Q2 2024 The RMR Group Inc Earnings Call

Kevin Barry: First, I would like to note that management will not be answering questions about the debt exchange offer that its client, Office Properties Income Trust, announced last week as the offering period is currently open. I would also like to note that the recording and retransmission of today's conference call are 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.

To note that management will not be answering questions about the debt exchange offer that its client office properties income Trust announced last week as the offering period is currently open.

Kevin Barry: I'd also like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company.

Kevin Barry: These forward-looking statements are based on RMR's beliefs and expectations as of today, May 8, 2024, 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.rmrgroup.com.

Kevin Barry: Today's conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095 and other securities laws.

Kevin Barry: These forward looking statements are based on Rmr's beliefs and expectations as of today may eight 2024, and actual results may differ materially from those that we project.

Kevin Barry: 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.

Kevin Barry: 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.

Kevin Barry: Investors are cautioned not to place undue reliance upon any forward-looking statement. In addition, we may discuss non-GAAP numbers during this call, including adjusted net income, adjusted earnings per share, distributable earnings, and adjusted EBITDA. A reconciliation of net income determined in accordance with U.S. generally accepted accounting principles to these non-GAAP figures can be found in our financial results. I will now turn the call over to Adam.

Kevin Barry: 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 distributable earnings and adjusted EBITDA.

Adam: Reconciliation of net income determined in accordance with U S. Generally accepted accounting principles to these non-GAAP figures can be found in our financial results.

Kevin Barry: I will now turn the call over to Adam.

Adam David Portnoy: Thanks, Kevin, and thank you all for joining us today. Since our last earnings call, we have continued to advance our business and support our clients through the current headwinds facing many aspects of commercial real estate. Overall real estate transaction volumes have remained subdued for over a year, largely as a result of an increase in interest rates, persistent inflation, and uncertainty regarding whether the Federal Reserve will cut interest rates later this year. While interest rates may remain higher for longer, we do remain cautiously optimistic about an improving market environment later this year and into 2025.

Adam: Thanks, Kevin and thank you all for joining us today.

Adam David Portnoy: Since our last earnings call, we have continued to advance our business and support our clients through the current headwinds facing many aspects of commercial real estate.

Adam David Portnoy: Overall real estate transaction volumes have remained subdued for over a year largely a result of an increase in interest rates persistent inflation and uncertainty regarding whether the federal reserve will cut interest rates later this year.

Adam David Portnoy: While interest rates may remain higher for longer.

Adam David Portnoy: We do remain cautiously optimistic about an improving proving market environment later, this year and into 2025.

Adam David Portnoy: The resiliency and strength of the RMR platform over many years and through numerous business cycles gives us a solid foundation to continue creating long-term value for all our stakeholders. Last night, we reported second-quarter results that reflect both revenue growth driven by our recent residential platform acquisition and investments we are making to ensure RMR remains well positioned to take advantage of growth opportunities in the future. This quarter, we generated distributable earnings per share of 51 cents and adjusted EBITDA of $22.7 million.

Adam David Portnoy: The resiliency and strength of the RMR platform over many years and through numerous business cycles gives us a solid foundation to continue creating long term value for all our stakeholders.

Adam David Portnoy: Last night, we reported second quarter results that reflect both revenue growth driven by our recent residential platform acquisition and investments we are making to ensure RMR remains well positioned to take advantage of growth opportunities in the future.

Adam David Portnoy: This quarter, we generated distributable earnings per share of <unk> 51, and.

Adam David Portnoy: And adjusted EBITDA of $22 7 million.

Adam David Portnoy: With nearly $200 million of cash and no corporate debt, we have ample flexibility to continue making the necessary investments to further our strategic objectives. The strength of our balance sheet and the durability of our cash flows also led to our recent announcement regarding an increase to our recurring dividend by 12.5% to $0.45 per quarter, which remains well covered by a 64% payout ratio. We ended the quarter with AUM of over $41 billion, broadly diversified across all major commercial real estate sectors.

Adam David Portnoy: With nearly $200 million of cash and no corporate debt, we have ample flexibility to continue making the necessary investments to further our strategic objectives.

Adam David Portnoy: The strength of our balance sheet and the durability of our cash flows also led to our recent announcement regarding an increase to our recurring dividend by 12, 5% to <unk> 45 per quarter, which remains well covered and a 64% payout ratio.

Adam David Portnoy: We ended the quarter with AUM of over $41 billion.

Adam David Portnoy: <unk> diversified across all major commercial real estate sectors.

Adam David Portnoy: While perpetual capital accounts for approximately 68% of our AUM, over the past four years, we have strategically focused on increasing our private capital AUM from essentially zero to more than $13 billion today. Our fiscal second quarter marks the first quarter of RMR Residential results being integrated, and we remain optimistic about the future of this business. Despite a recent leveling off in multifamily rent growth in the Sunbelt region, which is largely the result of absorbing new supply, the long-term multifamily fundamentals in the Sunbelt are supported by favorable long-term trends including continued population growth, a strong labor market, declining construction starts, and the cost differential between owning a home and renting.

Adam David Portnoy: While perpetual capital accounts for approximately 68% of our AUM over the past four years, we are strategically focused on increasing our private capital AUM from essentially zero to more than $13 billion today.

Adam David Portnoy: Our fiscal second quarter marks the first quarter of RMR residential results being incorporated and we remain optimistic about the future of this business.

Adam David Portnoy: Despite our recent leveling off in multifamily rent growth in the Sunbelt region, which is largely the result of absorbing new supply the long term multifamily fundamentals in the sunbelt are supported by favorable long term trends, including continued population in migration a strong labor market declining.

Adam David Portnoy: <unk> starts and the cost differential between owning a home and lending.

Adam David Portnoy: While multifamily deal volume has been muted, we have recently seen a considerable uptick in new transaction marketing activities, which we believe bodes well for the deployment of our residential dry powder in the back half of calendar 2024. Our residential acquisitions team is currently tracking close to 100 deals across various Sunbelt markets, including a number of potential off-market transactions. Beyond our residential platform, we are continually evaluating strategic growth opportunities that leverage our existing capabilities.

Adam David Portnoy: While multifamily deal volume has been muted we have recently seen a considerable uptick in new transaction marketing activity.

Adam David Portnoy: Which we believe bodes well for deployment of our residential dry powder in the back half of calendar 2024.

Adam David Portnoy: Our residential acquisitions team is currently tracking close to 100 deals across various sunbelt markets, including a number of potential off market transaction.

Adam David Portnoy: Beyond our residential platform, we are continually evaluating strategic growth opportunities that leverage our existing capabilities.

Adam David Portnoy: To this end, we are in the initial stages of creating a private debt vehicle that capitalizes on the attractive risk-adjusted returns private credit is currently generating and leverages the experience and expertise of our lending platform, Tremont Realty Capital. Tremont has demonstrated a successful track record of originating commercial mortgages that have generated substantial shareholder returns at a public mortgage REIT, Seven Hills Realty Trust.

Adam David Portnoy: To this end we are in the initial stages of creating a private debt vehicle that capitalizes on the attractive risk adjusted returns private credit is currently generating and leverages the experience and expertise of our lending platform Fairmount Realty capital.

Adam David Portnoy: <unk> has demonstrated a successful track record originating commercial mortgages that have generated substantial shareholder returns at a public mortgage REIT seven hills royalty Trust.

Adam David Portnoy: Since it began managing Seven Hills, Tremont has made approximately 50 value-add and light transitional investments totaling $1.3 billion, resulting in a weighted average gross IRR of 14.5% on its realized investment. With constrained bank lending for commercial real estate, together with nearly $2 trillion of commercial real estate debt maturing by the end of 2026, we see a meaningful opportunity to increase loan volume for both public and private capital investors. To launch this new strategic initiative, we plan to amass a seed portfolio of up to $100 million in loans over the coming months using our own balance, which would, in turn, help expedite capital raising for this vehicle. These loans will be leveraged through a bank repurchase facility, resulting in RMR's net equity, or cash, commitment to be minimal.

Adam David Portnoy: Since it began managing seven hills <unk> has made approximately 50 value add and light transitional investments totaling $1 3 billion, resulting in a weighted average gross IRR of 14, 5% on its realized investments.

Adam David Portnoy: With constrained bank lending for commercial real estate together with nearly two trillion of commercial real estate debt maturing by the end of 2026, we see a meaningful opportunity to increase loan volume for both public and private capital investors.

Adam David Portnoy: To launch this new strategic initiative, we plan to amass a seed portfolio of up to $100 million in loans over the coming months using our own balance sheet, which in turn help expediate capital raising for this vehicle.

Adam David Portnoy: These loans will be leveraged through a bank repurchase facility, resulting in rmr's net equity or cash commitment to be minimal based.

Adam David Portnoy: Based on market feedback, we believe raising private capital via a seeded venture will garner greater success than attempting to raise a blind pool of capital. As third-party investors are identified for this Tremont-managed vehicle, a substantial majority of the equity investment we are making is expected to be repaid, and the investments will move off the balance sheet at RMR. In support of this strategic initiative, last month, we accepted an application from a prospective borrower for a floating rate mortgage loan secured by a hotel in Massachusetts for a gross commitment of $40 million.

Adam David Portnoy: Based on market feedback, we believe raising private capital via a ceded venture will garner greater success than attempting to raise a blind pool of capital.

Adam David Portnoy: As third party investors are identified through this <unk> managed vehicles a substantial majority of the equity investment. We are making is expected to be repaid in the investments due to move off balance sheet at RMR.

Adam David Portnoy: In support of this strategic initiative last month, we accepted an application from our perspective borrower for a floating rate mortgage loan secured by a hotel and Massachusetts for a gross commitment of $40 million.

Adam David Portnoy: In the coming months, we plan to make additional commitments for similar types of loans, and we look forward to updating you on the progress of this strategic initiative in the future. Turning to noteworthy highlights in a perpetual capital climb During the quarter, we remain focused on assisting our clients with the execution of their strategic and financial priorities. We arranged over 3 million square feet of leases on behalf of our clients with a weighted average roll up in rent of 17%.

Adam David Portnoy: In the coming months, we plan to make additional commitments for similar type loans and we look forward to updating you on the progress of this strategic initiative in the future.

Adam David Portnoy: Turning to noteworthy highlights of our perpetual capital clients.

Adam David Portnoy: During the quarter, we remain focused on assisting our clients with the execution of their strategic and financial priorities.

Adam David Portnoy: We arranged over 3 million square feet of leases on behalf of our clients with a weighted average roll up in rent of 17%.

Adam David Portnoy: More than 60% of this quarter's leasing activity was executed at ILPT, highlighting continued strong demand for the company's industrial and logistics property. ILPG's quarterly earnings once again demonstrated solid operating results, and occupancy increased to 99%. Cash leasing leasing spreads grew 25%, or the strongest in six quarters, and Same Property Cash Basis NOI was up 230 basis points. With no final debt maturities until 2027, ILPT has the flexibility to be patient until the financing environment improves.

Adam David Portnoy: 60% of this quarter's leasing activity was executed at LPT, highlighting continued strong demand for the company's industrial and logistics properties.

Adam David Portnoy: <unk> quarterly earnings once again demonstrated solid operating results.

Adam David Portnoy: Occupancy increased to 99% cash leasing leasing spreads grew 25% were the strongest in six quarters.

Adam David Portnoy: And same property cash basis, NOI was up 230 basis points.

Adam David Portnoy: With no final debt maturities until 2027.

Adam David Portnoy: <unk> has the flexibility to be patient until the financing environment improves.

Adam David Portnoy: DHC continues to advance key initiatives focused on improving its operating results and further strengthening its capital and liquidity profile. First quarter financial results reflect continued improvement in DHC's retail segment, with same property cash basis NOI increasing almost 10% year over year and continued roll-ups in rent within their medical office and life sciences segment. DHC has also outlined targeted strategies for capital deployment and operator transitions within the SHOPS portfolio to continue improving performance.

Adam David Portnoy: D. C continues to advance key initiatives focused on improving its operating results in further strengthening its capital and liquidity profile.

Adam David Portnoy: First quarter financial results reflect continued improvement in Dht's shop segment with same property cash basis, NOI, increasing almost 10% year over year.

Adam David Portnoy: And continued rollout roll ups in rent within their medical office and life Sciences segment.

Adam David Portnoy: Phe as also outlined targeted strategies for capital deployment, and operator transitions within the shop portfolio to continue improving performance.

Adam David Portnoy: OPI has made considerable progress since the beginning of the year addressing its debt maturities and continues to execute on its financing strategies amid a challenging lending environment for the office sector. The company recently launched an offer to exchange certain, if it's outstanding, unsecured senior notes for new senior secured notes. Additional information about this exchange offer can be found in OPI's press release which was issued last week.

Adam David Portnoy: OPI has made considerable progress since the beginning of the year addressing its debt maturities and continues to execute on its financing strategies amid a challenging and lending environment for the office sector. The company recently launched an offer to exchange certain of its outstanding unsecured senior notes.

Adam David Portnoy: For new senior secured notes.

Adam David Portnoy: Additional information about this exchange offer can be found in <unk> press release, which was issued last week.

Adam David Portnoy: Lastly, at SVC, overall hotel performance during the quarter reflected softer seasonal trends, as well as the impact of ongoing renovations across the portfolio. SVC remains intensely focused on improving hotel operating trends and enhancing the quality of its hotel portfolio to best position its operators for long-term growth. To that end, the company is currently executing a two-fold strategy aimed at investing in its hotel renovation program and advancing plans to dispose of lower performing assets that have been a drag on profitability.

Adam David Portnoy: Lastly at SBC overall hotel performance during the quarter reflected softer seasonal trends as well as the impact of ongoing renovations across the portfolio.

Adam David Portnoy: <unk> remains intensely focused on improving hotel operating trends and enhancing the quality of its hotel portfolio to best position its operators for long term growth.

Adam David Portnoy: To that end the company is currently executing a two fold strategy aimed at investing in its hotel renovation program and advancing plans to dispose of lower performing assets that had been a drag on profitability in.

Adam David Portnoy: In addition, the near-term challenges within SVC's lodging portfolio are somewhat offset by the stability of SVC's net lease portfolio. With that, I'll now turn the call over to Matt Jordan, Executive Vice President and our Chief Financial Officer.

Adam David Portnoy: In addition, our near term challenges within Sbcs lodging portfolio is somewhat offset by the stability of Spc's net lease portfolio.

Adam David Portnoy: With that I'll now turn the call over to Matt Jordan Executive Vice President and our Chief Financial Officer.

Matthew Paul Jordan: Thanks Adam, good afternoon everyone. For the second quarter, we reported adjusted net income of $0.39 per share, adjusted EBITDA of $22.7 million, and distributable earnings of $0.51 per share. This court's results were in line with our guidance and reflect the balance of cost containment and necessary platform-level investments to support long-term growth. This quarter, we continue the integration of the RMR residential platform and remain on track to identify the synergies outlined at the time we announced the acquisition. The realization of the synergies and the related impact on our financials will occur over varying periods over the next two years.

Matthew Paul Jordan: Thanks, Adam and good afternoon, everyone for the second quarter, we reported adjusted net income of <unk> 39 per share adjusted EBITDA of $22 $7 million and distributable earnings of <unk> 51 per share. This.

Matthew Paul Jordan: This quarter's results were in line with our guidance and reflect a balance of cost containment and necessary platform level investments to support long term growth.

Matthew Paul Jordan: This quarter, we continued the integration of the RMR residential platform and remain on track to identify the synergies outlined at the time, we announced the acquisition.

Matthew Paul Jordan: The realization of the synergies and the related impact on our financials will occur in varying periods over the next two years.

Matthew Paul Jordan: Given the expectations around multi-family capital markets activity that Adam highlighted earlier, we expect RMR Residential to remain largely break-even through at least next quarter. Now, turning to this quarter's results. Recurring service revenues were $49.6 million, an increase of $3.4 million sequentially and in line with our expectations. The sequential increase reflects the full quarter impact of RMR residential partially offset by declines in construction management fees as a result of slowing construction spend at our clients.

Matthew Paul Jordan: Given the expectations around multifamily capital markets activity that Adam highlighted earlier.

Matthew Paul Jordan: We expect RMR residential to remain largely breakeven through at least next quarter.

Matthew Paul Jordan: Turning to this quarter's results recurring service revenues were $49 6 million.

Matthew Paul Jordan: An increase of $3 $4 million sequentially and in line with our expectations.

Matthew Paul Jordan: The sequential increase reflects the full quarter impact of RMR residential partially offset by declines in construction management fees.

Matthew Paul Jordan: As a result of slowing construction spend of our clients.

Matthew Paul Jordan: Next quarter, we expect recurring service revenues to remain relatively flat at an expected range of $48 to $50 million. This estimated range assumes enterprise values of our managed equity REITs stay at their current levels, normal seasonal improvements and Sinesta-related management fees, and Consistent Levels of Construction Spend.

Matthew Paul Jordan: Next quarter, we expect recurring service revenues to remain relatively flat at an expected range of $48 million to $50 million.

Matthew Paul Jordan: This estimated range assumes enterprise values at our managed equity REIT stay at their current levels.

Matthew Paul Jordan: Normal seasonal improvements in sonesta related management fees.

Matthew Paul Jordan: And consistent levels of construction spend.

Matthew Paul Jordan: Cash compensation was approximately $44 million, which includes the full quarter impact of RMR Residential, as well as the adverse impacts of payroll tax and 401k contributions resetting on January 1st, both of which were partially offset by strategic restructuring actions taken over the last 12 months. Looking ahead to next quarter, we expect cash compensation to remain at these same levels, and our cash reimbursement rate to be approximately 50%. G&A expenses this quarter were $11.6 million, which included $600,000 of an annual director share grant and $200,000 of technology transformation costs.

Matthew Paul Jordan: Cash compensation was approximately $44 million, which includes the full quarter impact of RMR residential as well as the adverse impacts of the payroll tax and 401K contributions resetting on January one.

Matthew Paul Jordan: Both of which were partially offset by strategic restructuring actions taken over the last 12 months.

Matthew Paul Jordan: Looking ahead to next quarter, we expect cash compensation to remain at these same levels and our cash reimbursement rate to be approximately 50%.

Matthew Paul Jordan: G&A expenses this quarter were $11 6 million, which.

Matthew Paul Jordan: <unk> $600000 of annual director share grants.

Matthew Paul Jordan: $200000 of technology transformation costs.

Matthew Paul Jordan: The remaining $10.8 million of recurring G&A expenses reflects increased levels of third-party construction costs and higher than anticipated expenses related to RMR Residential. As it relates to RMR Residential, the bulk of those costs are from marketing and technology expenses, the majority of which are passed through to managed properties and are included in our service revenue.

Matthew Paul Jordan: The remaining $10 $8 million of recurring G&A expenses reflects increased levels of third party construction costs.

Matthew Paul Jordan: And higher than anticipated expenses related to RMR residential.

Matthew Paul Jordan: As it relates to RMR residential the bulk of those costs, so from marketing and technology expenses. The majority of which are pass through to managed properties and are included in our service revenues.

Matthew Paul Jordan: Next quarter, we expect recurring GNA to remain at approximately $11 million. Aggregating these collective assumptions, we expect adjusted earnings per share to be between $0.37 and $0.39 per share, adjusted EBITDA to range from $21 to $22 million, and distributable earnings to range from $0.46 to $0.48 per share.

Matthew Paul Jordan: Next quarter, we expect recurring G&A to remain at approximately $11 million.

Matthew Paul Jordan: Aggregating these collective assumptions next quarter, we expect adjusted earnings per share to be between 37 and 39 per share.

Matthew Paul Jordan: Adjusted EBITDA to range from 21% to $22 million.

Matthew Paul Jordan: And distributable earnings to range from 46 to <unk> 48 per share.

Matthew Paul Jordan: As it relates to our balance sheet, we ended the quarter with almost $200 million in cash and no corporate debt, providing us ample flexibility to continue investing in our platform and leaves us well-positioned to capitalize on strategic opportunities as they arrive. Before we begin the question and answer portion of the call, I would like to first acknowledge the publication of our Annual Sustainability Report. RMR remains committed to reducing greenhouse gas emissions at assets we have operational control over by 50% by 2029 and to attain net zero emissions by 2050. Through calendar 2023, we are well on our way, having achieved a 35% reduction in greenhouse gas emissions through energy efficiency measures, sustainable procurement, and renewable energy programs.

Matthew Paul Jordan: As it relates to our balance sheet, we ended the quarter with almost $200 million in cash and no corporate debt, providing us ample flexibility to continue investing in our platform and leaves us well positioned to capitalize on strategic opportunities as they arise.

Matthew Paul Jordan: Before we begin the question and answer portion of the call.

Matthew Paul Jordan: I'd like to first acknowledge the publication of our annual sustainability report.

Matthew Paul Jordan: <unk> remains committed to reducing greenhouse gas emissions at assets, we have operational control over by 50% by 2029 and to attain net zero emissions by 2050.

Matthew Paul Jordan: Through calendar 2023, we are well on our way.

Matthew Paul Jordan: We achieved a 35% reduction in greenhouse gas emissions through energy efficiency measures sustainable procurement and renewable energy programs.

Matthew Paul Jordan: Lastly, as Kevin highlighted earlier, we cannot address questions regarding opi's current debt exchange offer.

Unknown Executive: Lastly, as Kevin highlighted earlier, we cannot address questions regarding OPI's current debt exchange offer. That concludes our formal remarks. Operator, would you please open the line to questions? We will now begin

Speaker Change: That concludes our formal remarks, operator would you. Please open the line to questions.

Unknown Executive: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Bryan Maher with B-Rally Securities. Please go ahead.

Unknown Executive: We will now begin the question and answer session.

Bryan Anthony Maher: To ask a question you May press Star then one on your telephone keypad.

Unknown Executive: If youre 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.

Unknown Executive: Our first question is from Bryan Maher with B Riley Securities. Please go ahead.

Bryan Anthony Maher: Thank you and good afternoon Adam and Matt. Just two from me today. I was hoping you could elaborate a little bit more on what you were talking about as it relates to the residential and the uptick in deals that you're seeing and how specifically that feeds through and will benefit RMR over the next couple of years.

Bryan Anthony Maher: Thank you and good afternoon, Adam and Matt just two for me today.

Bryan Anthony Maher: I was hoping you could elaborate a little bit more on what you were talking about as it relates to the residential and the uptake in deals that youre seeing and how specifically that feeds through and will benefit RMR over the next couple of years.

Adam David Portnoy: I'll talk about it generally. I'll let Matt maybe get a little bit more detail on how it can affect the financials. But generally speaking, Generally speaking, over the last, I'd say, two to three months, there has been an uptick in what I'd say marketing activities in terms of transactions or deals coming to market, especially that has actually happened across the board, but most pronounced in the residential area or multifamily space and specifically in the markets that we're targeting throughout the Sunbelt region.

Speaker Change: So I'll talk about in general and I'll, let Matt maybe get a little bit more details on how it can affect the financials, but generally speaking.

Adam David Portnoy: Generally over the last I'd say two to three months has been an uptick in what I would say marketing activities in terms of.

Adam David Portnoy: Transaction or deals coming to market, especially.

Matt: That's actually happened across the board, but but most pronounced in the residential area, our multifamily space and specifically in the markets that we're targeting throughout the Sunbelt region.

Adam David Portnoy: There are a lot of reasons maybe for why that's happening, you know, there hasn't been a lot of deal activity for several quarters now. But I think there is, I think buyers and sellers are starting to converge on pricing. I think sellers are getting a lot of pressure from, let's say, what's going on in the lending market. Broadly speaking, I think buyers are under some pressure; there's a lot of money on the sidelines, and some buyers are anxious to put that money to work before their investment period ends.

Adam David Portnoy: There's a lot of reasons, maybe for why that's happening there hasnt been a lot of deal activity for several quarters now I think there is.

Adam David Portnoy: I think buyers and sellers are starting to converge on pricing.

Adam David Portnoy: I think sellers are getting a lot of pressure.

Adam David Portnoy: From let's say whats going on the lending market broadly speaking I think buyers are getting some pressure if theres a lot of money on the sidelines in some buyers are anxious to put that money to work before their investment period ends. So I think they're starting to be a converging a convergence on pricing and we do expect.

Adam David Portnoy: So, I think there's starting to be a convergence on pricing, and we do expect to see more transaction volume occur. We expect we will actually engage in transactions throughout the calendar year. I'll let Matt talk about what that could mean for the company's financials. Yeah.

Adam David Portnoy: Jesse.

Matt: More transaction volume to occur and we expect we will actually engage in transactions.

Adam David Portnoy: Throughout the calendar year I'll, let Matt talk about what that could mean for the company's financials, yes, and Brian getting deals done are really the stimulus we need to get residential beyond breakeven. It is a platform built to handle much more AUM than the $5 $5 billion is currently managing so in terms of.

Matthew Paul Jordan: Yeah, and Bryan, getting deals done is really the stimulus we need to get residential beyond breakeven. It is a platform built to handle much more AUM than the $5.5 billion it's currently managing. So in terms of the way the business is structured today, every deal should generate an acquisition fee of about 62 to 65 basis points. So just getting a deal done has a very sizable impact on RMR's P&L because we'll recognize those acquisition fees immediately.

Matthew Paul Jordan: The way the business is structured today every deal should generate an acquisition fee of about 62% to 65 basis points. So just getting a deal done has a very sizable impact to rmr's P&L, because we'll recognize those acquisition fees immediately and then obviously there is property management that comes with that.

Matthew Paul Jordan: And then obviously, there's property management that comes with that new deal. The way I like to think about it, between property management and construction, every billion of new AUM in the residential platform should equal about $1 million of new property management and construction management fees per quarter. So deal volume is really the thing we need to start to see come through, and a lot of that will flow to the bottom line.

Matthew Paul Jordan: New deal.

Matthew Paul Jordan: The way I like to think about it between property management construction every billion dollars of new AUM in the residential platform should equal about $1 million of new property management and construction management fees per quarter.

Matthew Paul Jordan: Deal volume is really the thing we need to start to see come through.

Matthew Paul Jordan: And I think what Adam highlighted, we hope by the back half of this year, we'll see some of that come through because we've clearly made the investments in people, getting the right acquisitions professionals in place, and have a cost structure to support that growth when it starts occurring.

Matthew Paul Jordan: And a lot of that will flow to the bottom line and I think what Adam highlighted we hope by the back half of this year, we will see some of that come through because we've clearly made the investments in people getting the right acquisitions professionals in place and have a cost structure to support that growth when it starts occurring.

Adam David Portnoy: That's really helpful. And the second question for me, and I understand fully that you can't comment on the OPI deal, but you do see a lot of transactions and financing activity. Can you speak broadly as to what you're seeing in the commercial real estate financing market currently, kind of across categories, and, you know, how that can positively impact, you know, your managed REITs over the next years, and maybe specifically touch upon CMBS, here? So I'll stop.

Speaker Change: That's really helpful. And then second question for me and understanding fully that you can't comment on the <unk>.

Adam David Portnoy: But you do see a lot of transactions and financing activity can you speak broadly as to what youre seeing in the commercial real estate financing market currently kind of across categories and how that can positively impact your managed REIT over the next years and maybe specifically touch upon <unk>.

Adam David Portnoy: Yes.

Adam David Portnoy: So I'll start with CMBS. I would say the secured market, and especially the CMBS market, broadly speaking, for well-leased assets, Cross-Segments, ESO, It's open to do, you know, through conduits where you can do one-off transactions. You can also do large single issuer transactions as well. Generally, markets are open. They're more expensive than what people have been paying on their debts. So if they're refinancing their debt, you're paying more for it, but the market is definitely open.

Speaker Change: Sure. So I'll start with Cvs I would say the secured market.

Adam David Portnoy: And especially as the MBS market broadly speaking for well leased.

Adam David Portnoy: Assets Cross segments is open.

Adam David Portnoy: It's open to do two conduits, where you can do one off transactions you can also do large.

Adam David Portnoy: Single issuer transactions as well so.

Adam David Portnoy: Generally markets are open they are more expensive than typically what people have been paying on their debts. So if the refinancing that you're paying more for it but the market is definitely open.

Adam David Portnoy: Generally speaking, what you see in the capital markets in terms of debt availability and financing, largely trends, you know, overall sentiment, you know, people are more open to financing apartments, multifamily, industrial, and then there are pockets of other sort of niche assets around that, you know, life science buildings, medical office buildings, hotels, believe it or not, are very much in favor in the investment community. Probably the toughest market or toughest segment to find financing is in and around general, you know, multi-tenant office buildings. But even there, if it's the right asset, you know, a newer building, well located, well leased, there is financing available. It's expensive, but it's available. So the markets are open. Everything in general; it just costs more.

Adam David Portnoy: Generally speaking what you're seeing in the capital markets in terms of debt availability and financing largely trends overall sentiment.

Adam David Portnoy: <unk>.

Adam David Portnoy: People are more open to financing apartments multifamily industrial.

Adam David Portnoy: And then there is pockets of other sort of niche assets around that life science buildings medical office buildings hotels.

Adam David Portnoy: Believe it or not are very much.

Adam David Portnoy: Somewhat in favor in the investment community.

Adam David Portnoy: Probably the toughest market our toughest segment defined financing is in and around Gen rule.

Adam David Portnoy: Multi tenant office buildings.

Adam David Portnoy: But even there if it's the right asset.

Adam David Portnoy: Newer building well located well leased there is financing available it's expensive.

Adam David Portnoy: But it's available so markets are open everything in general it just costs more.

Speaker Change: Okay. Thank you.

Adam David Portnoy: Again, if you have a question. Please press Star then one.

Mitchell Bradley Germain: Again, if you have a question, please press star then 1. The next question is from Mitch Germain with Citizens JMP. Please go ahead.

Adam David Portnoy: The next question is from Mitch Germain with citizens JMP. Please go ahead.

Mitchell Bradley Germain: Thank you for taking the question. Matt, I appreciate the comments on residential and profitability or AUM growth and acquisition fees. I guess I'm trying to gain insight into near-term profitability of residential driven by additional synergies and acquisition fees, meaning the recurring income is already recognized in the numbers today. If you don't get any more AUM growth, is that the way to think about it?

Mitchell Bradley Germain: Alright, Thank you for taking the question.

Mitchell Bradley Germain: Matt I appreciate the comments on.

Mitchell Bradley Germain: Residential and profitability I guess.

Mitchell Bradley Germain: Or.

Mitchell Bradley Germain: AUM growth and acquisition fees, I guess im trying to gain insight and near term profitability.

Mitchell Bradley Germain: Residential is driven by additional synergies and acquisition fees, meaning the recurring income is already recognized in our numbers today, if you don't get anymore.

Mitchell Bradley Germain: AUM growth is that the way to think about it.

Matthew Paul Jordan: Yeah, the way I would think about it, the AUM we have today pays for the business, but that's about it. And the way their business works... You know, as value-add deals season, they ultimately do get sold. So it is critical the acquisitions activity pick back up later this year.

Matt: Yes, the way I would think about it.

Matthew Paul Jordan: AUM we have today.

Matthew Paul Jordan: As for the business, but thats about it and the way their business works.

Matthew Paul Jordan: As value add deals season.

Matthew Paul Jordan: Ultimately do get sold so it is critical the acquisition activity pick back up later this year.

Adam David Portnoy: That's it. And Adam, we've been, I guess you've got a full quarter of the team on the RMR platform. I'd love to get some initial thoughts about, you know, kind of where things are versus your original expectations.

Matthew Paul Jordan: Gotcha.

Speaker Change: Adam we've been I guess, you've got a full quarter of the team.

Adam: In the RMR platform I'd love to get some initial thoughts about.

Adam: Kind of where things are versus our original expectations.

Adam David Portnoy: So I think we're very pleased with the integration of the folks from RMR Residential into the broader RMR platform, and I think we're very pleased with many of the synergies that we planned on realizing and acquiring the business. We are clearly behind on the revenue side, Matt's alluding to it, in terms of we need more transaction volume. I think everyone's acutely focused on it.

Adam: So I think we're very pleased with the integration of the folks from RMR residential into the broader RMR platform and I think we're very pleased with many of the synergies that we planned on realizing in acquiring the business. We are clearly behind on the revenue side Matt's alluding to it in terms of we need.

Adam David Portnoy: More transaction volume.

Adam David Portnoy: I think.

Adam David Portnoy: I think everyone's acutely focused on it.

Mitchell Bradley Germain: And I think, unfortunately, it's a little bit, or maybe materially impacted by just the market environment. We are working really hard, and the acquisitions team that's focused on residential is working really hard at finding deals and sourcing them. I am optimistic that we will be able to close on transactions in the second half of this year.

Adam David Portnoy: And I think unfortunately, it's a little bit or maybe materially impacted by just market environment.

Mitchell Bradley Germain: We are working really hard in the acquisitions team. That's focused on residential is working really hard at finding deals.

Mitchell Bradley Germain: In sourcing them I am optimistic that we will be able to.

Mitchell Bradley Germain: Close on transactions in the second half of this year.

Adam David Portnoy: But, overall, I'm pretty pleased. But, yes, there's no question, you know, from a revenue side, we're behind where we'd want to be. But on the cost side, I think we're right, we're right where we thought we'd be. And I think from an integration point of view, just generally, you know, social issues, I think, you know, are great. I mean, I think we're well integrated. I think the team is working well. Teams are working well and integrated well, so that's how I'm looking at it, and I feel good about the business going forward.

Mitchell Bradley Germain: But so overall I'm pretty pleased but yes, there's no question.

Adam David Portnoy: On a revenue side.

Adam David Portnoy: We're behind where we'd want to be but on the cost side I think we're right. We're right, where we thought we'd be and I think from an integration just generally social issues I think.

Adam David Portnoy: Right I mean, I think we are well integrated I think.

Adam David Portnoy: The team has is working well the teams are working well and integrated well so.

Adam David Portnoy: That's how that's how I'm looking at it and I feel good about the business going forward.

Mitchell Bradley Germain: Great, last for me. I recall about, it must have been like, probably 2017, or 18, Adam, you tried to incubate a similar type of vehicle for the office sector, given your capability and the fact that you had some office assets that were held outside of the manageries. I'm curious how this is a little bit different and how you're approaching this new deck vehicle differently.

Adam David Portnoy: Great.

Adam David Portnoy: Last for me.

Mitchell Bradley Germain: I recall about.

Mitchell Bradley Germain: Must have been like probably 2017 and 18.

Mitchell Bradley Germain: Adam you tried to incubate a similar type of vehicle for the office sector.

Mitchell Bradley Germain: Given your capability.

Mitchell Bradley Germain: And the fact that you have some.

Mitchell Bradley Germain: Office assets that were held outside of the managed Reits.

Mitchell Bradley Germain: Curious how this is a little bit different and how you're approaching this new debt vehicle differently.

Adam David Portnoy: Yeah, so at the time, you're right, you have a good memory, Mitch, in terms of we tried something like this. It's similar, two different, one different asset class, obviously, at a different time.

Adam: Yes. So at the time you are right you have a good memory Mitch in terms of we tried something like this is similar to different one different asset class obviously.

Adam David Portnoy: Second, we have, and we're working with a very reputable placement agent on this capital raise that we're engaged in right now. We've also learned a lot, including from that exercise that you're mentioning from six, seven years ago about the best way to organically create a fund. And I think we've learned from all those, you know, experiments and all those twists and turns, especially what we did several years ago that you

Speaker Change: Different time.

Adam: We have we're working with.

Adam David Portnoy: Very reputable placement agent.

Adam David Portnoy: On this on this capital raise.

Adam David Portnoy: That we're engaged in right now.

Adam David Portnoy: We've also learned a lot including from that exercise that you are mentioning from 767 years ago about how is the best way to organically create a fund.

Adam David Portnoy: And I think we've learned from all those experiments and all of those twist and turns, especially what we did several years ago that you were referencing I feel very good about our ability to be able to raise this capital who is also the biggest maybe the biggest difference is the return profile.

Adam David Portnoy: I feel very good about our ability to be able to raise this capital. It was also the biggest, maybe the biggest difference was the return profile. We were trying to raise, at the time, a core Office Fund, CORE meaning High Single-Digit Return IRRs. Listen to what we're talking about on a levered basis. We're talking about mid-teens IRRs.

Adam David Portnoy: We were trying to raise at the time a core.

Adam David Portnoy: Office fund core meaning high single digit return Irr's here, what we're talking about on a levered based on a levered basis that we're talking about mid teens IRR.

Adam David Portnoy: And so it's a different investment profile, a different return expectation, which is partly based on what we learned from talking to the market. I feel very good about our ability to execute on this. Timing, how long it's going to take, that's a little bit of a wild card. Could it be one quarter? Could it take four quarters? I don't know till we actually get all the money in. But I'm confident we will raise money is the best way to say it. And I wouldn't be putting the RMR balance sheet to use here unless I had some pretty strong conviction that we were able to use it to start one of these funds.

Adam David Portnoy: And so it's a different investment profile different return expectation, which is partly based on what we learned.

Adam David Portnoy: And talking to the market.

Adam David Portnoy: You're very good about our ability to execute on this.

Adam David Portnoy: Timing, how long, it's going to take that's a little bit of a wildcard I cant could it be one quarters could it take four quarters I don't know till we actually get all the money in.

Adam David Portnoy: Hugh.

Adam David Portnoy: But I am confident we will raise money is the best way to say and I wouldnt be putting the RMR balance sheet.

Adam David Portnoy: Are you sure unless I had some pretty strong conviction that we were able to use it to start one of these fronts.

Speaker Change: Thank you.

Ronald Kamdem: The next question is from Ronald Kamdem with Morgan Stanley. Please go ahead.

Adam David Portnoy: Yes.

Adam David Portnoy: Next question is from Ronald Camden with Morgan Stanley. Please go ahead.

Ronald Kamdem: Great. Just a couple quick ones from me.

Ronald Kamdem: Great just a couple quick ones for me, just staying with the sort of capital raising for <unk>.

Adam David Portnoy: Just staying with the sort of capital raising for Tremont, you talked about sort of $100 million. Just trying to get a sense of what the opportunity set, what the pipeline is, and what is the sort of target? Is this something that could be $200, $300? What's the thought of how this was going to evolve over time?

Ronald Kamdem: You talked about sort of a $100 million.

Adam David Portnoy: Just trying to get a sense of what the opportunity set what the pipeline is and what is there sort of a target is this something that could be 200, 300, what's sort of the thought of harvest. So it's going to evolve over time.

Speaker Change: Sure so.

Adam David Portnoy: So just to be clear, we talked about up to $100 million gross investment that will use our balance sheet, and it's a little confusing when I say that because that's inclusive of leverage.

Adam David Portnoy: Just to be clear, we talked about up to $100 million gross investment that will use our balance sheet.

Adam David Portnoy: It's a little confusing when I say that we're going to that's inclusive of leverage we're going to use leverage on these on these loans.

Adam David Portnoy: We're going to use leverage on these loans. So let's just use the round number, 100 million of our gross investments, 70 million of which will be debt, and 30 million of which will be equity in the loan or use of our cash. That is to seed a portfolio or a fund. That is not the total fund itself. We expect that the fund itself from an equity perspective will be, tune in to, $400 million in equity and use leverage on that.

Adam David Portnoy: So, let's just use the round number of $100 million of our gross investments 70 million of which will be that.

Adam David Portnoy: $30 million of which will be equity in the loan or use of our cash that is to seed a portfolio or a fund that is not the total fund itself. We expect that the fund itself from an equity perspective will be.

Adam David Portnoy: To move to $400 million in equity use leverage on that and Youre talking about total investments of around call. It a $1 billion give or take so that I just wanted to be clear that's what we're trying to do with the balance sheet.

Adam David Portnoy: And you're talking about total investments of around, call it a billion dollars, give or take. So, just so I'm clear. That's what we're trying to do with the balance sheet to seed the portfolio. But the ultimate size of this first fundraise, I should point out, is about a billion dollars. In terms of the pipeline, again, we feel very good about the pipeline. Yes, there is less transaction volume going on in the marketplace today.

Adam David Portnoy: To see the portfolio, but the ultimate size in this first fundraise I should point out is about $1 billion in terms of the pipeline again, we feel very good about the pipeline.

Adam David Portnoy: Yes, there is less transaction volume going on in the marketplace today as a result of less transaction volume there are less loans being originated.

Adam David Portnoy: As a result of less transaction volume, there are fewer loans being originated. You know, fully half of what you used to see in originations of loans was, you know, new acquisition financing. Well, here, there's not a lot of new acquisition financing. There is some, but not much.

Adam David Portnoy: Fully half of what you used to see in originations of loans was.

Adam David Portnoy: New acquisition financing will here, there's not a lot of new acquisition financing there is some but not much. It's a lot of refinancings that were underwriting but from a risk return perspective, we're making first lien secured mortgages against.

Adam David Portnoy: It's a lot of refinancings that we're underwriting. But from a risk return perspective, you know, we're making first lien secured mortgages against performing real estate that's going to go through a value add or a light value add repositioning. And it doesn't really matter what type of real estate they are, because we'll lend them, we'll lend against almost anything, and that type of investment introduces, you know, mid-team returns. The pipeline's very strong. And we also think we differentiate ourselves in the marketplace. Look, there are a lot of folks that are talking about private credit and private credit real estate.

Adam David Portnoy: Forming real estate, that's going to go through a value add or a light value add repositioning and it doesn't really matter what type of real estate, because we will lend them, we'll lend against almost anything.

Adam David Portnoy: And that type of investment, which produces mid teen returns the pipeline is very strong.

Adam David Portnoy: And we also think we differentiate ourselves in the marketplace look theres a lot of folks that are talking about private credit.

Adam David Portnoy: And private credit and real estate, what really differentiates us from in the marketplaces, we are a real estate operating platform.

Adam David Portnoy: What really differentiates us from the marketplace is that we are a real estate operating platform. So, you know, we have perhaps a more robust underwriting of the loan itself. But also, we are able, given our scale, to be much more middle market focused. So our average loan size could be $20, $30 million versus many of the larger players who are focused on, let's say, $100 million or larger loans. So when we play in what we call that middle market tier, there's a tremendous amount of transaction volume and not as many players.

Adam David Portnoy: We have a perhaps a more robust underwriting of the loan itself.

Adam David Portnoy: But also we are able given our scale to be much more middle market focused so our average loan size could be 20 $30 million versus <unk>.

Adam David Portnoy: Many of the larger players are focused on let's say $100 million larger loans.

Adam David Portnoy: So when we play in what we call that middle market tier there is a tremendous amount of transaction volume and not as many players. So we don't have as much competition and actually leads to a little bit higher returns for the investors. So yes, we feel good about the pipeline we feel good about the investment opportunity.

Adam David Portnoy: So we don't have as much competition, and that actually leads to a little bit higher return for the investors. So yes, we feel good about the pipeline. We feel good about the investment opportunity we're presenting to potential LPs.

Adam David Portnoy: We're presenting two potential Lps.

Adam David Portnoy: And then my second question was just going back to RMR Residential. I think you made some comments about dry powder, potentially sort of opportunities in the second half of the year, and tracking 100 deals. Can you talk a little bit about the return profiles of those deals, and are there any sort of themes across those 100 deals and the type of properties you're looking at?

Speaker Change: Great and then my second one was just going back to RMR residential I think you made some comments about dry powder.

Adam David Portnoy: Potentially sort of opportunity in the second half of the year and tracking 100 deals just can you talk a little bit about sort of the return profile of those deals and is there any sort of thematic across a 100 deals and the type of properties you are looking at.

Adam David Portnoy: Sure, so we're targeting, again, sort of value-add turnaround or like turnaround properties in the multi-family space, so apartment buildings in the Sunbelt region where we currently operate. The return hurdle, when we referenced that 100 deals in the pipeline, we're talking about that type of characteristic deal that is going to hopefully produce a mid-to-high team IRR for the investor. So that's a general outline of the type of deals we're looking at, and when I said 100, they sort of all, in a mixed fashion, meet those criteria in some way.

Speaker Change: Sure. So we're targeting again sort of value add.

Adam David Portnoy: Turnarounds or like turnaround properties in the multifamily space of apartment buildings in the Sunbelt region, where we currently operate.

Adam David Portnoy: Return hurdle when we've met referenced that 100 deals in the pipeline, we're talking about that type of characteristic deal that is going to hopefully produce a mid to high <unk>.

Adam David Portnoy: <unk> IRR for the Investor.

Adam David Portnoy: So thats a general outline of the types of deals we're looking at.

Adam David Portnoy: <unk>.

Adam David Portnoy: When I said 100.

Adam David Portnoy: Our all in mixed fashion meet those criteria in some way.

Speaker Change: Great. Thanks, so much.

Adam David Portnoy: This concludes our question and answer session. I would like to turn the conference back over to Adam Portnoy for any closing remarks.

Adam David Portnoy: This concludes our question and answer session I would like to turn the conference back over to Adam Portnoy for any closing remarks.

Adam David Portnoy: Thank you all for joining us today. Operator, that concludes our call.

Adam David Portnoy: Thank you all for joining us today, operator that concludes our call.

Unknown Executive: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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