Q4 2024 The RMR Group Inc Earnings Call
Speaker Change: Good morning and welcome to the RMR Group Fiscal Fourth Quarter 2024 Earnings Conference Call.
All participants will be in a listen-only mode.
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Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to Kevin Barry, Senior Director of Investor Relations. Please go ahead.
Kevin Barry: Good morning and thank you for joining RMR's fourth quarter fiscal 2024 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.
Kevin Barry: 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: Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws.
Kevin Barry: These forward-looking statements are based on RMR's beliefs and expectations as of today, November 12, 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 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 rmrgroup.com
Kevin Barry: Investors are cautioned not to place undue reliance upon any forward-looking statements.
Kevin Barry: In addition, we may discuss non-GAAP numbers during this call, including adjusted net income, adjusted earnings per share.
Distributable Earnings, and Adjusted EBITDA.
Kevin Barry: 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.
Adam Portnoy: Thanks, Kevin, and thank you all for joining us this morning.
Adam Portnoy: Yesterday, we reported fourth quarter results that were generally in line with our expectations, which included adjusted net income per share of $0.34, distributable earnings per share of $0.51, and adjusted EBITDA of $21.8 million.
Adam Portnoy: Over the past year, we have continued to invest time and resources into growing our private capital business while simultaneously supporting our public clients through a challenging commercial real estate environment.
Adam Portnoy: This past quarter we have seen increased signs that we are entering a more favorable market environment.
Adam Portnoy: More specifically, we are seeing an increase in transaction activity and as a result a more energized fundraising environment.
Adam Portnoy: In fact, we're seeing increased interest from our legacy institutional partners as well as greater success in engaging with potential new capital partners.
Adam Portnoy: While there are many reasons for optimism, it is important to note that the industry continues to experience an elongated fundraising cycle.
Adam Portnoy: We are confident that the scale and diversity of real estate sectors our platform encompasses will position us to capture opportunities as the commercial real estate market improves.
Adam Portnoy: We have a robust and growing pipeline and are advancing discussions with new and existing partners across a number of sectors Some of which we have previously discussed and others we expect to discuss in the future
Adam Portnoy: Turning to our previously announced strategic initiatives, the fundraising process is progressing for our private debt vehicle, which we intend to seed with 100 million dollars in middle market and transitional bridge loans.
Adam Portnoy: To date, our real estate lending platform, Tremont Realty Capital, has originated $67 million in aggregate commitments for this vehicle, and these loans are expected to generate returns in the mid-teens.
Adam Portnoy: As part of the credit vehicle, in September we entered into a $200 million master repurchase agreement with UBS.
Adam Portnoy: which allows us to effectively leverage our loans up to 80%. After using the UBS facility, our net cash outlay was approximately $15 million for these loans.
Adam Portnoy: Expanding the RMR residential platform also remains a priority. As we previously announced, we closed on our first multifamily investment in July, acquiring a 240-unit garden-style community in Denver.
Adam Portnoy: While it is still in the early stages of the business plan for this property, we are already seeing increased rental rates as leases roll.
Adam Portnoy: In addition to this transaction, we are seeing increased activity in our residential acquisitions pipeline, and I'm optimistic that our residential AUM and its related EBITDA contribution will increase in 2025.
Adam Portnoy: In addition to our growing pipeline, my optimism is based on a continued belief that the U.S. multifamily market is positioned for significant long-term growth as the shortage of housing and high cost of home ownership continues.
Adam Portnoy: Beyond our strategic initiatives, we remain focused on assisting our managed equity REITs with the execution of their operational and financial strategies.
Adam Portnoy: During the quarter, we arranged 5.2 million square feet of leasing on behalf of our clients.
Adam Portnoy: highlighted by the early renewal of Vertex Pharmaceuticals for 1.1 million square feet in Boston Seaport District and the lease renewal of more than 2 million square feet with FedEx.
Turning to a few brief highlights across our public clients.
Adam Portnoy: SVC's third quarter performance reflected the continued slow recovery of its hotel portfolio combined with the impact of its ongoing renovation program.
Adam Portnoy: Notably, SVC is taking significant actions to improve liquidity and reduce leverage, including a reduction in its quarterly dividend and plans to sell 114 Sinesta hotels, targeting approximately $1 billion in proceeds.
Adam Portnoy: We are confident that the rationalization of its hotel portfolio, stable cash flows from its triple net lease assets, and continued prudent capital management will improve performance and drive long-term value for SVC shareholders.
Adam Portnoy: OPI continues to advance its process to address its upcoming debt maturities and strengthen its balance sheet.
Adam Portnoy: In the first half of the year, OPI completed $1.3 billion in secured financings and has since reduced its 2025 debt maturity by nearly $200 million.
Adam Portnoy: We are in active negotiations with OPI bondholders, and we continue to work with OPI's outside advisors to evaluate all possible strategies to address OPI's upcoming maturities.
Adam Portnoy: Lastly, DHC continues to progress on its initiatives to evolve its portfolio, increase occupancy, and advance its shop turnaround. The company is conducting a comprehensive portfolio analysis to transform its asset mix to focus on properties and key markets with the highest upside opportunities.
THC currently has LOI's or agreements to sell 28 properties
for estimated proceeds of $348 million.
Adam Portnoy: and recently expanded its shop disposition program to include a total of 32 communities which are in various stages of the disposition process.
Adam Portnoy: We are confident that the optimization of the portfolio, combined with the strategic operator transitions and capital investments, will position DHC to capitalize on market tailwinds and drive sustainable, profitable growth.
Speaker Change: In closing, RMR delivered a solid finish to fiscal 2024, and we are confident we are heading into fiscal 2025 in a strong position to capitalize on the growth opportunities we see ahead as markets improve.
Speaker Change: The business continues to have stable recurring revenues, a diversified client roster, and a solid balance sheet.
Speaker Change: We are actively taking measures to position our clients for long-term success while advancing our private capital initiatives to drive future growth and create long-term value for RMR and its shareholders.
Speaker Change: With that, I'll now turn the call over to Matt Jordan, Executive Vice President and our Chief Financial Officer. Thanks, Adam, and good morning, everyone. For the fourth quarter, we reported adjusted earnings per share of $0.34, adjusted EBITDA of $21.8 million, and distributable earnings of $0.51 per share.
Matt Jordan: The majority of these measures were in line with our expectations, though adjusted earnings per share were adversely impacted by depreciation and amortization costs from our Denver multifamily acquisition and year-end true-ups to our annual tax rate.
Recurring service revenues were $48 million this quarter.
a decrease of approximately $900,000 sequentially.
Matt Jordan: This decrease was in line with our expectations and primarily driven by our managed equity reach share prices and declines in construction supervision fees.
Matt Jordan: Next quarter, assuming enterprise values at our managed equity reach remain static, we expect service revenues to remain at these levels.
Matt Jordan: As Adam highlighted earlier, this quarter we executed on strategic investments within our credit and residential platforms.
Our financial results presentation provides detailed insights on these investments.
But in summary...
Matt Jordan: But in summary, while these investments are wholly owned by RMR, we expect them to have the following financial impacts.
Matt Jordan: The mortgage loans that we closed in July contributed approximately 1.3 million dollars in adjusted EBITDA this quarter.
Matt Jordan: It's important to note that these loans were not levered via our new UBS repurchase facility until late September, and accordingly, the $1.3 million in net investment income does not reflect a full quarter of interest expense.
Matt Jordan: Going forward, on a quarterly basis, we expect these loans to contribute approximately $500,000 in adjusted EBITDA.
Matt Jordan: As it relates to the Denver multifamily investment, this quarter it generated approximately $900,000 of net operating income.
Matt Jordan: Going forward, we expect this asset to contribute approximately $1.1 million of net operating income and approximately $600,000 of interest expense on a quarterly basis.
Turning to expenses.
Matt Jordan: Recurring cash compensation was 44 million dollars which excludes approximately 2.2 million dollars in annual bonus true ups this quarter.
Recurring cash compensation this quarter declined approximately $1 million sequentially.
Matt Jordan: which reflects the headcount actions we discussed on last quarter's call.
Matt Jordan: Looking ahead to next quarter, we expect recurring cash compensation to remain at approximately 44 million dollars with our cash reimbursement rate at approximately 49 percent going forward.
Matt Jordan: Recurring G&A expenses this quarter were 10.2 million dollars after the exclusion of non-cash loan loss reserves of $600,000 and $300,000 of technology transformation costs.
Matt Jordan: With construction volumes expected to improve next quarter, we estimate recurring G&A will increase to approximately $11 million due to increased levels of third-party construction oversight costs.
Matt Jordan: This quarter's income tax rate of 18.9% reflects year-end tax provision true-ups primarily related to limitations on tax-deductible compensation.
Matt Jordan: We expect our tax rate next quarter to normalize at approximately 15 percent.
Matt Jordan: Aggregating these collective assumptions, next quarter we expect adjusted earnings per share to range from $0.34 to $0.36 per share, adjusted EBITDA to range from $21 million to $22 million, and distributable earnings to range from $0.46 to $0.48 per share.
Matt Jordan: That concludes our prepared remarks. Operator, please open the line for questions.
We will now begin the question and answer session.
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Speaker Change: The first question today comes from Brian Meagher from BRiley. Please go ahead.
Brian Meagher: Thank you. Good morning, Adam and Matt. Just a couple for me today.
Brian Meagher: When we look at your cash position, I think it's $130-something million.
Brian Meagher: What percentage of that do you think you'll end up deploying in RMR Residential and the other private capital AUM initiatives? And maybe ask a different way, how much do you think you need to retain just to kind of run RMR ops from day to day?
Sure, Brian, good to talk with you.
Speaker Change: I think a good amount of that money is open for investment in different initiatives. We're very much focused on sort of pivoting the platform and seeding new investments. We've talked about it for a long time but I would say over the last several months
Speaker Change: It's really accelerated and you've seen that in the acquisitions, which we think are really good acquisitions and around the credit Investments as well as the arm our residential investment. I expect you'll see
Speaker Change: investments like that maybe in those sectors as well as other sectors going forward as to how much we really sort of need this
Matt Jordan: Hold on to for just general operations. I'll let Matt answer that. Yeah, Brian. It's probably five to ten million dollars And I guess I would also highlight. We're still a business It's generating 90 million or so of adjusted EBITDA and about 20 of that is really growth capital after taxes and dividends. So
I would say no more than five to ten million.
Speaker Change: Okay, and then when we think about syndicating out equity stakes like in RMR residential, you know, example being Denver acquisition, you know, what's been the receptivity of that to date and what percentage equity stake do you think you retain in each of these investments?
Sure, so as I talked about in my prepared remarks,
You know
Speaker Change: We don't have anything to announce today in terms of syndicating the equity, but what we can talk about is there's been sort of a
Speaker Change: I would say over the last three months, really, when the Fed started reducing rates, sort of a little bit of a sea change in the market environment where we have a lot more active conversations happening with potential partners. And so I feel, we feel optimistic that we will be able to eventually
Speaker Change: syndicate either the equity or get those funds off the ground. You know, timing is a very difficult thing to predict precisely. I can say generally, and again, I said this in my prepared remarks.
Speaker Change: You know, it is elongated, investors, LPs are taking a longer time to make decisions.
Speaker Change: , they sort of have, you know, they have advantages in their court because there's not a lot of money going out and those that are putting money out can be very judicious around it. And so they're taking their time in terms of making evaluations and making decisions. And I don't think this is unique to us. This is across.
Speaker Change: In terms of what our retention will be in these vehicles or equity, I don't believe it will be more than 20%. I expect it will likely be on average less than 20%, but I think the upper limit would be 20%.
Speaker Change: Okay, and just last for me, you know, when we look at the public managed REITs and kind of the shrinking AUM there through the asset sales which, you know, basically will lower your base management fees there.
Speaker Change: You know, how do you think about that relative to the potential upside?
Speaker Change: from incentive management fees in the next, you know, one, two, three years from, you know, for lack of a better phrase, you know, doing the right thing by these public entities and sacrificing in the near term, potentially making it up, you know, in the incentive fee side, you know, how do you think through that process?
Speaker Change: Sure, so I think we're primarily focused on doing what is in the best interest of those public vehicles and generally speaking as a theme across all of the public vehicles, public equity REITs for example, I think the theme is deleveraging.
Speaker Change: and Reducing Leverage and Right-Sizing the Balance Sheets. That's a general theme across all the equity REITs.
Speaker Change: and you know that's our primary objective and our view is as you deliver those vehicles that you should get rewarded in the stock price.
Speaker Change: generally speaking lower levered equity reach trade at a better premium trade better than highly leveraged equity reach and that's a general statement.
Speaker Change: So, you know, our hope is that over time, that's a way to increase stock price performance, and we'll pick that up hopefully over time as we de-leverage these REITs.
Speaker Change: that will pick that up both in the base management fee, as you know, Brian, we get our fee based not just AUM is the lower of enterprise value or gross investments and assets. So even though the gross investments and assets is going down,
Speaker Change: all of our equity REITs are being paid on the lower of enterprise value.
And so there's the potential, and our hope is...
that any reduction in, let's say,
Speaker Change: AUM will be more than made up, or let's say real estate AUM, will be more than made up in hopefully stock price performance.
Speaker Change: and eventually that will drive the increase in both base management fee and incentive fee. It's going to take time. We have to execute on these strategies with our equity reach, and we understand that.
Speaker Change: So, a little bit of what you said is true. We are taking some short-term...
Speaker Change: paying at RMR but it's the right thing to do for these equity REITs and that's primarily what we're focused on is doing the right thing and making those recommendations to the boards of those equity REITs in terms of what's the best thing and best course of actions with those those businesses.
Perfect, thank you.
Adam Portnoy, Tyler Batory, Bryan Maher, Matthew Jordan, Ronald Kamdem,
Speaker Change: As a reminder, if you would like to ask a question, please press star then 1 to enter the question queue.
Speaker Change: The next question comes from Ronald Camden with Morgan Stanley. Please go ahead.
Ronald Camden: Hey, just two quick ones. Just going back to the pipelines for RMR, residential as well as a private lending vehicle, maybe can you just talk a little bit through sort of the opportunities that you're looking at? Should we expect anything to close?
Ronald Camden: by sort of year-end or is it all sort of a 2025 story now at this point?
Speaker Change: On the lending vehicle itself, the credit vehicle, it's probably more of a 2025 story in terms of bringing in partners there.
Speaker Change: That being said, again, as I said in my prepared remarks, we are, I would say, picking up traction there. It's obviously an attractive investment sector for many investors if they're focused on investing in real estate, commercial real estate. We have a very strong
Speaker Change: performance track record there and we also have a seed portfolio that we think positioned us very well to attract investors into that vehicle. So I do think it's a 2025 event more than is you know likely a 2024 event.
Speaker Change: And then on the residential I think it's fair to say that is also an early 25 event but the momentum is far accelerating now that started in late summer.
Speaker Change: With the interest rate cuts and now the elections behind us, we've definitely seen our legacy partners and, frankly, new partners come back to the table, so we're feeling good heading into 25 on the residential front too.
Great. My second question was just on the cash balance.
Speaker Change: you know, obviously, you know, goes down as you're sort of investing.
Speaker Change: But then, you know, you could sort of lever up things and so forth. Just curious where you would expect CAST to end, sort of at the end of this year. Any sort of high-level comments for next year in terms of what CAST is going to go out and do?
and what's going to come in.
Thanks.
Speaker Change: Longer term, it's going to be a function of what strategic investments.
Speaker Change: start to get executed upon. As I look at where we're going to land at December 31st, frankly, I'm expecting our cash to increase to approximately $150 million just because we don't expect anything significant on the strategic front to close in the next, in this upcoming quarter, but expect that to accelerate into calendar 25, and I think you'll start to see us.
Speaker Change: draw down some of that cash to execute on strategic actions.
Great. Thanks so much. That's it for me.
Thank you.
Speaker Change: The next question comes from Mitch Germain with Citizens JMP. Please go ahead.
Speaker Change: Thanks. Are there additional loan and multifamily investments that you're targeting? I mean, you know, two in loan and one in multifamily, is that enough to attract, you know, investors to think about, you know, setting up a larger venture?
Speaker Change: So on those two specific strategies, you know, I think we we originally said, you know anywhere from two to four
Speaker Change: credit loans in the credit vehicle so we could do more in the credit vehicle over the coming months that you could see on our balance sheet to set that up.
Speaker Change: I think we're probably at the higher, on the upper end would be four loans.
Speaker Change: And maybe it would be a little more than $100 million that we've targeted, but it wouldn't be much more than $100 million.
Speaker Change: more that we've targeted. On the residential side there's also a possibility that there could be, you know...
Speaker Change: I'm picking a number here, one or two more investments that could happen that we put on our balance sheet, but again, that's an area where.
Speaker Change: you know, we talked about on our, both in the prepared remarks, Matt's mentioned it too before, we are seeing significant, you know, interest.
in and around residential.
Speaker Change: And while we may put more money out to work in that strategy,
Speaker Change: there's an opportunity that we won't have to put it on our balance sheet. In other words, we'll be able to syndicate the equity before closing as we move forward with those sort of acquisitions.
Speaker Change: And so I expect we'll be making more acquisitions there, but it's less likely we're going to have to put it on our balance sheet. I don't rule it off the table.
Speaker Change: We may still put one or two more investments there. I will also, you didn't ask this Mitch, but I'll tell you, you know, there are other strategies we are pursuing, and I sort of hinted at it in my prepared remarks.
Speaker Change: You know, we spent a lot of time talking about the credit vehicle and the residential vehicle. There are other strategies we're pursuing where we may put the asset on our balance sheet to help seed those investments.
Speaker Change: and you know to sort of go there without anyone asking I'll say
Speaker Change: Generally speaking, it's sort of in the areas that, if you were paying attention to commercial real estate, which all of you are, they're the areas that are most favorable to folks. Things like industrial.
Speaker Change: parts of retail, some development activities that have high returns, that gives you a flavor for some of the other things that we're looking at that may also go on our balance sheet in the coming months. So that's a little more than you asked, Mitch, but it gives you a feel.
Speaker Change: Well you actually answered my second question, so there you go Adam. Maybe shift you over to Matt, just in thinking about base management fees obviously you know you still have
Speaker Change: a little time before this quarter is over, but, you know, we saw a drop in price of one of the managed REITs, we saw some increases in the other, you've got some planned asset sales. So, obviously, what are the different machinations that you're paying attention to with regards to, you know, thinking about?
what they'll equal, you know, kind of quarter over quarter.
utilizing their capital budgets.
Speaker Change: or some of the sales impacting enterprise value from a debt perspective and seasonality in our operators. But net-net, the expectation is it will all wash to get us back to a flat answer for next quarter.
Speaker Change: Gotcha, that's super helpful and then maybe last one for me and maybe this kind of moves over to Adam in terms of how should we be thinking about the sustainability of revenues associated with
OPI. Obviously it's very early stages in terms of
how that process could play out.
as you near
Speaker Change: the refinancing date, but I think given how things are structured, it seems like business as usual for RMR, at least initially, is that how we should think about it?
Speaker Change: Yeah, I think it's a broader question about what's going on with OPI. All I can really say, it's not exactly what you asked Mitch, but I'll just say it anyways, you know.
Speaker Change: you know, as OPI said on its earnings call, it is engaged in discussions with its bondholders. Those construct, those conversations are constructive.
Speaker Change: That being said, we continue to plan that we will be operating and managing OPI for the foreseeable future. That is the way RMR is, the way we are planning it, and it's the way we are thinking about the business.
Thanks for watching!
That's super helpful, thank you guys.
Speaker Change: This concludes our question and answer session. I would 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 this morning. Have a good day.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.