Q3 2022 RMR Group Inc Earnings Call
Good day and welcome to the RMR fiscal third quarter 2022 earnings Conference call.
All participants will be in a listen only mode.
You need assistance. Please don't always conference specialist by pressing the star followed by zero.
After todays presentation, there will be an opportunity to ask questions to.
To ask a question you May press Star then one on I know you touched on so.
So it's all your question. Please press Star then two.
Please note today's event is being recorded.
I would now like to turn the conference over to Michael caught US director of Investor Relations. Please go ahead Sir.
Good afternoon, and thank you for joining Rmr's third quarter of fiscal 2022 conference call.
With me on today's call are president and CEO , Adam Portnoy, and Chief Financial Officer, Matt Jordan.
Just a moment they'll provide details about our business importantly results followed by a question and answer session.
Note that our reporting 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.
These forward looking statements are based on Rmr's beliefs and expectations as of today August eight 2022.
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.
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 Dot com investors are cautioned not to place undue reliance upon any forward looking statements and.
In addition, we may discuss non-GAAP numbers during this call, including adjusted net income adjusted earnings per share adjusted EBITDA and adjusted EBITDA margin.
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 EBIT margin can be found in our earnings release and now I would like to turn the call over to Adam.
Thanks, Michael and thank you for joining us this afternoon.
We are pleased to report another strong quarter of financial results with adjusted net income of 59 per share and adjusted EBITDA of $29 $4 million.
Representing sequential quarter increases of 18% and 14% respectively.
As an alternative asset manager focused primarily on core commercial real estate Rmr's unique structure remains highly attractive in today's operating environment.
Our competitive advantage is rooted in over 35 years of experience in managing commercial real estate as well as our large size and scale, which includes over 2100 properties located throughout North America.
This expertise is especially important today as we navigate the ongoing macroeconomic challenges related to heart rising inflation, increasing interest rates and slowing economic activity.
These trends have resulted in significant reductions in commercial real estate transaction activity as buyers and sellers adjust to this new environment.
While we have historically seen increases in AUR.
From growth at our existing publicly traded equity Reits.
Last few years have demonstrated our success in raising private capital to grow our AUM away from these equity rights.
From almost $0 of private capital under management management, just two years ago. We have built a platform that currently has almost $4 billion of private capital assets under management.
Access to private capital markets gives the RMR in additional path for continued growth, especially during times like these with pronounced market volatility.
With that said there remains significant revenue opportunity within our publicly traded equity Reits.
For the third fiscal quarter, almost 75% of our revenues came from our managed public real estate capital clients.
With our publicly traded equity reach representing the vast majority of these revenues.
Based on the capital structures of these equity reached today, there is significant feed durability and limited downside to the revenues we generate from this year you earn.
Moreover, there were significant fee revenue upside without the need to grow a U M. At these equity Reits as we are highly incentivized to increase their respective share prices.
To put this in perspective, if we close the gap between enterprise value and historical cost of the equity reach underlying assets, we could generate approximately $53 million of incremental revenues annually with close to 100% flow through to EBITDA.
This number is all the more remarkable because it excludes the potential for any incentive fees.
Ultimately this two pronged approach growing internally and externally through both public and private capital markets enhances our <unk> ability to thrive within almost any economic environment.
Furthermore, our operating results this quarter highlight the benefits of this approach.
<unk> ranged almost 5 million square feet of leases on behalf of our clients this quarter more than doubling the previous quarters activity with a weighted average lease term of approximately 19 years and a weighted average roll up in rent of almost 26%.
Almost 80% of this quarter's leasing activity was executed was executed at IOP T owned assets highlighting the continued robust demand for industrial and logistics properties and supporting our recent focus on acquiring well leased and attractive industrial assets.
Earlier this year <unk> closed on the strategic acquisition of Monmouth Real estate investment Corporation, which includes approximately 26 million square feet of high quality E Commerce focused industrial assets.
<unk> consolidated portfolio of well located assets are currently 99% leased by strong credit quality tenants with a 9.2 years weighted average lease term.
On prior calls we discussed the <unk> long term financing plans for the mom acquisition, which included the sale of additional equity interest in an industrial joint venture that includes Monmouth assets and property sales.
However, given the current interest rate environment, which has led to a meaningful deterioration in real estate market conditions.
<unk> made the decision to pause any discussions with potential joint venture partners and buyers of assets in conjunction with these decisions IOP reduced its quarterly dividend to preserve liquidity in the short term.
We are comfortable that LPG will weather. These short term challenges as the core operating fundamentals remain robust and represents strong tailwind until permanent financing solutions are put in place.
O P I recently.
OPI recently reported strong results this quarter that included growth in both same property cash NOI and normalized <unk>.
Despite this quarter's strength office fundamentals remain in a period of transition as tenants continue to assess the longer term space needs and possible hybrid work environments.
Over the last three years OTI has carefully curated its portfolio recycling capital into stronger well leased core assets, while continuing to have the security of the U S government as one of its largest tenants.
Despite headwinds in the office space sector, we remain encouraged by Opi's leasing trends and our internal tenant activity metrics suggests OPI seeing tenant engagement across its portfolio that exceeds national office sector averages.
Turning to our hotel and service retail businesses and.
A travel centers of America business was remarkably strong with adjusted EBITDA of almost $123 million this quarter, representing a 67% year over year improvement.
While inflation a possible recession represent possible headwinds Ta has established a resilient business model that should withstand possible pressures on operating margins in the future.
At SBC growth in normalized <unk> and adjusted EBITDA reflects the continued benefits of SBC portfolio diversity and distinguishing factor when compared to other hotel focused Reits.
Just under half of Spc's assets are in the service retail sector led by its leases with Ta Ajay.
As I previously highlighted Tas results continue to reinforce the strength of SBC service retail portfolio.
With aggregate coverage of its net lease portfolios minimum rents being a very robust two eight times as of June 30.
With regards to sbcs owned hotels the portfolio has benefited from the ongoing improvements to lodging industry fundamentals specific USB C Hotel average daily rates. This quarter were at historical peak levels and Revpar growth exceeded the broader hotel industry average by over.
18%.
Since the beginning of the year Sbcs show 59 hotels for almost $510 million and repaid $500 million of senior notes the.
The strength of Spc's results has led to it now being in compliance with all debt covenants.
Well ahead of prior expectations.
D. H C reported yet another sequential quarter of NOI growth in our same property shop segment, due primarily to rate increases and occupancy stabilization.
A year ago DHT began the process of transitioning management of 107 communities to New third party regional operators, which completed late last year.
This quarter occupancy into transition communities increased 210 basis points and NOI continues to improve both price positive signs that these regionally focused operators are driving improved operating results.
During the quarter DHA repaid $500 million of 975% debt sold an additional 10% equity interest in its existing Boston life Science property joint venture and is making progress towards regaining compliance with its debt covenants.
We are encouraged by recent trends with THC and with continued capital investments in Dht's senior living assets and the recently announced restructuring plan at <unk> life.
We are hopeful the The's operating results will continue to improve in the coming quarters.
Finally at our commercial mortgage REIT seven Hills Realty Trust, we continue to believe that the business has attractive long term growth prospects.
During the quarter seven hills portfolio remained default free and with new originations its aggregate committed capital was $735 million at quarter end.
We expect that seven hills will benefit from the current rising interest rate environment, because its portfolio consists of 100% floating rate loan investments, which leaves it well positioned for continued earnings growth.
In closing our public and private managed vehicles collectively have over $37 billion in assets under management today.
Which represents over one $3 billion of growth per year on average since going public seven years ago.
As I highlighted earlier, there also remains significant opportunities for revenue growth without any AUM growth through share price improvements at our existing publicly traded equity rates.
Additionally, we remain optimistic that there are ample opportunities to grow private capital either organically or through possible M&A activity in the years to come.
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.
Thanks, Adam and good afternoon, everyone in the third fiscal quarter, we reported adjusted net income of $9 8 million or 59 per share and adjusted EBITDA of $29 $4 million, both representing significant sequential quarter increases in each metric, finishing above the midpoint of our guidance.
Total revenues were $53 million this quarter, which was over $7 million higher on a year over year basis, and almost $4 million higher on a sequential quarter basis.
The sequential quarter increase in revenues was primarily attributable to the full quarter impact of Imtt's Monmouth acquisition increases in construction management fees and fee growth tied to the continued strong operating performance of sonesta in Ta.
Looking ahead to the fourth quarter, we expect to generate between 50 and $52 million of revenues based on the current enterprise values of our managed equity Reits as well as our expectations of continued increases in construction management fees.
Turning to expenses for the quarter cash compensation. This quarter was $32 2 million, which was an increase of $500000 sequentially and our corresponding cash reimbursement rate improved slightly this quarter to approximately 44%.
While wage inflation and labor scarcity, both remain a headwind, especially in greater Boston our employee retention rates have remained ahead of industry benchmark and we continue to leverage technology secondary hiring locations in select outsourcing solutions to mitigate these headwinds.
Looking ahead, we expect cash compensation to remain at approximately $32 million for the fourth quarter and our reimbursement rate to remain at 44%.
As a result of these collective expectations guidance for the fourth quarter remains unchanged with adjusted earnings per share forecasted to range from 57% to 60 per share and adjusted EBITDA should range from $28 million to $30 million.
Rmr's quarterly dividend of <unk> 40 per share remains well covered at our current payout ratio of approximately 55%.
We closed the quarter with almost $200 million in cash and continue to have no debt.
We believe our balance sheet leaves us well positioned to pursue a variety of strategies to expand our platform.
Before we begin the question and answer portion of the call I would like to first acknowledge Rmr's recently published sustainability report our sustainability report provides a comprehensive overview of our long term ESG goals, including Rmr's zero emission promise, whereby we have pledged to reach net zero greenhouse gas emissions across the.
Properties, we directly managed by 2050 with a target of reaching a 50% reduction by 2030.
We would encourage those listening to go to RMR sustainability website, where readers can see a collective overview of the successes we've had thus far in driving energy emissions water and waste reductions as well as our contributions to the communities we operate in and the investments we are making in our people.
That concludes our formal remarks, operator would you. Please open the line for questions.
Absolutely if you would like to.
To ask a question. Please press Star then one on your Touchtone phone.
They're usually with bigger problem. We ask you. Please pickup your handset before pressing the keys.
Your question. Please press Star then two.
Once again, that's star then one if you have a question.
Today's first question comes from Bryan Maher with B Riley FBR. Please go ahead.
Good afternoon, Adam and Matt.
Thanks for those comments.
Couple of questions for me on the domestic front now that you bought well sonesta bought four properties in Manhattan earlier this year in conjunction with M. S.
S V C E contribution.
Do you have any thoughts on this growth trajectory kind of going forward over the next year or two.
As it relates to buy more hotels and gateway markets.
Sure.
Brian Thanks for that question about Sonesta, Es Sonesta, you're right to focus on Sonesta, It's really had a great quarter and really showcasing the.
The improvements they are having in the operations, especially over the last quarter into this summer with regards specifically to your question about how it's playing to grow I would say that.
The real focus at Sonesta is on growing its franchising business.
We're not ruling out that it could also make acquisitions outright acquisitions of hotels.
But I would say the focus is really on growing its franchise. The number of hotels that franchise. It has a really good base about 1200 hotels, three roughly 300 and manages itself.
And then around 900 that are franchises.
Its franchising businesses is really starting to pick up pace.
And I expect that's going to be the majority of where Youll see unit growth coming and again just to tie. It all back together that is of course as we grow revenues at sonesta that benefits RMR and of course, as we grow cash flow at sonesta that indirectly.
It helps SPC through its 34% ownership in sonesta so.
That's principally how we're thinking about growing at Chester and we feel pretty good about it.
Okay. Thanks for that and then over the years, you've talked a lot about acquisition opportunities you have a lot of cash on the balance sheet. I think if memory serves me that might slow down a little bit, but you were getting inbound inquiries.
Looking at is there anything going on there given the capital market dislocation of the past.
Couple of few mines and talk on Wall Street are you know weakness because theres no deal activities is that ramping up at all with people approaching you to revisit some of that.
I'm not sure of the ramping up is the right word, but we are in discussions or have had discussions with groups.
Just to recap for you maybe less so but for others. Brian you know in 2000 22021, we had a very concerted outgoing you know engagement, where we work actively calling on partners. We were calling them. We were asking for meetings really beginning last six months or so we've been stepping back in.
Not so much go making outbound calls, we're getting we're sort of sitting back and waiting for inbound calls and they have been occurring I would say every quarter.
We get 123 inquiries.
EBIT from groups that we've talked to you in the past that circle back and want to check in indoor talk at a high level about something or and or theres something going on in the market where.
Potential.
The acquisition has actually retained.
Advisor and is engaged in a process.
Of course, we're on the short list of folks that they would call. So.
Nothing imminent to speak of in terms of.
We're not in the process of negotiating a PSA a purchase and sale agreement or anything like that but we have pretty regular dialogue. It's you know it comes and goes but I'd say on average every quarter. There is at least a couple of conversations that occur.
Yeah, just two more for me on the JV front, which you referenced in your prepared comments.
Which has really grown quite a bit over the past couple of few years can you talk a little bit more about.
The JV partners or potential partners as that broadened out over the past year or two as you know whatever sovereign wealth funds or other large private capital sources.
You've done it.
And want to participate in that can you give us some more color on that.
Well there is nothing to point to specifically in terms of we suddenly taking on a mandate with a new partner to speak of but I can tell you that yes very much. So we have had.
Increasing dialogue.
Over time with groups.
I would say the groups that we are focused on talking to you. All have had the most conversation with tend to be other sovereign wealth funds and that's because and I think this is a good thing the sovereign wealth funds, we are doing business with us have referred us to other sovereign wealth funds.
And sometimes without are prompting.
Which is no greater compliment than that that they say they are enjoying their relationship with us and they suggest us to others and so we immediately get a pretty good audience do that and Thats happened on a handful of occasions already.
And so we are in dialogue with other folks we mentioned several a couple or few quarters ago that we have had a more direct and focused effort in and around family offices and high net worth individuals. There's definitely been several conversations with that sort of constituent of potential partners that have occurred as well.
And so I'd say the dialogue is progressing.
Well and that's why you've heard us tactically.
Couple of quarters ago say things like.
We're more focused on sort of growing it internally organically ourselves rather than relying on having to jumpstart it through M&A. It doesn't mean, we won't.
I'll engage in M&A just means that we are getting increasingly gaining confidence that we are going to be able to continue to grow the business or grow that AUM growth.
Through that means in that channel just doing it ourselves.
Okay, and just last from me, you're sitting on almost $200 million in cash thinking about a year ago, you did that big $7 per share special dividend.
Clearly you don't have the nearly 40 million you had a year ago, but is there any thought as we look out over the next quarter or two.
A potential special dividend or otherwise returned capital.
Yeah, it's probably a little early for us to have any sort of serious dialogue around that at the board I think what we've been thinking about.
<unk> is using that capital source similar sort of ties back to your private capital sourcing question. Prior as we think about growing private capital.
And additional separate managed accounts joint ventures, possibly engaging in fund raising around their specific fund of some sort you know.
I think we more and more thinking that some of that capital could be used for.
Co investment.
If youre going to put a vehicle together in its simplest example.
<unk> put a couple of hundred million dollars of equity together.
As a sponsor they typically look for some sort of investment as you source start off in that business. You are co investment is probably is going to be a little larger than it might be when you are more established and so that's sort of why we keep that money in reserve.
To help us think through those types of strategies and to have it there as those opportunities present, we also as I said, we're not when we talk about M&A and it's opportunistic, but we do get inbound calls.
Some of them are interesting conversations are we like to keep that liquidity if any of those conversations actually came to fruition.
Okay. That's all for me thank you very much.
Thank you, ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one at this time, we will pause momentarily to assemble our roster.
And ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to Adam Portnoy Portnoy for any closing.
Okay.
Thank you for joining us today, operator, operator that concludes our call.
Thank you Sir This concludes today's conference call. We thank you all for attending today's presentation.
May now disconnect your lines and have a wonderful day.