Q1 2023 RMR Group Inc Earnings Call
Good morning, and welcome to the RMR first quarter of fiscal 2023 financial results Conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
If you ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
Please note this event is being recorded.
I'd now like to turn the conference over to Melissa Mccarthy manager of Investor Relations. Please go ahead.
Good morning, and thank you for joining Rmr's first quarter of fiscal 2023 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 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 February 3rd 2023, and actual results may.
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 Adil.
Additional information concerning those 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 a calculation of adjusted EBITDA margin can be found in our earnings release.
Now I would like to turn the call over to Adam.
Thanks, Melissa and thank you for joining us this morning before we discuss the first quarter results I would like to start by highlighting the enhanced earnings release format that we issued last night.
This enhanced format is intended to align more closely with our alternative asset manager peers, and we expect it to be easier for investors and analyst to efficiently Digest, our results and make comparisons to our peer group. We have also evolved the way we define our clients and as a result throughout our earnings release and 10.
Q, you will see them presented as either perpetual capital clients or private capital clients.
As I sit here today and survey the overall economic environment, the ongoing market uncertainty driven large part by the Feds rapid interest rate increases has created significant headwinds for the commercial real estate industry.
This market uncertainty has significantly slowed real estate transaction volumes with many including our organization, taking a more wait and see approach.
The impact on the publicly traded REIT industry has also been significant with the U S. REIT index down over 24% in 2022, and each respective publicly traded REIT sector generating negative returns since returns last year.
In light of these challenges RMR strong first quarter financial results are a testament to the diversity of our clients and the durability of our business model.
We ended the calendar year 2022, with $37 4 billion.
Dollars and assets under management with $30 billion, representing perpetual capital. Additionally.
Additionally over the course of 2022, our fee, earning AUM increased almost 10% to end the year at $26 $9 billion.
This quarter, we reported adjusted net income of 51 cents per share distributable distributable earnings of 58 cents per share adjusted EBITDA of $26 $4 million.
And adjusted EBITDA margin of 58%.
Finally, we again declared our dividend of <unk> 40 per share this quarter, which remains secure and well covered as evidenced by our 62, 4% distribution payout ratio.
From an operational perspective, our organization continues its focus on delivering high quality and amenity rich buildings to our tenants.
Despite a slowing and cautious commercial real estate market from a leasing perspective fundamentals across our managed assets remained favorable our portfolio of managed real estate ended the quarter at nearly 96% leased and during the quarter. We helped a range $2 5 million square feet of leases on behalf of our.
Clients.
Which resulted in a combined 2% roll up in rent and a weighted average lease term of almost nine years.
As a reminder, we are limited as to what we can discuss this quarter regarding our publicly traded clients as we are reporting results in advance of them.
With that said I want to highlight some items of note across our perpetual capital clients.
On October <unk> amended its revolving credit facility to extend the facility's maturity date to July 2023, and remove restrictions on paying dividends and issuing secured debt.
With the amendment behind them Sbcs Board increased the quarterly cash dividend from one cents per share to <unk> 20 per share, which is well covered at a conservative 37% payout ratio.
SBC management is currently focused on refinancing $500 million in bonds that will that will mature. This June with multiple options currently available to them.
Bond refinancing discussions at SBC have also been helped because all aspects of its business continued to perform well.
And the hotel sector fundamentals remain solid as evidenced by higher TSA checkpoint travel volumes, and increasing increasing occupancy and revpar levels across the industry.
This positive momentum was evident this past week at the Analyst conference in Los Angeles, a major hotel industry event that included representation from both SBC and sonesta, where the mood was the most upbeat since the beginning of the pandemic.
As it relates to the retail portion of SB CS business. This same positive momentum is also evident as discretionary consumer spending continues to remain resilient across all income levels.
Cash cushions remain well above pre pandemic levels.
And the majority of Sbcs retail tenants remain current on their lease obligations.
Turning to our real estate lending platform seven Hills Realty Trust, our publicly traded mortgage REIT continues to be a growth story for the organization as its loan book approaches $1 billion.
In uncertain times like these lending against commercial real estate as compared to owning the equity in the same real estate is an attractive way to generate high risk adjusted returns.
Kevin Hills default free track record, coupled with the ability to access the broader RMR real estate platform continues to be a differentiating factor for us.
In January seven Hills Board declared a 40% increase in its quarterly dividend from 25 per share to 35 per share.
This new dividend rate is a strong signal of our confidence in the companys momentum and the stability of its loan portfolio.
At OPI occupancy remains above 90% despite headwinds from hybrid work arrangements and cost cutting measures across corporate America.
While national indicators suggest office you should usage is improving our internal data shows opi's asset tracking ahead of national averages, which most likely reflects the diverse geographic nature of Opi's portfolio and its limited reliance on gateway markets.
Given the current environment, we expect office fundamentals to remain remained subdued specifically rent growth and lease rent growth growth in leasing velocity.
As such the organization is focused on getting ahead of OPI is upcoming 2023, and 2024 lease expirations by actively engaging tenants and thoughtfully investing in Opi's properties.
A D. H C. We are working with its senior living operators to improve <unk> operating performance.
As a reminder, in the third quarter in the third calendar quarter DHT reported its sixth consecutive quarter of occupancy growth and its senior living communities.
That trend is consistent with the broader industry no inflationary pressures in labor supply challenges remained a headwind headwind to margin and profitability for the entire industry.
These efforts are critical to <unk> long term success and its ability to refinance upcoming debt maturities in 2024.
With over $800 million in cash as of September 30th we're confident ghd can both weather. These near term challenges and continue strategically investing in its assets.
I'll close with our private capital business, which ended the year at over $7 billion in managed assets, including the mountain joint venture that was created when <unk> acquired Monmouth REIT in early 2022.
The private capital portion of our business are all represents 20% of our consolidated overall, AUM and 15% of our fee, earning AUM.
Both significant milestones given this portion of our business is only about five years old.
At this time, we are simultaneously pursuing organic private capital growth, we start with our existing capital partners developing new private capital vehicles, and assessing strategic M&A opportunities as they present themselves.
With over $200 million in cash and no debt. We believe we are well positioned to take advantage of strategic opportunities that we believe will result from the ongoing market volatility.
I'll now turn the call over to Matt Jordan, Our Chief Financial Officer, Thanks, Adam and good morning, everyone for the first quarter of fiscal 2023, we reported adjusted net income of $8 $7 million or <unk> 51 per share and.
And adjusted EBITDA of $26 $4 million with both financial measures being in line with our quarterly guidance.
Total management and advisory service revenues were $49 $6 million this quarter, which was almost $4 million higher on a year over year basis, though down approximately $2 million sequentially.
The sequential quarter decrease was primarily attributable to enterprise value declines at the managed equity REIT.
And normal seasonal declines at Ta and sonesta, partially offset by increases in construction supervision fees.
Construction supervision fees almost doubled from the same period last year as RMR continues to look for ways to maximize value of our clients' assets through redevelopment and repositioning efforts.
For the second fiscal quarter of 2023, we expect to generate between 48 and $49 $5 million of management and advisory service revenues.
Upon the current enterprise values of our managed equity REIT.
As it relates to incentive fees, which as a reminder, based on a comparison of our managed equity REIT three year total shareholder return to their respective peer groups. We unfortunately did not earn any incentive fees for calendar 2022.
With that said OPI three year total return exceeded its peer group by over 800 basis points.
So cumulative returns for OPI in the office sector with negative given the headwinds broadly facing the office sector, which resulted in no incentive fees being due from opioid.
Additionally, both OPI and Sbcs total shareholder return for calendar 2022 exceeded their respective peer groups by over 500 basis points.
Which hopefully creates a foundation for future incentive fees.
Turning to expenses.
Recurring cash compensation this quarter was approximately $33 3 million and.
An increase of $1 $7 million on a sequential quarter basis due primarily to annual merit increases that were effective October one.
While wage inflation and labor scarcity of moderating.
We remain vigilant and continually assessing staffing levels and continue to look to secondary hiring locations in select outsourcing solutions to mitigate further expense growth.
Looking ahead to next quarter, we expect recurring cash compensation to increase to approximately $34 $5 million due to payroll tax and 401k contributions resetting on January one.
And then moderating at approximately $34 million each quarter thereafter.
G&A expense of $9 $2 million. This quarter includes approximately $400000 or <unk> per share of technology transformation costs, which were excluded from adjusted EPS and adjusted EBITDA.
Over the next two years, we have committed up to $10 million to our technology infrastructure to ensure we harnessed the breadth of the data we generate internally to eight strategic decision making.
As well as ensure we have an operating environment that leverages technology to drive innovation and efficiencies.
At this time, it's still early in our technology transformation journey. So we are unable to speak to the exact pattern of spend over the next 18 months.
But it's worth noting that a portion of these technology investments will be both capitalized level and reimbursed by our clients.
On a normalized basis G&A should be approximately $9 million next quarter, excluding both technology investments and the annual share grants to our board of directors in March.
We closed the quarter with over $200 million in cash and given the rising interest rate environment. We currently operate and we generated interest income this quarter of approximately $1 8 million and expect this number to exceed $2 million per quarter throughout the remainder of fiscal 2023.
Aggregating all the prospective assumptions I previously outlined.
Next quarter, we expect adjusted earnings per share to range from 46 to <unk> 49 per share and.
And adjusted EBITDA should range from $24 five to $26 $5 million.
That concludes our formal remarks, operator would you. Please open the lines of questions.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
And our first question comes from Bryan Mayer of B Riley FBR. Please go ahead.
Good morning, Adam and Matt I. Appreciate those comments can you give us an update on what youre seeing or hearing from the sovereign wealth funds that you've dealt with and kind of private capital and as it relates to potentially re engaging this year on.
Either a second partner for <unk>.
And or some asset sales.
Sure. Good morning, Brian . Thank you for that question with regard specifically to the partners were dealing with at the sovereign wealth funds I would say.
They are very much open for business.
That happens to be a little bit unique I think.
To the relationships, we have specifically with those groups, which I can't name, but not.
Not all sovereign wealth funds are open for business, but the ones. We are dealing with very much are open for business I think not surprisingly they are focused on the favorite asset classes that most institutional investors are focused on which would be industrial real estate residential or multifamily real estate and then sort of more.
Nicky sectors like <unk>.
Data centers and dorm Mlps, our life science buildings with regards to specifically our platform and the ability to grow AUM with them. This year I think there will be opportunities to grow with him this year.
And I think but if I had to put sort of a timeline around it I think there'll be more opportunities to do it in the second half of the year and there would be in the first half of the year.
I just think given the nature of what's going on in the portfolios that we manage.
And what's going on more broadly in the market.
It's probably more likely that you would see growth in those vehicles. If it were to occur in 2023 in the second half of the calendar year, rather than the first half that's a little bit more driven by things going on at our firm and by their appetite because they are very much open.
Doing things and.
And so that's sort of where we're at I think they in some ways. They see this is there a real opportunity.
To aggregate assets because.
To be perfectly Frank some of the non traded Reits that have existed. We're also competing for the same assets may have largely exited the market.
And they are now largely the only buyers of the majority of the largest buyer of what I would call core core plus real estate in the market today. So I think from their perspective, if you were to ask them they'd say this is a real this is a real opportunity for them because they have less competition to deal with and so I think it.
It will turn into opportunities for us in the future.
So that segways well into my second question is we've been getting questions from investors regarding the managed REIT, whether it's cash on hand, obviously I think you have some satisfied burgers for certain things, whether it's capex et cetera are refinancing or availability to borrow to make.
Acquisition, what is the appetite for managed to reach this year.
For acquisitions on their balance sheet or is it just a function of.
Keeping that cash powder for refinances, Capex et cetera, maybe you can address that.
Sure I think across the board is limited.
Limited acquisitions that you will see across the board at the four Reits are for various reasons I think there is different reasons why that is the case that each one of the reach but broadly speaking limited acquisition appetite.
If there are some acquisitions it could be smaller acquisitions <unk> related to you know.
Properties in and around existing properties lets say an add on.
From an adjacent property that adds the value to an existing property or something like that we are very focused.
Certainly the first half of this year.
And you can see it in our numbers around construction management supervision fees. There is a lot of development activity. We're looking at to deploy capital this year across the REIT, especially in our senior living portfolio in our hotel portfolio.
Well into the hundreds of millions of dollars that we plan to be putting to work and so theres a lot of effort underway in that respect which.
Does create fees for RMR itself, because we're working on the on the construction management side of that that all being said depending on timing around debt repayments specifically at some of the REIT for 2023 maturities and as they may have more cash on hand, there could be opportunities.
Especially at the end of the second half of the year do you actually open up to do some acquisition opportunities at the REIT in the second half of the year.
Yeah.
And then just last for me I mean, I would be remiss not to mention the <unk> acquisition announced this morning.
Any extra color you can give us on that one.
What's the plan might be there is our margin to be involved at all and is there any impact on D. C and that's all for me.
Sure. Thanks for that question Brian .
We fully anticipate getting a question like that it was really a coincidence. This was not planned to have that announcement out. This morning on the same day, we did our earnings release. So we anticipated. The question. Unfortunately I have been advised by counsel that this is not the proper form to go into what that announcement.
Is there will be.
In relation to that transaction, a schedule T O or tender offer document that will be filed with the SEC in the coming days, which will have a lot of information in it and I encourage you to review that document when it's filed because I should I anticipate it will answer most if not all of your questions generally release related to that trans.
The only other thing I think we can say about the transaction because it really just directly from Rmr's perspective, maybe Matt dress the fee impact, yes, there should be no there will be no impact to rmr's revenues as it relates to <unk> life and that's pretty much all we can say.
Okay. Thank you.
Yes.
Once again, if you would like to ask a question. Please press Star then one.
And our next question will come from Ronald Camden of Morgan Stanley . Please go ahead.
Hey, Good morning, just a couple quick ones can you just update us on I E. In the past, it's where they looked at smaller.
Central acquisition of of the smaller asset managers maybe.
Can you just update us where we are in that process and where your head's at today.
Sure no. Thanks for that question. We are we continue to evaluate opportunities as they present themselves. There are have been anecdotally.
A couple more opportunities that have presented themselves in the last couple of months that where opportunities to sort of come around again.
Where we were involved in discussions and they are presented and they have reappeared.
I think it's a pretty interesting environment, we are entering into in 2023.
I anticipate that there will be some I don't know if it's going to be distressed sales, but there's going to be opportunities where people are going to be looking to perhaps exit or more importantly, joining a larger firm because it's a difficult operating environment.
And to give you. An example, affirm that might have let's say a larger portion of their assets in and around office real estate, which is not a favorite asset class at the moment.
Might be more inclined to join a larger firm that is more diversified.
Uh huh.
And there could be opportunities for example around that sort of a theoretical situation. So I think.
There's nothing imminent.
As to be announced certainly, but we have sort of ongoing regular dialog with folks and I anticipate that to continue and I'm hopeful that.
As we get later into 'twenty three that some of those some of the dialogue will turn into actionable items, and we could see some M&A activity, which would be.
One of the primary earmarked uses for our cash on our balance sheet and so we are hopeful that something like that will materialize in the coming year.
Great and then my last one would just be if you can just comment on sort of the on sort of on the office side sort of talked about the return to office.
Got a couple of data points about job losses in and tenants potentially.
Or do you think space, just curious where or what you guys are hearing what you guys are seeing.
On the office side. Thanks.
We spend an enormous amount of time thinking in discussing and talking about what's going on in our office portfolio. It is a very large portion of the real estate, we manage across not just OPI, but other vehicles as well.
At a high level you know.
It's almost like an analogy to <unk>. We are the waters are calm today, meaning occupancy is pretty high people are paying their rent we've been leasing space at a pretty regular clip things are okay, but that all being said we are looking to 2020 later this year 'twenty three 'twenty four and all the signs.
From a macro perspective that things are going to slow.
And it's almost like Youre looking into the Horizon you see storm clouds, you just don't know if we're going into a category one storm or a category five storm in the market. If you look at the office sector office REIT I think investors are assuming going into a category five storm theyre just assuming the worse I will tell you from a planning.
<unk>, we're obviously planning as we think about our office portfolio. We do the best we can to plan for it is going to be a very rough environment and hope it's not as rough as we planned as we're planning for you sort of plan for the worst and hope for the best we know it's going to be a difficult operating environment because you have the trip.
<unk> threat of.
A slowing economy rising interest rates and work from home that just sort of not abating in a major way and so that's having an impact across the whole industry. Even if even if you have a portfolio of properties that have higher occupancy our utilization than the industry as a whole, which we do nonetheless.
Because the whole market sort of recede to go backward, we get affected by that and so that's that's what we're seeing we know what's going to slow down we just don't know by how much and we're planning.
And it's going to slow down quite a bit and hope that it's not quite as bad as we that we planned for in my prepared remarks, we talked about how we're very focused at OPI for example, our largest portfolio of office buildings.
Dealing with our 'twenty three 'twenty four and even 25 lease explorations, that's a real big focus for the company.
And we have.
Varying views on where those leases are going to shake out it's hard to know precisely where we sit today. It is going to shake out but at a macro level. Yes. So it's going to be lower occupancy there will be rent roll downs on a general basis, but the whole industry sort of facing that.
We just don't have a good sense by how much and that's what and I don't think anyone in the industry really knows precisely where it is going to be which by the way Conversely presents opportunities at the same time.
Because when the.
It places so negative and sort of assumes the worst as we get further along into 'twenty three and into 'twenty four, especially as there's so much debt that comes due in the industry around office buildings. It does present, an interesting opportunity not just for ourselves, but others in the marketplace that might take us slightly contrarian view for certain.
<unk> office properties, very specifically, there may be sort of caught in the downdraft of the industry, but it might be great assets you can buy at a good price. So that's the converse.
Opportunity the other the other side of the corn, let's say.
To the downturn and what's going on in office.
Helpful. Thank you.
Yeah.
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 and you may now disconnect.
Yes.
[music].
Yes.