The RMR Group Q4 Earnings Call Highlights

Key Points

• RMR beat its fiscal fourth-quarter guidance, reporting $17.2 million in distributable earnings ($0.53 per share) and $21.5 million in adjusted EBITDA, despite a $12.4 million GAAP net loss largely tied to unrealized investment losses. Fiscal 2027 adjusted EBITDA guidance is $77 million to $81 million, excluding potential incentive fees.
• SVC plans to sell substantially all 77 retained hotels by the end of 2028, starting in 2027, and use proceeds to reduce leverage from about nine times net debt to adjusted EBITDA to no more than five times. Management says operating improvements and prior renovations could lift hotel EBITDA by about $109 million; the board rejected TKO’s $2 billion offer as below its view of the assets’ potential value.
• Fundraising remains challenging amid high interest rates, inflation and geopolitical uncertainty, but cost discipline helped RMR raise its adjusted EBITDA margin by 460 basis points sequentially to 45.9%. RMR ended the year with approximately $103 million in liquidity.

The RMR Group NASDAQ: RMR reported fiscal fourth-quarter distributable earnings and adjusted EBITDA above its guidance, while executives outlined a multiyear plan to sell the remaining hotels at managed REIT SVC and reduce its debt.

RMR reported distributable earnings of $17.2 million, or $0.53 per share, and adjusted EBITDA of $21.5 million. The real estate manager also posted a GAAP net loss of $12.4 million, driven primarily by unrealized losses on investments.

For fiscal 2027, the company forecast adjusted EBITDA of $77 million to $81 million, excluding potential incentive fees. It expects adjusted EBITDA of $18.5 million to $19.5 million and distributable earnings of $0.42 to $0.44 per share in the next quarter.

SVC hotel sales targeted through 2028

President and CEO Adam Portnoy devoted much of the call to SVC’s plan to transition from a hotel-focused REIT into a pure-play triple-net lease REIT. He said RMR expects SVC to begin selling its 77 retained hotels in 2027, with a goal of selling substantially all of them by the end of calendar 2028.

Portnoy said SVC is likely to obtain higher proceeds by selling individual hotels or small portfolios rather than the entire collection in one transaction. He said the timing would depend on improvements in hotel earnings and cautioned against becoming a forced seller.

SVC has spent $628 million renovating the retained hotels over the past three years. Portnoy said operating initiatives could add approximately $109 million of EBITDA over the next 12 to 24 months and that SVC estimates the hotels could be worth $3 billion to $4.1 billion in aggregate with the increased cash flow. Those figures are management projections, not completed sale prices.

In response to an analyst’s question, Portnoy estimated that more than 90% of the anticipated EBITDA improvement would come from operational changes and the benefits of capital spending, rather than a stronger hotel market. He said most renovation spending has already occurred, although additional expenditures are planned.

SVC has sold 142 mostly select-service hotels for $1.1 billion over the past three years, largely using the proceeds to repay debt, Portnoy said. Its objective is to reduce leverage from approximately nine times net debt to adjusted EBITDA to no more than five times.

Board rejects hotel offer

Portnoy said SVC’s board, including all six independent trustees, unanimously rejected a $2 billion offer from TKO for the hotel portfolio because it was significantly below the value management and the board believe the assets could command after earnings improve.

He also addressed a public letter from investment firm Blackwells calling for SVC to sell its remaining hotels immediately at the highest available price. SVC issued a response as RMR’s call began, he said.

According to Portnoy, neither TKO nor Blackwells contacted SVC or RMR before issuing their public communications. He said TKO had not provided additional materials or sought discussions with the companies.

Portnoy added that SVC would seriously consider an earlier unsolicited offer from a credible party if its price was close to the value management expects after hotel cash flows improve. He said RMR’s management and potential incentive fees, along with a recent $50 million equity investment in SVC, align its interests with SVC shareholders.

Revenue outlook and potential incentive fees

Chief Financial Officer Matt Brown said fourth-quarter recurring service revenue was $45.2 million, down modestly from the preceding quarter. He expects it to decline to approximately $43.9 million next quarter, mainly because of recent declines in the total market capitalization of certain managed equity REITs.

RMR recorded a $22.7 million loss on investments during the quarter, largely reflecting noncash unrealized changes in share prices. Those losses were excluded from adjusted EBITDA and distributable earnings, Brown said.

The company remains on pace to earn nearly $38 million in aggregate incentive fees in the quarter ending Dec. 31, primarily reflecting the performance of managed REITs DHC and ILPT, Brown said. The amount remains subject to change and is excluded from RMR’s quarterly and full-year guidance.

RMR ended the fiscal year with approximately $103 million in liquidity, including $48 million in cash and $55 million of revolving credit capacity. Its quarterly dividend was $0.45 per share.

Fundraising remains challenging

Chief Operating Officer Matt Jordan said higher interest rates, inflation and geopolitical uncertainty have weighed on commercial real estate fundraising. Although fundraising for RMR-sponsored vehicles has been muted, the company continues to invest in capital formation and institutional investor relationships, he said.

Jordan said RMR manages $12 billion in private capital and has made contact with 105 of 131 identified non-U.S. limited partners with more than $50 billion in investable assets. “We’re playing the long game,” he said.

RMR also reduced resources in parts of its organization following asset sales by clients. Those actions and expense discipline helped lift its adjusted EBITDA margin by 460 basis points sequentially to 45.9% in the fourth quarter, Jordan said.

About The RMR Group (NASDAQ:RMR)

The RMR Group Inc. is a U.S.-based alternative asset management company that provides management services to real estate and related businesses. Its clients include publicly traded real estate investment trusts, real estate operating companies and private capital vehicles. RMR's services include property and business management, asset management, leasing, acquisitions and dispositions, financing, development and advisory support. The businesses it manages operate across a range of real estate sectors, including senior living, healthcare, office, industrial and retail.

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