Q4 2022 RMR Group Inc Earnings Call
Good morning, and welcome to the R M. Our fiscal fourth quarter 2022 earnings call.
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I would now like to turn the conference to Michael Codec Director of Investor Relations. Please go ahead.
Good morning, and thank you for joining Rmr's fourth 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 and quarterly results followed by a question and answer session.
I'd like to note that the recording and retransmission of today's conference call is prohibited without 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 November 15th 2022, and actual results may differ materially from those that we project.
The company undertakes no obligation to revise or publicly release the results of any revision to the forward looking statements made in today's conference call.
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.
Investors are cautioned not to place undue reliance upon any forward looking statements.
In addition, we may discuss non-GAAP numbers during this call, including adjusted net income adjusted earnings per share adjusted EBITDA and adjusted EBITDA margin. A reconciliation of net income determined in accordance with U S. Generally accepted accounting principles to adjusted net income adjusted earnings per share adjusted EBITDA and the calculation of adjusted.
EBIT margin can be found in our earnings release.
Now I would like to turn the call over to Adam.
Thanks, Michael and thank you all for joining US this morning for the fourth quarter. We reported adjusted net income of 57 per share and adjusted EBITDA of $29 $5 million, both increases of at least 12% on a year over year basis.
This quarter's results are indicative of RMR is resilient business model, which can perform well in all economic cycles, while commercial real estate transaction activity has slowed meaningfully we think there remains a strong investment case to be made for RMR and its clients as our collective organization continues to proactively work.
Through the ongoing headwinds related to inflation, increasing interest rates and capital markets volatility.
From a leasing perspective fundamentals across our managed assets continue to trend favorably as we arrange 2.7 million square feet of leases on behalf of our clients, which resulted in a 23% roll up in rent and a weighted average lease term of five eight years.
For the entire fiscal year 2022 leasing volumes exceeded $13 5 million square feet, a 28% increase compared to fiscal year, 2021, and a 78% increase compared to pre pandemic levels in fiscal year 2019.
Historically real estate has performed well through inflationary environments also.
So most real estate leases typically have mechanisms to reprice rents to offset cost increases. This is especially true for shorter lease term asset types, such as hospitality and senior living. Additionally, a majority of the leases within our managed office industrial and service retail portfolios currently.
<unk> expense recovery provisions that largely offset the effects from the current inflationary environment on property operating expenses.
Before turning it over to Matt I want to briefly touch upon some highlights across our platform.
First at <unk>, we continued to experience strong operating fundamentals.
<unk> portfolio is over 99% leased and this quarter, we facilitated new and renewal leases for approximately one 7 million square feet at weighted average rental rates that were 77, 5% higher than prior rental rates for the same space.
This quarter, we also organized a $1.2 billion debt financing that enabled <unk> to fully repay the bridge loan facility used for the Monmouth acquisition earlier this year.
We are pleased with the outcome of this debt refinancing and we believe I L. P. T has both the time and flexibility to execute our deleveraging strategies because it has no debt maturities for almost five years.
At OPI, despite the challenges seen across the office sector. We were pleased with same property cash basis, NOI growth and continued leasing momentum as we facilitated 606000 square feet of new and renewal leasing, including a new lease for 84000 square feet.
<unk> Life Science development project in Washington, and Seattle, Washington.
Overall, OPI is 97% portfolio occupancy continues to lead the industry and its balance sheet remains well positioned with $629 million of total liquidity and no senior notes maturing until mid year 2024.
Yes, the SBC F O doubled from prior year levels, while EBITDA increased 26% year over year, both a reflection of the continued benefits of SBC portfolio diversification and further improvements in lodging fundamentals.
<unk> lodging operating improvements were most pronounced within the full service portfolio, which benefited from strength across major coastal in destination markets as well as the continued recovery of urban full service and suburban select service hotels.
Additionally, SBC service retail assets led by its leases with Ta continued to perform solidly with occupancy at 98% and rent coverage increasing sequentially to two nine times as of September 30th.
This positive operating momentum helped support Spc's decision to reinstate its normal quarterly dividend of <unk> 20 per share, which represents an <unk> payout ratio of only 37%.
This decision was driven by Sbcs continued improvements in portfolio operating metrics, coupled with available liquidity of over $800 million, including over $100 million of cash and over $700 million of undrawn amounts on its revolving credit facility.
DHT this quarter saw same property cash basis NOI in their office portfolio segment increased four 7% year over year and one 2% sequentially.
As it relates to DHT senior living portfolio, while inflationary pressures continue to impact operating costs occupancy improved 110 basis points sequentially, which was the sixth consecutive quarter of occupancy growth.
We are confident in <unk> ability to both refinance any upcoming debt maturities and continue investing in its senior living communities, because DHT is well capitalized with over $800 million of cash as of September 30th.
To conclude I'd like to reaffirm our confidence in the ultimate recovery of our managed equity Reits as we help them navigate these turbulent markets. I also believe it's important to reinforce our alignment with our REIT shareholders as Rmr's revenues and cash flows are directly impacted by changes in our managed equity REIT.
Share prices to put this in perspective.
We closed the gap between enterprise value and the historical cost of our managed equity Reits underlying assets, we would generate approximately $60 million of incremental revenues annually. Additionally, our incentive fee structure with the managed equity Reits further aligns us with shareholders because the only way.
We can earn incentive fees is if we exceed each reached respective peer groups shareholder return, while we do not expect to earn incentive fees in calendar year 2022, we remain optimistic that the strategic steps, we are taking across our clients will improve total shareholder returns and in turn increase the likelihood of receiving.
Incentive fees in the future well.
While we appreciate the stability our managed equity Reits providers. We also continued to pursue external opportunities to grow and diversify our platform.
This past fiscal year represented another transformative year for the organization with AUM, increasing $4 $6 billion and most importantly, private capital <unk> growing to $3 $9 billion.
Access to private capital gives RMR and additional path for continued growth, especially during times like these with pronounced market volatility.
As I've said on prior calls given the current economic environment I expect there may be unique opportunities to take advantage of in the market that will benefit our platform for years to come with $190 million of cash and no debt, we remain well positioned to do just that I'll now turn the call.
All over to Matt Jordan, our Chief Financial Officer, Thanks, Adam and good morning, everyone for the fourth quarter, we reported adjusted net income of $9 $4 million or <unk> 57 per share and adjusted EBITDA of $29 $5 million with both of these measures being in line with our quarterly guidance.
Total management and advisory service revenues were $52 million this quarter, which was almost $5 million higher on a year over year basis, so down approximately $1 million sequentially. The.
The sequential quarter decrease was primarily attributable to enterprise value declined with the managed equity REIT due to deleveraging and share price declines, partially offset by increases in construction management fees.
As it relates to our construction and development efforts across the platform. This past quarter, we oversaw approximately $116 million in directly manage projects, which brought the cumulative fiscal year capital oversight to over $350 million.
Looking ahead to next fiscal year, we expect this direct oversight to expand and then aggregate approached almost $500 million.
For the first fiscal quarter of 2023, we expect to generate between $49 five and $51 $5 million of management and advisory service revenues based on the current enterprise value at our managed equity Reits and normal seasonal declines at some of our manage operating companies.
Both of which are expected to be partially offset by continued growth in construction management fees.
Turning to expenses recurring cash compensation this quarter was approximately $31 $6 million after.
Alluding to $6 million from our from our annual true up to Rmr's discretionary bonus program paid in September .
This quarters recurring cash compensation represented a decline of approximately $500000 on a sequential basis due to favorable head count mix and vacation utilization.
As it relates to our discretionary bonus program and the resulting annual true up that was recorded this quarter throughout the fiscal year, we accrued at a rate that reflected our best estimate of where the discretionary program with land.
In response to continued wage inflation and labor scarcity actual bonus payments for the fiscal year came in higher than our estimated range.
Looking ahead to next quarter, we expect recurring cash compensation to be approximately $34 million with the increase from fourth quarter levels, primarily due to annual merit increases that were effective October 1st.
The success of this organization and the ability to focus on strategic growth opportunities requires continued investments in our people.
While wage inflation will continue to be a headwind we continue to seek out ways to mitigate further cost increases via technology secondary hiring locations in select outsourcing solutions.
G&A costs of $8 5 million to $8 $5 million. This quarter were flat sequentially. We are projecting G&A cost to be approximately $9 million per quarter in fiscal 2023, which reflects some incremental third party cost to support the growth in our construction oversight as well as the investments we are making in strategic.
Technologies.
We closed the quarter with almost $190 million in cash and given the rising interest rate environment over the last few months, we generated interest income this quarter of approximately $900000 and expect this to continue into future quarters.
Aggregating all of the prospective assumptions I previously outlined.
Next quarter, we expect adjusted earnings per share to range from 51 to 53.
And adjusted EBITDA should range from $25 million to $27 million.
That concludes our formal remarks, operator would you. Please open the line to questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Our first question will come from Bryan Mayer with B Riley FBR you May now go ahead.
Good morning, Adam and Matt.
Two questions from me. This morning are first.
First of all thanks for that outlook, particularly on the construction.
Oversight for next year, I think you said $500 million in projects with 20 mass Av and Seattle winding down in the second quarter, how should we expect that.
<unk> hundred million to kind of flow through the year or do you have some pretty big projects behind that in the back half of next year.
Hey, Brian .
500 million is fairly ratable and Youre right. It will transition from OPI spend and I think you'll see more of that spend start occurring at D. H C and SPC due due to senior living in hotel renovations in.
And the projects they have embarked on and I think they've each publicly spoken to so I think youll see the 500 million occur at 130 to 120 a quarter.
And generate about $5 million in construction management fees each quarter.
Okay, and then maybe for Adam when you're talking to your private capital partners or prospects are you getting a sense of what their appetite is for 2023, when it comes to acquisitions and investments in and kind of how are you and they thinking about.
Commercial real estate in General you know over the next 12 to 18 months, so I'm not really talking about RMR, specifically, but as it relates to growth within the managed Reits or within the private capital or with beefing up the JV.
Sure. So thanks for the question Brian .
You're right we are in pretty regular dialogue with a host of different capital providers, we obviously have.
A handful of existing relationships, which are weighted towards sovereign wealth funds I would say in.
In general they are still very much open to put capital out, especially groups, we are dealing with and the sovereign wealth world.
In some ways they see some of the market dislocation occurring in other.
The parts of the market to be an opportunity for them to come in because they have significant amounts of capital because they are earmarked to invest in commercial real estate in the United States.
I would say if theres any questions around that it's around level setting on price expectations.
And while Youre still putting capital out today.
I think.
They.
Our most focused as we get into 'twenty three that we might have a more stable, albeit maybe higher interest rate environment, which might lead to a more stable cap rate environment.
And I think they are positioning themselves to put significant capital to work we've been talking to them about these types of things I would say the types of assets that they are most interested in are not too different than what they were interested in the past broadly speaking industrial warehouse.
Multifamily there's different segments within that of course within warehouse cold storage. Some people think of data centers is an outgrowth of that.
In other sectors specialty sectors like student housing.
Or life science buildings, perhaps medical office building sort of Subsectors within office. They are interested in but that's generally.
What we're seeing I will tell you away from the sovereign wealth funds, there's very much a feeling of.
Freezing, but sort of waiting to get through this year and waiting for the interest rates to rise to whatever terminal rate. The fed is going to get too and so if you're talking to endowments or pension plans or let's say gatekeepers of consultants to deal with them or family offices. They are much more in the camp of led.
Wait and see.
How the market shakes out.
We get into 'twenty three.
Whereas the sovereign wealth funds and Luckily they are groups that we do most of our business with they are very much looking to put money to money to work I think there'll be significant opportunities for us to put money to work in either joint venture growing existing joint ventures, forming new ventures, as we get into 'twenty three and beyond.
And as we've stated on many prior calls that is a growth.
<unk> Avenue for us at the reach and you did mention the reach.
Our primary focus there and I said in my prepared remarks.
We got a $60 million gap and revenues between where our current share prices are at the managed Reits versus what we could be earning and regular management fees not even talking about incentive fees. So theres a tremendous amount of focus internally on doing everything operationally we can do.
To improve those companies operating performance and balance sheets. So they will be in a position to hopefully outperform in 'twenty three 'twenty four and again highlighting the alignment between RMR and those reach that's what our focus is.
Great. Thank you.
Again, if you have a question. Please press Star then one our next question will come from Kenneth Lee with RBC capital markets. You May now go ahead.
Hi, Good morning, Thanks for taking my question I'm wondering if you could just share your thoughts on how you view share repurchases within the context of our capital allocation plans for RMR. Thanks sure. So in.
In terms of returning share capital to shareholders.
We have biased ourselves a little bit towards dividends over share repurchases, that's not to say that we couldnt do a share repurchase in the future I would also say that we've talked about this in meetings with prior investors and on calls we're still very focused on maintaining significant liquidity.
To take advantage of opportunities that may present themselves we are in a.
Clearly in a dislocated market.
Market environment, we're probably going to be there for some period of time.
Whenever there is this type of dislocation there is typically opportunities.
For companies and we hope that there could be an opportunity for us to maybe expand our platform through some sort of strategic M&A that may present itself in this type of environment.
That may normally not present itself and so we're just trying to especially over.
Over the next coming quarters stay pretty liquid.
And so we can be in a position to about Trump's are those sort of opportunities if they present themselves.
That's really how we're thinking about capital allocation. We currently have a regular dividend is well covered at around 50% of our.
Call it.
Distributable earnings.
And so there could be opportunities to do something there, but in terms of specifically your question stock buyback.
It is not top of mind, it's not something I take off the table ever but it's not top of mind of what we're thinking about today.
Got you that's very helpful. There.
And then one follow up.
And this is just a follow up on the question for the managed equity Reits.
And you touched upon this it sounds like.
Some of the key factors that could drive potential improvements in the share prices in the near term for the managed equity Reits, it's going to depend on operational improvements and the <unk> is this something that you view sort of like a multi quarter kind of timeframe. Just wondering if you just talk a little bit more about.
A couple of like either milestones, we can look forward to or what are you looking forward to to help drive improvements in the managed equity REIT share prices in the near term. Thanks.
Sure. So it's a combination of two things.
Proving operating performance as well as addressing some of the balance sheet issues at the Reits.
Let's go each region I'll do it very quickly SBC, our biggest probably the furthest along in their recovery.
If reinstated the dividend we're hopeful that we can increase that dividend going forward I highlighted that the <unk> payout ratio is very low it's less than 40%. It's about 37% based on Q3 numbers I believe and there's a lot of room to grow that dividend.
And that's based on gets you can see continued improvement in the operating performance of the hotels in.
In that portfolio, which we are seeing and have been seeing for several quarters now so that's sort of the furthest along.
And as that continues to progress I think that will lead to continued import hopefully improvement in the in the stock price.
As a management team the most effective thing we can do to change the stock price performance is.
The company is really well, if we can operate them well and they can outperform on operating metrics. Eventually our belief is the share price will respond to that and so that's what we're focused on.
Touching on THC. It's also it's an operating issue there it's taking longer the DHT, we have a senior living recovery is taking longer than expected as an industry, but we also have some unique issues to our portfolio that we are addressing.
In terms of the operating performance of <unk> life, and how it's been performing on its portfolio managers for DHT. There's been a lot of management changes at <unk> life in the last couple of quarters. There's been a lot of focus on writing the operations in that company and I believe over the coming quarters, we'll start to see the fruits of that labor and better.
Performance at the senior living portfolio of THC.
It <unk> its not really an operating performance issue. The portfolio is performing really well as I said in my marriage in my opening remarks, it's 99% leased we rolled up rent, 77% or thereabouts last quarter theres not much more we can do in terms of operating.
Oh well.
There is a balance sheet issue and we have to.
Delever that balance sheet. There is no question, we have to do that unfortunately, we're in a market environment that is going to make it very difficult to do that until.
Interest rates stabilize.
When we get to basically the fed's terminal rate wherever and whenever that's going to be I think that's sort of a catalyst for when we can basically probably fully address the balance sheet at IMTT OPI opi's balance sheets in very good shape, it's performing very well, it's well leased you can look it up almost every metric.
Compared to its peers, it's performing in line if not better.
The issue is its got the overhang of it's an office REIT and office is going through.
A tremendous amount of change and there's a lot of uncertainty about.
What office, how much office space is going to be needed by companies going forward and is there an issue with obsolete office buildings given their age going forward. So there is other issues affecting OPI, we're doing the best we can there we've done some redevelopment.
Hep grade the portfolio through capital recycling as much as we could over the last.
A few years I mean, we've sold well over $1 billion in the last few years at OPI.
We used those proceeds to repay debt <unk> buy newer class a.
Office buildings that are well positioned to stay well leased.
We talked about also at Seattle, Washington in that company. We recently signed a lease there for a building that we have converted into a life science complex, which I think is well on its way to be a homerun in terms of.
Case study and being able to retrofit an existing office building turning to life science and getting much better rents and getting a very return on that so there is various things we're doing there to try to improve the operating performance, but that sort of gives you a lay of the land I just went through all four of the reach they all get sort of unique challenges, but we have a plan in place.
For all of them.
To improve their operating performance and to fix their balance sheets.
Both of which we think we believe is the best we can do that will then lead to outsized shareholder performance and then we will benefit as RMR, because we get paid based on those share prices, our base management fee and not even to mention the incentive fees, we have to outperform our peers to get an incentive fee. So.
Highly aligned to do everything we can to make those businesses performed well.
Got you that was very very helpful. Thanks again.
Yeah.
It appears there are no further questions. This concludes our question and answer session I would like to turn the conference back over to Adam Portnoy for any closing remarks.
Thank you all 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.