Q3 2024 The RMR Group Inc Earnings Call
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Operator: Good morning, and welcome to the RMR Group Fiscal Third Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the call over to Kevin Barry, Senior Director of Investor Relations.
Good morning, and welcome to the RMR Group fiscal third quarter 2024 earnings Conference call, all participants will be in a listen only mode or.
Speaker Change: Where do you need assistance. Please signal conference specialist by pressing the star keep followed by zero.
After today's remarks, there will be an opportunity to ask question you ask a question you May Press Star then one on your touch sensor to withdraw your question. Please press Star then two.
Speaker Change: Please note this event is being recorded.
I would now like to turn the call over to Kevin Berry Senior director of Investor Relations. Please go ahead.
Kevin Barry: Good morning, and thank you for joining RMR's third quarter of fiscal 2024 conference call. With me on today's call are President and CEO Adam Portnoy and Chief Financial Officer Matt Jordan.
Good morning, and thank you for joining Rmr's third quarter of fiscal 2020 for a conference call with me on today's call are President and CEO, Adam Portnoy, and Chief Financial Officer, Matt Jordan.
Kevin Barry: In just a moment, they will provide details about our business and quarterly results, followed by a question and answer session. 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. These forward-looking statements are based on RMR's beliefs and expectations as of today, August 2, 2024, and actual results may differ materially from those that we project.
Speaker Change: In just a moment they will provide details about our business and quarterly results followed by a question and answer session. I would 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: 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. 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.
Speaker Change: Today's conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 and other securities laws. These forward looking statements are based on Rmr's beliefs and expectations as of today August 2nd 2024, and actual results may differ materially from those that we project.
Speaker Change: 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 www Dot RMR group Dot com.
Speaker Change: 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.
Speaker Change: Reconciliation of net income determined in accordance with U S generally accepted accounting principles.
Speaker Change: non-GAAP figures can be found in our financial results.
Speaker Change: I will now turn the call over to Adam Thanks.
Adam Portnoy: Thanks, Kevin, and thank you all for joining us this morning. Yesterday, we reported third quarter results that were in line with our expectations, which included adjusted net income per share of $0.37, distributable earnings per share of $0.45, and adjusted EBITDA of $21 million. Our quarterly dividend remains well covered with a payout ratio of approximately 70%, and we believe these results continue to underscore the durability of the RMR platform. As a highly scalable alternative asset manager, RMR's recurring management fees have provided stability to our business for over 35 years.
Adam: Thanks, Kevin and thank you all for joining us this morning.
Adam: Yesterday, we reported third quarter results that were in line with our expectations, which included adjusted net income per share of 37 cents distributable earnings per share of 45 cents.
Adam: Adjusted EBITDA of $21 million, a quarterly dividend remains well covered with a payout ratio of approximately 70%.
Adam: We believe these results continue to underscore the durability of the RMR platform.
Adam: Our highly scalable alternative asset manager Rmr's recurring management fees have provides stability to our business for over 35 years, we have evolved throughout our history to changing industry conditions and market cycles, while generating strong cash flows with limited ongoing capital needs.
Adam Portnoy: We have adapted throughout our history to changing industry conditions and market cycles while generating strong cash flows with limited ongoing capital needs. Assets under management of $41 billion reflect a broadly diversified portfolio across all major real estate sectors with investments in both equity and debt and managing both public and private vehicles. Added to the foundational stability of the business, our balance sheet remains strong with substantial cash on hand and no corporate debt.
Adam: Assets under management of $41 billion reflects a broadly diversified portfolio across all major real estate sectors with investments in both equity and debt and managing both public and private vehicles.
Adam: Adding to the foundation of stability of the business our balance sheet remained strong with substantial cash on hand, and no corporate debt.
Adam Portnoy: At a macro level, over the past few years, valuations have declined across the U.S. real estate industry as the Federal Reserve took aggressive action to combat inflation. Clearly, this dynamic has adversely impacted the enterprise values of our public clients and, as a result, weighed on RMR's base management fee. Fortunately, inflation continues to ease, and there is once again growing investor consensus that the Fed will begin to reduce interest rates in the coming months.
Adam: At a macro level over the past few years valuations have declined across the U S real estate industry as the Federal reserve took aggressive action to combat inflation.
Adam: Clearly this dynamic has adversely impacted the enterprise values of our public clients and as a result weighed on Rmr's base management fees.
Fortunately inflation continues to ease and there is once again growing investor consensus that the fed will begin to reduce interest rates in the coming months.
Adam Portnoy: This favorable shift in sentiment bodes well for the real estate industry and our clients. Along those lines, over the past few months, we began executing on strategic initiatives that best position RMR to capture the significant opportunity that exists within the private capital market, with a near-term emphasis on real estate credit and multifamily housing. First, we recently started fundraising for our previously announced private debt vehicle that utilizes the expertise and strong track record of our existing real estate lending platform, Tremont Realty Capital.
Adam: This favorable shift in sentiment bodes well for the real estate industry and our clients.
Adam: Along those lines over the past few months, we began executing on strategic initiatives to best position RMR to capture the significant opportunity that exists within the private capital markets with a near term emphasis on real estate credit and multifamily housing.
Adam: First we recently started fundraising for our previously announced private debt vehicle that utilizes the expertise and strong track record of our existing real estate lending platform Tremont Realty capital.
Adam Portnoy: Our initial objective is to seed a portfolio with gross investments of approximately $100 million in middle market and transitional bridge loans. To that end, in July, we closed two floating rate mortgage loans with aggregate commitments of $67 million secured by hotel and industrial property. Initially, we are funding these loans with cash on hand, although we expect to lever the loans this quarter at an advance rate of approximately 75% via a master repurchase facility with one of our banking relationships, which will keep RMR's net cash outlay at less than $20 million. With leverage, we expect these loans to generate returns in the mid-teens.
Adam: Our initial objective is to see the portfolio with gross investments of approximately $100 million in middle market in transitional bridge loans.
Adam: To that end in July we closed two floating rate mortgage loans with aggregate commitments of $67 million secured by hotel and industrial properties.
Adam: Initially we are funding these loans with cash on hand, although we expect to lever the loans this quarter and an advance rate of approximately 75% via our master repurchase facility with one of our banking relationships, which will keep rmr's net cash outlay and less than $20 million.
Adam: With leverage we expect these loans to generate returns in the mid teens.
Adam Portnoy: Looking ahead, as third-party investors are identified through our fundraising efforts, a substantial majority of the equity investments we are making in these loans are expected to be repaid, and the loan portfolio and related repurchase facility will shift off RMR's balance sheet. Our second initiative is focused on expanding the RMR residential platform, which will simultaneously help move that platform closer to our initial underwriting and overall profitability. We continue to have conviction that the U.S. multifamily market is primed for long-term growth supported by an overall shortage of housing, the high cost of home ownership, and favorable demographic tailwinds for the Sunbelt markets, which is where RMR Residential has extensive operating experience.
Adam: Looking ahead as third party investors are identified through our fundraising efforts a substantial majority of the equity investments, we're making in these loans are expected to be repaid in the loan portfolio and related repurchase facility will shift off rmr's balance sheet.
Adam: Our second initiative is focused on expanding the RMR residential platform, which will simultaneously help move that platform closer to our initial underwriting and overall profitability.
Adam: We continue to have conviction that the U S multifamily market is prime for long term growth.
Adam: Supported by an overall shortage of housing the high cost of home ownership and favorable demographic tailwind for the Sun belt markets, which is where RMR residential has extensive operating experience.
Adam Portnoy: I'm pleased to report that this week, RMR Residential closed its inaugural multifamily investment with the acquisition of a 240-unit garden-style community in Denver for approximately $70 million. The acquisition, which is value-added in nature, was made with a combination of cash on hand and a $46.5 million five-year fixed-rate interest-only mortgage. RMR's total equity commitment, inclusive of transaction costs, will be approximately $25 million. The property is expected to generate returns to investors in the high teens based on the opportunity for operational upside, including future rent growth.
Adam: I am pleased to report that this week RMR residential closed its inaugural multifamily investment with the acquisition of a 240 unit garden style community in Denver for approximately $70 million.
Adam: The acquisition, which is value add in nature is made with a combination of cash on hand, and a $46 5 million dollar five year fixed rate interest only mortgage RMR.
Adam: Rmr's total equity commitment inclusive of transaction costs will be approximately $25 million.
Adam: The property is expected to generate returns to investors in the high teens based on the opportunity for operational upside, including future rent growth.
Adam Portnoy: While RMR acquired this multifamily investment, utilizing our balance sheet, in the coming months, we plan to syndicate the majority of the equity in this acquisition, with RMR remaining as the general partner. As a result, once this equity is syndicated, the investment and its associated debt will move off the balance sheet for RMR. Our current multifamily investment pipeline reflects an increase in both on and off market deals. We currently have over 125 deals in various stages of review that we hope to capitalize on now that we have demonstrated RMR Residential is again an active market participant.
Adam: Well RMR acquired this multifamily investment utilizing our balance sheet in the coming months, we plan to syndicate. The majority of the equity in this acquisition with RMR remaining as the general partner.
Adam: As a result once this equity is syndicated the investment and its associated yet well move off balance sheet for RMR.
Adam: Our current multifamily investment pipeline reflects an increase in both on and off market deals.
Adam: Currently have over 125 deals in various stages of review and we hope to capitalize on now that we have demonstrated RMR residential is again, an active market participant.
Adam Portnoy: Beyond our strategic initiatives, we remain focused on assisting the managed equity REITs with the execution of their operational and financial strategies in an effort to maximize their long-term performance. During the quarter, we arranged 1.2 million square feet of leasing and executed over $1.8 billion of new financings on behalf of our clients, turning into a few highlights across the managed equity. OPI is intensely focused on executing on strategic strategies to address its upcoming debt maturities, as well as navigating the ongoing challenging office market conditions.
Adam: Beyond our strategic initiatives, we remain focused on assisting the managed equity reached with the execution of their operational and financial strategies in an effort to maximize the long term performance.
Adam: During the quarter, we arrange one 2 million square feet of leasing and executed over $1.8 billion of new financings on behalf of our clients.
Adam: Turning to a few highlights across the managed equity Reits.
Speaker Change: Oh P is intensely focused on executing on strategic strategies to address its upcoming debt maturities as well as navigating the ongoing challenging office market conditions.
Adam Portnoy: Since the beginning of the year, OPI has completed $1.3 billion of secured finances, including a debt exchange in June that reduced total debt by nearly $300 million and reduced their upcoming 2025 debt maturity to approximately $500 million. We continue to evaluate all possible strategies to address OPI's debt maturities, along with OPI's third-party advisor, Mullis & Company. Last night, DHC reported strong quarterly results reflecting continuing momentum within their shop segment and double-digit rent growth from leasing activity in the medical office and life science segment. DHC Shop Portfolio generated a same property cash basis NOI increase of 27% on a year-over-year basis, driven by improved occupancy and a continued focus on operating expenses.
Adam: Since the beginning of the year OPI completed $1.3 billion of secured financings <unk>.
Adam: Including a debt exchange in June that reduced total debt by nearly $300 million reduced their upcoming 2025 debt maturity to approximately $500 million.
Adam: We continue to evaluate all possible strategies to address opi's debt maturities, along with OPI third party adviser Moelis <unk> company.
Speaker Change: Last night DHT reported strong quarterly results, reflecting continued momentum within their shop segment and double digit rent growth from leasing activity in the medical office and life Science segment.
Speaker Change: Ph D shop portfolio generated a same property cash basis, NOI increase of 27% on a year over year basis, driven by improved occupancy and a continued focus on operating expenses.
Adam Portnoy: As you will hear later today, DHC's management remains laser-focused on driving long-term shareholder value through targeted capital investments in underperforming communities, strategic operator transitions, and property sales. SVC will not report earnings until next week, limiting what we can discuss today. I do want to highlight some recent capital markets activity. In June, SVC closed $1.2 billion of senior guaranteed unsecured notes, including $700 million of five-year notes and $500 million of eight-year notes.
Speaker Change: As you will hear later today DH management remains laser focused on driving long term shareholder value through targeted capital investments and underperforming communities strategic operator transitions and property sales.
Speaker Change: S. B C will not report earnings until next week limiting what we can discuss today.
Speaker Change: Although I do want to highlight some recent capital markets activity.
Speaker Change: In June SPC closed $1.2 billion of senior guaranteed unsecured notes.
Speaker Change: Including $700 million of five year notes and $500 million of eight year notes SPC use the proceeds from this offering and cash on hand to fully redeem its 2025 debt maturities, which leaves S. P C virtually free of any debt maturities until 2026.
Adam Portnoy: SVC used the proceeds from this offering and cash on hand to fully redeem its 2025 debt maturities, which leaves SVC virtually free of any debt maturities until 2026. In closing, RMR's business remains strong with stable recurring revenues, a diversified client roster, and a solid balance sheet. We are taking actions necessary to best position our clients to navigate the current economic environment and challenges in the real estate sector while advancing private capital initiatives to drive future growth and create long-term value for RMR and its shareholders. With that, I now turn the call over to Matt Jordan, Executive Vice President and our Chief Financial Officer. Thanks, Adam.
Speaker Change: In closing Rmr's business remained strong with stable recurring revenues, a diversified client roster and a solid balance sheet.
Matt Jordan: We are taking actions necessary to best position, our clients to navigate the current economic environment and challenges in the real estate sector, while advancing private capital initiatives to drive future growth and create long term value for RMR and its shareholders with that I'll now turn the call over to Matt Jordan.
Speaker Change: Jackie <unk>, Vice President and our Chief Financial Officer, Thanks, Adam and good morning, everyone for the third quarter, we reported adjusted net income of 37 cents per share.
Matthew Jordan: Thanks Adam, and good morning everyone. For the third quarter, we reported adjusted net income of $0.37 per share, adjusted EBITDA of $21 million, and distributable earnings of $0.45 per share. All of which were in line with our expectations for the quarter. Recurring service revenues were $49 million, a decrease of approximately $700,000 sequentially, primarily due to expected declines in management fee revenues from our managed equity reach. Partially offset by seasonal improvements in SINESTA-related management.
Matt Jordan: Adjusted EBITDA of $21 million in distributable earnings up 45 cents per share.
Speaker Change: All of which were in line with our expectations for the quarter.
Matt Jordan: Recurring service revenues were $49 million, a decrease of approximately $700000 sequentially.
Matt Jordan: Due to expected declines in management fee revenues from our managed equity Reits.
Speaker Change: Partially offset by seasonal improvements in sonesta related management fees.
Matthew Jordan: Next quarter, we expect recurring service revenues to be down slightly at an expected range of $47.5 to $49 million. This range assumes enterprise values at our managed equity rates stay at their current levels and construction volumes slow further, as our clients thoughtfully manage capital spend. Turning to expenses,
Matt Jordan: Next quarter, we expect recurring service revenues to be down slightly in an expected range of $47.5 million to $49 million.
Matt Jordan: This range assumes enterprise values at our managed equity REIT stay at their current levels and construction volumes slow further.
Matt Jordan: As our clients thoughtfully manage capital spending.
Matt Jordan: Turning to expenses.
Matthew Jordan: Cash compensation was approximately $45 million, an increase of $863,000 sequentially, which mainly reflects the impact of a favorable bonus drawn up last quarter, offset by seasonal vacation usage. Looking ahead to next quarter, we expect cash compensation to decline to approximately $44 million. This projected decline reflects the tough decision we made in June in light of the continued challenges within the real estate sector to selectively make headcount reductions that will generate $4 million in annual corporate cost savings.
Matt Jordan: Cash compensation was approximately $45 million, an increase of $863000 sequentially, which mainly reflects the impact of a favorable bonus true up last quarter offset by seasonal vacation usage.
Matt Jordan: Looking ahead to next quarter, we expect cash compensation to decline to approximately $44 million.
Matt Jordan: This projected decline reflects the tough decision we made in June in light of the continued challenges within the real estate sector to selectively make head count reductions that will generate $4 million in corporate level annual cost savings.
Matthew Jordan: Consistent with this quarter, we expect our cash reimbursement rate to remain at approximately 50.5% going forward. Recurring G&A expenses this quarter were $11.2 million, which represents our expectation for next quarter as well. I would also like to highlight the expected financial impacts on RMR of the strategic transactions Adam highlighted earlier. First, as it relates to the Denver Value Add multifamily investment, while RMR owns 100% of this asset.
Matt Jordan: Consistent with this quarter, we expect our cash reimbursement rates remain at approximately 55% going forward.
Matt Jordan: Recurring G&A expenses this quarter were $11 $2 million, which represents our expectation for next quarter as well.
Speaker Change: I would also like to highlight the expected financial impacts to RMR of the strategic transactions Adam highlighted earlier.
Matthew Jordan: We are expecting the investment to contribute approximately $250,000 per quarter in pre-tax income and over $750,000 in adjusted EBITDA per quarter on a run rate basis, or the equivalent of a 12.5% cash-on-cash return. Secondly, as it relates to the mortgage loans we closed in July, we expect those loans to contribute approximately $600,000 in pre-tax income and adjusted EBITDA per quarter on a run rate basis, which represents cash-on-cash returns of approximately 14%.
Speaker Change: First as it relates to the Denver value add multifamily investment while RMR owns 100% of this asset.
Matt Jordan: We are expecting the investment to contribute approximately $250000 per quarter and pre tax income and over $750000 in adjusted EBITDA per quarter on a run rate basis or the equivalent of a 12, 5% cash on cash return.
Matt Jordan: Secondly, as it relates to the mortgage loans, we closed in July we expect those loans to contribute approximately $600000 in pretax income and adjusted EBITDA per quarter on a run rate basis, which represents cash on cash returns of approximately 14%.
Matthew Jordan: Aggregating these collective assumptions, next quarter we expect adjusted earnings per share to range between $0.37 and $0.39 per share using a share count of 16,500,000 shares. Adjusted EBITDA to range from $21 to $22 million, and distributable earnings to range from $0.47 to $0.49 per share. In closing, we end the quarter with over $200 million in cash and no corporate debt. After giving consideration to the strategic transactions outlined earlier and the fact that annual bonuses are paid each September, we still expect to end next quarter with approximately $150 million in cash, providing us ample flexibility to continue investing in strategic growth initiatives. That concludes our formal remarks. Operator, would you please open the line for questions?
Matt Jordan: Aggregating these collective assumptions next quarter, we expect adjusted earnings per share to range between 37, and 39 cents per share using a share count of 16.500 million shares.
Matt Jordan: Adjusted EBITDA to range from $21 million to $22 million.
Speaker Change: And distributable earnings to range from 47 to 49 cents per share.
Speaker Change: In closing we ended the quarter with over $200 million in cash and no corporate debt.
Speaker Change: After giving consideration to the strategic transactions outlined earlier and the fact that annual bonuses are paid each September.
Speaker Change: We still expect to end next quarter was approximately approximately $150 million of cash providing us ample flexibility to continue investing in strategic growth initiatives.
Speaker Change: That concludes our formal remarks, operator would you. Please open the line to questions.
Operator: Thank you, and we will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key.
Speaker Change: Thank you.
Speaker Change: Well now begin the question and answer session.
Speaker Change: To ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two and at this time, we will pause them entirely for the first question.
Operator: To withdraw your question, please press star then two. And at this time, we'll pause momentarily for the first question. And our first question today will come from Bryan Maher with eRiley Securities. Please go ahead.
Bryan Maher: Thanks. Just a couple for me this morning. When you talk about the 125 deals that are in various stages of looking at, can you maybe break down with a little bit more granularity, you know, what type of deals those are? Maybe, you know, by asset type, you know, region, the country, etc.
Speaker Change: And our first question today will come from Brian not hurt with B Riley Securities. Please go ahead.
Brian Naughton: Thanks, just a couple for me. This morning, when you talk about the 125 deals that are in various stages of looking at can you maybe break down a little bit more granularity what type of deals those are maybe.
Speaker Change: I ask the Thai yeah regionally.
Speaker Change: Three et cetera.
Adam Portnoy: Sure, Bryan, good morning. Basically, you know, those 125 deals generally fit the criteria of value-add, multi-family investments, a similar dynamic or characteristics to the investment we made in Denver. They typically, you know, they're primarily in the Sunbelt markets, again, leveraging the expertise of the RMR residential platform, which is that's where they have their 5 billion plus of assets that they're currently managing sort of throughout the Sunbelt. So, you know, it's mostly value-add. It's Sunbelt, multi-family, typical, you know, garden-style community, real apartment complex.
Speaker Change: Sure Brian Good morning, basically those 125 deals generally fit the criteria of value add multifamily investments similar dynamic or characteristics to the investment we made in Denver.
Speaker Change: They typically they're primarily in the sunbelt markets again, leveraging the expertise of the RMR residential platform, which is that's where they have their 5 billion plus of assets that they're currently managing sort of throughout the sunbelt. So.
Speaker Change: It's mostly value add it's a sunbelt multifamily.
Speaker Change: Typical.
Speaker Change: Carton style community real apartment complexes.
Adam Portnoy: And what is the motivation of the sellers that you're coming across on these deals?
Speaker Change: And what is the motivation of the sellers that you're you're coming across on these deals.
Adam Portnoy: A lot of it can be debt maturity, which can drive a lot of it. That's actually what drove the transaction that we put on our balance sheet and really created an opportunity in some ways because, you know, we had to close on a very specific shortened time frame in order to meet the seller's need to repay debt, and that actually opened up an opportunity for us. That's the most typical sort of driving factor.
Speaker Change: A lot of it can be debt maturity can drive a lot of it that's actually what drove the transaction that we put on our balance sheet and really created in some ways opportunity because we had to close on a very specific shortened timeframe.
Speaker Change: And in order to meet the sellers need to repay debt and that actually opened up an opportunity for us. That's that's the most typical sort of a driving factor. The other thing is you know.
Adam Portnoy: The other thing is, you know, it could be a property that is not quite through its business plan to renovate and improve the operations or the cash flow, and the landlord is becoming cash constrained for some reason. And so they're looking to offload the property sort of earlier than they probably would have liked to because they've become cash constrained. So it's sort of a little bit of forced selling, I would say, is what you're seeing.
Speaker Change: It could be it up it could be a property that.
Speaker Change: He's not quite through its business plan to renovate and improve the operations of the cash flow and the landlord is becoming cash constrained for some reason and so theyre looking to offload the property sort of earlier than they probably would have liked to because they've become cash constrained so sort of.
Speaker Change: A little bit of forced selling I would say is what you are seeing we do see a part of the challenge for the team is that Theres a lot of potential sellers that are exploring the market, meaning they get pov. They hire brokers. They explore they get first round bids it may even get second and third round.
Adam Portnoy: We do see, you know, part of the challenge for the team is that there are a lot of potential sellers that are exploring the market, meaning they get BOV, they hire brokers, they explore, they get first round bids, and they even get second or third round bids, and then they pull back, and they decide not to transact. So unfortunately, we're, it's also hard to know if somebody will actually transact when they put a property out.
Speaker Change: Bids and then they pull back they decided not to transact. So unfortunately, where it's also hard.
Speaker Change: To know somebody actually will transact when they put a property out.
Bryan Maher: Thanks for that! Just shifting gears, I don't think I heard you say anything about ILPT in your prepared comments. I'm not sure if that was intentional or not, but it would seem to me with the sharp decline in interest rates, you know, fairly recently and including today, that really, you know, despite the fact that we know it's over-leveraged and we're waiting for a JV opportunity, et cetera, but it seems to me like sharply lower interest rates on, you know, an entity that's got great fundamental Do you have any thoughts there that you could add?
Speaker Change: Thanks for that I, just shifting gears I don't think I heard you say anything about I L. P. T. In your prepared comments not sure if that was intentional or not but it would seem to me with a sharper decline in interest rates fairly recently and including today.
Speaker Change: Really well despite the fact that we met with all of the library and we're waiting for a JV opportunity et cetera, but it seems to me like sharply lower interest rates on you know an entity that's got great fundamentals, great assets, but just kind of suffers from the leverage and interest expense that that's got to start to tee up maybe some opportunity.
Speaker Change: <unk> on that man needs to read.
Speaker Change: Do you have any thoughts there that you could add.
Speaker Change: Sure I largely agree with everything you said, Brian I think lower maybe all of our reach all of our businesses are going to benefit from lower interest rates, but you're right to specifically highlight IMTT you're right. We didn't talk about in the prepared remarks, but you are right to point out that at lower interest rates will definitely as an.
Adam Portnoy: I largely agree with everything you said, Bryan. I think lower, you know, maybe all of our REITs, all of our businesses are going to benefit from lower interest rates, but you're right to specifically highlight IOPT. You're right, we didn't talk about it in the prepared remarks, but you're right to point out that lower interest rates will definitely have an outsized impact on that company because of the high amount of leverage it has and debt it has.
Speaker Change: Outsize impact on that company because of the high amount of leverage it has and that it has those as those interest rates come down.
Adam Portnoy: You know, as those interest rates come down, it will really have a positive impact on not only the cash flow but our ability to refinance out of the existing debt on more favorable terms. So you're right, that company, IOPT, has great tailwinds. The fundamentals are very strong, and occupancy is very high. Rolling up rents as they come due. So we're, you know, it's a company that is naturally deleveraging just from the rent roll and increasing cash flow from that. And if you can add an extra boost of lower interest rates on top of it, you're right. That company is well positioned to benefit, maybe in an outsized manner, from lower interest rates.
Speaker Change: It really will have a positive impact on <unk>.
Speaker Change: Not only the cash flow, but our ability to refinance out of the existing debt at more favorable terms. So you're right that company IMTT has great tailwind fundamentals are very strong occupancy is very high rolling up rents as they come due so where.
Speaker Change: It's a company that is naturally deleveraging just from rent roll and increasing cash flow from that and if you can add an extra boost of lower interest rates on top of it you are right that company is well positioned to benefit maybe in an outsized manner from lower interest rates.
Bryan Maher: Thanks. And just last for me, maybe for Matt, you know, when I look at the adjusted EBITDA margin on page 20 of the presentation, we see this kind of decline, you know, from 49-ish to 41-ish percent. Do you think, you know, that the lower 40s is the new run rate on adjusted EBITDA margin, or are the, you know, efforts that you've taken with some headcount reduction and other things going to drive that back up to some degree? And that's all. Now we...
Matt Jordan: Thanks, and just last for me maybe for Matt you know when I look at the adjusted EBITDA margin on page 20 of the presentation.
Matt Jordan: We see this kind of decline from $49 to 41 ish.
Speaker Change: Person do you think you know that lower forties as the new run rate on an adjusted EBITDA margin or are the efforts that you've taken with some head count reduction and other things I'm going to drive that back up to some degree and that's all for me.
Matthew Jordan: No, we, Bryan, definitely want to get back to what we're used to in the 50% range. I think the cost containment measures will clearly help, but the big driving force right now is the RMR residential business, and the acquisition we did last year is a break-even business right now. So, you've got $5 to $6 million of revenue each quarter that is a zero-margin business, and that's driving those margins down to the low 40s right now.
Speaker Change: No Brian we definitely want to get back to what we're used to in the 50% range I think the cost containment measures will clearly help but the big driving force right now is the RMR residential business and the acquisition. We did last year is a breakeven business right now so you've got five to 6 million.
Speaker Change: Of revenue each quarter that is zero margin business and that's driving those margins down to the low forties right now so I I am very hopeful this is temporary as markets rebound in transaction volumes come back later this year.
Matthew Jordan: So, I am very hopeful this is temporary, and as markets rebound and transaction volumes come back later this year, that that business will return to profitability, and you'll see those margins go back to what you're used to seeing for RMR.
Farmer: That business will return to profitability and you'll see those margins go back to what you're used to seeing farmer.
Speaker Change: Okay. Thank you.
Operator: And once again, if you would like to ask a question, please press star then 1. Our next question will come from Ronald Kamdem with Morgan Stanley. Please go ahead.
Speaker Change: And once again, if you would like to ask a question. Please press Star then one.
Speaker Change: Our next question will come from Ronald Camden with Morgan Stanley. Please go ahead.
Ronald Kamdem: Hey, just two quick ones for me. Back to the multi-family pipeline, the 135 deals, but any sort of thoughts on just in terms of dollars out the door, what that could look like this year, what you're going to keep on the balance sheet, and I think you said in the opening comments that returns are sort of in the teens. Is that sort of the right range that we should be thinking about going forward?
Ronald Camden: Hey, just two quick ones from me back to the multifamily pipeline out of 135 deals, but any sort of thoughts on just in terms of dollars out the door.
Ronald Camden: That could look like this year, what youre going to keep on balance sheet and as I think you said in the opening comments to returns are sort of in the teens is that sort of the right.
Speaker Change: Range that we should be thinking about going forward.
Adam Portnoy: So, with regard to the multifamily investments going forward, yes, in terms of the return profile, you know, those are value-add investments where we expect to get, you know, outsized returns because we're adding value in terms of repositioning the property and getting higher rents. And so, I think that's clearly sort of the sweet spot for us.
Speaker Change: Sure so with regard to the multifamily investments going forward, yes in terms of the return profile.
Speaker Change: Those they are value add investments, where we expect to get.
Speaker Change: Outsize returns on because we're adding value in terms of repositioning the property getting higher rents were and so.
Matt Jordan: I think that's that's clearly showing the sweet spot for us and as Matt highlighted you know on a cash on cash basis, it's generating on an EBITDA, 14% to the bottom line.
Adam Portnoy: And as Matt highlighted, you know, on a cash-on-cash basis, it's generating EBITDA to the bottom, you know, to the contribution to RMR as a whole. In terms of the pipeline, the 125 deals... from It's it's a little hard to peg how many we're going to be able to do this year. It's a little bit.
Speaker Change: <unk> contribution to tour to RMR as a whole in terms of the pipeline.
Matt Jordan: The 125 deals.
Speaker Change:
Matt Jordan: It's a little hard to peg, how many we're going to be able to do this year, it's a little bit if we have to continue to put them on our balance sheet and then syndicate afterwards, the pace will be slower.
Speaker Change: Then if we are fortunate enough to be able to syndicate the equity prior to putting it on our balance sheet and that might be a very nuanced answer, but basically what happened with the Denver deal and it will give you. Some context is you really had an opportunity because I said before in answering the other question that you had debt coming due so we.
Adam Portnoy: If we have to continue to put them on our balance sheet and then syndicate afterwards, the pace will be slower than if we are fortunate enough to be able to syndicate the equity prior to putting it on our balance sheet. And that might be a very nuanced answer, but basically, what happened with the Denver deal, and this will give you some context, is that we really had an opportunity, because I said before in answering the other question that we had debt coming due, so we had a very motivated seller, and we had a very fixed time frame.
Speaker Change: A very motivated seller, we had a very fixed timeframe.
Adam Portnoy: Because of that, we had a shortened period of time to syndicate the equity, and so we ended up, because we thought it was such a strong investment, we just said, look, let's be opportunistic, let's just take it down on our balance sheet; we'll syndicate it afterward. That uses up capacity at RMR.
Speaker Change: Because of that we had a shortened period of time to syndicate the equity and so we ended up because we thought it was such a strong investment. We just said look let's be opportunistic, let's just take it down on our balance sheet will syndicate afterwards.
Adam Portnoy: We're confident we'll be able to syndicate. But, you know, going forward, I would imagine that most deals will be syndicated before we put them off, you know, before we actually close. So the more we're able to syndicate deals prior to closing, the higher the volume. We end up having to close them like this, and it might be that we end up closing one or two more deals, you know, having to use our balance sheet because of just the natural constraints of the balance sheet and how much cash we have. We won't be able to do as much.
Speaker Change: That uses up capacity at RMR, we're confident we'll be able to syndicate it.
Adam Portnoy: But you know going forward I would imagine that most deals will put will be syndicated before we put it out before we actually close so the more we're able to syndicate deals prior to closing the higher the volume we ended up having to close them like this and it might be that we ended up closing one or two more deals you know having to.
Speaker Change: Use our balance sheet because of the just the natural constraints of the balance sheet, how much cash we have we wont be able to do as much.
Adam Portnoy: So I would put the range, and this is going to be a wide range, you know, it's somewhere between two and ten more deals that we could do, depending on, you know, whether we're putting them on the balance sheet and then syndicating afterwards, or whether we are, you know, able to syndicate them prior to closing. That really drives the velocity more than anything else.
Speaker Change: Put the range and this is gonna be a wide range you know somewhere between two and 10 more deals that we could do.
Speaker Change: Depending on whether we're putting them on balance sheet, and then syndicating afterwards or whether we are.
Speaker Change: Able to syndicated prior to closing that really drives the velocity more than anything else.
Ronald Kamdem: helpful. And then if I could switch gears on the lending ventures, two deals, 40 and 27 million. Maybe, can you give any comments on the pipeline there and sort of opportunities and, you know, again, same question. In terms of getting volume suits through the door, what's a good sort of run rate we should be thinking about?
Speaker Change: Helpful. And then if I could switch gears on the lending ventures are two deals.
Speaker Change: 27 million, maybe can you any comments on the pipeline, there and sort of opportunities and you know again same question just what do you think in terms of getting volumes due to the door. What's a good sort of run rate, we should be thinking about.
Adam Portnoy: Yeah, so that's a little bit different. What we're doing there is we're actually seeding a fund that we are actually out in the market, you know, talking to LPs about. And we think since this is our first private fund focused on lending, real estate lending, Given it's a crowded market for lending, and we're, you know, we're attuned to what's happening in the market, what differentiates us is that we actually have a portfolio of loans that an investor can underwrite and invest in.
Speaker Change: Yeah, So that's a little bit different.
Speaker Change: Situation, what we're doing there is we're actually seeing a fund we are actually out in the market.
Speaker Change: You know talking to Lps about and we think since this is our first private fund focused on lending.
Speaker Change: Lending real estate lending give.
Speaker Change: Given it's a crowded market for lending and where we are tuned to what's happening in the market. What differentiates us is that we actually have a portfolio of loans that are investor can underwrite and invest into we think this will benefit us and b make it more likely that we are able to raise the money and not only raise the money but raise.
Adam Portnoy: We think this will benefit us and be able to make it more likely that we are able to raise the money and not only raise the money, but raise it faster. I give you all that history because we don't need to have a large pool of loans on our balance sheet. I think we're thinking somewhere between two to four. We already have two, so maybe there are another two we can put on the balance sheet, which again is very focused on seeding, having a seed portfolio that LP investors can then underwrite and then accelerate, you know, the fundraising around that strategy.
Speaker Change: It rains it faster I gave you all that history because.
Speaker Change: We don't need to have a large pool of loans on balance sheet I think we're thinking somewhere between two to four we already have two so maybe there's another two we put on the balance sheet, which again very focused on seating having a seed portfolio that LP investors can then.
Speaker Change: And underwrite and then accelerate the fund raising around that strategy. So I don't see us.
Adam Portnoy: So I don't see us, you know, the short answer is I can't imagine it will be more than two more loans, and it may just be one more loan we end up putting on the balance sheet over the next six to nine months.
Speaker Change: The short answer is I can't imagine it will be more than two more loans and it may just be one more alone we ended up putting on the balance sheet.
Speaker Change: Over the next six to nine months.
Ronald Kamdem: That's it for me. Thank you.
Speaker Change: Helpful. That's it for me thank you.
Speaker Change: And this will conclude our question and answer session I'd like to turn the conference back over to Adam Portnoy, President and Chief Executive Officer for any closing remarks.
Operator: And that will conclude our question and answer session. I'd like to turn the conference back over to Adam Portnoy, President and Chief Executive Officer, for any closing remarks.
Adam Portnoy: Thank you all for joining us today. Operator, that concludes our call.
Adam Portnoy: Thank you all for joining us today, operator that concludes our call.
Operator: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect your lines at this time.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect your lines at this time.
Speaker Change: Yeah.
Speaker Change: Yeah.