The RMR Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 6 speakers on the call.

Operator

And welcome to the RMR Group Fiscal Third Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to Kevin Barry, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, and thank Mr. 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 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.

Speaker 1

These forward looking statements are based on RMR's beliefs and expectations as of today, August 10, 2023, 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 In addition, we may discuss non GAAP numbers during this call, including adjusted net income, adjusted earnings per share, Adjusted EBITDA and adjusted EBITDA margin. A reconciliation of net income determined in accordance with U. S.

Speaker 1

Generally accepted accounting principles To adjusted net income, adjusted earnings per share, adjusted EBITDA and the calculation of adjusted EBITDA margin can be found in our financial results. I will now turn the call over to Adam.

Speaker 2

Thank you, Kevin, and thank you all for joining us this morning. On July 31, RMR announced an agreement to acquire Carroll, a vertically integrated multifamily platform with approximately $7,000,000,000 in assets under management. RMR will acquire 100 percent of the equity interest in Carroll for $80,000,000 in cash with a potential earn out Consideration of up to an additional $20,000,000 based on the deployment of future capital. With approximately 700 employees and long term relationships High quality global institutional partners, the Caro platform gives us access to market knowledge and expertise. The business also has a pipeline of attractive opportunities to further diversify RMR's capabilities beyond Core Plus Real Estate.

Speaker 2

We expect the transaction to close this fall, at which time the founder will step down and the Carrol platform will be integrated into our organization With the card management team remaining in place, as we have discussed in the past, an important aspect of RMR's growth strategy involves utilizing our strong balance sheet to pursue strategic acquisitions. Our focus when assessing these opportunities has been to ensure any transaction complements our already considerable scale By further diversifying our platform, increasing our private capital AUM and providing us access to new institutional relationships. We believe the Carroll transaction achieves these objectives and is a great strategic fit for the following reasons. 1st, The transaction provides us an attractive opportunity to enter the multifamily space, which is the only major commercial real estate sector We do not have a significant presence. After the closing of the acquisition, multifamily AUM will represent approximately 16% of RMR's total AUM.

Speaker 2

Outside of the industrial real estate sector, multifamily has some of Strongest tailwinds given the continued shortage of new housing in the U. S. In addition, Carol has been focused on deploying capital Family Investments and Sunbelt Markets, some of the strongest overall markets in the U. S. 2nd, Expanding our private capital AUM has been a key strategic priority for us and the Carroll acquisition doubles our private capital AUM to approximately $15,000,000,000 AUM's total AUM will increase nearly 20% to approximately $44,000,000,000 further advancing our position as a leading alternative asset management platform.

Speaker 2

Our institutional relationships will also increase substantially from the capital partners that invest in Carol's Funds and its managed properties. The existing Calf Fund Series currently has the potential to make in excess of $3,000,000,000 of additional multifamily investments, putting us in a position to continue to scale the platform in the near term. Given the historical track record of generating returns to investors In excess of 30%, we believe deployment of this capital is achievable within the next couple of years. 3rd, We plan to drive growth by leveraging Carrol's vertically integrated capabilities that address all aspects of multifamily investments From acquisitions and property management to asset management and innovative marketing strategies. Carol's In the markets they operate has been achieved through their successful consumer brand, Aerium Living, which we believe has strong market awareness and have a track record of exceptional resident experiences.

Speaker 2

The success of its vertically integrated platform has been demonstrated to the growth of Carroll's 3rd party management portfolio, which should only accelerate once this transaction closes. In addition to driving revenue growth, The 3rd party management business also provides critical insights into the markets in which Caroll operates. We anticipate that the Successful operating aspects of the Carrol platform will also benefit the broader RMR platform. Lastly, The acquisition is expected to be immediately accretive and presents a tremendous opportunity to create long term value for our shareholders. Like RMR, Caroll is a profitable, scalable and asset light business with a recurring revenue stream and longer term upside potential Potentially create revenue synergies as we integrate capabilities across the broader platform, including multifamily lending And new development opportunities.

Speaker 2

In summary, we believe this transaction is directly aligned with our strategic objectives to further diversify RMR and drive future growth is highly complementary to our current platform and represents a compelling redeployment of the 1 with the management team and their commitment to the platform, their employees and their capital partners. We think this is an incredible opportunity for both sides And we are excited to welcome the entire Carrol organization to RMR. Now turning to our Q3 results. Our results once again highlight R&R's resilient business model, especially amid the current unsettled market conditions In commercial real estate volatility, this quarter, we reported adjusted earnings per share of $0.48 And adjusted EBITDA of $24,600,000 with our quarterly dividend remaining well covered and a payout ratio of approximately 67% of distributable earnings. From a macro perspective, commercial real estate conditions Continued to be impacted by market volatility and interest rate uncertainty during the quarter.

Speaker 2

While real estate transaction volume remains Lower than last year, it is recovering modestly as market participants gain more confidence in transacting with improved visibility executing the strategic plans of our clients with the goal of delivering shareholder returns that will ultimately benefit both our clients and RMR. We are highly incentivized to improve the equity values of the public equity REITs we manage as it has a direct impact on RMR's potential revenue growth. To put this in context, if we close the gap between enterprise value and historical cost of the Equity REIT's underlying assets, We could generate approximately $65,000,000 of incremental revenues annually with close to 100% flow through to adjusted With respect to operating fundamentals, leasing activity across our platform remains strong As a result of the hard work and commitment of our experienced real estate professionals nationwide, despite the challenging macro conditions impacting commercial real estate, our team arranged nearly 5,000,000 square feet of commercial leases on behalf of our clients, which resulted in over 15% roll up in rents and a weighted average lease term of more than 10 years. These leasing results continue to demonstrate our organization's ability to deliver value at our managed assets through creative leasing strategies And a continuous focus on tenant retention.

Speaker 2

In closing, we made some progress on our strategic objectives during the quarter Despite ongoing volatility in the commercial real estate market and we took an exciting step forward on our private capital growth strategy With the acquisition of the Carroll platform, with a healthy balance sheet and strong financial profile, we are well position to pursue further opportunistic growth strategies and we remain confident in the long term trajectory of RMR's business. With that, I'll now turn the call over to Matt Jordan, our Chief Financial Officer, who will review our financial results for the quarter.

Speaker 3

Thanks, Adam, and good morning, everyone. For the Q3, we reported adjusted net income of $8,000,000 or $0.48 per share and adjusted EBITDA of $24,600,000 with both measures finishing at the higher end of our quarterly guidance. In addition to recurring adjustments for separation costs, Equity method investments and technology transformation costs, adjusted earnings this quarter excludes $1.05 per share of termination and incentive fees and an add back of $0.03 per share for transaction costs associated with strategic transactions, including the Carrol platform. As Adam highlighted earlier, we expect the Carrol transaction to be immediately accretive. In the 1st full year after closing, it is our expectation that the Carroll platform's recurring fee business will contribute between 11 and $13,000,000 of adjusted EBITDA and $0.22 to $0.26 of distributable earnings per share.

Speaker 3

Given the uncertainty of when the Carroll transaction may close, any guidance for next quarter that I provide will be focused solely on RMR's legacy business. Management and advisory service revenues were $47,000,000 this quarter, which was down approximately $1,000,000 sequentially. This decrease was in line with expectations and was primarily attributable to the completion of the TA transaction on May 15. As it relates to next quarter, based upon the current average enterprise values of our managed equity REITs, a full quarter impact of the TA transaction And lower projected construction volumes, we expect revenues to be between $43,000,000 $46,000,000 next quarter. Turning to expenses.

Speaker 3

Recurring cash compensation this quarter was approximately $34,000,000 a decrease of $300,000 sequentially, due primarily to statutory caps being met for taxes and benefits and a favorable headcount mix. Looking ahead to next quarter, We expect recurring cash compensation to be closer to $33,000,000 based on employees continuing to reach statutory tax and benefit caps, as well as some strategic restructuring of corporate office roles we've undertaken, all of which will help drive an increase in our projected reimbursement rate to 46%. G and A cost of $9,600,000 this quarter includes approximately $400,000 or $0.01 per share On a normalized basis, G and A should be approximately $9,000,000 next quarter, excluding continued technology investments. Aggregating all the perspective assumptions I outlined earlier, next quarter we expect adjusted earnings per share to range from $0.43 to $0.47 per share and adjusted EBITDA should range from $23,000,000 to $25,000,000 We closed the quarter with almost $300,000,000 in cash. After the closing of the Carroll acquisition, we expect to continue to have no debt And over $200,000,000 in cash on hand for further opportunistic growth strategies, which gives us tremendous We will now begin the Q and A session.

Speaker 3

That concludes our formal remarks. Operator, would you please open the line to questions?

Operator

Yes. Thank you. At this time, we will begin the question and answer session. And the first question comes from Bryan Maher with B. Riley FBR.

Speaker 4

Thank you and good morning. Adam, can you maybe touch upon the Carroll transaction and what set that particular Apart from other multifamily opportunities you were looking at and how quickly do you think you can implement The EBITDA savings that you discussed in your PowerPoint that you guys put out, which would effectively reduce the EBITDA Multiple costs on the transaction?

Speaker 2

Sure. Good morning, Brian. Thanks for that question. Look, We've looked at a lot of opportunities over the last several years as we've talked about in prior calls and in meetings with investors. I think what we really liked about Caroll Is it checked a lot of boxes for us that we've talked about?

Speaker 2

And I said in my prepared remarks, they're vertically integrated multifamily platform. So it checks the box that they're vertically integrated like us. We think that's actually competitive advantage in the marketplace that we run our real estate. We don't outsource the running of the real estate. They also are obviously multifamily is the one hole in the piece of the puzzle for our commercial real estate platform.

Speaker 2

It fills that. They have they're right they're the right size. Dollars 7,000,000,000 of AUM is sort of the sweet spot. We've been talking about Sizes of organizations that would be sort of the perfect fit given where we are in our lifecycle, something between $5,000,000,000 $10,000,000,000 was always sort of the sweet spot For us, they're private capital relationships. Our strategic objective was to always grow Our relationships, they have over 20 very deep relationships with very well established institutional investors that we hope We'll become our clients and we can maybe do more with them in the future.

Speaker 2

And then maybe an aspect that We it was sort of additive that we maybe weren't necessarily looking for, but is really the fact that they focus the majority in their investments, not all of But the majority of what we would call value add, you buy, you fix, you sell, and that's how you get a return for their investors. We're much more of a long term hold, core plus, core real estate shop. They do some of that investing, that core real estate investing. I think that sort of expertise that they bring to the table is a real complement to what we do. And so I think it just checked Every box possible for us and that's what just made it very compelling.

Speaker 2

In terms of the EBITDA, I'll turn it over to Matt Discuss that.

Speaker 3

Yes, Brian, I would say we feel pretty good that we're going to hit the 11% to 13% in year 1 and we're aligned with management team and how we're going to get there through a combination of the business performance, getting this transaction behind them will be critical and has been critical because it's put The business on hold in a lot of ways, and they are aligned with us in identifying synergies, closing open roles and looking for economies of Scale across the combined platform. So I think we feel really good about the numbers we've publicly disclosed and getting that in the 1st full year of operation.

Speaker 4

Thanks. And Adam, you discussed in your prepared comments continuing to pursue other growth opportunities. Can you be a little bit more specific there? Would it be more multifamily or would it be in any other particular sector?

Speaker 2

Sure. So generally, it's an interesting environment we're in. Given the distress going on more generally in commercial real estate, I would say we are looking at more opportunities now than at any one time in the last several years, meaning there are multiple things that have been presented to us that we are evaluating. So we think it's a pretty interesting time and I'm not sure we'll End up executing on any of the other opportunities, but we are actively looking at other things. To your Specifically the question, would it be in multifamily?

Speaker 2

I don't think multifamily is this particular focus of what we would do a follow on acquisition. Carol really fills that void for us. Carol will be the basis for our growth of our multifamily Investments in platform going forward, sort of to answer your first question a little bit too, one of the things we really liked about Carrol 2 that sort of distinguished it from the others was the management team and specifically the management team that's going to be staying on. It was clear to us that they're highly they're very good at what they do. In meeting with their investors as part of our diligence, it became very Clear that they were very highly regarded and we plan to keep that entire team in place.

Speaker 2

And I think that's also Why we felt we were excited about Carroll, but it's also why I don't think we're looking to Expand more into multifamily. I think we have the right team with the Carroll platform to grow our multifamily investments.

Speaker 4

Okay. And thanks. And just last for me, usually in your comments you talk about kind of the highlights of the 4 Managed to REITs during the quarter. I'm going to assume for the sake of this call that you're probably not going to want to go down the DHC, OPI road. But is there anything that Did have particularly good or bad among your 4 managed REITs that you might want to highlight?

Speaker 2

Touching on all of them, I mean, you cover all of our REITs, Brian, and for those listening, look at I think at SVC, OPI, ILPT, they all had really good quarters for different reasons. At DHC, It's sort of, we had some good results in our SHOP portfolio. It was offset by some unfortunate setbacks in sort of other parts of the portfolio. All I will say about the OPI GHC potential merger that is in the market is from RMR's perspective and we're here talking about RMR, we're really sort of indifferent. We're neutral to whether the transaction We're to occur or to not occur, we've been very vocal about that.

Speaker 2

I think the REITs themselves have been very vocal about that, That we're sort of indifferent and neutral whether the revenues we would collect as the manager in a merged vehicle versus 2 separate vehicles would be virtually identical. So it's really we don't really have much dog in that fight from RMR's perspective.

Speaker 4

Thank you, Adam.

Speaker 3

Yes. Thank you.

Operator

And the next question comes from Ronald Kamdem with Morgan Stanley.

Speaker 5

Hey, just going back to the Carroll. I think you provided a little bit more color. So it sounds like so the G and A and the structure And everything is going to stay the same. So is the idea just to grow the platform through more of Value add sort of multifamily, just maybe a little bit more color on how both sort of the operating structure of the D and A and The strategy to grow

Speaker 3

the Carroll would be helpful. Sure.

Speaker 2

So I think certainly short term, call it the next few years, We're going to continue to run that or have that business run very similar to the way it has been running with a focus on doing exactly what they've been doing. And the reason for that is they're very good at what they do. And so that in what they have been doing and what we expect them to do for the next 2, 3 years is to gain to be very focused Value add multifamily investments, that's the nature of their relationships with their partners. I don't see that changing Over time, I do think that we could see a complement to that over time and this could be 2, 3 years out Is that we could really bring to bear on the Carroll platform more core, core plus investing, meaning One of the things that RMR through our relationships is we have some pretty deep relationships with those folks that are LPs that are interested in holding assets for More core, core plus real estate and we think there's an opportunity perhaps over time that we could bring some investments to bear at Carroll There will be in addition to multifamily core, core plus.

Speaker 2

And so I think short term next 2, 3 years, you're going to see it very much focused Value add investing doing very much the similar thing as what they've been doing. Over time, they will continue to do that, but we hope to expand that repertoire And be able to basically do some more investing into Core, Core Plus. Look, obviously, we would hope that we could expand the platform. RMR is I'm talking geographically. RMR today is a nationwide operating platform.

Speaker 2

We have 2,200 assets in every state in Canada and the Caribbean. Carol is very focused on the Sunbelt. Again, short to medium term, they're I stay focused on the Sunbelt. Over time, could we see them expanding into other parts of the country? Yes, that is something that we would hope to maybe also do Expand their reach and expertise to other parts of the country.

Speaker 5

Great. And then just my follow-up was just on the So the $11,000,000 to $13,000,000 of adjusted EBITDA includes $5,000,000 to $6,000,000 of synergies. So where are those synergies coming Rob, if it sounds like it's not G and A, maybe what are the other synergies opportunities there? Thanks.

Speaker 3

Well, a chunk of it will be G and A. I think you're See some of that through technology, cost, economies of scale on different service providers and I think there will obviously be some back office Personnel alignments, whether that's through closing open positions that currently exist across Carol and or Putting, mixing and matching the organizations, it's not just on Carol's back. There may be ways that we should be rethinking things at RMR to collectively get those synergies. So a lot of that's in process and will play itself out during the integration phase and the ongoing process as we work towards closing.

Speaker 5

Okay, great. So my last one was just on, I think historically you talked about sort of private capital raising and doing sort of joint venture of assets. Wondering if there's any sort of more conversations happening On sort of AVs of assets across any other REITs? Thanks.

Speaker 2

We're in pretty regular dialogue with our partners about potential things. I would say there is nothing imminent going It is advanced in any sort of real way. I think our partners are open to expanding. They would like to expand. Some of the issues are, I think most of the growth In some of our joint ventures that are up and running today is we would like to both sides would likely grow them more externally through external acquisitions, More than trying to take assets from our existing REITs, let's say.

Speaker 2

And there's just as we've talked about, there's not a tremendous amount of transaction Activity going on in the marketplace today, things are getting better and there's limited asset classes that I think Some of our partners are interested in expanding. Industrial happens to be the one of the areas that we do have Significant capital out and I think we could grow that possibly through some external acquisitions in those JVs in the coming Quarters, but there's not a lot of I mean, there's been a couple of headlines in the last quarter about some big transactions, specifically with some of the larger private equity firms, but there's not a lot of large transactions occurring out there. This is sort of one offs. And so I don't expect a lot of growth in those joint ventures in, let's say, the next few quarters, But that doesn't mean that they aren't open to growth and we could grow them modestly or Opportunities could present themselves and we could end up going to sort of more aggressively than what I'm talking about here as well.

Speaker 5

Got it. Thanks so much.

Operator

Yes. Thank you. And this concludes the question and answer session. Would like to turn the call to Adam Portnoy, President and Chief Executive Officer, for any closing comments.

Speaker 2

Thank you all for joining us today. Operator, that concludes our call.

Operator

Thank you. As mentioned, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Key Takeaways

  • Acquisition of Carroll: RMR will pay $80M (+ up to $20M earn-out) to acquire a $7B AUM multifamily platform, boosting private capital AUM to ~$15B and total AUM to ~$44B, with multifamily → 16% of total AUM.
  • Immediate accretion: Carroll platform expected to add $11–$13M of adjusted EBITDA and $0.22–$0.26 of distributable EPS in its first full year post-close, plus potential revenue synergies through cross-platform integration.
  • Q3 results beat guidance: adjusted EPS of $0.48 and adjusted EBITDA of $24.6M, with dividend well covered at a ~67% payout ratio and cash balance of ~$300M.
  • Strong operating fundamentals: despite market volatility, the team arranged nearly 5M sq ft of leases with a ~15% rent increase and >10-year average lease term, demonstrating CRE expertise.
  • Outlook and growth strategy: Q4 guidance of $0.43–$0.47 EPS and $23–$25M adjusted EBITDA; management is actively evaluating further opportunistic acquisitions amid CRE market distress.
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Earnings Conference Call
The RMR Group Q3 2023
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