During the RMR Group's (RMR) fiscal second quarter 2024 earnings call, CEO Adam Portnoy presented a mixed picture, highlighting the company's growth and strategic initiatives in the face of market headwinds. Despite subdued real estate transaction volumes influenced by rising interest rates and inflation, RMR Group remains cautiously optimistic about the market's future.
The company reported revenue growth, attributed to a recent residential platform acquisition, and announced a 12.5% dividend increase. With over $41 billion in assets under management and a focus on private capital, RMR is actively pursuing nearly 100 residential deals and considering the creation of a private debt vehicle.
The company ended the quarter with significant cash reserves and no corporate debt, positioning itself well for future investments.
Key Takeaways
- RMR Group reported revenue growth and a 12.5% increase in recurring dividends.
- Distributable earnings per share stood at $0.51, with adjusted EBITDA of $22.7 million.
- The company has over $41 billion in assets under management and is eyeing growth in private capital AUM.
- RMR is evaluating strategic opportunities, including a private debt vehicle and a new strategic initiative to increase loan volume.
- The company ended the quarter with almost $200 million in cash and no corporate debt.
- RMR Group is committed to reducing greenhouse gas emissions and achieving net zero emissions by 2050.
Company Outlook
- RMR Group expects recurring service revenues to remain relatively flat in the next quarter.
- Cash compensation and G&A expenses are projected to stay at similar levels.
- The company anticipates closing transactions in the second half of the year.
Bearish Highlights
- Increased interest rates and inflation have led to subdued real estate transaction volumes.
- The company predicts flat recurring service revenues for the next quarter.
Bullish Highlights
- RMR Group is tracking close to 100 deals for residential acquisitions.
- They are exploring the launch of a private debt vehicle and a strategic initiative to increase loan volume.
- The company's perpetual capital clients have made progress in their respective sectors.
Misses
- Marketing and technology expenses were the main drivers of costs for RMR Residential.
Q&A Highlights
- RMR Residential discussed an uptick in deals in the residential space, citing convergence on pricing and lending market pressure.
- The company is confident in its ability to raise capital for a fund targeting $200 million to $400 million in equity.
- RMR Residential's future profitability and AUM growth hinge on additional synergies and acquisition fees.
The RMR Group (NASDAQ:RMR), with its prudent financial management and strategic initiatives, is navigating a challenging market environment while laying the groundwork for future growth. The company's strong cash position and lack of corporate debt provide a stable foundation for its ambitious plans, including raising significant capital for a fund focused on secured mortgages for real estate repositioning.
With a commitment to sustainability and a clear strategy for capitalizing on market opportunities, RMR Group is poised to continue its trajectory in the dynamic real estate sector.
InvestingPro Insights
The RMR Group's (RMR) recent fiscal report and strategic outlook are underscored by some compelling financial metrics and InvestingPro Tips that could be of interest to investors. The company's commitment to a strong balance sheet is evident as it holds more cash than debt, a reassuring sign for investors concerned about financial stability and risk management. This aligns with one of the InvestingPro Tips, which highlights RMR's liquidity and its ability to meet short-term obligations.
Investors may also find the valuation multiples particularly intriguing. RMR is trading at a low EBIT valuation multiple and a low EBITDA valuation multiple, suggesting that the company may be undervalued relative to its earnings before interest and taxes, and earnings before interest, taxes, depreciation, and amortization. This is further supported by the company's P/E Ratio, which stands at a modest 8.67, and an even more appealing adjusted P/E Ratio for the last twelve months as of Q2 2024 at 8.16.
The dividend yield of 7.8% as of the latest data is another important consideration, especially for income-focused investors. RMR's dividend growth of 12.5% in the last twelve months as of Q2 2024 is a testament to its commitment to returning value to shareholders.
For those interested in further analysis and additional InvestingPro Tips, which include insights into the company's profitability and analyst predictions, visit the dedicated RMR page on InvestingPro. There are a total of 9 additional InvestingPro Tips available to help you make a well-informed investment decision. And remember, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription for even more in-depth insights.
Full transcript - RMR Group Inc (RMR) Q2 2024:
Operator: Good afternoon. And welcome to the RMR Group Fiscal Second Quarter 2024 Earnings Conference Call. All participants will be in listen only mode [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Kevin Barry, Senior Director of Investor Relations. Please go ahead.
Kevin Barry: Good afternoon. And thank you for joining RMR's second quarter of fiscal 2024 conference call. 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. First, I would like to note that management will not be answering questions about the debt exchange offer that its client Office Properties Income (NASDAQ:OPI) Trust announced last week as the offering period is currently open. 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 forward-looking statements are based on RMR's beliefs and expectations as of today, May 8, 2024, and actual results may differ materially from those that we project. 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 Web site at www.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, distributable earnings and adjusted EBITDA. 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, Kevin. And thank you all for joining us today. Since our last earnings call, we have continued to advance our business and support our clients through the current headwinds facing many aspects of commercial real estate. Overall, real estate transaction volumes have remained subdued for over a year, largely a result of an increase in interest rates, persistent inflation and uncertainty regarding whether the Federal Reserve will cut interest rates later this year. While interest rates may remain higher for longer, we do remain cautiously optimistic about an improving market environment later this year and into 2025. The resiliency and strength of the RMR platform over many years and through numerous business cycles gives us a solid foundation to continue creating long term value for all our stakeholders. Last night, we reported second quarter results that reflect both revenue growth, driven by our recent residential platform acquisition, and investments we are making to ensure RMR remains well-positioned to take advantage of growth opportunities in the future. This quarter, we generated distributable earnings per share of $0.51 and adjusted EBITDA of $22.7 million. With nearly $200 million of cash and no corporate debt, we have ample flexibility to continue making the necessary investments to further our strategic objectives. The strength of our balance sheet and the durability of our cash flows also led to our recent announcement regarding an increase to our recurring dividend by 12.5% to $0.45 per quarter, which remains well covered in a 64% payout ratio. We ended the quarter with AUM of over $41 billion, broadly diversified across all major commercial real estate sectors. While perpetual capital accounts for approximately 68% of our AUM, over the past four years, we have strategically focused on increasing our private capital AUM from essentially zero to more than $13 billion today. Our fiscal second quarter marks the first quarter of RMR Residential's results being incorporated, and we remain optimistic about the future of this business. Despite a recent leveling-off in multifamily rent growth in the Sunbelt region, which is largely the result of absorbing new supply, the long term multifamily fundamentals in the Sunbelt are supported by favorable long term trends, including continued population in migration, a strong labor market, declining construction starts and the cost differential between owning a home and renting. While multifamily deal volume has been muted, we have recently seen a considerable uptick in new transaction marketing activity, which we believe bodes well for deployment of our residential dry powder in the back half of calendar 2024. Our residential acquisitions team is currently tracking close to 100 deals across various Sunbelt markets, including a number of potential off market transactions. Beyond our residential platform, we are continually evaluating strategic growth opportunities that leverage our existing capabilities. To this end, we are in the initial stages of creating a private debt vehicle that capitalizes on the attractive risk adjusted returns, private credit is currently generating and leverages the experience and expertise of our lending platform Tremont Realty Capital. Tremont has demonstrated a successful track record originating commercial mortgages that have generated substantial shareholder returns at our public mortgage REIT, Seven Hills Realty Trust. Since it began managing Seven Hills, Tremont has made approximately 50 value add and light transitional investments totaling $1.3 billion, resulting in a weighted average gross IRR of 14.5% on its realized investments. With constrained bank lending for commercial real estate together with nearly $2 trillion of commercial real estate debt maturing by the end of 2026, we see a meaningful opportunity to increase loan volume for both public and private capital investors. To launch this new strategic initiative, we plan to amass a seed portfolio of up to $100 million in loans over the coming months using our own balance sheet, which would in turn help expediate capital raising for this vehicle. These loans will be levered through a bank repurchase facility resulting in RMR's net equity or cash commitment to be minimal. Based on market feedback, we believe raising private capital via a seeded venture will garner greater success than attempting to raise a blind pool of capital. As third party investors are identified for this Tremont managed vehicle, a substantial majority of the equity investment we are making is expected to be repaid and the investments to move off balance sheet at RMR. In support of this strategic initiative, last month, we accepted an application from a prospective borrower for a floating rate mortgage loan secured by a hotel in Massachusetts for a gross commitment of $40 million. In the coming months, we plan to make additional commitments for similar type loans. And we look forward to updating you on the progress of this strategic initiative in the future. Turning to noteworthy highlights of our perpetual capital clients. During the quarter, we remain focused on assisting our clients with the execution of their strategic and financial priorities. We arranged over 3 million square feet of leases on behalf of our clients with an weighted average roll up in rent of 17%. More than 60% of this quarter's leasing activity was executed at ILPT, highlighting continued strong demand for the company's industrial and logistics properties. ILPT's quarterly earnings once again demonstrated solid operating results. Occupancy increased to 99%. Cash leasing spreads grew 25% or the strongest in six quarters and same property cash basis NOI was up 230 basis points. With no final debt maturities until 2027, ILPT has the flexibility to be patient until the financing environment improves. DHC continues to advance key initiatives focused on improving its operating results and further strengthening its capital and liquidity profile. First quarter financial results reflect continued improvement in DHC's SHOP segment, with same property cash basis NOI increasing almost 10% year-over-year and continued roll-ups in rent within their medical office and life sciences segment. DHC has also outlined targeted strategies for capital deployment and operator transitions within the SHOP’s portfolio to continue improving performance. OPI has made considerable progress since the beginning of the year addressing its debt maturities and continues to execute on its financing strategies amid a challenging and lending environment for the office sector. The company recently launched an offer to exchange certain of its outstanding unsecured senior notes for new senior secured notes. Additional information about this exchange offer can be found in OPI's press release, which was issued last week. Lastly, at SVC, overall hotel performance during the quarter reflected softer seasonal trends, as well as the impact of ongoing renovations across the portfolio. SVC remains intensely focused on improving hotel operating trends and enhancing the quality of its hotel portfolio to best position its operators for long term growth. To that end, the company is currently executing a twofold strategy aimed at investing in its hotel renovation program and advancing plans to dispose of lower performing assets that have been a drag on profitability. In addition, the near term challenges within SVC's lodging portfolio is somewhat offset by the stability of SVC's net lease portfolio. With that, I'll now turn the call over to Matt Jordan, Executive Vice President and our Chief Financial Officer.
Matt Jordan: Thanks Adam. And good afternoon, everyone. For second quarter, we reported adjusted net income of $0.39 per share, adjusted EBITDA of $22.7 million and distributable earnings of $0.51 per share. This quarter's results were inline with our guidance and reflect the balance of cost containment and necessary platform level investments to support long term growth. This quarter, we continued the integration of the RMR Residential platform and remain on track to identify the synergies outlined at the time we announced the acquisition. The realization of the synergies and the related impact on our financials will occur in varying periods over the next two years. Given the expectations around multifamily capital markets activity that Adam highlighted earlier, we expect RMR Residential to remain largely breakeven through at least next quarter. Turning to this quarter's results. Recurring service revenues were $49.6 million, an increase of $3.4 million sequentially and inline with our expectations. The sequential increase reflects the full quarter impact of RMR Residential, partially offset by declines in construction management fees as a result of slowing construction spend at our clients. Next quarter, we expect recurring service revenues to remain relatively flat at an expected range of $48 million to $50 million. This estimated range assumes enterprise values at our managed equity REIT stay at their current levels, normal seasonal improvements in Sonesta related management fees and consistent levels of construction spend. Cash compensation was approximately $44 million, which includes the full quarter impact of RMR Residential, as well as the adverse impacts of payroll tax and 401k contributions resetting on January 1st, both of which were partially offset by strategic restructuring actions taken over the last 12 months. Looking ahead to next quarter, we expect cash compensation to remain at these same levels and our cash reimbursement rate to be approximately 50%. G&A expenses this quarter were $11.6 million, which includes $600,000 of annual director share grants and $200,000 of technology transformation costs. The remaining $10.8 million of recurring G&A expenses reflects increased levels of third party construction costs and higher than anticipated expenses related to RMR Residential. As it relates to RMR Residential, the bulk of those costs are from marketing and technology expenses, the majority of which are passed through to managed properties and are included in our service revenues. Next quarter, we expect recurring G&A to remain at approximately $11 million. Aggregating these collective assumptions, next quarter, we expect adjusted earnings per share to be between $0.37 and $0.39 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. As it relates to our balance sheet, we ended the quarter with almost $200 million in cash and no corporate debt, providing us ample flexibility to continue investing in our platform and leaves us well positioned to capitalize on strategic opportunities as they arise. Before we begin the question-and-answer portion of the call, I would like to first acknowledge the publication of our Annual Sustainability Report. RMR remains committed to reducing greenhouse gas emissions at assets we have operational control over by 50% by 2029 and to attain net zero emissions by 2050. Through calendar 2023, we are well on our way having achieved a 35% reduction in greenhouse gas emissions through energy efficiency measures, sustainable procurement and renewable energy programs. Lastly, as Kevin highlighted earlier, we can not address questions regarding OPI's current debt exchange offer. That concludes our formal remarks. Operator, would you please open the line to questions?
Operator: [Operator Instructions]. Our first question is from Bryan Maher with B. Riley Securities.
Bryan Maher: Just two for me today. I was hoping you could elaborate a little bit more on what you were talking about, as it relates to the residential and the uptick in deals that you are seeing, and how specifically that feeds through and will benefit RMR over the next couple of years?
Adam Portnoy: I'll talk about it generally and I'll let Matt maybe get a little bit more details on how it can affect the financials. But generally speaking, generally over the last, I'd say, two to three months there's been an uptick in, what I'd say, marketing activities in terms of transaction or deals coming to market, especially -- that's actually happened across the board but most pronounced in the residential area or multifamily space, and specifically in the markets that we're targeting throughout the Sunbelt region. There's a lot of reasons maybe for why that's happening. There hasn't been a lot of deal activity for several quarters now. I think there's -- I think buyers and sellers are starting to converge on pricing. I think sellers are getting a lot of pressure from, let's say, what's going on in the lending market. Broadly speaking, I think buyers are getting some pressure. There's a lot of money on the sidelines and some buyers are anxious to put that money to work before their investment period ends. So I think there’s starting to be a convergence on pricing and we do expect to see more transaction volume to occur. And we expect we will actually engage in transactions throughout the calendar year. I'll let Matt talk about what that could mean for the company's financials.
Matt Jordan: And Brian, getting deals done are really the stimulus we need to get residential beyond breakeven. It is a platform built to handle much more AUM than the $5.5 billion it's currently managing. In terms of the way the business is structured today, every deal should generate an acquisition fee of about 62 to 65 basis points. So just getting a deal done has a very sizable impact to RMR's P&L, because we'll recognize those acquisition fees immediately. And then, obviously, there's property management that comes with that new deal. The way I like to think about it between property management and construction, every billion of new AUM in the residential platform should equal about $1 million of new property management and construction management fees per quarter. Deal volume is really the thing we need to start see come through, and a lot of that will flow to the bottom line. I think what Adam highlighted, we hope by the back half of this year we'll see some of that come through, because we've clearly made the investments in people, getting the right acquisitions professionals in place and have a cost structure to support that growth when it starts occurring.
Bryan Maher: And the second question for me and understanding fully that you can't comment on the OPI deal, but you do see a lot of transactions and financing activity. Can you speak broadly as to what you're seeing in the commercial real estate financing market currently kind of across categories and how that can positively impact your managed REITs over the next years, and maybe specifically touch upon CMBS?
Adam Portnoy: I'll start with CMBS. I would say the secured market and especially CMBS market, broadly speaking for well leased assets cross segments is open. It's open to do conduits where you can do one off transactions, you can also do large single issuer transactions as well. So generally markets are open, they're more expensive than typically what people have been paying on their debts. So if they're refinancing debt, you're paying more for it, but the market is definitely open. Generally speaking, what you see in the capital markets in terms of debt availability and financing largely trends overall sentiment, people are more open to financing apartments, multifamily, industrial and then there's pockets of other sort of niche assets around that life science buildings, medical office buildings, hotels, believe it or not are very much somewhat in favor in the investment community. Probably the toughest market or toughest segment to find financing is in and around general multi-tenant office buildings. But even there, if it's the right asset, newer building, well located, well leased, there is financing available, it's expensive, but it's available. So markets are open. Everything, in general, it just costs more.
Operator: [Operator Instructions]. The next question is from Mitch Germain with Citizens JMP.
Mitch Germain: Matt, I appreciate the comments on residential and profitability or AUM growth and acquisition fees. I guess I'm trying to gain insight -- and near term profitability of residential is driven by additional synergies and acquisition fees, meaning the recurring income is already recognized in the numbers today, if you don't get any more AUM growth. Is that the way to think about it?
Matt Jordan: The way I would think about it, the AUM we have today pays for the business, but that's about it. And the way their business works, as value add deals season, they ultimately do get sold. So it is critical the acquisitions activity pick back up later this year.
Mitch Germain: And Adam, I guess you've got a full quarter of the team in the RMR platform. I'd love to get some initial thoughts about where things are versus your original expectations?
Adam Portnoy: So I think we're very pleased with the integration of the folks from RMR Residential into the broader RMR platform, and I think we're very pleased with many of the synergies that we planned on realizing and acquiring the business. We are clearly behind on the revenue side, Matt's alluding to it, in terms of we need more transaction volume. I think everyone is acutely focused on it. And I think unfortunately it's a little bit or maybe materially impacted by just market environment. We are working really hard and the acquisitions team that's focused on residential is working really hard at finding deals and sourcing them. I am optimistic that we will be able to close on transactions in the second half of this year. But -- so overall, I'm pretty pleased. But yes, there's no question, from a revenue side, we're behind where we want to be. But on the cost side, I think we're right where we thought we'd be. And I think from an integration, just generally, social issues, I think are great. I think we’re well integrated. I think the team is working well, the teams are working well and integrated well. So that's how I'm looking at it and I feel good about the business going forward.
Mitch Germain: Last for me, I recall about -- had must have been like probably 2017, 2018. Adam, you tried to incubate a similar type of vehicle for the office sector, given your capability and the fact that you have some office assets that were held outside of the managed REITs. I'm curious how this is a little bit different and how you're approaching this new debt vehicle differently?
Adam Portnoy: So at the time -- you're right, you have a good memory, Mitch, in terms of we tried something like this. It's similar. Two different -- one different asset class, obviously, different time. Second, we're working with a very reputable placement agent on this capital raise that we're engaged in right now. We've also learned a lot including from that exercise that you're mentioning from six, seven years ago about how is the best way to organically create a fund. And I think we've learned from all those experiments and all those twists and turns, especially what we did several years ago that you're referencing. I feel very good about our ability to be able to raise this capital. It was also the biggest -- maybe the biggest difference is the return profile. We were trying to raise at the time a core office fund, core meaning high single digit return IRRs. Here what we're talking about on a levered basis, we're talking about mid teens IRRs. And so it's a different investment profile, different return expectation, which is partly based on what we've learned and talking to the market. I feel very good about our ability to execute on this. Timing, how long it's going to take, that's a little bit of a wild card. Could it take one quarter, could it take four quarters, I don't know till we actually get all the money in. But I'm confident we will raise money is the best way to say it. And I wouldn't be putting the RMR balance sheet at use here unless I had some pretty strong conviction that we were able to use it to start one of these funds.
Operator: The next question is from Ronald Kamdem with Morgan Stanley.
Ronald Kamdem: Just a couple of quick ones from me. Just staying with the sort of capital raising for Tremont. You talked about sort of $100 million. Just trying to get a sense of what the opportunity set, what the pipeline is and is there sort of a target, is this something that could be $200 million, $300 million, what sort of the thought of how this was going to evolve over time?
Adam Portnoy: So just to be clear, we talked about up to $100 million gross investment that will use our balance sheet, and it's a little confusing when I say that, that's inclusive of leverage. We're going to use leverage on these loans. So let's just use the round number $100 million of our gross investments, $70 million of which will be debt, $30 million of which will be equity in the loan or use of our cash. That is to seed a portfolio or a fund that is not the total fund itself. We expect that the fund itself, from an equity perspective, will be $200 million to $400 million in equity. Use leverage on that and you're talking about total investments of around, call it $1 billion give or take. So that -- I just want to be clear, that's what we're trying to do with the balance sheet to seed the portfolio but the ultimate size in this first fund raise, I should point out, is about $1 billion. In terms of the pipeline, again we feel very good about the pipeline. Yes, there is less transaction volume going on in the marketplace today. As a result of less transaction volume, there are less loans being originated. Fully half of what you used to see in originations of loans was new acquisition financing. Well here, there's not a lot of new acquisition financing. There is some but not much. It's a lot of refinancings that we're underwriting. But from a risk return perspective, we're making first lien secured mortgages against performing real estate that's going to go through a value add or a light value add repositioning. And it doesn't really matter what type of real estate, because we'll lend against almost anything. And that type of investment [produces] mid teen returns. The pipeline is very strong and we also think we differentiate ourselves in the marketplace. Look, there's a lot of folks that are talking private credit and private credit real estate. What really differentiates us from -- in the marketplace is we are a real estate operating platform. So we have perhaps a more robust underwriting of the loan itself. But also we are able, given our scale to be much more middle market focused. So our average loan size could be $20 million, $30 million versus many of the larger players are focused on let's say $100 million larger loans. So when we play in what we call that middle market tier, there's a tremendous amount of transaction volume and not as many players. So we don't have as much competition and actually leads to a little bit higher returns for the investors. So yes, we feel good about the pipeline. We feel good about the investment opportunity we're presenting to potential LPs.
Ronald Kamdem: And then my second one was just going back to RMR Residential. I think you made some comments about dry powder, potentially sort of opportunities in the second half of the year and tracking 100 deals. Just can you talk a little bit about the return profiles of those deals? And is there any sort of thematics across those hundred deals and the type of properties you're looking at?
Adam Portnoy: So we're targeting again sort of value add turnaround or light turnaround properties in the multifamily space or apartment buildings in the Sunbelt region where we currently operate. The return hurdle -- when we referenced that hundred deals in the pipeline, we're talking about that type of characteristic deal that is going to hopefully produce a mid to high teen IRR for the investor. So that's a general outline of the type of deals we're looking at. And when I said 100, they serve all in mixed fashion meet those criteria in some way.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Adam Portnoy for any closing remarks.
Adam Portnoy: Thank you all for joining us today. Operator, that concludes our call.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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