Q2 2025 The RMR Group Inc Earnings Call
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Speaker Change: Good morning, and welcome to the RMR Group Digital Section Quarter 2025 on each conference hall.
Speaker Change: All participants will be in a slow remote. Should you need assistance, please are going to conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star them on your telephone keypad and to withdraw your question, please press star them too. Please note today's event is being recorded.
Speaker Change: I would now like to turn the conference over to Matt Murphy, manager of Investor Relations. Let's go ahead
Matt Murphy: Good afternoon, and thank you for joining RMR's second quarter fiscal 2025 conference call.
Speaker Change: With me on today's call are President and CEO , Adam Portnoy, and Chief Financial Officer, Matt Jordan. In just a moment, they will provide details about our business and quarterly results, followed by a question and answer session.
Speaker Change: 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.
Speaker Change: Today's conference call contains four looking statements within the meaning of the Private Security's litigation reform act of 1995 and other securities laws.
Speaker Change: These four-looking statements are based on RMR's beliefs and expectations, as of today, May 7, 2025, 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.
Speaker Change: 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.
Speaker Change: Investors are cautioned not to place undue reliance upon any forward-looking statements.
Speaker Change: In addition, we made discuss non-GAAP numbers during this call, including adjusted net income, adjusted earnings per share, distributable earnings, and adjusted EBITDA.
Speaker Change: A reconciliation of net income determined in accordance with US 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, Matt. And thank you all for joining us this afternoon. Yesterday we reported second quarter results that were slightly below our expectations.
Adam Portnoy: with adjusted net income coming in at 28 cents per share and distributable earnings of 40 cents per share.
Adam Portnoy: The shortfall to our expectations primarily related to our managed equity rates spending less on capital expenditures given the more uncertain economic environment and de-leveraging activities adversely impacting RMR's revenues.
Adam Portnoy: While in recent months we've been forced to navigate economic volatility, we continue to engage with private capital investors regarding our various investment initiatives across the residential sector, credit strategies, and select development opportunities.
Adam Portnoy: While we found most partners ready to start investing in a significant way in the latter part of 2024 and into early 2025, recent market volatility has modestly tempered enthusiasm.
and caused some investors to temporary pause new allocations.
Adam Portnoy: With that said, across many of our investment strategies, we believe now is the time to take advantage of opportunities when others are pulling back.
Adam Portnoy: As an example, we were already seeing new supply decrease in the residential sector, which bodes well for rent growth and occupancy gains heading into 2026.
Adam Portnoy: With the recent tariff actions, we believe this will further slow new construction starts and strengthen residential fundamentals and many of our sunbelt markets where migration trends continue to drive housing shortages.
Adam Portnoy: During the quarter, we closed two joint venture acquisitions of residential communities in South Florida for an aggregate transaction value of approximately $196 million.
Adam Portnoy: RMR raised an aggregate $64.3 million in equity from institutional investors to capitalize these joint ventures.
Adam Portnoy: with RMR acting as the General Partner and contributing a total of $11 million or retaining a weighted average 15% interest in the combined ventures.
Adam Portnoy: Another example of a real estate sector where we have conviction and believe an opportunity exists.
Adam Portnoy: in today's turbulent market. In April , we closed on a $21 million value ad community shopping center located outside of Chicago.
Adam Portnoy: This center is currently 77% occupied and our business plan includes leasing up card vacancy while also rolling up rents for existing tenants.
which today are almost 20% below market.
Adam Portnoy: Our target returns over the projected five-year-old period are in the mid to high teens.
Adam Portnoy: Our value ad retail strategy is centered on leveraging the experienced retail team we already have in place at RMR.
to establish a track record within the Value Add retail sector.
that we can then fundraise around in the future.
Adam Portnoy: This initial purchase in Chicago is expected to be part of a small portfolio of value-ad retail properties we require using RMR's balance sheet over the next six to twelve months that will aggregate to approximately $100 million.
Adam Portnoy: on balance sheet investments such as this value-ad retail acquisition are all part of our continued strategy to diversify our client base and grow our private capital AUM.
Adam Portnoy: While the current fundraising environment may be challenging, we remain confident in our ability to grow private capital A&M in the future.
Adam Portnoy: As a reminder, in less than five years time, our private capital assets under management have grown from essentially zero to over $12 billion.
Adam Portnoy: and we believe it could comprise over half of RMR's total AEM in the next five years.
Adam Portnoy: Turning to a few notable updates at our public capital clients.
D.H.C. Posted Solid First Quarter Results
Adam Portnoy: with revenue, normalized FFO for share, and adjusted EBITDA, all handedly beating consensus estimates.
The Strong Results were led by GHC Shopsegment
Adam Portnoy: which saw consolidated NLI improved 49% year-over-year because of active acid management and the positive impact of capital deployed to upgrade many of the communities over the last few years.
At SVC, first quarter results also exceeded consensus expectations.
Adam Portnoy: RevPAR, at SVC's Hotel Portfolio, improved 2.6% year-over-year and outpaced the industry by 40 basis points.
Despite Meaningful Revenue Displacement from Renovation Activity
Adam Portnoy: SVC also continues to benefit from the stable cash flows generated from its triple net lease assets.
Adam Portnoy: led by its $3.3 billion investment in travel centers which are currently leased to investment-grade rated BP.
Adam Portnoy: In terms of its de-leveraging efforts, we are pleased to report that SVC remains on track to sell 123 non-core hotels for approximately $1.1 billion this year.
despite the ongoing macroeconomic uncertainty.
Adam Portnoy: The sales process generates significant interest in pricing that met or exceeded our expectations.
Adam Portnoy: IELPT reported first quarter results that highlight the quality of its portfolio, as tenants continue to renew in place while also delivering meaningful roll-ups and rent.
Adam Portnoy: ILPT completed 2.3 million square feet of leasing activity in the quarter, and weighted average rental rates that were approximately 19% higher than prior rents.
Adam Portnoy: Although IOPT has no final debt maturities until 2027, it continues to explore ways to deliver its balance sheet while also looking to refinance its current debt with longer term fixed rate debt.
Adam Portnoy: Lastly, OPI continues to face headwinds associated with its nationwide portfolio of office properties.
Adam Portnoy: OPI, along with its advisors, continues to explore all options to address its upcoming
Adam Portnoy: To conclude, we are pleased with the progress we have made assisting our clients with their financial and strategic objectives.
Adam Portnoy: We also believe that RMR operates a durable business model supported by clients with a nation-wide portfolio of real estate across multiple sectors.
Adam Portnoy: This durable business model, with almost 70% of our AEM coming from perpetual capital, enables us to drive new initiatives forward in a volatile economic environment.
Adam Portnoy: We look forward to updating one of our progress in the coming quarters.
Adam Portnoy: With that, I'll now turn the call to Dr. Matt Jordan, Executive Vice President and our Chief Financial Officer. Thanks Adam and good afternoon everyone. As Adam highlighted earlier, this court's results was slightly below our expectations.
Matt Jordan: is RMR Generator Adjusted Net Income of 28 cents per share, and Distributable Earnings of 40 cents per share.
Matt Jordan: Recurring service revenues were $45.5 million as quarter, a sequential quarter decrease of approximately $1.8 million, driven primarily by lower than expected capital spend, as well as declines in the enterprise values of the Manage Equity Reef.
Matt Jordan: Both of which were partially offset by $700,000 in acquisition fees earned from the two residential joint ventures Adam discussed earlier.
Matt Jordan: Next quarter, based on the current enterprise values for our manage equity reach, and continued muted levels of capital spend.
Matt Jordan: We expect recurring service revenues to be between $44 and $45 million million dollars.
Adam Portnoy: As it relates to the value-ad shopping center in Chicago that Adam highlighted earlier, we expect this acquisition to generate EBITDA of approximately $350,000 per quarter in fiscal 2025.
Turning to expenses [inaudible]
Adam Portnoy: Recurring cash compensation was $42.1 million as quarter, a decline of approximately $500,000 sequentially, which reflects the impact of headcount actions taken in recent quarters.
Adam Portnoy: Looking ahead to the next quarter, we expect recurring cash compensation to decrease to approximately $39 million through continued cost-containment measures driven by strategic asset sales.
Adam Portnoy: Given that a significant number of the head count actions were associated with strategic asset sales, and where that's reimbursable roles, next quarter's cash compensation reimbursement rate is expected to decline to 48%.
Adam Portnoy: Recurring GNA, this quarter was $10.7 million, after excluding $600,000 in annual Director
Adam Portnoy: Recurring GNA of $10.7 million represents a modest sequential quarter decrease.
Due to lower third-party construction costs and continued expense management.
Adam Portnoy: Next quarter, we expect for Couragee and A to be close at $10.5 million.
Adam Portnoy: Aggregating these collective assumptions. Next quarter, we expect adjusted earnings per share to be between $0.28 and $0.30 per share, adjusted EBIDA to be between $0.19 and $0.20 million, and distributable earnings to be between $0.42 and $0.44 per share.
Adam Portnoy: Our dividend remains well-covered with a payout ratio of approximately 79%, which is shown on page 12 of our financial results.
Adam Portnoy: With $137 million of cash on hand and no corporate debt, we remain poised to take advantage of strategic opportunities.
Adam Portnoy: Before we take questions, I would like to highlight the recent publication of our annual sustainability report.
Adam Portnoy: This report provides a comprehensive overview of our commitment to addressing sustainability across our portfolio of approximately 2,000 properties.
Adam Portnoy: A link to the report can be found on our website at RMRGroup.com
Adam Portnoy: That concludes our prepared remarks. Our operator, please open the line for questions.
Speaker Change: Thank you. If you'd like to ask a question, please press star to the one on your Telephone T-pad. If your question has already been addressed, you'd like to read yourself from Q, please press star to the two. Once again, then star to the one if you have a question.
[inaudible]
Speaker Change: And today's first question comes from Tyler Betori with Oppenheimer. Please go ahead.
Tyler Batori: Hey, good afternoon. Thank you. My first question, I felt the value and retail acquisition was interesting. So, can you give a little bit more more details on the strategic brushing off work for doing this?
Speaker Change: Let me talk about using the balance sheet to do about $100,000 as the next six-of-all-bond. So, why keep these on balance sheets and just talk a little bit more about your plans for this area of the business.
Speaker Change: Sure. Thank you for that question. So you're right. The retail value add retail acquisition this year, this quarter, is a little different for us. It's different for us because we typically have not bought much value add retail or community shopping centers in the past.
Speaker Change: You know, we're really building off of a deep bench of expertise and retail within RMR. We've been investing in retail
Speaker Change: for about 15 years. Today's entire portfolio of about 5 billion of our AUM is in retail.
Speaker Change: And it's over 500 properties that we have today that are classified as retail properties that we manage and oversee. So we feel like we have a very good understanding of the market.
Speaker Change: and we've been watching the retail market now for some years and we really think there's a turning point going on in parts of retail that make a lot of sense to generate very high returns, specifically around community shopping centers or grace grocery anchored [inaudible]
Speaker Change: or Drugs Door Anchor Shopping Centers. What we've observed in the retail space, both as a market and within our own portfolio, is in the last couple of years, vacancies have become very low.
and there's really been a lot of positive absorptions.
Speaker Change: We've seen that in the marketplace and we're also seeing that within our own portfolio and a totally, you know, space comes up in one of our existing retail locations. We often, nine times out of ten, have a list of folks that we can go to that will backfill and often they backfill and pay higher rents.
Speaker Change: and you can ask what's driving this within our own portfolio and also more generally in the market. It's really a lack of supply.
Speaker Change: that's happened, there hasn't been much retail building going on for over a decade and demand is sort of finally caught up and it's really caught up in the last couple years. And we think this is a great time because we don't think there's going to be any more real building or significant building in retail.
Speaker Change: and we expect vacancies to remain low. And so we think, you know, tapping into the expertise we have within RMR to really generate outsized returns for these types of investments. We think now is the time to do that. In terms of your question around using of the balance sheet.
Speaker Change: Look, we haven't made value add retail investments before and so before I think the first step is to do some of them on our balance sheet.
Speaker Change: I'm not saying we wouldn't move these off balance sheet. I just think it's more likely that they will stay on balance sheet till we build up a little bit of a track record.
in this with maybe a small portfolio.
Speaker Change: I think I then think we'll use that track record to go raise more money third party capital around it. This gets back to using our balance sheet.
Speaker Change: to really seed investment ideas or initiatives that we think can generate outsized returns.
Speaker Change: The other thing that's sort of thematic about this is you'll notice...
The Return Profile, it's Value Ad.
Speaker Change: You know, if you look at the 40 billion of A when we manage the vast majority of it
Speaker Change: is what people would call core, core plus, meaning stable, meaning high occupancy, not a lot of active management, and let's say
Turning it around to then sell at a high return.
Speaker Change: You'll notice we do that type of investing in our residential sector today. We're starting to do it now more in retail. I expect over time you'll see us do even more of that type of investing in other asset classes as well. So that's a long-winded answer to what your question was but hopefully that answers it.
Speaker Change: You know, that's a very good detail. I appreciate it. A specific question.
Speaker Change: lower construction fees, re-spending a little bit less on the catback. So just talk a little more about that. This is a good run rate here and how you also think about season hourly quarter to quarter in terms of some of that spending and how it flows through.
Speaker Change: Yeah, good question. The first calendar quarter of every year tends to be a seasonally low quarter as people kind of as you may remember the last quarter of last calendar year is always a high number for us as people use up their budgets.
Speaker Change: Unfortunately, I think the seasonality, this run rate is going to stick for a couple quarters given some of the judicial spending and capital constraints at our reclients right now.
Speaker Change: Okay, make sense. Well, last one for me, I'll be getting a few questions from folks on the dividends, and I think you added a new slide in the presentation that helps address that, but I'm curious if you can just talk a little bit more about
How you feel about coverage?
Speaker Change: for the dividends. And we look at skeletal capital allocation broadly and we look at stock yielding.
Speaker Change: where it is right now. You know, are you kind of thinking about other uses for capital instead of the dividend? Just kind of walk through some of the thinking there if you could please.
Matt Murphy: Sure, so I'll let Matt say a couple of words about some of the information we've put in the slide and how we calculate our payout ratio, but we feel very comfortable generally speaking with our payout ratio as it sits today and I'll let Matt get into that in a second, but you're more broadly in terms of your question around capital allocation.
Matt Murphy: We still feel we have no corporate level debt and we are still sitting on a sizeable amount of cash. We have an untapped corporate credit facility.
You know,
Matt Murphy: We still feel that we have a tremendous amount of capacity to add investments on our balance sheet.
Matt Murphy: and when you think about capital allocation, we do believe it's important to provide some return given we have a high margin, high cash flowing business to our fairholders, and so we've always felt the best balance was to provide some return to shareholders in the form of a dividend.
Matt Murphy: But on top of that, you know, the type of investments that we are then using our cash and liquidity for
We believe are very high returning investments, meaning...
Um.
Matt Murphy: We think very high in terms of return on investments and we expect them to have a very high return in the short term, you know, two to three maybe two to three at most five years and as we think about capital allocation
you know, until we sort of get closer to even
Matt Murphy: Possibly exhausting our liquidity, which we are very far from doing. I think, you know, that's going to be continued to be where we focus on allocating capital and keep the dividend relatively stable.
Matt Murphy: And from a coverage perspective and the questions you may be getting...
Matt Murphy: As we illustrate in our earnings, the dividends cover about 79% and I guess what I would remind folks is this is always the low point for us for a number of seasonal reasons, both on the top line and in the expense line for compensation.
Matt Murphy: and when you look at our guidance at 42 to 44 cents.
Matt Murphy: and as I think further out, as we get some of this AUM growth happening on the residential side, the reach share prices improving, I really think this is a low point and we're still covered at 79%. So any risk around the dividend is not something we're focused on right now.
Matt Murphy: Okay, I appreciate all that detail. That's all from me. Thank you.
Speaker Change: Thank you, and as a reminder, to ask a question, please press dog in one. Our next question comes from John Massacre with the Riley Securities. Please go ahead.
Good afternoon.
Speaker Change: If you could talk to your potential partners on either the JV side or you know somebody
Speaker Change: Central Future Fund, you might see, what are they looking for in either the macro environment or the real estate environment before they get comfortable again and maybe kind of what are you thinking in terms of a timeline for when that kind of equity capital might be available again?
Speaker Change: Sure, so the short answer is that, you know, our partners generally speaking, the private capital, LPs of the world, are seeking a higher return on their dollars, generally speaking then they were, let's say, five years ago.
which is partly to explain why we as a fern
Speaker Change: have decided to invest in the vote more resources into what we call value ad investments and that type of strategy.
Speaker Change: because that's a strategy that's typically going to generate a mid-team to high-team return for investors. And so that's what we're seeing from LPs generally speaking that would come into, let's say funds.
Speaker Change: The thing I think is important to point out is LPs and investors are still investing.
Speaker Change: You know, just our last quarter that we brought in, you know, ten to millions of dollars in J.V. Capital.
Speaker Change: for two properties we bought down in Florida. The investors are willing to open the checkbook and they are willing to make investments.
Speaker Change: in terms of when do we think that we could see a substantial increase in the amount of AUM and these regenerate? Look, today we are in a
Speaker Change: One of the most difficult fundraising environments for private equity and especially around real estate private equity that's existed since the great financial crisis, almost 15 years, more than 15 years ago.
Speaker Change: and so I think it's going to take probably another...
Speaker Change: You know, short period of time, I think as the world becomes more stable and there's more stable outlook around interest rates, I think, you know, I think LPs will be more interested in opening up their checkbook and book and allocating more resources.
Speaker Change: to that. With regards to RMR itself, look, we expect, and we said this during our last earnings call, you know, upwards of a billion dollars in calendar year 2025, we'll be spent in and around private capital issues. And what do we mean by that? Us?
Speaker Change: That's total assets. That's us putting JVs together and that's also buying some properties on our balance sheet. That's what I think we'll do this year and I think it ramps from there.
Speaker Change: Is there potential for you to put more on your balance sheet as you look at it, this quarter versus the last quarter, just given the appetite you're seeing for LPs today?
Speaker Change: I think it's entirely possible. I think it's entirely possible in the residential space. And as Adam highlighted, obviously we're going to look for a couple more value add retail centers.
Speaker Change: But the key to our growth in accelerating AUM growth is going to be raising third party capital. With RMR, co-investing is most the third party capital partner's request.
Speaker Change: Okay. And then, I mean, I missed it, but the value-ad, shopping centers, you're beyond the one you've closed in April . What's the size of that portfolio? Apologies, I think anyway, but it's prepared remarks.
Speaker Change: Sure, it's a $21 million investment. It's about $204,000 square feet.
Speaker Change: And I think we could grow it through about $100 million in aggregate assets.
Speaker Change: But are those $100 million things that are like kind of in the pipeline under contract, or is that just kind of a, I mean, is that more of a pipeline number, or is that kind of an under contract under L-O-I type of number?
Speaker Change: That's a pipeline number. We have nothing under LOI or contract at this moment in addition to what we've closed on, but we're actively underwriting and bidding and evaluating those types of investments.
Speaker Change: Is that taking into account some of the disposition activity, particularly from your DHT and SVC? Essentially, is that already accounted for, given maybe capital isn't being put into assets they're going to sell, or could that further decline as they look to...
Speaker Change: He has disposed of the math sets for capital recycling and deliveraging purposes.
Speaker Change: Now, a fair question that it is all inclusive and would consider all plan spend in all active disposition activity.
Okay, I appreciate the color. That's it for me.
Speaker Change: Thank you. This concludes our question and intercession, and abides the technical office back over to Adam Portnoy for closing remarks.
Adam Portnoy: Thank you all for joining our call today. We look forward to seeing many of you at the upcoming narrowing conference in June . Institutional investors should contact RMR investor relations if you would like to schedule a meeting with management operator that concludes our call.
Speaker Change: Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now have a spiritual audience and have a wonderful day.