related party existing relationships and whenever we engage in further related party transactions Theyre generally.
Difficult to explain in the marketplace and for whatever reason, they're often looked at.
Some groups of investors look at them skeptical skeptically, so I'm not sure that's really the way, we're thinking about it or plan to do it if we did start buying Greenfield again, the first place you might see a day and this is not going to be meaningful might be in and around industrial.
But if we did that it would be on <unk> balance sheet, we probably won't do debt, let's say on RMR personally or outside and then try to sell it to <unk>.
Okay, and just shifting gears, so clearly it looks like.
From this week's earnings that D. H C and SBC, probably turned the corner here with a lot more positive outlook for the next 12 to 18 months.
With what you're seeing you know kind of internally what do you think accelerates faster out of the downturn D. H E. R. S V C.
I Love your question Brian.
It's a funny word I haven't thought of it that way, but it looked like.
Got it.
Yes, it's like a horse race.
Look both of them Youre right <unk>. The 2 each day of most been negatively impacted by what's happened with Covid and they're both going through you are correct for second quarter second calendar quarter for results for both those companies was very good and we are as you're right. It does feel like we've sort of turned the corner and things are getting better there.
So many variables that are at play.
We think through the fall and into 2022 net effect, how those both those companies.
Come out.
And of course, it's all comes back to Covid on the SBC side its about how fast this business travel come back in does.
Is the delta variant sort of.
Make that harder as we get into the fall for business travel to come back in.
The question the answer is nobody really knows but everyone's suspect it's going to have some impact on the THC side. It's the same thing as.
If COVID-19 becomes a bigger part of the story in the U S. Economy, then does that does that hinder.
The ability to see occupancy grow the good news is I think both businesses are going to improve cash.
As we get further into 'twenty, 1 and certainly into 'twenty, 2 it's very hard to say.
At what rate that I think what we debate and what we spent a lot of time thinking about is the.
The speed of which the recovery will happen and both both are recovering and both are expected to keep recovering and getting positive. It's just very hard to say, which 1.
Do it faster and so.
That's the basic answer.
Okay, great. Thanks, Adam all for me.
And our next question today comes from Jim Sullivan of <unk>. Please go ahead.
Thank you.
So Adam I'd like to just kind of a follow on to some other questions that Brian had.
Let's start with capital allocation.
For the.
In terms of the development activity as opposed to act.
Acquisitions, presumably there's a there's a risk premium there.
And I'm curious if you could explain to us how you think about that what kind of hurdle rate do you have for development.
Number 1 and then I guess when you think about it in connection with the alternative of acquisitions that are very expensive environment, where you are.
How far off are you from the market. If you are under a lot of products and maybe.
Against the second or third round, how far off do you find the market for what you're willing to put capital into acquisitions.
Thanks, Jim I think we are not far off and we are winning transactions. It's just.
It's a very broad funnel at the top.
And you have to basically go through a lot of processes.
Some are more widely marketed and others.
To sort of get to that deals that we win obviously this past quarter, we bought $550 million of very high quality office properties, and we announced some small acquisitions at IMTT in the industrial side. So we are able to make acquisitions.
And I think we will be able to grow through acquisitions going forward in terms of capital allocation risk premium again, we have the.
The reason I said to the earlier question about focused on development at incumbent legacy properties as we have a built in.
Often low basis in the land.
And in the product in the real estate as it exists today on the balance sheet and so it helps us in terms of getting that good return on a development, meaning if we were to just buy vacant parcel in the same location of some of these properties.
On the development potential will be factored into the cost of the <unk>.
Land or the Greenfield and so that can eat into your returns. So part of the reason we're focused on.
Trying to do development activities on what I call incumbent properties is because we have that built in low basis, and it's easier to get to their hurdle generally speaking what are we building towards high single digits.
On a core return on.
For development high single digits.
Does it depend on if it's industrial or if it's office or even if it's going to be mixed use or even if it's.
Some other asset type it sort of varies but generally speaking across the board.
We're targeting high single digits, but thats incorporating the fact that we are already have a low basis in the real estate.
So thats how it helps get a good return for that client company when we put them when we put the additional capital growth.
Hopefully add 1 other world.
Yes, thanks for your for that 1 other alternative in terms of capital allocation, obviously, we've seen it, especially with some of the multifamily rates.
To have a an active developer capital program for structured finance book, we've seen companies like SL Green and do it in office and main street retail in UDR and others doing in multifamily.
And you have your mortgage REIT switch to a different type of business I believe but I'm just curious whether you have kind of.
On a serious look at it starting a developer capital program, we provide debt mezz level.
For the developers and sometimes retain an option to buy the property at the end of the day and to the.
So thats something that Youre looking at.
Jim It's something we're not seriously looking at.
We have looked more it's related to what youre talking about take out commitments, meaning rather than just providing the financing as part of the development phase with a takeout attached we have looked and circumstances of just committing to a forward takeout.
For a developer.
I think we probably do that before we commit to the financing, especially for us on a spec basis, even the forward commitments that we've looked at and haven't done I'm just telling what we've looked at has been around developments that have.
Usually attended in tow, meaning it's a build to suit.
<unk> subject to getting the building leased.
Before we could take a takeout guests.
Yes, you can get some cap rate.
Discount or however, you want to think about it it's a little better but of course you take.
It's the time value for money, it's when does that take out is going to be done.
Is how we've thought about so specifically answer your question no. We haven't looked at that way in terms of probably mezz financing for development, we still on the lending side, which you're right. It's related to what you are talking about we find we are proud of a pretty robust pipeline and think we can get a lot of money out to work looking just sort of that these transitional.
Value add light value add bridge loans, and we're seeing that on a risk adjusted basis, we feel more comfortable putting money there at the moment.
Okay and then final question for me regarding the pay platform.
When the.
RMR was talking about a major investment in P. For P platform, a while ago ultimately you scaled that back and to the point where you.
<unk> share of the cash will go to a special dividend and I'm just curious.
You guys are investigated presumably a lot of opportunities in terms of a P platform and I'm just curious whether the issue was.
Pricing expectations for the sellers are just too rich.
Or whether there was simply an absence of opportunities whether it would be kind of a good meeting of the minds of marriage in terms of the personnel debt.
It was platform you'd be buying.
Sure. It's a good question just to be clear I would not say, it's completely off the table.
Yeah.
I was more optimistic that that was going to be our primary way of growing the private capital business.
Some quarters ago.
Mike <unk>, our thinking around that has shifted a little bit more where I think we have a very good opportunity and we will be successful growing it internally or organically ourselves.
We talked about that in the prepared remarks, we were having advanced discussions with.
Being able to put hopefully together and I still believe this number billions of dollars to work in and around private capital that we will organically place that all being said, we haven't completely put aside the idea of doing something with that with M&A.
And.
To date. The reason, we haven't done something is not because of price.
I would say to date, we entered this market it is.
Now several quarters, maybe a year or 2 that we've been doing this now and we had lots of discussions I would say as much as this has been about us being very choosy about what we want to acquire.
And more specifically.
I don't think youre going to see us buy and this gets really nuanced within the industry.
<unk> debt is heavily reliant on closed end funds that do opportunistic investing in real estate.
A bridge too far from what we do and shops that are focused on that and that's the majority of the private real estate private real estate shops that exist out there. Our focus has been just we are more interested in.
With folks that are more they are investing sort of more core.
Real estate less closed end funds, maybe more separate managed accounts.
And that just fits better it's just it's a better there's a lot more synergies with what we do on our organization with a firm like that and so we've narrowed the focus.
To be there and I think it took us for a while to figure this out but this is what we wanted to do as an organization. If we were going to do this from an M&A perspective and be successful at in M&A from doing this on an M&A perspective and so.
Date due for.
Firms, we have talked to that sort of mid <unk>.
Check all the boxes meet that criteria have been.
It has not been without price it's been more about.
We wanted to do a controlled transaction.
And thats, not just financially but to a certain extent operationally. We think we can bring for example significant synergies to bear.
On an organization like I've identified.
On expenses.
And so the by the seller has to be comfortable with that sort of arrangements as we go forward and so it hasnt been price. It's just been more meeting of the minds culturally getting together with groups and also us being more picky and very very choosy about what it is we are willing to buy.
Okay very good thanks for that Adam.
And our next question today comes from Kenneth Lee RBC capital markets. Please go ahead.
Hi, Thanks for taking my question.
Just 1 about the.
Do you have larger scale developments.
You mentioned that this is Eric.
That could grow over time and you also mentioned that you are.
Right now wrapping up your capability just wondering if you could just perhaps give us a better sense of day potential timeframes involved were.
Where you can reach that level of capability and where it could start to see more meaningful contributions.
Yeah.
I don't want to put too much I don't want to overstate.
The level of contribution that this business could be providing here in the short to medium term as we get it when I say short to medium term 2021, 2022, probably well into 2023. This is 1 development takes a long time when they're in the specialty type of developments. We're talking about for example, 20 mass AV development, we mentioned in our <unk>.
Third script. This is something that is a $200 million project at <unk>.
<unk>, it's not going to be delivered to Q1.2023.
We have a handful of other projects of sort of the same scale that.
As I think about it those projects that will start.
In the coming years.
As we get into 'twenty 2 into 'twenty 3 those projects will begin F.
On a scale like what we're talking about so.
Think it's an important capability for an organization like ourselves and I think as time goes on.
Years from now I think this could be something thats quite that could become more meaningful.
Maybe we're somewhat or on conservative what I'm trying what were trying to do is sort of build up our capabilities over time and I think.
It also sort of helps legitimize us in the eyes of investors that were sort of a full service.
<unk> integrated.
Real estate company that can do all stripes are things real estate with a focus generally.
Generally focused on core real estate, either buying managing or building to core real estate.
And that's really our focus.
And so I don't want to overstate it again not to pick on industrial but that could be the 1 place that you could see a small uptick in the stuff, where we could start maybe.
<unk> some more development, there and again it would be development to core.
I like to see US walk before we run we have 1 development project going on down in Dallas.
Going to be.
It's a $10 million project all in.
If that and I really like to see US do it successfully before we start green lighting, many more projects. So it's going to be a process. We go through but I do think it will be and it's important for us for multiple reasons and someday could be a bigger part of our story.
Got you that's very helpful.
And 1 follow up question, if I may you mentioned in the prepared remarks about.
The S&P REIT index being discontinued could you just talk a little bit more about what you see it could be the potential impact to incentive fees given the calculations use a 3 year.
Thanks.
Yes. Good question, Ken So pretty similar to our prepared remarks. This is something we've learned from S&P in the last 3 or 4 weeks, where in the process of assessing alternatives.
To be fair the ultimate goal is to find an index and.
On alternative.
With S&P or otherwise.
It's very closely mirrors, what we have today with the hope.
That there will not be.
Significant change to where the.
Current incentive fee is trending.
Whether it be the SNL index or replacement index. So thats our goal and I think we will have more to say on this.
At our next earnings call or in advance of our next earnings call, but we need to go through a process, where we talk to both the RMR boards in the respective REIT boards over the next few weeks as we identify alternatives.
Got you very helpful. Thanks again.
Our next question today comes from Ronald Campbell with Morgan Stanley. Please go ahead.
Yes.
Hello <unk>. Your line is open for you on mute, perhaps yes.
Yes can you hear me now.
Yes.
Okay, great sorry about that.
I had a quick follow up on sort of the S&P and.
Index exploration.
And I can appreciate you guys are still sort of in the middle of conversations you may not know, but with the idea be finding a new index for.
For our calculation for the remaining of the year or.
Is there a chance to just redo the calculation.
Even for sort of the time, that's already passed with the current index hopefully that makes sense.
I think both alternatives or possibility Ron I think we just need to go through the process of assessing what the alternative is and then what the process of adoption will be.
With each respective board in the RMR Board.
Got it makes sense.
Just 1 other things I wanted to follow up on us.
Conversation earlier about.
Private capital vehicles, I know you've talked about historically.
Maybe get potentially getting exposure to multifamily sector.
Just curious how much of that is.
Played into sort of the search.
In terms of the core real estate manager and if not.
Realistically.
Whats the path.
Maybe executing on something on the multifamily side, if you're still contemplating it.
Yes, I would say that.
It hasnt been lets say.
Our requirements or criteria that the firm must be in the multifamily space, but that all being said most core.
Private equity firms.
Have a multifamily aspect to them.
Just about everyone. We've talked to had some level of multifamily that thats 1 of their core competencies or they have.
Some amount of it and so I think if we were to do anything in and around that.
Let's say make an acquisition.
I think it would likely come with some multifamily on X.
For Ts and of course that would be obviously an area we could try to grow around that if we don't make do something in multifamily.
In terms of M&A.
I think we would have.
Have to explore building it out or on our own.
And would that require is supplementing some of the folks here at RMR that have a little bit more expertise in and around multifamily and basically building it.
And that could be re using some of our capital to seed.
Our fund of some sort or an initiative or vehicle hopefully with some outside capital alongside us.
So to get it up and going but that would be probably the way we would think about doing it.
Just to be clear, though.
That's not something that we are actively trying to set up today. So I don't want you to think that youre going to see on.
Our multifamily platform suddenly announced at RMR that we're going to organically build that's not something we are actively trying to build I think based on the canful conversations where we.
We're sort of 1 as 1 day ground to the very end. These these conversations with a handful of folks and see if we can get 1 across the line and if we do.
And it likely will come with a multifamily aspect to it and sort of build from there. So that's how we're thinking about it.
Helpful. Thank you.
And ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then 1 on our next question comes from Owen Lau with Oppenheimer. Please go ahead.
Thank you for taking my question I wanted to go back to special dividend.
I think Adam you mentioned.
Our model, it's still considering paying special dividend by the end of this year I think last quarter. You mentioned the 6 ship may be make by September and RMR could return for.
50% of cash on hand.
I think the U S GAAP because in your prepared remarks, you also mentioned RMR and non something like some growth initiatives in the coming months I just wanted to see whether September and 50% are still about it here. Thank you.
Thanks, So on yes.
Thinking and timing and sizing around the dividend since our last quarterly call really Hasnt changed we continue to think that it could be up to half, let's say of our cash which is roughly half of our cash is today $200 million and our plan is to still hopefully make a decision by September or by our for.
Fiscal year end, which is September 30.
Okay got it that's very helpful and then a.
Quick modeling question on so nester I think it.
It has been doing quite well.
Last quarter you mentioned.
The revenue off so napster will go up.
Do you like $1.6 million in the fourth fiscal quarter, I think which is $500000 higher and I think net this quarter.
Matt you mentioned something like you're expecting these to be flat.
From this quarter. Thanks Corp quarter, I, just want to make sure I understand the dynamic here. Thank you.
Hi on yes. Thank you I know you had largely asking very specific modeling question, but let me just say a couple of things about sonesta, which I'm glad you opened up the Florida that sonesta is doing very very well.
<unk> 1 of our largest clients announced its earnings earlier today first time, its announced positive hotel EBITDA.
Since the pandemic began for the quarter and that's largely because of the performance of Sonesta, which has been very very strong probably stronger than we initially thought it would be it's been so far it's been so strong yet sonesta.
That you also heard SPC talk this morning about how they were marketing 69 hotels for sale and they mentioned that they are selling them initially with the idea that they would be encumbered by brand. It is.
The response in the marketplace to Sonesta has been so robust debt when we went out to brokers to talk about.
Valuations for potential selling selling of the hotels.
This was a little bit of a surprise even to myself and to others, we heard back that they thought debt.
Selling them encumbered by Sonesta would be very little if no discount.
To selling them unencumbered and I point that out because it speaks to the market place opportunity debt SBC and sonesta are experiencing which is and I don't think any of us have.
Fully realized it when we bought let's say Red Lion and put the whole sonesta business together largely on necessity because of our our managers defaulted on us but.
Today in the marketplace. We are now 1 of the largest hotel companies and as we go out to talk to folks about franchising. The reception. We are getting is incredibly robust and it's because 1 we may not charge the same rate for the Marriott wood, but maybe more importantly, 2 factors 1 sonesta es.
As an owner operator, not just a franchise company.
And 2 it's much more getting in on the early days of what could be a potential major brand is the way I used the analogy I use is <unk>.
We're sort of getting in as a franchisee with sonesta or the third the force, meaning if you are jumping in with Marriott you are in the eighth or ninth inning may have saturated the market. So if you have an extended stay hotel and you want to.
By 1 of the hotels were selling at SDC.
Youre going to be maybe the 20th Marriott for the 15th Hilton or the 10th highest in that marketplace on extended stay yes might be the only sonesta are 1 of 3 sonesta.
And you might and we may not charge as much. So it's been really interesting to see the response, we're getting in the marketplace, which explains why I think SCC is going to be able to hopefully sell the hotels encumbered and likely not pay and not realized any discount in the pricing, which at first might be.
<unk>, a little bit of a surprise to people, but it also speaks to the power of the Sonesta brand in this marketplace today.
Matt why don't you talk about if at all on to your specific on our modeling. So this quarter sonesta generated about $1 million in half and fee revenue.
On where they see leisure travel and hopefully some resumption post labor day of business travel, we're modeling them out at about $1.8 million next quarter now. Please keep in mind my prepared remarks, we're net net while they are up the operators as a whole should end up all things being equal back at 7.
Which is where they are this quarter.
Got it so 1.8 from $1.5 okay got it and then just 1 final clarification on on the SNL benchmark with SMP discontinue or the benchmark you're using with just 1 specific benchmark I'm trying to understand that they they've had some business transactions and mergers on their side and they need to.
Any index.
Tied to the SNL brand name.
So all right.
Right.
Okay. Thank you very much.
And our next question is a follow on for Bryan Maher with B Riley FBR. Please go ahead.
Great. Thanks for all that discussion got me thinking.
1 thing that jumped to my mind is can you maybe explain the advantage to the franchisees other than the getting in the early innings as far as the year on.
Marketing fee standpoint, what's the advantage to that and if you could quantify it in any way and secondarily Red line came with a lot of brand I'm guessing that the focus really is on the net debt.
<unk> Redline itself do you think you might prune any of the other brands that came along with debt transaction.
Sure in terms of the brands themselves.
At Red line.
Could be 1 or 2 brands it overtime.
We would prune overtime in terms of franchising.
It's still very much a focus on the Red line.
Brands themselves, there's a couple of large brands within Red Lion America's best value in that does very well that.
<unk> to generate interest in the marketplace.
Debt, but youre right that the focus has now been shifting towards sonesta and when we shift the focus to sonesta, it's been around more what I'd call. The extended stay in the select service product. So it's what we have today is the Es suite C. Sonesta Es suites, the sonesta simply streets.
As the extended stay product and Sonesta select which is these limited service product.
There is a lot of interest and that happens to be the vast majority of the 69 hotels that SBC selling is extended stay on your select service is a vast amount of interest in talking to sonesta about those transactions those hotels, but also just franchising in general.
And I think SBC talked about this on this call. This morning, but theyre going through the franchising getting the franchise disclosure documents filed in August.
On file where they have to be and also working through its sonesta sort of finalizing brand standard. So this can all sort of be rolled out to potential franchisees look in the beginning I'm not going to put specific numbers on it but you can think it's going to be a little.
Modestly.
Less expensive than it would be for let's say, a marriott, which is sort of historically been the most expensive.
With regards to fees in the marketplace again, reiterating what I said before and again I.
This.
This also was not something I think we fully realize the benefit of and when we put sonesta together with Red Lion, we thought on a standalone Red line was going to do very fine on its own I don't think we fully appreciated the benefit the sonesta is going to realize by tacking on that franchise system, which we have.
Now done.
Because franchisees.
They really like.
Not so much day, it's less cost I mean of course people like that but it's really that sonesta is also an owner operator I can't underestimate. This enough the big brands have all gone so massively asset light that is very pleasing to the investor community is.
Very unpleasing for the franchise community that they have done that and so the franchisees feel very put upon for from the larger brand owners about being forced to hit brand standards.
And the fact, the sonesta itself manages and operates on behalf of SBC. Many of the hotels the franchisees feel that hey, there's a kindred spirit here if they put a brand standard in place on the franchisees they got to do it themselves with their own hotels and that they liked debt because they think that.
We just we'll think more in line with franchisees along those lines and again, it's the whole idea that youre getting in with sonesta.
And if you if your franchise, let's say on an extended stay hotel with US you might be 1 of 3 in the entire marketplace. The whole metropolitan area, where it's located you'll be 1 of 'twenty fives for Marriott and so that itself is also very exciting for franchisees and so look I think the potential for sonesta.
<unk> is pretty robust.
That all being said, we have to fully get through Covid and how it is impacting the hotel industry and but no different for us than anybody else in the marketplace, but there really is a competitive advantage and I don't think we really fully grasp the competitive advantage that exists until we sort of put this all together and start talking.
The potential franchisees.
Right, you keep referencing Marriott and you could probably throw Hilton in the same basket.
We've heard a lot of pushback from owners about brand standards as it relates to over the past year with Covid, but when we think about sonesta and the fact that you have the Royal Sonesta brand to which I think if memory serves me you are putting on in the 'twenty mass at property in D C.
On the Royal Sonesta full service and luxury resorts give kind of an uplift for the whole brand and it just kind of resonate a little bit like Hyatt, which offset historically has had skin in the game and you have park Hyatt and you have all the different types of Hyatt Hyatt place et cetera.
Is that maybe the direction, that's a net debt.
He used towards.
Yes. The short answer is yes, Brian for the fact that we have the high end product the Royal Sonesta, Sonesta hotels and resorts definitely benefits. The overall brand collection of brands at Sonesta.
Debt, we have and so.
Yes, it's definitely part of our strategy I think not unlike the big brands Youre going to see more of our hotel units will be extended stay select service, but you will definitely see us grow the Royal Sonesta and Sonesta hotels in resort I think we're basically going after the lowest hanging fruit.
Front, just because we we have gotten a lot of reverse inquiry on the extended stay and select service and we've got to get that sort of up and going but yes. We will lapsed, we will naturally move up the up the ladder and eventually start doing deals with Sonesta resort hotels and Royal Sonesta is I just think we don't even have to go.
They are quite yet because there's so much opportunity in the extended stay and select service that we try to work towards over the next several months year or so.
Great. Thank you.
And ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Adam Portnoy for closing remarks.
Thank you all for joining us today, operator that concludes our call.
Thank you Sir.
This conference call is now concluded you may now disconnect your lines and have a wonderful day.