Q3 2023 The RMR Group Inc Earnings Call

Hello, and welcome to the RMR group fiscal third quarter 'twenty to 'twenty two earnings 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 to ask a question you May Press Star then one on you touched on phone to withdraw your question. Please press Star then two please.

Please note today's event is being recorded.

The conference over to Kevin Berry Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining Rmr's third quarter of fiscal 2023 conference call.

On today's call are president and CEO , Adam Portnoy, and Chief Financial Officer, Matt Jordan in just a moment they'll 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.

Forward looking statements are based on Rmr's beliefs and expectations as of today August 10, 2023, 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.

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.

At Www Dot RMR group Dot Com <unk>.

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 EBITDA margin can be found in our financial results.

I will now turn the call over to Adam.

Thank you Kevin and thank you all for joining us this morning.

On July 31st RMR announced an agreement to acquire Carol vertically integrated multifamily platform with approximately $7 billion in assets under management.

RMR or acquire 100% of the equity interest in Carroll for $80 million in cash with a potential earn out consideration of up to an additional $20 million based on the deployment or future capital.

With approximately 700 employees and long term relationships with high quality global institutional partners. The Cal platform gives us access to market knowledge and expertise.

The business also has a pipeline of attractive opportunities to further diversify rmr's capabilities beyond core plus real estate.

We expect the transaction to close this fall at which time, the founder will step down and the Kearl platform will be integrated into our organization with the current management team remaining in place.

As we have discussed in the past an important aspect of Rmr's growth strategy involves utilizing our strong balance sheet to pursue strategic acquisitions.

Our focus when assessing these opportunities has been to ensure any transaction complements our already considerable scale by further diversifying our platform increasing our private capital a U N.

And providing us access to new institutional relationships.

We believe the Carole transaction achieves these objectives and has a great strategic fit for the following reasons.

First the transaction provides an attractive opportunity to enter the multifamily space, which is the only major commercial real estate sector that we do not have a significant presence.

After the closing of the acquisition multifamily a U M will represent approximately 16% of rmr's totally win.

Outside of the industrial real estate sector multifamily or some of the strongest tailwind given the continued shortage of new housing in the U S.

In addition, Carol has been focused on deploying capital to multifamily investments in Sun belt markets. Some of the strongest overall markets in the U S.

Second expanding our private capital has been a key strategic priority for us and the Carol acquisition doubles, our private capital a web to approximately $15 billion.

<unk> told Rmr's Caito total AUM, well increased nearly 20% to approximately $44 billion further advancing our position as a leading alternative asset management platform.

Our institutional relationships will also increased substantially from the capital partners to invest in carol's funds and its managed properties.

The existing Cal Fund series currently has the potential to make in excess of $3 billion of additional multifamily investing investments putting us in a position to continue to scale the platform in the near term.

Given the historical track record of generating returns to investors in excess of 30%. We believe deployment of this capital is achievable within the next couple of years.

Third we plan to drive growth by leveraging perils vertically integrated capabilities that address all aspects of multifamily investments from acquisitions and property management asset management and innovative marketing strategies.

<unk> presence in the markets. They operate has been achieved through their successful consumer brand area I'm living which we believe has strong market awareness and our track record of exceptional record resident experiences.

The success of its vertically integrated platform has been demonstrated to the growth of carols third party management portfolio, which should only accelerate once this transaction closes and.

In addition to driving revenue growth. The third party management business also provides critical insights into the markets in which Carol operates we anticipate that the successful operating aspects of the Cal platform will also benefit the broader RMR platform.

Lastly, the acquisition is expected to be immediately accretive and presents a tremendous opportunity to create long term value for our shareholders like RMR Carol is a profitable scalable and asset light business with a recurring revenue stream and longer term upside potential from promote fees on any.

New investments made after the transaction closes.

Over time, we believe there is the potential to create revenue synergies as we integrate capabilities across the broader platform, including multifamily lending in new development opportunities.

In summary, we believe this transaction is directly aligned with our strategic objectives to further diversify RMR and drive future growth.

He is highly complementary to our current platform and represents a compelling redeployment of the $100 million in proceeds we generate from the recent travel centers of America transaction.

We have been impressed throughout the diligence process with the management team and their commitment to the platform their employees and their capital partners. We think this is an incredible opportunity for both sides and we are excited to welcome the entire care organization to RMR.

Now turning to our third quarter results.

Our results once again highlight our Mars resilient business model, especially amid the current unsettled market conditions in commercial real estate volatility.

This quarter, we reported adjusted earnings per share of 48, and adjusted EBITDA of $24 $6 million with our quarterly dividend remains well covered at a payout ratio of approximately 67% of distributable earnings from a macro perspective commercial real estate conditions.

<unk> continued to be impacted by market volatility and interest rate uncertainty during the quarter.

Well real estate transaction volume remained slower than last year. It is recovering modestly as market participants gained more confidence and transacting with improved visibility to the possible and the federal reserves current interest rate hike cycle.

Our organization's focus continues to be on executing the strategic plans of our clients with the goal of delivering shareholder returns that will ultimately benefit both our clients and RMR.

We are highly incentivized to improve the equity values of the public equity reached we manage as it has a direct impact on rmr's potential revenue growth there.

Put this in context, if we close the gap between enterprise value and historical cost of the equity reach underlying assets, we could generate approximately $65 million of incremental revenues annually with close to 100% flow through to adjusted EBITDA.

With respect to operating fundamentals leasing activity across our platform remains strong as a result of the hard work and commitment of our experienced real estate professionals nationwide.

Spike the challenging macro conditions impacting commercial real estate, our team arranged nearly 5 million square feet of commercial leases on behalf of our clients, which resulted in over 15% roll up in rents and a weighted average lease term of more than 10 years.

These leasing results continued to demonstrate our organization's ability to deliver value to our managed assets to creative leasing strategies and a continuous focus on tenant retention.

In closing we made some progress on our strategic objectives during the quarter. Despite ongoing volatility in the commercial real estate market and we took an exciting step forward on our private capital growth strategy with the acquisition of apparel platform.

With a healthy balance sheet and strong financial profile, we are well positioned to pursue further opportunistic growth strategies and we remain confident in the long term trajectory of our Mars business 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 morning, everyone for the third quarter, we reported adjusted net income of $8 million or <unk> 48 per share and adjusted EBITDA of $24 $6 million.

With both measures, finishing at the higher end of our quarterly guidance.

In addition to recurring adjustments, but separation cost equity method investments and technology transformation costs.

Adjusted earnings this quarter excludes $1 <unk> per share of termination and incentive fees.

And then add back of <unk> <unk> per share for transaction costs associated with strategic transactions, including the Kearl platform.

As Adam highlighted earlier, we expect the Carol a transaction to be immediately accretive.

The first full year after closing it is our expectation.

And that the Carol platforms recurring fee business will contribute between 11 and $13 million of adjusted EBITDA and 22 to 26 cents of distributable earnings per share.

Given the uncertainty of when the Calvert transaction may close any guidance for next quarter that I provide will be focused solely on rmr's legacy business.

Management and advisory service revenues were $47 million this quarter, which was down approximately $1 million sequentially.

This decrease was in line with expectations and was primarily attributable to the completion of the Ta transaction on May 15.

As it relates to next quarter based upon the current average enterprise values of our managed equity Reits, a full quarter impact of the Ta transaction and lower projected construction volumes, we expect revenues to be between 43 and $46 million next quarter.

Turning to expenses recurring cash compensation. This quarter was approximately $34 million a decrease of $300000 sequentially due primarily to statutory caps being met for taxes and benefits and a favorable head count mix.

Looking ahead to next quarter, we expect recurring cash compensation to be closer to $33 million based on employees continuing to reach statutory tax and benefit caps as well as some strategic restructuring of corporate office roles, we've undertaken all.

All of which will help drive an increase in our projected reimbursement rate to 46%.

G&A costs of $9 $6 million. This quarter includes approximately $400000 or one cent per share of technology training.

Yeah.

On a normalized basis G&A should be approximately $9 million next quarter, excluding continued technology investments.

Aggregating all the prospective assumptions I outlined earlier net.

This quarter, we expect adjusted earnings per share to range from 43 to 47 per share.

And adjusted EBITDA should range from $23 million to $25 million.

We closed the quarter with almost $300 million in cash after.

After the closing of the Carole acquisition, we expect to continue to have no debt and over $200 million in cash on hand for further opportunistic growth strategies, which gives us tremendous flexibility to continue to take advantage of additional opportunities to deliver attractive risk adjusted returns for our shareholders.

That concludes our formal remarks, operator would you. Please open the line of questions.

Yes. Thank you.

We will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to try your question. Please press Star then two at.

At this time, we will pause momentarily to assemble the roster.

And the first question comes from Bryan Maher with B Riley FBR.

Thank you and good morning.

Adam can you maybe touch upon it.

Carol transaction, and what that that particular opportunity apart from other multifamily opportunities you were looking at and how quickly do you think you can implement.

Oh, yeah. The EBITDA savings that you discussed in your Powerpoint, you guys put out which would effectively reduce the EV to EBITDA multiple costs on the transaction.

Sure. Good morning, Brian . Thanks for that question you know look we've looked at lots of opportunities over the last several years as we've talked about in prior calls and in meetings with investors I think what we really liked about Carol is it checked a lot of boxes for us that we've talked about and I said in my prepared.

Remarks, they're vertically integrated multifamily platform. So it checks the box that they are vertically integrated like us.

We think that's actually a competitive advantage in the marketplace that we run a real estate, we don't outsource the running of the real estate.

They also are obviously multifamily is the one hole in the piece of the puzzle for our commercial real estate platform is still sat.

They have their right to the right size, you know 7 billion a day when is sort of the sweet spot we've been talking about.

<unk> of organizations that would be sort of the perfect fit given where we are as you know our lifecycle something between five and 10 billion was always sort of the sweet spot for us.

They're a they're private capital relationships you know our strategic objective was to always grow our relationships. They have over 20 very deep relationships with very well established institutional investors that we hope will become our clients and.

We can maybe do more with them in the future.

And then maybe of Asps.

Aspect that we there.

It was sort of additive that we maybe weren't necessarily looking for but it's really the fact that they focus the majority of their investments not all of it but the majority of what we would call value add.

By your fix yourself and that's how you get a return for their investors were much more of a long term hold core plus core real estate shop. They do some of that investing that core real estate investing I think that sort of expertise that they bring to the table is a real complement to what we do and so I think you know it just checked.

Every box possible for us and that's what just made it very compelling in terms of the EBITDA I'll turn it over to Matt to discuss that yet Brian .

I'd say, we feel pretty good that we're going to hit the 11 to 13 in year, one and we're aligned with the management team and how we're going to get there through a combination of the business performance getting this transaction behind them will be critical and has been critical because it put the business on hold and a lot of ways and they are aligned with us and.

Find synergies closing open roles and looking for economies of scale across the combined platform. So I think we feel really good about the numbers, we've publicly disclosed and getting that in the first full year of operation.

Thanks, Adam you discussed in your prepared comments, we are continuing to pursue other growth opportunities can you be a little bit more specific there would it be more multi family or would it be in any other particular sector.

Sure. So generally it's an interesting environment, where in given the distress going on more generally commercial real estate.

I would say we are looking at more opportunities now than at any one time in the last several years, meaning there are multiple things that have been presented to us that we are evaluating so we think it's a pretty interesting time and I'm not sure. It will end up executing on any of the other.

Cities, but we are actively looking at other things to your spec rates specifically the question would it be in multifamily I don't think multifamily is this particular focus of what we would do a follow on acquisition.

Carol really fills that void for us Carol will be the basis for our growth of our multifamily investments in platform going forward.

Sure to answer your first question a little bit too you know one of the things, we really liked about carroll to that sort of distinguished it from the others was the management team and specifically.

The management team, that's going to be staying on it was clear to us that there.

They're very good at what they do.

In meeting with their investors as part of our diligence it became very clear that they were very highly regarded and we plan to keep that entire team in place and I think that's also why we felt we were excited about Carol but it's also why I don't think we're looking to expand.

Expand more into multifamily I think we have the right team with the <unk> platform to grow our multifamily investments.

Okay. Thanks, and then just last for me you know usually in your comments you talk about kind of the highlights for me I'm used to read during the quarter.

I'm going to assume for the sake of this call and you're probably not going to want to go down to D. C. O P. I rode.

But is there anything that stood out, particularly good or bad among your core managed reads that you might want to highlight.

Touching on all of them I mean, you you cover all of our reach Brian and for those listening you know look at our I think it S V C.

Oh P I I L. P T. They all had really good quarters for different reasons.

You know at D. C. It's sort of we had some good results in our shop portfolio was offset by some unfortunate setbacks and sort of other parts of the portfolio. All I will say about the O P. I G H C <unk>.

Potential merger that is in the market is rmr's perspective, and we're here talking about RMR were.

We're really sort of indifferent were neutral to whether the transaction were to occur or not occur. We've been we've been very vocal about that I think that the reach themselves have been very vocal about that that we're sort of indifferent at neutral whether the revenues, we would collect as the manager in emerge vehicle versus two.

Separate vehicles would be virtually identical.

So it's really we don't really have much dog in that fight from Rmr's perspective.

Thank you Adam.

Yes.

Thank you and once again just a reminder, please press star and then one if you would like to ask a question.

Yeah.

And the next question comes from Ronald Camden with Morgan Stanley .

Hey, just going back to the Carol.

I think you provided a little bit more color. So it sounds like so the G&A and the structure and everything is gonna stay the same so is the idea just.

Just to grow the platform through more of value add sort of multifamily just maybe a little bit more color on how.

You know both sort of the operating structure of the DNA and the strategy to grow.

The Carol would be helpful.

Sure. So I think you know certainly short term call. It. The next few years, we're going to continue to run that or have that business run very similar to the way. It has been running with a focus on doing exactly what they've been doing and the reason for that is they're very good what they do.

And so that in what they have been doing and what we expect them to do for the next two or three years is beginning to be very focused on value add multifamily investments. That's the nature of their relationships with their partners I don't see that changing over time I do think that we could see a complement to that.

Over time and this could be two three years out is that we could really bring to bear on the on the Carol platform more core core plus investing meaning you know one of the things that RMR to our relationships as we have some pretty deep relationships with those folks that are Lps that are interested in holding assets for.

More core core plus real estate and we think there's an opportunity perhaps over time that we could bring some investments to bear at Carol there'll be in addition to multifamily core core plus and so I think you know short term next two or three years you can see it very much focused on you know value add.

Investing doing very much the similar thing is what they've been doing overtime. They will continue to do that but we hope to expand that repertoire and be able to basically do some more investing into core core plus look obviously, we would hope that we could expand the platform RMR.

I'm talking geographically RMR today is a nationwide operating platform.

We have 2200 assets in every state.

And in Canada, and the Caribbean.

Carol is very focused on the sunbelt again.

Short to medium term theyre going to stay focused on the sunbelt over time could we see them expanding into other parts of the country. Yes that is something that we would hope that maybe also do is expand their reach and expertise to other parts of the country.

Great and then just my follow up was just on the.

11 of 13 million of adjusted EBITDA.

It includes $5 6 million of synergies so what what are those synergies coming from if it sounds like it's not DNA, maybe what are the other.

Synergies opportunities there.

Well stunk of it will be G&A.

I think youre going to see some of that through technology cost economies of scale on different service providers and I think there'll obviously be some back office personnel are alignments.

Whether that through closing open positions that currently exist across Carol.

And or putting mixing and matching the organizations. It's not just on carol's back there may be ways that we should be rethinking things at RMR to collectively get those synergies.

So a lot of that is in process and will play itself out during the integration phase and in the ongoing process as we work towards closing.

Okay, Great Oh my.

Last one was just on <unk>.

You know I think historically, you talked about sort of private capital.

Raise and doing sort of joint venture of assets I'm wondering if there's any sort of more conversations happening.

On on an onslaught of JV the of assets across any other REIT.

We're in a pretty regular dialogue with our partners about potential things I would say there's nothing imminent.

Going.

Is that is danced in any sort of real way I think our partners are open to expanding our they would like to expand.

Some of the issues are.

I think most of the growth in some of our joint ventures that are up and running today is we would like to go.

Both sides will likely grow them more externally through external acquisitions.

More than trying to take assets from our existing reach let's say.

And there's just as we've talked about there's not a tremendous amount of transaction activity going on in the marketplace today.

Things are getting better and.

There's limited asset classes that I think some of our partners are interested in expanding in industrial happens to be the one area. One of the areas that we do have significant capital out and I think we could grow that possibly through some external acquisitions and those JV ease in the coming quarters.

But theres not a lot of I mean, there's been a couple of headlines in the last quarter about some big transactions.

Specifically with some of the larger private equity firms, but theres not a lot of large transactions occurring out there because it's sort of one offs and so.

I don't expect a lot of growth in those joint ventures in let's say the next few quarters, but that doesn't mean that they are.

Open to growth and we could grow the modestly.

Or opportunities could present themselves, we could end up going to search.

More more aggressively than what I'm talking about here as well.

Got it thanks, so much.

Yep.

Thank you and this concludes the question and answer session I would like to turn the call to Adam Portnoy, President and Chief Executive Officer for any closing comments.

Thank you all for joining us today, operator that concludes our call. Thank you and as mentioned the conference has concluded. Thank you for attending today's presentation and you may now disconnect your lines.