Q2 2022 RMR Group Inc Earnings Call
Good day and welcome to the RMR Group <unk> second quarter of 2022 earnings call all participants will be listen only mode.
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Now I'd like to turn the conference over to Michael <unk> Director of Investor Relations. Please go ahead.
Good afternoon, and thank you for joining RMR second quarter of fiscal 2022 conference call.
With me on today's call, our President and CEO add importantly, and Chief Financial Officer, Matt Jordan.
And just a moment they'll provide details about our business and quarterly results followed by a question and answer session.
He'd like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company.
Today's conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 and other securities laws.
Forward looking statements are based on Rmr's beliefs and expectations as of today may 5th 2022, and the actual results may differ materially from those that we project.
Company undertakes no obligation to revise or publicly released the results of any revision to the forward looking statements made in today's conference call additional.
Additional 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 Dotcom and.
Investors are cautioned not to place underlines 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 reconciliation.
Reconciliation of net income determined in accordance with U S. Generally accepted accounting principles to adjusted net income adjusted earnings per share adjusted EBITDA in 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.
Thanks, Michael Thank you for joining us. This afternoon. We are pleased to report improved results. This quarter included adjusted net income of 50 cents per share an adjusted EBITDA of $25.7 million, both meaningful sequential quarter increases.
This quarter was highlighted by I O P. DS 4 billion dollar acquisition of Monmouth Real estate investment Corporation, which resulted in assets under management at the end of the quarter, reaching almost $38 billion.
Since becoming a public company at the end of 2015 or assets under management have grown almost 50% in just six and a half years.
The closing of the Mommas transaction was the result of the tireless commitment of many parts of the RMR organization, ensuring a seamless integration of man. This 126 high quality E Commerce focused properties.
The transaction provides the I O P T with increased scale and greater tenant and geographic diversity, while also ensuring I LPT as well positioned to take advantage of the current industrial market dynamics.
Turning to real estate fundamentals and highlights this quarter from some of the other clients.
Historically real estate has proven to be resilient during inflationary environment, and we believe our portfolio is well positioned to whether market volatility.
Market volatility approximately 85% of leases properties are more managers have annual <unk> escalator, CPI adjustments or percentage rent provisions.
Further over 60% of our manage leases have operating expense recoveries that should further mitigate inflationary risks.
As new and prospective tenants become increasingly active in securing their long term real estate needs an office building utilization levels increase we were not surprised to see strong leasing momentum carry into the second fiscal quarter.
RMR arranged almost 2 million square feet of leases on behalf of our clients. This quarter with a weighted average lease term of approximately nine years and a weighted average roll up and read it over 10%.
Additionally, we continue to see increasing signs of a normalizing operating environment and more specifically a general easing a pandemic related business disruptions.
Even before mass mandates were listed for air travel GSA checkpoint travel numbers were up 82% during the first calendar quarter compared to the prior year.
Indicating a growing eagerness to resume not only leisure travel, but also in person business meetings and conferences.
We believe this is a significant precursor to a more robust return of business travel hospitality demand an office utilization.
Oh P. I, an FCC are the two companies, we manage than most directly stand to benefit from these improving trends as.
Is postponed demick Tailwinds continue office fundamentals have exhibited steady improvement with increased office utilization improved leasing volumes and less available sublease space in the market.
Of the four managed equity reads OPI remains the most competitive with regard to its total shareholder return versus it's peer group and we remain encouraged by Opi's capital recycling activities development initiatives and strong operating results.
At S. B C. The diversity of its assets continues to distinguish it from other hotel focused reads more specifically, it's service retail portfolio, including its leases with travel centers of America continue to be well covered with with any pandemic related disruptions, having largely passed.
In terms of its hotel portfolio SBC saw increases in hotel occupancy and revpar throughout the quarter as repositioning efforts materialize transient travel in group activity recovers and business travel rebounds.
Finally, SBC recently enhanced its liquidity by extending its credit facility through January 2023.
Gaining extended covenant relief.
SBC also recently completed twenty-two hotel sales with an additional 42 hotels currently under agreements to be sold.
We believe SBC as well positioned heading into the second half of 2022.
<unk> reported sequential quarter NOI growth and at the same property shop segment, due primarily to rate increases and occupancy stabilization.
We are encouraged by these results and with continued capital investments and <unk> senior living assets, we are hopeful for continuing acceleration and Ght's recovery.
Additionally earlier this week <unk> life, who manages 120 communities on behalf of D. H C. A.
Appointed the company's current CFO as interim President and Chief Executive Officer.
Laris life also announced that it retained the healthcare consulting group of Oliver as in Marseille to conduct an operational review of the company over the coming weeks.
We are hopeful that these changes will deliver enhanced financial performance and value creation for both Laris life and THC in the future.
At the end of the quarter THC had almost $1.5 billion in cash and extended the maturity date of its credit facility to January 2024.
With ample liquidity, improving operating performance and medical office leasing results that have remained resilient, we're confident and dht's trajectory.
Finally in a commercial mortgage REIT seven Hills Realty Trust, we continue to believe that the business has attractive long term prospects.
During the quarter seven halos deployed almost $100 million of capital into three first mortgage bridge loans.
Is seven hills Leverages, our Mars best in class originations platform. The touts a strong default three track record.
Turning to our efforts to expand our private capital assets under management.
Manage private capital AUN ended the quarter at approximately $4 billion a significant increase from just two years ago, when private capital total less than $500 million.
During the quarter GAC entered into a 703 million dollar joint venture for 10 office properties with two global institutional investors, who acquired a combined 80% equity interest in the venture.
In addition, the Monmouth transaction completed by IL P. D was partially funded through a joint venture with an institutional investor who contributed $587 billion in equity.
This new industrial joint venture will not be included in our private capital a web metrics until such time as ILP G. No longer has a controlling interest in the venture.
To that end, we are inactive discussions with possible institutional investors seeking to deploy capital in the industrial sector via this new Monmouth joint venture and expect to have more to report in the future.
We are also talking through our various private capital relationships about other possible ventures, including credit vehicles that would leverage the successful track record and substantial infrastructure of our termite royalty capital subsidiary.
Before I turn the call over to Matt I wanted to highlight our continued efforts to strengthen corporate governance as we recently added four new independent trustees to the boards of Ilp's.
OPI THC in seven hills.
We look forward to benefiting from their collective insights and experiences.
With that I'll now turn the call over to Matt Jordan, Our Chief Financial Officer, who will review our financial results for the quarter.
Adam and good afternoon, everyone and the second fiscal quarter, we reported adjusted net income of $8 $2 million or 50 per share an adjusted EBITDA $25.7 million with both metrics, finishing at the higher end of our guidance.
Total revenues were $49.3 million this quarter, which was approximately $7 million higher on a year over year basis and over $3 million higher on a sequential quarter basis.
The sequential increase in revenues was primarily attributable to Ilp's February 25th acquisition of Monmouth.
And continued increases in construction management fees.
Looking ahead to the remainder of our fiscal year, we expect further increases in our revenues with each of the remaining quarters in the fiscal year expected to generate revenues of between 52 and $54 million.
This guidance is impacted most notably by the following assumptions.
First base management fee projections are based on enterprise value that THC SBC and OPI that reflects recent market volatility.
As well as expectations for modest debt reduction in THC in SBC over the remainder of the fiscal year.
Secondly, a full quarter of the mindless transaction is expected to generate approximately $3 million in additional fees next quarter.
And lastly continued increases in construction activity across the platform should generate approximately $750000 in incremental revenues each successive quarter <unk>.
As it relates to construction management fees I did want to highlight that in response to investor feedback we've added additional disclosure and our 10-Q filing differentiating construction fees from property management fees.
Turning to expenses for the quarter cash compensation of $31.7 million was flat sequentially is cost increases related to payroll tax and 401k contributions resetting on January 1st.
Were offset by two fewer days in the quarter and favorable head count mix.
Looking ahead, we expect cash compensation to remain at approximately $32 million per quarter for the remainder of the fiscal year, although the current labor market and wage inflation considerations make these estimates subject to potential change.
Cash compensation reimbursement was approximately 43% this quarter and we expect this reimbursement level to hold for the remainder of the fiscal year, if not slightly improve.
G&A was eight $5 million this quarter inclusive of $550000 of incremental costs related to annual share grants to our board of directors.
We expect G&A to trend at approximately $825 million per quarter for the remainder of the year as we continue to make strategic strategic investments in our operating platform.
In summary for each of the remaining two quarters of our fiscal year, we expect adjusted earnings per share to range from 57% to 60 cents per share and.
And adjusted EBITDA to range from $28 million to $30 million.
While we are pleased with this quarter's results as we look ahead. We believe this guidance represents meaningful increases reflective of how're infrastructure provides for increased profitability as AUM grows.
We closed the quarter with over $181 million in cash and continue to have no depth.
We believe our balance sheet leaves us well positioned to pursue a variety of strategies to expand our platform.
That concludes our formal remarks, operator would you. Please open the lines of questions.
We will now begin the question and answer session to ask you. A question you May Press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Bill Cats with Citigroup. Please go ahead.
Okay. Thank you very much and thank you for taking the questions I appreciate the update guidance when they start they're just sort of looking at how some of the rates have performed court date.
I guess I'm surprised by the resiliency on the revenue side, how should we be thinking about and maybe it's already embedded in in your response to some modest deleveraging, but just looking at the end of the equity values dropping as much as they've dropped incrementally since the end of March how should we be thinking about any kind of you know further deleveraging and how does that spilled back.
If it all back too.
To RMR apps, and just sort of a revenue hit is there any sort of capital at risk here.
Sure. Thanks, Bill this is Adam.
I don't think there's any capital at risk.
In terms of the performance of the reach themselves.
The most effective thing we can do as a manager of these reaches continued to try and focus on their operations and also.
Prudently manage their balance sheets and I think.
Some of our reach that we manage are going to benefit I think quite a bit as we come out of COVID-19.
Especially I think of SPC for example, as hotel.
Utilization increases in the coming quarters, I think that's going to have a market improvements on the financial performance of SBC and.
And remember SBC still doesn't pay a meaningful dividend, we're still not compliance with our debt covenants, but I think we are optimistic about being able to do getting compliance at least by the third quarter of this year and then hopefully soon thereafter, we can think about the dividend there and those are things for example at S. B C.
I think having a meaningful impact on the stock price for that company cut.
Company like <unk> I'm, just going through the list that companies, obviously dealing with access excessive leverage at the moment, which we anticipate will come down in the coming quarters as we delever that company by bringing in additional equity investors in the joint venture that we set up with regards to the.
<unk> acquisition.
Da see somewhat similar to.
SBC in the sense that as there is an improvement, especially at the shop portfolio and some of the actions that are highlighted in my prepared remarks that have occurred just this week.
With the change in leadership in a layer of Slife, which is the largest manager.
The shop portfolio THC, bringing in an outside consultant that has all been done geared towards very much improving operations at hilarious life, but also the shop portfolio and again is that is that performance improves we expect it to get in compliance with it.
<unk> and eventually be able to reinstate its dividend as those things occur in the coming quarters I think it will have a positive impact on those businesses.
Okay. That's helpful. Thank you so much and then they went from match just want to make sure I understand your guidance. So the revenue guidance of 52 to 54.
Is that all in number I apologize or is the guidance on monitors and the construction revenues incremental to that and then maybe more broadly as you look out into physical 23, I guess really count to 23, how you're thinking about construction revenues post this sort of activity level.
So let me start with the first one the 52% to 54 is all in all service an advisory so that.
We're trying to give you some of the piece parts to get to that growth, which is largely from where we are today anyway, which is largely monmouth's and then some of the construction activity you highlighted and then in terms of the construction and development frankly, it's development dollars.
That are driving.
Our guidance. So this quarter, we managed approximately $80 million in construction and development, we're projecting in that guidance those numbers, increasing to about $100 million to $120 million and I would expect that will continue based on the ongoing projects across the companies we manage.
Thanks, so much.
The next question comes from <unk> would be Riley F. B R. Please go ahead.
Hi, This is Taiwan for Brian .
Hoping you could touch on this semester brand a little bit kind of how the transition of 200 hotels to us and that's the brand over a sbcs disrupted their operations within the hotel portfolio, but it seems like there's meaningful opportunity for those to ramp up in 2022, and then maybe just more Broadway could you talk about John Murray's strategy to grow.
The brand over the next few years.
Sure Hi, Carl Thank you for that question, Yes, I think sonesta is he.
He is ramping quite nicely and really from the public markets perspective, really the only way to see that is through looking through SBC sort of two different ways. One you look at the performance of the hotels that.
<unk> owns that are being managed by sonesta.
But also through its 34% ownership that effectively flows through to <unk> as well everyone probably knows SBC owns 34% of senescence senescence itself is a private company sinister.
Is growing quite a bit and it's not just growing.
It all really on the back of SBC, just earlier last week on its balance sheet.
Four hotels in New York City, which was a great entry way into that Gateway city for the brand that's bit was done on tests <unk> balance sheet. You also have to remember that while there is 200 hotels being managed by sonesta for SBC.
We have almost 1200 hotels that are within the family of Sonesta as well over 900 that are being made that are being franchise, they're effectively coming off of the as a result of the Red Lion acquisition. So sonesta has a lot going on in it right now away from just managing.
The hotels SPC that being said the management of the hotels is significant for sinister and I'm pretty optimistic and I think the team at CNS is pretty optimistic that in the over the coming year, we're going to meaningfully improve the margin.
Over time, I think SBC will also quite a bit benefit from that 34% ownership.
And as an SBC investor I really do hope to market looks through not only at the margins of the hotels, what they're producing but also the value of that 34% ownership because in combination I believe as we get out into the out years here and as soon as that continues to grow and expand.
In 2003, and 2425 in combination the margin as well as the value of that ownership is probably going to significantly exceed.
The cash flow it was receiving when the hotels were branded by the prior brands and so I think we feel pretty good about where we are in terms of what John Murray focused on is the new CEO . It's an asset I think part of the reason John we sort of the perfect fit for going over to sonesta at this time when Carlos.
The former CEO decided to the park the company.
Was one John it's got a long history in hotels and.
It was heavily involved in acquiring almost every hotel that <unk>.
<unk> currently manages and there's also integral in the hotel of Red the acquisition of Red line last year, but you have to remember John also is is it.
Probably gonna hate me, saying this but he's a deal guy he's a growth oriented fellow.
He ran acquisitions at RMR for many years before that he ran just acquisitions for hospitality I think he's very focused on growth and I don't think.
Be very clear I think he's he added think about where he is focused it's picking up additional franchising franchises, it's picking up additional management contracts.
A little bit using the sonesta balance sheet to make outright acquisitions of hotels, but I think that's very much what he's focused on why he's the right person to lead the company right now because that's that's what's <unk> really needs to focus on is is.
Is is growing it's brand and growing the number of hotels that he franchise, they're managed by success and where you have a great opportunity now it's 1200 hotels, but I think we really have an opportunity to grow that quite.
Quite a bit and.
In the coming years.
Great. Thanks for all that color that's all for me.
Again, if you have a question. Please press Star then one.
The next question comes from Ronald tandem with Morgan Stanley . Please go ahead.
Hey, Thanks for taking my question is this the first one on Ilp's. Thank you.
Comment just about a hiccup.
Congrats on closing the acquisition.
I think the plan assorted delever that may be a little bit more collar on.
Conversation that you may be having it in terms of.
Their party capital to come in and and how you think about sort of refinancing.
Some of it that there would be helpful. Thanks.
Sure. So thank you for that question, so would I OTT.
Sort of.
In the wake of their public announcements last week, when they announced earnings you know they are.
In having very productive we are having very productive discussions with additional equity providers into that joint venture. We remain confident if not optimistic that we will have additional equity investors into that joint venture and by doing that alone It will deconsolidate.
That joint venture off of the <unk> balance sheet, and just doing that alone will on a headline number on its balance sheet reduce leverage significantly.
And the other thing that is going on there more specific to the ilp's.
Balance sheet.
Post, let's say a deconsolidation of the of the joint venture is also deleveraging through asset sales and I think as <unk> said on the call last week.
They are moving forward.
We are moving forward very well we've continued to re confident again optimistic that we will.
The real estate assets.
As outlined since we made the acquisition.
And.
In our experience and RMR the good news from our perspective.
Depth of our platform the type of real estate market the different sectors, we work in.
We see we're buying and selling assets across the board.
Every week and so we have a pretty good feel for what's going on in the market and so generally speaking we remain confident those sales will occur.
Largely as we said they would and not unto itself will be a deleveraging.
Events for I LPT, so those two things, which we continue to feel confident about or what we think is going to happen in Iowa, BT and will result in what I believe to be significant deleveraging.
Before the end of the year.
Great and if I could just follow up on that you know obviously, the the the Amazon news about sort of over capacity.
Something like that impact conversations or willingness to do deals in the market or just a capitalist too long term focus and is just.
Industrial fundamentals remain too attractive for that to matter just trying to get a sense of timing could be impacted at all just just from that news if there's a ripple effect that made sense.
Yeah, I think there's the Amazon comments last week from their earnings announcement, obviously ripple through through the industrial sector in industrial markets as a whole look I don't think the long term fundamentals and thesis surround the growth in need for growth in industrial space has changed.
We have seen some of the highest rent increases.
For the last couple of quarters were running in our portfolio close to 100% occupied.
Everything we see points to to have continued.
Double digit rent growth in the coming quarters.
To be honest with you I think the bigger impact, which we haven't seen yet, but I'm looking out for is less what Amazon said and more just the movement and interest rates and is that eventually going to have an impact on cap rates.
I think it could be said, it's certainly in the industrial sector.
Large portfolios very large portfolios I think it has had some impact on pricing I've, yet to see meaningful changes in pricing on an individual asset by acid basis and industrial.
But the fed made an announcement yesterday and they have indicated where interest rates are going in and.
That's something I think we look out on our focus on the.
The counter to that is just what you said there is so much capital looking to invest in this sector.
It was only a few real estate sectors that most people want to invest in industrial is one of them as many that had been red lined by many investors retail office hospitality.
And so there's not many left to invest in multifamily industrial being two of the biggest that people are still focused on and so part of what we've.
The counter to the fact that interest rates might be going up and that could affect industrial cap races. We just look at the multifamily sector and while in that sector. We've continued to see very low cap rates.
In that sector and maybe that's a precursor to what is going to continue to happen in the industrial even with rising interest rates may be industrial cap rates do not move meaningfully but to be honest with you I am less folk I'm less concerned about the Amazon announcements and.
I'm more thinking about what's happening to interest rates and does that affect the cap rates for industrial.
Helpful. That's it for me thanks, so much.
This concludes our question and answer session I would like to turn the conference back over to Adam Potently Glennie closing remarks.
Thank you for joining us today, 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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