Q3 2025 The RMR Group Inc Earnings Call
Good afternoon and welcome to the RMR Group's physical third quarter 2025 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touchtone phone. To withdraw your question, please press star then 2. Please note that this event is being recorded. I would now like to turn the conference.
Over to Matt Murphy, Manager of Investor Relations. Please go ahead, sir.
Good afternoon, and thank you for joining RMR's third quarter, fiscal 2025 conference call.
With me on today's call are our 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.
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.
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 four looking statements are based on RMR's beliefs and expectations as of today, August 6, 2025, and actual results may differ materially from those that we project.
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.
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, and adjusted AVA.
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.
Thanks, Matt, and thank you all for joining us this afternoon.
Yesterday, we reported third quarter results that were in line with our expectations, highlighted by adjusted net income of $0.28 per share.
Distributable earnings of $0.43 per share and adjusted EVAa of $20.1 million.
Despite ongoing economic uncertainty, we have remained focused on the strategic initiatives of our managed reads and our Mars Private Capital business.
For the manager reads, these initiatives have included deleveraging actions through a combination of asset sales and accretive refinancing.
We've been pleased with the public market reactions to these initiatives, as the share prices of certain of our REITs, most notably DHC and IOPT, have increased substantially year to date.
Further, as a demonstration of the alignment of interests we have with our clients, these share price improvements have also resulted in our client companies accruing potential incentive fees. This past quarter,
Which could result in a payment to RMR at year-end that is in excess of $17 million.
While potential incentive fees are subject to change, this is encouraging for RMR and its shareholders at this point in the calendar year.
As it relates to our private capital initiatives, this aspect of our platform now totals over $12 billion.
We continue to engage with investors regarding our platform's capabilities and the real estate strategies. We are fundraising for Andor, investing in which includes retail, residential credit, and select development opportunities.
Within the retail sector, a sector in which we have continued conviction,
We are sourcing opportunities to accumulate a portfolio of value, adding multi-tenant retail assets of approximately $100 million in gross asset value as a means to build a track record in this sector.
Our first investment, our $21 million community shopping center located outside of Chicago, closed this past quarter.
We plan to leverage our in-house retail team to execute the value. Add a business plan at this property.
which is primarily focused on capital improvements to enhance the curb appeal of the center and strategic leasing.
Upon execution of this value-add business plan, we expect to generate mid-teen returns.
In terms of our residential and credit platforms, each of these sectors continues to benefit from market tailwinds.
Which is illustrated by each having robust pipelines of approximately $1 million in possible deals.
On the residential side, we anticipate closing two value-add acquisitions in August for an all-in cost of $147 million.
1 is a 266-unit property near Raleigh, North Carolina.
And the other is a 275-unit property near Orlando, Florida.
These two properties, along with the two properties we acquired in a joint venture earlier this year in Florida.
As well as our currently owned multifamily asset in Denver.
Will be the seed properties for our recently launched RMR residential enhanced growth venture.
While it is early in the fundraising process, our conviction around the residential sector remains supported by decelerating supply growth and favorable migration trends, both of which will drive rent growth and occupancy gains for well-positioned assets, particularly across the Sun Belt.
This Venture is targeting returns in the mid to team, mid to team to high teams.
Well, the fundraising environment remains challenging. However, we are confident in our ability to grow private capital AUM over the long term.
To that end, this past quarter, Mary Sedwick joined RMR as a Senior Vice President and Head of Capital Formation.
Mary has a successful track record of raising institutional capital, and we believe she'll expand the sources of capital available to our various strategies.
Turning to a few notable updates at our public C-capital clients.
DHC posted solid second quarter results, with almost all financial measures beating consensus estimates. GHC's strong results continue to be led by their shop segment, which saw a same-property cash basis NOI increase of 18.5% year-over-year.
Growth was a direct result of strong sector fundamentals, the strategic capital deployed across the portfolio over the last several years, and our active asset management.
DHC has also been successful in selling assets at attractive valuations in an effort to de-lever.
At SVC, results were in line with consensus expectations, with RevPAR across SBC's hotel portfolio increasing 40 basis points year-over-year and outpacing the industry by 90 basis points.
Despite meaningful revenue, displacement from renovation activity during the quarter.
SVC continues to benefit from the stable cash flows of its triple net lease assets, which are anchored by SB3, SBC's $3.3 billion investment, and Travel Centers, which are leased to investment-grade BP through 2033.
SBC has also made significant progress with its hotel sales, with 1,114 hotels now earmarked for sale in the second half of 2025.
With over $900 million currently under binding agreement.
Iopt is results, were highlighted by continued, strong, operating results, and IOP is refinancing of 1.2 billion dollars of floating rate, debt with new 5-year, fixed rate debt. At a weighted average interest rate of 6.4%,
The refinancing and continued strength of ILP's industrial portfolio help support the decision of OP's board to increase its dividend to $0.05 per share per quarter.
Lastly, OPI continues to face headwinds associated with its nationwide portfolio of office properties.
OPI, along with its advisers, continues to explore all options to address its upcoming debt obligations.
To conclude, we are pleased with the progress the company has made over the past quarter.
Assisting our clients with their financial and strategic objectives.
We continue to believe RMR operates a durable business model.
Supported by clients within Nationwide's portfolio of real estate.
Spanning multiple commercial real estate sectors.
Our Perpetual Capital clients provide RMR with stability.
But also allowing us to pursue new growth initiatives to drive revenue and earnings growth.
We look forward to updating you on our progress in the coming quarters.
With that, I'll now turn the call over to Matt Jordan, Executive Vice President and our Chief Financial Officer.
Thanks, Adam. Good afternoon, everyone. As Adam highlighted earlier this quarter, we reported adjusted net income of $0.28 per share.
Adjusted EVA DOV was $20.1 million and distributable earnings were $0.43 per share.
All of which were in line with our expectations.
Recurring service revenues were approximately 44 million, a sequential quarter, decrease of approximately 1.5 million driven primarily by lower Property Management. Fees at our, my residential is managed assets. Realize their respective business plans which was partially offset by seasonal improvements in cesta related management fees.
Next quarter, we expect service revenues to increase to approximately $45 million based on favorable trends in the enterprise values of our managed REITs, as well as construction and property management fees that are expected to remain consistent with this past quarter.
Turning to expenses, recurring cash compensation was $38.6 million this quarter, a decline of approximately $3.5 million sequentially, which reflects the impact of recent cost containment measures.
As it relates to equity-based compensation, with our fiscal year end approaching, our March share awards to employees are expected to occur in September.
Based on historical grants, we expect approximately $X dollars in incremental equity compensation next quarter.
Recurring GNA this quarter was $9.5 million, a sequential quarter decrease of $1.2 million, as we continue to minimize discretionary spending.
We expect recurring G&A to remain at these levels.
As it relates to the upcoming Sun Belt residential acquisitions, we expect these assets to generate incremental adjusted EBITDA of approximately $900,000 next quarter.
In aggregate, our own real estate is expected to generate adjusted EBITDA of approximately $2.2 million next quarter.
Interest expense this past quarter was $1.1 million.
Given that our two pending residential acquisitions will each use leverage to fund their respective purchases, interest expense next quarter is expected to increase to $1.7 million.
It is worth noting that as Armar uses its balance sheet to acquire real estate, it is part of our strategic growth initiatives.
Certain financial metrics, like adjusted earnings per share, will be adversely impacted by expenses. RMR is not historically incurred, such as depreciation and interest expense.
Accordingly, we believe cash flow measures such as adjusted EBITDA and distributable earnings are becoming more relevant when comparing our results to prior periods and/or other alternative asset managers.
Aggregating the collective assumptions, I've outlined next quarter. We expect adjusted EBITDA to be approximately $20.5 million. Distributable earnings are expected to be between $0.44 and $0.46 per share.
And adjusted earnings per share to be between $0.21 and $0.23 per share.
In closing, after giving consideration to the cash outlay for our upcoming residential acquisitions.
And annual bonuses that are paid each September.
We expect to end the fiscal year with approximately $60 million of cash and no borrowings on our $100 million line of credit.
That concludes our prepared remarks. Operator, please open the line for questions.
Thank you. And ladies and gentlemen, we will now begin the question-and-answer session.
To ask a question, you may press star then 1 on your touchtone phone.
If you're using a speakerphone, please pick up your handset before pressing the keys to withdraw your question. Please press star, then 2.
And our first question today will come from Tyler, but Tori with Oppenheimer, please go ahead.
Uh, good afternoon, thank you. Um, mostly big picture questions uh from from me and my first 1 on the fundraising environments, specifically on the on the private Capital side. Um, you know, sounds like it. It's still a little bit challenging out there. Um, conditions are are a little bit tough, but I'm not sure if you're seeing any any green truths more recently. Um, I'm not sure if there's some, some optimism around lower interest rates and perhaps that contribute to a, uh, a more constructive, uh, backdrop for for raising capital on that side.
Sure, Tyler. Thanks for that question. Yes, you're correct that the fundraising environment continues to be overall challenging, especially for private capital. But I would say it is improving. I think it is, uh, we have had, by just judging sort of meetings with potential providers of capital, uh, it's ramped up a lot this year compared to last year. And as I look out over the next six months, I expect us to continue to see that ramp up. So, uh, I do think we're starting to see some thawing. I think, uh, it's just conjecture, but I think you're right. You know, the possibility of lower interest rates may be moving.
Some folks off the sidelines is also a lot of groups. We talked to pension plans, insurance, even some sovereigns that, you know, they have a lot of capital tied up that hasn't been returned to them.
And we're starting to see a little bit of thawing in the transaction market as well, and more money is being returned to these, call it, direct capital providers. I think it's easier for them than to allocate more money out. So things are overall still challenging, there's no question of that. And it will take time to raise capital, and obviously...
Probably longer than we would like to raise capital, but it is improving. If that’s your question, it is improving.
More in terms of the mechanics. Um, the rationale how that's going to work. I'm assuming. Um, all the residential properties that that you've done so far and then the 2, um, deals that are that are still upcoming. Um, I'm assuming that all of those are going to fold into that feature, um, but I just want to be clear, just kind of what's going on with that.
Yes, you basically have a correct dialer. What we're trying to do is take effectively five assets, three of which are wholly owned and two of which are in joint ventures, and take, let's say, our GP interest in those and include those GP interests.
For 2 of those assets, with the 3 wholly owned assets, we have a total of 5 assets. Taking that out of the market is the total RMR. When you look at all 5 direct assets—GP Investments—it’s just under $100 million of equity that we’ve invested in those 5 assets, whether it be direct, fully owned, or JVs, and GP interests. We’re taking that group of assets out to market as sort of a seeded portfolio. One of the ways we think we can distinguish ourselves and differentiate ourselves in this market is through this approach. We hear this from investors quite a bit, so we somewhat tailored this to what we heard from investors over the last several quarters.
Uh, months and quarters, they are less inclined to fund a blind pool. Not saying they won't, but less inclined and a lot more open to underwriting, you know, committed capital, meaning they want to be able to put their money to work day one.
I think there is a little bit of a, you read this in the popular press quite a bit. There's a lot of money that's been committed that's not working, and I think as investors think about deploying capital and funds like ourselves or others.
They are, they're much more, uh, open, or like the idea of being able to invest in something where the money immediately works.
And so by seeding the portfolio with a hundred million dollars of effectively equity investments, that allows them to effectively buy out the majority or the vast majority of what we've already invested. To replace us, let's say, as the equity holder in those ventures, we will likely retain some piece as the GP. Let's call it 5% to 10% of the venture, somewhere around there. Then you use that as a seed for a venture, which will eventually go on to make more acquisitions. So it's a, hopefully, you know, on top of this $100 million, our hope is that maybe we can put a venture together that in the beginning will be another $300 million of equity, which gets us to about a billion dollars of buying power.
We don't know put that to work and then that might roll to the next fund eventually. And then, you know, really it's eventually you get to the point where you're hopefully raising fully discretionary, uh, you know, closed-end funds that are focused, let's say on residential investing and just the, you know, pull up that a little bit that's that that same business model. That same strategy is a lot of what we're doing in the credit side, because we have a couple loans on our balance sheet and we're trying to do the same thing and we talk about what we're doing, on the retail side around value, add multi-tenant retail, we're trying to build up the portfolio to again, see to provide seed Investments, for hopefully a venture which will then lead to a larger pool of capital. We're managing
Hopefully, that makes sense and answers your question.
Uh, yes, that, that, that's very good detail. Um, and that's all the questions I have for now, so I appreciate it. Thank you.
And once again, if you would like to ask a question, please press star, then 1. Our next question will come from Mitch Germaine with Citizens. Please go ahead.
Uh, thank you. Um, Adam, I might have missed it. Do you have sizing of what you're looking to raise on the residential side?
Yes. Uh, we would be out. Our hope is to do about $100 million of equity.
Again, we've seeded it with just under $100 million in assets that would go into the venture day one.
But the goal would be for that venture about $300 million on the credit side. We're also out with a venture about the same size, $300 million, that's been seeded. It's about just under $70 million that has been seeded there, but the same strategy.
Okay, great. Um, and you referenced a...
Raising really begins, and you start to see the fruits of some of those efforts. You're probably not going to act on any of those acquisitions yet. Is that the way they kind of think about it?
Uh, not exactly Mitch. I we probably won't act on them, to put them on our balance sheet is wholly owned assets, but we'd be very open and I and we'd be, we could continue to do joint venture deals where we come in as the GP and fund, a, a sliver of the equity those. So I think we'll still be active.
In in acquiring residential while we're in this fundraising mode but you'll they'll just be a lot more joint ventures is what we'll be doing and and Mitch this is Matt just to add in. I think it's really important when we're out. Fundraising uh that Capital Partners, see a very active and current pipeline because the atoms point, they want to know, you can deploy Capital quickly. Uh, so we that that keeping that pipeline, fresh is critical to our residential team.
Can you align the interests of those LP investors with the fund investors? How does that work? Or would they be separate from the fund?
Going forward.
That, those would be S. I mean likely separate. I mean those would be okay, um, very, very general terms. Many of our LPs in our joint ventures are, uh, other asset managers.
Uh, private equity firms that we partner with.
I think the likely investors in our funds would not be other asset managers. They would be more like traditional pension plans, insurance companies, and sovereign wealth funds. So it's a different investor group we're approaching for each type of deal.
Gotcha. Um, just a couple more for me. Um, the performance of Armar Residential, I guess you could characterize them as business plan conclusion or something. Like...
Is this an appropriate run rate? And what is truly driving the...
Change. You know, in terms of what your service revenues are, advisory revenues are a quarter of a quarter.
Yeah, look their business plan is value add. Uh, so the normal cycle is 3 to 5 years. So what we acquired was a, you know, when, when we bought the Carol platform, you had a series of assets, say 5 and a half billion that were in various stages of their life cycle. So we're seeing some of those assets realize their full potential uh and the respective LPS, you know, initiating a sales transaction. So AUM to some degree is shrinking, which means our service revenues are shrinking and in the current fundraising environment that flywheel has not refilled itself. Uh, so right now, this is kind of our run rate for the near-term.
Until the fundraising environment, uh, returns to closer to normal levels.
Okay.
Um, that's super helpful. And then I...
God, I think you said, um, 2.2 million.
Run rate for acquisitions EBITDA. Is that? Am I wrong on that? I apologize.
Okay, and then you have the EBA contribution.
From the acquisition from our own, yeah.
For our three own pieces of real estate, Lowry, the Denver deal we did last summer, and then the two deals that are pending.
Okay, wait. I just... that's just on the multifamily side, or I'm... help me out. Correct? Because, okay, and then you have the retail asset, and then you have the credit asset. So when you kind of put all that together,
Well, the credit assets are on a separate line. That's the loan; you know the loans are presented separately. Um, and then you have the retail, which is in that $2.2 million. So, I apologize.
Okay, so it's multi-family and retail, okay?
Um, okay, great, and I apologize. It got a lot of questions here. Last one for me is.
Just I, I listen. This is a pretty complicated corporate structure, and I know it's not straightforward, but...
Maybe if you can provide some perspective and insight on the dividend. You know, I recognized, you know, kind of your view toward coverage, but it's not so direct when you're looking at the analysis. And I know a lot of it.
It's in the footnotes and the complications around the structure, but maybe you can provide some, you know, kind of a quick rationale as to how we should be thinking about the dividend and coverage here.
Summarize um that really speaks to how the dividend is funded and how we get comfortable when we say our dividend is well covered. So the dividend is funded through 2 different sources. You have armor LLC, which is the operating business,
32 cents of our 45 Cent dividend is coming from the operating business. And when we think about the operating business and the distributable earnings that business that the the uh, operating partnership. Generates, we look at that coverage ratio of 74%. At the same time, 13 cents of our dividend is also coming from RMR Inc. The holding company and our Market Inc. And this is why we we bifurcated. Our balance sheet is sitting on 22 million of cash. So that 22 million is also. It has no other purpose than basically to to help fund the dividend. Um, because it can't be used in the operating business so that when we look at and this is what we try and articulate that 22 million out of 13. Cent level per quarter has over 3 years of life to it. Uh, and we're hoping over that 3 year period llc's contribution to the dividend simultaneously increases and minimize.
Is the need for the 13s but in the near term we feel really good about the 45 Cent dividend based on the contribution from the operating partnership as well as the monies at Inc and we try to spell that out in visual form on page 12 of our results back. Okay so that monies that I think it's about 120 million or so give or take that. Is that balance doesn't change though? Meaning it's only going to shrink over time, correct.
The, uh, well, based on what we do for strategic growth initiatives, the ink balance, the $22 million. Yeah, the ink will, will slow, I'm sorry. The $22 million in ink—my bad. I was looking at the $121 million in R LLC, I'm sorry about that. The amount that's in ink, that $22 million, that's just going to shrink over time; that doesn't get replenished. Correct?
It does get replenished. That's what takes 3-plus years to burn it down. Um, because every quarter, uh, we're making.
Rrlc has to make tax distributions to its various members, and its members are ABB Trust and RMR Inc.
So there is tax distributions going to each of the members. Uh, and in the case of RMR Inc, it's going up to arm our Inc at a rate that is higher than what it needs to pay for its Federal obligation as a C Corp. So there is some leakage that's, that's continuing to add to the cache at armar Inc over time. So yes, it will bleed down over 3 plus years.
But it's going to take a while because we're simultaneously adding some incremental money every quarter because we're Distributing cash taxes at about 37% and their corporate is lower than that, okay? So 3 plus years at current economics but as the LLC contribution, grows that 3 plus years becomes 4 plus years or or more I got you and it could and that's when we we continually with the board. Look at our dividend levels because we don't want that arm. Our ink level, the the cash to get too big.
Gotcha. Okay, I appreciate that.
And our next question will come from John Moussaka with B. Riley Securities. Please go ahead.
Good afternoon. Um, maybe kind of continuing to talk about the RMR residential contribution or deduction that came in in the quarter.
I guess. Kind of why wouldn't we expect that to maybe continue going forward, right? If they're seeing kind of...
A little bit of a reduction in AUM is something that gets kind of redistributed back to investors.
Is that a trend that should continue? I guess kind of. Why would it stay steady at the current level?
Uh, we have very active relationships with our LP, uh, partners and have line of sight into where they may have feel where they may feel an asset has maximized value. Uh, and when we look out 12 to 18 months, uh we don't see a lot of pending sales transactions coming and that could be because we obviously know where the business plan stands Andor. There might have been a recent refinancing in an asset where the partner is in this. Now, for the Long Haul. So, we feel the AUM which now sits at about 4.6 billion at Armour residential across just under 60 assets. Um,
should not materially move, uh, in the next 9 to 12 months.
Um, and then thinking about, um, you know, the growth side, you know, in terms of.
uh,
The retail investments, how big, I mean? Do you think that the portfolio needs to get to about the size where kind of the on-balance sheet and JB multifamily portfolio is before you similarly went out and tried to kind of...
Um, look for, you know, additional sources of capital, or is it need to be larger? Small arms, kind of thinking, what's kind of the timeline to get that into a similar place as the, um,
The residential growth vehicle.
Yeah, I
Uh, John, I think the short answer is.
Million dollars of.
Cash used to, uh, of cash at RMR. Uh,
To grow the retail portfolio.
We would probably, you know, in terms of timing.
I mean.
Uh, this is a matter of quarters, not years, you know, as the way I measure it. Um, so I think we probably...
Uh, you know, it's not going to take us years to deploy. It's going to take quarters, though—multiple quarters to get there.
Okay. And then, thinking ahead, you know,
Would there be a view to creating maybe additional platforms, or do you think?
I'm kind of trying to build up both of these two vehicles, and you know, obviously all the other activity going on, but building up those two vehicles on the private side is kind of going to be the focus here in the next couple of years. Or could there be multiple new similar types of vehicles being seeded in, in kind of trying to capitalize off those?
So right now we have 3 strategies that are being receded and trying to raise money. We're at
Three strategies that are seated, two of which we're trying to raise money. We have, obviously, the residential and multifamily.
We have credit; both of those are seated, and we're trying to raise money. The third one is the retail side, which you're right.
We're not really going to market yet with that strategy, but I imagine in the coming future, we will.
Uh, the other areas that we are open currently is there's a lot of
There's a lot of potential development activity.
that we could be, uh,
Seeding and, or participating in some ventures around real estate development activities.
Uh, that's probably a little longer out.
That's the old, maybe the fourth.
Leg of that table that, as I look out today, but
I think that's as I as we look today that's probably where those are sort of the strategies but that but to answer your question more generally we're trying to demonstrate a track record in in a few sectors and hopefully we're successful in raising money and then we take that same formula and use it to other sectors that are attractive in the marketplace. Let's say, 2 3 years from now,
You know, industrial might be a lot more attractive uh to folks and we could maybe see a value. Add industrial portfolio. That's not something on the table today but that's something they give you an example of what we could continue to do that is what we're trying to like, to build as a business, uh, and to try to help jumpstart the capital raise. So, yes, it could be other verticals and other sectors. We'll focus on. And I think that's 1 of the advantages of RMR. Obviously, the fact that we're in every almost every sector of commercial real estate, and have a sizable portfolio, and we just do commercial real estate, right? We're not, we're not a multi-platform.
Uh, Diversified.
Asset manager, where an alternative asset manager just does real estate. So, I think that really does...
distinguish us or differentiate us.
And it will be appealing to investors.
Okay. And then just a quick detail on the modeling side, as we think about the kind of...
Potential incentive fee payout that you talked about and prepared remarks, is that assuming, you know, the maximum incentive fee?
From the DHC and ILPT at this point.
Yes.
Okay, that's it for me. Thank you very much.
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.
To RMR, investor relations, if you’d like to schedule a meeting with the management operator that concludes our call.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.