Q3 2019 Earnings Call
Good afternoon, and welcome to the RMR Group third quarter 2019 financial results Conference call.
All participants will be in listen only mode should you need assistance. Please said another conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Ask a question press Star then one on your touch jumps out to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to 10 Downing Senior Vice President Mr., Brian . Please go ahead.
Good afternoon, and thank you for joining us today.
With me on the call are president and CEO Adam Portnoy.
Chief Financial Officer, Matt Jordan.
Just a moment they will provide details about our business performance for the third quarter fiscal 2019.
They will then take questions from analysts.
I would like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company.
Also note that todays conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Other securities laws.
These forward looking statements are based on our Mars beliefs and expectations as of today.
August nine 2019.
Actual results may differ materially from those that we project.
The company undertakes no obligation to revise or publicly release the results.
Any revision to the forward looking statements made in today's conference call.
Additional information concerning factors that could cause any differences is contained in our filings with the securities and exchange Commission, whereas he see which can be accessed from our website RMR group dotcom or the Fccs website.
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 earnings per share adjusted EBITDA and adjusted EBITDA margin.
A reconciliation of net income determined in accordance with U.S. generally accepted accounting principles to adjusted earnings per share adjusted EBITDA and the calculations of adjusted EBITDA margin.
Can be found in the news release, we issued this morning.
And now I would like to turn the call over to Adam coordinates begin our quarterly review Adam.
Thanks, Tim and thank you for joining us this afternoon.
For the third quarter fiscal year 2019, we reported adjusted net income of $8.6 million or 53 cents per share, which is an increase of three cents per share on a sequential quarter basis.
We also generated $26.5 million of adjusted EBITDA, which is a sequential quarter increase of 7.2%.
Adjusted EBITDA margin of 56.6%, which is a sequential quarter increase of 250 basis points.
As a reminder, during last quarters earnings call, we highlighted that RMR and its quite companies, we're well positioned to benefit from the repositioning and restructuring actions, we have facilitated over the last year.
And as such we believe last quarter's results represent a low watermark.
The sequential growth I just highlighted in some of our key operating metrics all reinforce that we are generating positive momentum across the organization.
Since our last earnings call there have been two significant events impacting or March certain of our client companies.
First in June hospitality properties Trust announced it had entered into a definitive agreement to acquire high quality net lease portfolio, a 774 service oriented retail properties for $2.4 billion from spirit, M.T., a read or S.M.T.J.
The acquisition, which will be funded entirely with unsecured debt will provide H.P.T. with increased scale, a more secure financial profile and greater diversity in tenant base property type and geography.
Yes, and D.A. shareholders will vote on the transaction on September 4th and assuming a favorable outcome HBT will close before the end of September .
This acquisition is expected to generate approximately $12 million in annual revenues for RMR.
The second event of note relates to our Mars recent secondary offering.
Since we went public in December 2015, the most consistent question asked during investor meetings has been about the prospect of increasing our public float.
This question was answered on July 1st there's three of our client companies HBP SNH and OPI completed a secondary public offering of 7.9 million shares of our common stock that they don't which has more than doubled our public float.
This offering was in many respects a re IPO for RMR and as part of the more TV marketing efforts reengage in over 60 meetings with investors across North America. The met the vast majority of whom were hearing our story for the first time.
With the completion of this offering which priced at $40 per share the reach recognized the 283% return on their investment.
As it relates to our client companies operating fundamentals remain positive this quarter with RMR arranging almost 1.5 million square feet of leases on behalf of our client companies there were approximately 2% higher than prior rents for the same space and had an average term of nine years.
RMR also supervised approximately $33.5 million in capital improvements at our client companies during the quarter.
Some of the more noteworthy highlights across our client companies outside of the SMTC transaction HPG include the following.
This quarter opioid continued its positive leasing momentum were 571000 square feet of leasing activity that helped increase the overall occupancy to 200 basis points to 91.6%.
More importantly, OPI made substantial progress on its strategic disposition program and goal of getting leverage levels to its long term target range of 66, and a half times debt to EBITDA.
Since the beginning of 2019 OPI as either sold has under agreement to sell or is negotiated agreements for $630 million of property sales and I realize $105 million net proceeds from the sale of its RMR shares.
During the quarter SNH continue to make progress on its business restructuring arrangement with its largest tenant five star senior living.
In June five star shareholders approved the issuance of stock to SNH and its shareholders as a condition of the restructuring.
Further as it relates to SNH is goal of selling $900 million of assets by year end to reduce leverage as an agent sold or has under agreement to sell 50 properties for total expected proceeds of $197 million.
In addition, as an h. use the $99 million received from the sale of its RMR shares to reduce leverage.
As it relates to five star the restructuring is already producing positive results five star reported its first profitable quarter since the second quarter of 2013.
And registered in overall occupancy increase of 160 basis points this quarter.
I owe PT saw same property cash basis, NOI increased 2.6% and had 359000 square feet of leasing activity that resulted in weighted average rental rates that were approximately 27.5% higher than prior rental rates.
In addition, I lpgs completed over $900 million in mainland industrial and logistic property acquisitions. This year that further strengthens and diversifies its portfolio.
Looking forward, we continue to expect growth that RMR to come from two primary means first we remain focused on growing and improving the performance of our client companies.
The acquisition of Aesynt da by age BT is a good example of that.
Secondarily, we are continuing our effort to expand our private capital asset management business.
Given the breadth of our operations, we continue to develop relationships with large sources of private capital such as sovereign wealth funds as part of identifying possible joint venture opportunities and our client companies.
These relationships could expand overtime and I expect that these types of arrangements may lead to the most likely short to medium term growth opportunities and our private capital business.
For example, it is possible that some of these relationships may turn into private separate managed to kelk business for our more in the future.
With regard to the RMR real estate open end fund we are no longer distributing this voluntary third party marketing for and were now focused on growing it through sourcing for our funds from larger institutional providers of private capital.
We do not plan on using any of the $100 million of capital committed to this fund by RMR until we have more clarity regarding this funds future.
In addition, we continue we're exploring opportunities to accelerate our private capital fundraising capabilities to possible M&A activities. We are engaged in discussions with real estate private equity groups that could result in us acquire firms that may help accelerate the growth of our private capital asset management business that said. These discussions are all preliminary in nature and no transaction is close to being agreed.
I'll now turn the call over to Matt Jordan, Our Chief Financial Officer, who will review our financial results for the quarter. Thanks, Adam Good afternoon, everyone.
As Adam highlighted earlier, we reported adjusted net income attributable to RMR of $8.6 million or 53 cents per share this quarter.
In addition to recurring adjustments the separation costs and unrealized gains and losses on our investment CA adjusted earnings per share. This quarter included an add back of 14 cents per share due to an impairment of our investment it from our mortgage trust.
Total management Advisory service revenues were $44.4 million this quarter, which represents a $3.9 billion decrease on a year over year basis, primarily from lower base business management fees and OPI in US an age partially offset by acquisition related fee growth and I Hope you take.
On a sequential quarter basis revenues increased approximately $1 million.
Due to acquisition related fee growth at I., LPT and increased construction and development activity at our client companies.
The quarter ended June 32019, all our managed equity rates, except for the LPT currently paying base business management fees on a market capitalization basis.
The impact of being on this lower measure resulted in lost revenue opportunity of approximately $8.7 million this quarter.
Next quarter, we are projecting total management and advisory service revenues to be approximately $45 million.
Based on where the managed equity reached share prices are today.
Projections around around when strategic acquisition and disposition activity will occur.
And estimated capital spend.
Turning to expenses for the quarter.
Cash compensation of $28.5 million. This quarter is a modest decline both on a year over year and sequential quarter basis due to favorable changes in our workforce mix driven by leadership retirement.
This favorable shift our workforce also impacts cash compensation and reimbursements without recovery rate increasing to 45%.
Looking ahead, we expect fourth quarter cash compensation to be consistent with this quarter, an increase to approximately $30.5 million per quarter in fiscal 2020, after giving effect to affect the annual merit increases and staffing associated with supporting the FMTI acquisition.
It is important to note that a significant portion of this increase in fiscal 2020 cash compensation is expected to be recoverable from our client companies.
DNA expenses of $7.7 million. This quarter represents an increase of $1.1 million on a year over year basis, due primarily to $800000 in annual RMR director share grants this quarter.
We ended the quarter with approximately $377 million in cash and no debt.
Management and our board of directors continue to believe that using our balance sheet to grow the organization remains a higher priority than other options such as using capital for a special dividend or stock buybacks.
Before we go to questions I want to acknowledge the hard work of a number of people across our property management engineering and sustainability teams RMR has recently been recognized as a winner eight property awards by Bauma and the U.S. Green building Council.
In addition, OPI was recently named a silver level Green leaf leader by the US Department of energy.
These honors recognize RMR the efforts to promote high performance energy efficient properties.
That concludes our formal remarks, operator would you. Please open the lines for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
So with Janney. Your question. Please press Star then too.
Our first question today comes from Olin Lu with Oppenheimer. Please go ahead.
Thank you Hi, Adam Oh, Hi, Matt. Thank you for taking my question.
So given that you have a high cash balance a stable base earnings and not increase public float.
How should we think about capital return in terms of buybacks versus dividend and also with the addition of a spirit empty a read your base as it should be much higher than your 53 cents. This quarter I mean, it seems to me there is room for dividend raise on next quarter.
How should we think about that thank you.
Sure. Thank you for those questions on the first part around.
Allocation of capital as Matt said in his remarks, no overarching theme is we believe.
You know using our capital today, which is about 277 million of cash on the balance sheet.
For growth initiatives is probably the highest and best use today in our view are using that cash.
You are right, we have a regular recurring dividend we increased about 40%.
Body nine months ago.
And we could think about that.
An increase in our recurring dividend.
In the coming quarters, Thats, something I think we would debate and think about as management and the board is something we could consider doing but I think the overall focus on using our capital right. Now is I think it's very important for our more.
Do you work towards diversifying its revenue streams.
And grow while our reach and our primary clients today are fantastic clients and we're very focused on then performing well I think for the medium to long term outlook of RMR. It's in the best interest of us to try to diversify our revenues, especially into private.
Sources of capital that we can raise and so.
That's why I think we're very you hear us talk about it pretty often that's been very much the focus.
In terms of.
We want to take the company strategically and that's why we're sitting on cash we want to use that cash.
Very prudently and strategically.
To help us achieve our strategic goal of growing our asset base and growing the types of clients that we service does that answer your question on.
Yeah, I think it's very helpful, but I think adding to dad trying to get.
Your sense about a macro view about interest rate risks. So what is your expectation about the interest rate movement for the rest of this year.
And given your cash level I'm not sure what that drives your decision about you are having a high cash level, but how are you going to position our mall and you'll manage a company needs to go through that that movement indicated by the yield curve right now and I guess.
What are the recent opportunities you're seeing if the fed does cut as many times as the market it's predicting.
Yeah.
Great questions.
I think of myself as a little bit of a.
As an operator of real estate and the manager of real estate I'm not great you're predicting interest rate movements, but that being said.
If you'd asked me at the beginning of the year I would have said that it was more likely interest rates are going up over the course of the year. If you ask me now it looks like they're probably going down.
The market's changed so radically so fast you know just think about where we were at the beginning the year with a 10 year Treasury yield was and where we are.
Seven eight months into the year I think there are very few people that thought the interest rates would be 100 basis points lower than where they were at the beginning of the year at that time. So it's hard to make a lot of strategic decisions about interest rate movements I will say generally as interest rates go down historically.
Reach to perform better.
They tend they can be.
They can get some tailwind from that and that can be helpful for our stock prices and our rights.
That then.
You know can benefit our revenues.
Because we are currently receiving revenues based off the lower market rather than historical cost of assets. So that's that's.
Now that could be a benefit if interest rates continue to go down and Thats My best guess, but we're not really changing honestly.
The strategy so much based on that environment.
It's more you know we have there's been a lot of strategic changes. We've made there were I think were on the back end of.
Most of our at our client companies over the last 12 months I think we just have to follow through on a lot of those strategic initiatives through the remainder of this year and a little bit into 2020.
And I think if we execute well on that which I think we will then our operating businesses will perform well.
In return so that's that's really how we're thinking about things and the only other part of our business that is affected by interest rates is not a big part of our business is our mortgage lending, but we all the mortgage lending. We do is floating rate and we also match funded on a floating rate basis. So the movement of interest rates actually has very very little impact on the earnings we receive from that from that business.
That's great color final question for me going back to some of your maybe potential strategic.
Actions I think you.
I kind of alluded to a joint venture opportunities with sovereign funds all.
Maybe pension funds I think in the past you indicated that you are interested in not just seen a controlling stake I guess my question. It's more what makes you to kind of change of direction a little bit. Thank you.
Sure. It's a great question you know, let's back up you know for the first 33 years of this company's existence, our Mars existence, we have been wholly focused on accessing capital in the public markets. It's really only been in the last six to nine months that there's been a real strategic effort and sure sourcing private capital.
And there's been a lot what I'd say a lot of irons that we have put in the fire and we've had a tremendous amount.
Okay.
Tivity around this effort in terms of under learning about the market understanding the market better.
I think given that we are new to that type of fund raising the most likely.
Type of partner, that's willing to work with us and I think we will match up well with.
Our big pools of capital sovereign wealth funds pension plans that are willing to.
Work with US, let's say on a separate account basis.
Going forward I think theres, some real opportunity to do things in that front.
Separately and I think this gets a little bit to what you were talking about we are at the same time and this is simultaneous it sort of we're doing two things at once where we're sourcing private capital directly to start managing those funds, but then separately, we're having M&A discussions with multiple parties and these are all early stage, but we are having M&A discussions with multiple parties about the possibility of you know.
Integrating them into our platform in those conversations, let's say when we're buying a platform or an existing business did let's say has several billion of eight UN already under management.
That would be a control transaction, we've been very clear about that in a market that we'd only be interested in a controlled transaction. If we engaged in something like that so that's what's going on on the private capital front.
And when you when you reference control transaction, that's what we're talking about.
Okay. That's it from me thank you very much.
Again, if you have a question. Please press Star then one.
The next question comes from Bryan Maher with B. Riley FBR. Please go ahead.
Good afternoon Adam.
Following up on Alan's question, a little bit because I was little confused.
And you discussed in your comments section are you now.
Correct me if I'm wrong are you not contributing $100 million to $100 million now to that fund through RMR.
No we're not saying we're not what we're saying is until we get some so we get some better traction from investors.
We are holding off and so that fund.
He has been making some investments and it's actually continuing to look at investments and we're still very focused on it and it still exists it's just.
You know to be.
Very candid I said in my prepared remarks, we're no longer marketing it through a third party distributor that third party distributor was very focused on tapping into the ROI E channel in high net worth individuals.
Yeah sure looking at raising funds call it.
Sub $5 million per chunk or a per per commitment.
We thought for various reasons that might work well for us and it's turned out after having well over 100 conversations and meetings in that market.
That.
That's probably not going to be the most effective way to grow that business and in fact, we think it makes more sense to you.
Pyramid and you focus on trying to raise capital in that fund through.
Big ticket investors basically looking for an anchor investor that might invest tens of millions of dollars if not hundreds of millions of dollars to help the go side by side with us in that fund.
Since this is sort of a new strategic initiative for us.
This also requires a lot of my personal time.
Because.
It's the first time, we're getting involved in it so it's requiring be myself to take a lot of these meetings and to take and you interact with a lot of these folks and it's also just very efficient since it's involving a lot of my time to go after larger pools of capital.
At this time until we sort of get some traction and so I'd say we are so as you know we are holding off on making that investment until we until we sort of find that big anchor investor to come in side by side with us.
Okay, and how are those meetings being sourced is it just your relationships with these entities is it through investment banks that you deal with on a regular basis, how are those meetings getting set up at the sovereign wealth funds and pensions et cetera.
Both we have contacts into several of them that we've been a we we had been in prior.
We've been we've had reverse inquiries into us over the time, it sort of mining going back to those reverse inquiries that we've had and we have some relationships existing at the retail but also we're beginning introductions through third parties like investment bankers as well.
Okay, and then shifting gears to the HBT spirit transaction.
Yeah, that's a lot of properties, the 770 properties and I know that some will be divested in the fourth quarter. So I don't know what that brings it down to is it 600 or 650, but its still a lot of properties. How are you internally planning on.
I know you just collecting rent Jackson, it's triple net and what have you, but you still have to monitor kind of the credit quality of the credit profile or how a lot of these entities are doing and some of them are in whether it's fair to say it or not.
Businesses that some people have concerns about maybe that could get Amazon or whatever so how are you internally staffing or thinking about taking on so many new properties into the RMR group.
Hey, Brian its Matt.
We're clearly going to add incremental staffing and bring on some additional real retail experience, but I think the benefit of the RMR platform is the national offices, we've got people or across the country and a lot of the markets that these assets will reside in that we'll be able to touch and feel them every day and assess what weve.
Acquired here in this transaction and I think.
It will be a very active manager and on top of that you have our corporate infrastructure that this.
Set of properties will quite easily roll into.
We will build additional credit capabilities and monitoring techniques, but you have other technology in the asset management platform that these can slide into so it it outside of adding additional manpower we're pretty comfortable.
That we can take this on and execute.
Okay, Great and then just last from me.
Adam I think you've talked about possibly taking a controlling position in a private equity shop or platform now for for at least a quarter or two.
Probably been thinking about a lot longer than that what inning would you say you're in in making kind of the go no go decision and what do you think the probability is that you find something that you could consummate.
I think it's truly 50 50, Brian .
That we find something we have several.
It's hard to put it what inning now he's a private enterprises.
The vast majority of everyone. We're talking to is private.
Yes, and there's often.
Where we gained the most traction or get the most interest is is firms that let's say are going through a generational leadership change and so the older generations thinking about.
Exiting and they have a good amount they have good staff and this could be a way for them to.
Exit and so there is obviously social issues involved with them getting comfortable that.
This might be the end of their career.
And so.
And then there's also groups that were talking to that or.
No not don't fit that profile, but let's say.
They might have.
Ill professional managers that are running the firm day in and day out and there is a group of investors, let's call. It the founders that are not active anymore, but they own the for.
And you know the social issues of how do you go to.
Integrate all those professional managers there now deferment through our firm.
I think the best way to characterize it is.
It's 50 50, it really could go either way, we have some pretty interesting conversations that we're having.
But you know we it's just as likely.
Then we know that we will it's just as likely we find groups that are interested in us that we don't want to move forward with as it is finding.
Groups they want it.
That we want to work with it has to be the right fit on many different levels and then it's got to make sense.
Economically on top of that but I do think.
Look in today's market. There is a there is a lot of talk about what's happening in.
Correct, yes.
In private equity and real estate private equity, especially and there is a lot of folks that believe that there's going to be two ends of the barbell, there's going to be folks that are going to be multibillion dollar enterprise. As you know one end you know, it's Blackstone and a half a dozen other folks that are sort of raising multibillion dollar funds every time. They go out and then at the other ends of the barbell is going to be.
What he called really specialized local sharpshooters that are you know two or $3 billion shops, and it's really it's sort of interesting whats happening to the middle market folks that are call. It more than 5 billion less than 15 billion, maybe even up to 20 billion no are they.
Are they big enough that they can make the jump to be.
One ended a barbell and they are obviously not.
The too big to be considered specialist. So there is a pretty interesting group book affirms sort of in the middle that we have been reaching out to and dialoguing with that.
I think I could make a lot of sense and what I'm trying to explain here is partly the rationale why they are interested in talking to us.
They are sort of stuck in the middle there, having trouble jump starting to become that Mega billion dollar from which we might be able to help them do and they're not in there too big to be a real specialize sharpshooter 'cause that's in many ways what the market seems to be turning into on the real estate private equity side.
Thanks, that's helpful and just lastly, what's the what's the bigger hold up do you see is it price or control.
I'd I'd probably.
Price, it's probably a little bit of both.
I'm not sure there is a hang up these are these conversations are ongoing and.
You know if it's a we Megan let me put it this way we tackle the control question early enough Ron and so if somebody is just not interested in that there's just no discussion so that makes it quite easy.
And so thats why I say, if they make it through that threshold. Then then it then I guess it becomes down the price.
Okay, great. Thank you Adam.
Yep.
This concludes our question and answer session I would now like to turn the conference back over to Adam Portnoy for any closing remarks.
Thank you for joining us operator that concludes our call.
This conference has now concluded. Thank you for attending today's presentation you may now disconnect.